ANNUAL REPORT 2005 - CMVMweb3.cmvm.pt/sdi2004/emitentes/docs/PC9049.pdf · 2020. 8. 23. · Annual...

ANNUAL REPORT 2005

Jerónimo Martins, SGPS, S.A. Public Trade Company

Registered with the Lisbon registrar of Companies under 8.122 Share Capital: EUR 629.293.220 Corporate Tax No. 500 100 144

Rua Tierno Galvan, Torre 3, 9º, Letra J 1099 - 008 LISBOA

Table of Contents

3 Chairman’s Message

I. Introduction 6 1. The Group’s Strategic Profile

10 2. Operating and Financial Highlights

14 3. Corporate Bodies

16 4. Businesses and Ownership Structure

18 5. Management Structure

II. Corporate Governance 21 0. Declaration of Compliance 22 1. Disclosure of Information 45 2. Exercise of Shareholder Voting and Representation Rights 47 3. Company Rules 48 4. Board of Directors

III. Consolidated Management Report 58 0. Relevant Facts of the Year 60 1. Macroeconomic Environment 63 2. Sectorial Environment 66 3. Overview of the Group’s Consolidated Activity

77 4. Food Distribution - Portugal 88 5. Food Distribution - Poland 91 6. Manufacturing 97 7. Marketing Services, Representation and Restaurant 101 8. Human Resources 102 9. Simplification of Internal Management Processes 105 10. Group Investment Programme 108 11. Perspectives for 2006 113 12. Events after Balance Sheet Date 114 13. Proposed Application of Results 115 14. Consolidated Management Report Annex 117 15. Financial Glossary 119 16. Contacts

IV. Social Responsability 121 0. Relevant Facts of the Year 123 1. Jerónimo Martins and Social Responsibility 124 2. Corporate Ethics 125 3. Human Resources 136 4. Quality and Food Safety 145 5. Environmental Management 159 6. Patronage 166 7. Frequently Asked Questions

V. Consolidated Financial Statements 173 1. Consolidated Financial Statements 209 2. Auditor’s Report

VI. Individual Financial Statements

214 1. Management Report

223 2. Financial Statements

252 3. Auditor’s Report

256 Excerpt of the Annual General Meeting Draft Minute

Annual Report’05

3

1. Dear Shareholders The year 2005 was replete with events, some of a worrying nature, both abroad and at home. On the international scene, the oil crisis worsened, and is yet to be solved, France and Holland rejected the European Constitution, leading to question marks over the future of the Union, general elections in Germany and Poland changed the political outlook in those countries, and his Holiness John Paul II passed away. In Portugal, the main events included the election of the new Government with an absolute majority, the controversial nominations for public posts without the necessary clarification between professional merit and party criteria, the insufficient dialogue between the Government and the private sector, the only sector able to fight against the scourge of growing unemployment, the increase in oil products taxation and VAT and the lack of a practical plan of action to reduce the State deficit. These are some of the events that are worthy of note as they affect, either directly or indirectly, the economy in general and the Jerónimo Martins business in particular. In an unfavourable business climate the Jerónimo Martins Group upheld its tradition of facing the challenges in a professional and creative manner, transforming threats into opportunities and implementing measures to strengthen the market positions of its companies. Sales figures met Management forecasts, with consolidated net sales growing 9.4% to 3.8 billion euros, which reflects the solid evolution of the retail chains, especially in the last quarter of the year. The strategy implemented by Pingo Doce again proved spot on, as it maintained a solid performance throughout the whole year, with like-for-like sales rising 4.6% and an average deflation of 3.6%. At Feira Nova, the repositioning of the format and the price policy adopted led to excellent results. The mini-hypermarkets enjoyed 2.2% like-for-like growth, with stronger growth in the last quarter, mirroring the large hypermarkets, which managed to turn around the downward trend, and in the same period returned like-for-like growth in the order of 0.8%. At Recheio the difficulties affecting its traditional customers created a new challenge, which was met with a strong and definitive investment in an alternative growth channel. The positive evolution in sales of the HoReCa channel will stimulate the Company to accelerate the development of its strategy to become an authentic Food Service specialist. In Poland the year 2005 signalled an historic benchmark for Jerónimo Martins and the Biedronka chain. The company celebrated ten years in the country and broke through the barrier of 5 billion zlotys in sales, having ended the year with 805 shops. These facts further vindicate the decision made by Jerónimo Martins to move into this market, where it intends to continue to develop its retail activity

CHAIRMAN’S MESSAGE

Annual Report’05

4

and increase its presence in other segments, pay attention to all the business opportunities that fit into the defined strategy. In the area of Manufacturing and Services, the integration of Bestfoods into FimaVG was consolidated, keeping the production in Portugal, and channelling resources into innovation and marketing of the different brands, especially in the Personal Hygiene segment, which led to a big rise in the volumes sold. In all areas of its business activity Jerónimo Martins aims to achieve sustainable development, to remain aware that it is part of the community and that it can and should contribute to the economic, social and environmental development of the countries it operates in. This responsibility encompasses all sectors of society and is borne out in projects as diverse as patronage, prosecution of food and environment safety certificates and subscription to the GRACE Commitment Charter with the Millennium Objectives. With regard to patronage, an emphasis has been placed of the policy of helping underprivileged children through the “Jerónimo Martins Feed Future Smiles” programme. As for certification, pride of place goes to the Environmental Certification Programme implemented at LeverElida, and the double certification of the Distribution Centres in Portugal, in Food and Environmental Safety Management, which makes Gestiretalho the first company in the distribution sector to obtain this recognition in the country. This socially responsible attitude implies humility and a strong belief in continuous improvement. As such, Jerónimo Martins has created the Client’s Ombudsman, which is an unprecedented initiative in Portugal. This entity, autonomous and independent, intends to be an ideal platform for contact between the companies and their consumers, who can put forward their suggestions and criticisms, helping us to improve our offer supported on the quality of the service. Finally I would like again to express my gratitude to all our employees, without whom we would not have achieved the ambitious goals we set ourselves, and to our Shareholders who maintained their confidence and support in the project being undertaken by Jerónimo Martins, an innovative company confident in the future.

I. Introduction

6 1. The Group’s Strategic Profile

10 2. Operating and Financial Highlights

14 3. Corporate Bodies

16 4. Businesses and Ownership Structure

18 5. Management Structure

Annual Report’05 - Introduction

6

Jerónimo Martins is a Portuguese Group of relevant size, with a turnover for the year 2005 of Euro 3.8 thousand million, with approximately 30 thousand employees, and whose international business represents roughly 35% of sales and 43% of employees. The Group holds a balanced business portfolio which combines the strength of its market position in the retail and wholesale market, with the growth potential of the Biedronka operation in the Polish market, and the maturity and capacity for freeing up cash flow brought by its Manufacturing partnerships with the Unilever Group in Portugal. In the Food Distribution Area in Portugal, the Group occupies, considering the three companies, the leading Market position, with the brands Pingo Doce (179 supermarkets in Mainland Portugal and 13 supermarkets in Madeira), Feira Nova (9 hypermarkets and 20 mini-hypers), and Recheio (30 cash & carry stores and 2 Food Service platforms in Continental Portugal and two stores on Madeira), being the market leader in the supermarket and the cash & carry segments. In Poland, the Biedronka stores that offer a variety of high-quality food products combined with a constant low-price policy, is the clear leader in its format, with a wide lead over its competitors in terms of number of stores and brand notoriety. In 2005, the Company surpassed the figure of 360 million transactions and Euro 1.3 thousand million in turnover, with a total of 805 stores at the end of the year. Jerónimo Martins is also the biggest manufacturing Group in consumer goods, through its partnership with Unilever in the companies FimaVG (Food Products), LeverElida (Personal and Domestic Care) and IgloOlá (Ice Creams and Frozen Foods), holding market leader status in the Olive Oil, Spreads, Ice Tea, Ice-Cream and Fabrics Detergent Markets, among others. The portfolio of the Group also includes the business area of Marketing, Representation and Restaurant Services, including (i) Jerónimo Martins Distribuição de Produtos de Consumo, which is the Portuguese representative of several international brands of fast-moving food products, some of which are market leaders; Caterplus, which sells and distributes specific food products in the Food Service segment; selective cosmetics; and in the consumer cosmetics area through PGJM, the result of a joint venture between the Jerónimo Martins Group and the Puig Group; (ii) the Specialist Retail chain Hussel, with 18 stores selling chocolates and confectionary; and (iii) Jerónimo Martins Restauração e Serviços, which is dedicated to the development of projects in the Restaurant sector, and which includes the chain of coffee kiosks Jeronymo, the ice-cream stores Ben & Jerry’s, Olá ice-cream stores and the sandwiches Subway stores, which offer healthier alternatives for light meals (sandwiches and salads “made while you wait” – an eat fresh concept).

1. THE GROUP’S STRATEGIC PROFILE


7

History 1792 –Jerónimo Martins opens a quality grocery store in Lisbon in the Chiado area. 1944 – The Fima plant opens (producing mainly cooking oils). 1949 - 1970 – A partnership with Unilever in Portugal to develop manufacturing and market know-how in the fast moving consumer goods market. This began with Fima and later grew to include Lever (Home and Personal Care); Olá (Ice-creams) and Iglo (Frozen Food). 1980 - 1995 – High investment in the Food Distribution sector (Pingo Doce supermarkets; Feira Nova hypermarkets; the expansion of Pingo Doce to Madeira, with Lidosol; the cash & carry brand Recheio; in the Marketing and Representation Services area, with JMD), and in Specialised Retail (Hussel – chocolates and confectionary stores), through both organic and acquisitional growth, and supported by strategic partnerships (with Delhaize for Pingo Doce; later with Ahold succeeding Delhaize and accompanying Jerónimo Martins in the hypermarket business; with Booker, for Recheio, and with Douglas, for Hussel). 1989 – Jerónimo Martins is listed on the Stock Market, to begin a decade of consistent and significant share capitalizations. 1995 – 2000 – International expansion to Poland (cash & carry Eurocash, Biedronka stores and Jumbo hypermarkets), Brazil (Sé supermarkets) and England (Lillywhites chain of sporting goods). Diversification of the business portfolio into retail banking, under a joint venture with BCP (Expresso Atlântico) and participation in the telecommunications sector (Oniway). The Group also moves into the Water and Tourism business with the acquisition of VMPS. 2001 - 2002 – Financial restructuring, with the sale of businesses outside the core activity areas, along with risk and debt reduction; operational restructuring also occurred, with the aims of maximising the scale and synergies of the Group, simplifying processes, reducing costs and simultaneously focussing operational units on the commercial dynamics of their respective segments. 2003 – A return to profit, with a continuation of the management dynamic. 2004 – Consolidation of the process of restructuring and refocusing on operational excellence, with the simplification and optimization of processes, the creation of multi-disciplinary teams and an increase in the Organization agility. In market terms too, the Group has carried out innovative initiatives, with the launch of Exclusive Brands to be carried throughout its various Food Retail chains, with the objective of maximizing scale and supply, as well as significantly widening the range of selected perishable products, controlled from source and identified with the brand seal as a guarantee of Quality and Food Safety.


8

The Jerónimo Martins Group, pioneer in Portuguese business life in various fields, is renowned, among other reasons, for being the first Food Distribution company in Portugal to adopt the International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) in 2000, to implement a business to business (B2B) platform in its relations with suppliers in 2004, to initiate a process of certification in Food Safety and to launch a Food Service platform. Mission Statement Jerónimo Martins is a Group with an international projection operating in food distribution and manufacturing, which aims to satisfy the legitimate interests of its shareholders, while contributing to the economic growth and the sustainable development of the regions in which it operates. In the fulfilment of its mission, the Group aims to:

Promote maximum operational efficiency across all business areas, so as to optimize the results generated through its financial, material and human resources;

Ensure maximum customer satisfaction, by improving their quality of

life through a firm commitment in terms of innovation and in terms of offering the best possible value for money in the products and services it provides;

Ensure that the entire Organization works to the highest possible

standards of conduct and of Social Responsibility, enhancing relationships of trust with all stakeholders;

Conduct business through dynamic and flexible Organizations, staffed

with human capital who can bring together the benefits of their experience and know-how with an acceptance of the permanent need for change, through continual investment in training and in the most up-to-date management practice, so guaranteeing that the whole Organization is in line with the strategic challenges faced and with those activities which are real value creators.

Identity A longstanding benchmark in its business sector and in the market in general, Jerónimo Martins has a history of over 210 years, a history made up of hugely diverse events, experiences and learning, which have conferred on the Group its solidity and capacity for renewal, mirrored in the strength and vitality for which it is renowned. The new Jerónimo Martin’s corporate identity, carried out in 2004, demonstrates and symbolizes the profound changes that have taken place within the Group. This new visual identity embodies the new reality of Jerónimo Martins and of the three values that are core to its corporate culture and positioning in the market:


9

Rigour in Management... • Adequate analysis of macro-economic, sectorial and market trends; • The definition of strategic priorities; • The establishment and conveyal of clear, demanding objectives; • Adequate control and correct critical evaluation of results.

Permanent Innovation, which stimulates...

• A pioneer spirit in management processes and practice; • Dynamism and market leadership.

Transparent Policy, which promotes...

• The prioritization of shareholder’s interests; • The ethical conduct of the Organization in relation to all its stakeholders; • The objective assessment of Employees with regard to their performance

and professional development; • Social Responsibility as a strategic option; • Investment in strategic partnerships in those markets and regions in which

it operates. Jerónimo Martins today is a solid, cohesive Group, with a clear vision. It is an Organization focussed on the pursuit of professional excellence, which is prepared to add another chapter to its already long history, adding to a stable, solid, lasting future. Strategic Priorities In defining its strategy, the Jerónimo Martins Group makes a clear commitment to solid, profitable growth, focussing its management operations largely on the creation of value and on the expansion of its current portfolio of assets, while simultaneously ensuring our continual preparation for the Group future growth through the studied experimentation and exploitation of new business opportunities.


10

2. OPERATING AND FINANCIAL HIGHLIGHTS

% €' 000.000

EBITDA & EBITA Margin

4.2003.861

3.8283.4953.417

2,8%3,6%

5,5%5,9%

5,4%

8,1%

8,7%8,5%

6,8%6,2%

0

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

2001 2002 2003 2004 20050,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

8,0%

9,0%

10,0%

Sales & Services EBITDA EBITA Margin

EBITDA & EBITA MarginComparable*

* excluding Sé, Waters, Tourism, Lillywhites, Jumbo, JM &M and Eurocash but including Bakery e Diversey disposed in 2002

€' 000.000 %

3.828

3.256 3.300 3.372 3.495

8,9% 8,6% 8,7%

5,6% 5,6% 5,7% 5,9%5,4%

9,0%

8,1%

0

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

2001 2002 2003 2004 20050,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

8,0%

9,0%

10,0%

Sales & Services EBITDA Margin EBITA Margin

1.828

1.453

1.180 1.1601.249

0

200

400

600

800

1.000

1.200

1.400

1.600

1.800

2.000

2001 2002 2003 2004 20050,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

14,0%

16,0%

18,0%

20,0%

Average OIC EBITA Margin ROIC

€' 000.000

Pre-Tax ROICComparable Pre-Tax ROIC *

1.1601.249

1.1691.262 1.190

0

200

400

600

800

1.000

1.200

1.400

1.600

1.800

2.000

2001 2002 2003 2004 20050,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

14,0%

16,0%

18,0%

20,0%

Average OIC EBITA Margin ROIC

* excluding Sé, Waters, Tourism, Lillywhites, Jumbo, JM &M and Eurocash but including Bakery e Diversey disposed in 2002


11

* before minority interests

-73

-184

82

131146

133

168

223247247

-205

-155

-105

-55

-5

45

95

145

195

245

2001 2002 2003 2004 2005

Net Results Cash Flow *

€' 000.000

Net Results and Cash Flow

497612

715

837

1.212

0

200

400

600

800

1.000

1.200

1.400

2001 2002 2003 2004 20050,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

4,5

5,0

Debt Debt / EBITDA Debt / Equity

Net Debt

Associates

19.4

10

18.3

28

18.0

79

17.8

23

17.0

31

17.2

81

10.3

79 12.3

84

11.8

11

12.6

43

10.0

45

11.8

83

13.4

72

591

539

490

18.4

75

4.80

0 8.17

4

7.56

0

0

5.000

10.000

15.000

20.000

25.000

1999 2000 2001 2002 2003 2004 2005

Portugal Poland Brazil United Kingdom


12

5,7 6,1 6,

6

5,4

11,3

5,6

5,6 6,

4

5,5

12,0

5,7

5,2 6,

2

5,8

13,4

5,8

4,9 6,

0

5,7

14,5

6,1

4,9

6,3

5,5

14,9

0

2

4

6

8

10

12

14

16

Pingo Doce Feira NovaHypers

Feira Nova Mini-Hypers

Recheio Biedronka

2001 2002 2003 2004 2005

Sales / sqmLocal currency ('000)

10,3

%

6,5%

10,0

%

3,3%

11,1

%

6,5%

9,7%

3,6%

10,1

%

7,5% 7,8%

4,4%

10,4

%

7,5%

8,5%

4,9%

9,7%

6,7%

8,0%

5,1%

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

Retail Cash & Carry Madeira Biedronka

2001 2002 2003 2004 2005

EBITDA Margin% of sales

449

252

570

805849

412

249

597

925

419

241

624

925

408

255

621

1.05

9

930

404

281

607

1.34

8

862

867

884

0

200

400

600

800

1.000

1.200

1.400

1.600

Pingo Doce Feira NovaHypers

Feira Nova Mini-Hypers

Recheio Biedronka

2001 2002 2003 2004 2005

Sales €'000,000


13


14

Election Date: 15th April 2004 Composition of the Board of Directors elected for the term 2004-2006

President of the Board of Directors Elísio Alexandre Soares dos Santos

• 71 years old; • President of the Group since February, 1996.

Executive Board Members:

CEO and Responsible for the Financial Area (CFO) Luís Maria Viana Palha da Silva

• 50 years old; • President of the Executive Committee since 2004; • Executive Member of Jerónimo Martins SGPS, S.A. Board

since 2001. Responsible for Food Distribution Operations Pedro Manuel de Castro Soares dos Santos

• 46 years old; • Member of the Executive Committee; • Executive Member of Jerónimo Martins SGPS, S.A. Board

since 1995. Responsible for Manufacturing Operations and Representation and Marketing Services José Manuel da Silveira e Castro Soares dos Santos

• 43 years old; • Member of the Executive Committee; • Executive Member of Jerónimo Martins SGPS, S.A. Board

since 2004. Non-Executive Members of the Board:

António Mendo Castel-Branco Borges • 57 years old; • Non-Executive Member of the Jerónimo Martins SGPS, S.A.

Board since 2001. Hans Eggerstedt

• 67 years old; • Non-Executive Member of the Jerónimo Martins SGPS, S.A.

Board since 2001. Rui de Medeiros d’Espiney Patrício


Board since 2001.

3. CORPORATE BODIES


15

Artur Eduardo Brochado dos Santos Silva • 64 years old; • Non-Executive Member of the Jerónimo Martins SGPS, S.A.

Board since 2004. Manuel Fernando Macedo de Alves Monteiro


Board since 2004. Substitute Member of the Board of Directors:

Álvaro Carlos Gonzalez Troncoso

Single Auditor and External Auditor: PricewaterhouseCoopers & Associados – Sociedade de Revisores Oficiais de Contas, Lda. Palácio Sottomayor, Rua Sousa Martins, 1 – 3º, 1050-217 Lisboa Represented by: Jorge Manuel Santos Costa, R.O.C.

Substitute: José Manuel Henriques BernardoC.

Corporate Secretary:

Henrique Soares dos Santos Substitute Secretary:

Margarida Martins Ramalho President of the Shareholder’s General Meeting:

José Manuel Dias Loureiro Secretary of the Shareholder’s General Meeting:

António Neto Alves


16

4. BUSINESS AND OWNERSHIP STRUCTURE

PINGO DOCE - Supermarkets

FEIRA NOVA - Hypermarkets / Mini-hypermarkets PORTUGAL

RECHEIO - Cash & Carry

D I S T R I B U T I O N POLAND BIEDRONKA – Retail Stores

FIMA – Spreads & Cooking, Olive Oil, Ready to Drink Tea, Soups and Savoury

LEVER – Home & Personal Care

M A N U F A C T U R I N G

PORTUGAL

IGLOOLÁ – Ice Cream & Frozen Food

JMD – Agency & Marketing Services – Food and Cosmetics

JM RESTAURAÇÃO – Specialised Retail – Coffee Shops, Ice Cream Stores & Sandwich Stores

S E R V I C E S

PORTUGAL

HUSSEL - Specialised Retail – Sweets & Chocolates

A


17

Ownership Structure

Feira Nova

Gestiretalho

Pingo Doce JMR

JG Camacho

Funchalgest

Lidosol II

DISTRIBUITION

Recheio C&C

Recheio

Tand B.V. JMD (Biedronka)

FimaVG Fima Victor Guedes

Bestfoods

LeverElida Lever

IgloOlá Iglo MANUFACTURING & SERVICES

JMDPC

Caterplus

JM Restauração & Services

Hussel

J E R Ó N I M O M A R T I N S S G P S , S . A .

51%

100%

50%

35% 35%

100%

65%

58,5%

100%

41,5%

100%

51%

40%

100%

26%

100% 100%

100%

100%

49%

100%

100% 100%

50%

100%

51%

100%

PGJM 50%


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Jerónimo Martins, SGPS, S.A. is the Group’s Holding Company. It encompasses three distinct Business Areas: Food Distribution, Manufacturing and Representation and Marketing Services. Food Distribution is divided into the geographical areas of operation, in Portugal and Poland. In Portugal, the Business Divisions – Pingo Doce, Feira Nova, Madeira and Recheio - are responsible for the areas of Operations, Category Management, Marketing and Technical areas, and are supported by the Management Control and Human Resources managers, who in turn report to the Head of the Business Division, as well as functionally to the respective areas in the Holding Company. The management structure follows a near-matrix model, with Functional and Operational Management teams working to maximize the Group’s synergies in terms of scale, resources and know-how, and to guarantee the necessary focus on the consumer and on business formats. Complementing this, the Functional Divisions – Sourcing, Logistics, Quality Control, Financial, and Information Systems – are grouped in Gestiretalho, a company that provides services to the Business Divisions in the various areas of activity. The Business Divisions and the Functional Divisions are represented on the Executive Board for Distribution, a body that coordinates and focuses strategic decisions in the Distribution business in Portugal. In Poland, the management structure follows a model in which the head of the Business Division is responsible for the areas of Category Management, Marketing, Operations, Technical, Human Resources, Logistics, Financial, Quality Control and IT Systems. The Manufacturing management structure also follows a near-matrix, being organized into Business Divisions and Functional Divisions, so as to maximize synergies in terms of resources and know-how and ensure the requisite focus on the consumer. The Business Divisions - FimaVG, LeverElida and IgloOlá are responsible for Sales, Marketing and Production, and are supported by Management Control staff, who in turn report to the Head of the respective Business Area, and functionally to the respective Functional Areas. The Functional Divisions for Human Resources, Supply-Chain (including Purchasing, Planning, Logistics, Customer Service and Quality Control), Finance and Information Systems provide services to the businesses in their respective areas of activity. The General Managers of the Manufacturing and the General Managers of the Functional Areas sit on the National Conference, the organ that presides over the coordination of strategic decision-making for the various industrial businesses.

5. MANAGEMENT STRUCTURE


19

The Marketing, Representation and Restaurant Services are organized into the following Business Areas: JMD (which comprises the Food, Cosmetics and Caterplus divisions), Hussel and Jerónimo Martins Restauração e Serviços – all of which are under the same General Management. Each Business Area is responsible for Sales, Customer Service and Marketing, in the case of JMD, and for Operations, Marketing and Buying, in the case of Hussel and Jeronymo. Finance and Information Systems are Functional areas that provide services to JMD, Hussel and Jerónimo Martins Restauração, reporting to the same General Management structure, which is also responsible for Human Resources management in conjunction with the Functional Divisions of the Group’s Holding Company. The outsourcing of logistics was implemented in 2005 leading to the closing of this Functional area in this business area. Jerónimo Martins, SGPS, S.A. also includes a number of Functional Divisions whose responsibility is to support and advise the Executive Committee, the Board of Directors and to all the Companies of the Group, in the specific situation of each area – Human Resources, Development and Strategy, Planning and Control, Consolidation and Accounts, Internal Auditing, Financial Operations and Risk Management, Investor Relations, Special Projects, Tax, Judicial Affairs, Communication and Safety. Each of these Functional Management Teams of the Group’s Holding Company is responsible for ensuring consistency of approach for each of the objectives defined. A specific chapter deals with their activities, within the Corporate Governance section of this report.

II. Corporate Governance

21 0. Declaration of Compliance 22 1. Disclosure of Information 22 1.1. Organisational Structure and Distribution of Responsibilities

28 1.2. Specific Committees

29 1.3. Risk Control System

37 1.4. Share Price Performance

41 1.5. Dividend Distribution Policy

41 1.6. Stock Options Plan

42 1.7. Business between the Company and the Members of the Board, Holders of Qualified Stakes and Companies in a Parent-Subsidiary or Group Relationship

42 1.8. Investor Relations Office

44 1.9. Remuneration Committee

44 1.10. Yearly Amount paid to External Auditor

45 2. Exercise of Shareholder Voting and Representation Rights 45 2.1. Statutory Rules on Exercising the Right to Vote

46 2.2. Required Deadline for Depositing or Blocking Shares

46 2.3. Deadline for Receiving Postal Votes

46 2.4. Number of Shares Corresponding to One Vote

47 3. Company Rules 47 3.1. Code of Conduct and Internal Regulations

47 3.2. Internal Procedures for Risk Control in Company Activity 47 3.3. Measures Likely to Interfere with Public Tender Offers

48 4. Board of Directors 48 4.1. Description of the Board of Directors

52 4.2. Executive Committee

53 4.3. Structure and Role of the Board of Directors

54 4.4. Remuneration Policy of Board of Directors

54 4.5. Remuneration of the Members of the Board 55 4.6. Communications Policy for Alleged Irregularities Occurring within the

Company (Whistleblower Procedure)

Annual Report’05 – Corporate Governance

21

The Company fully complies with the recommendations of the Securities and Exchange Commission (CMVM) on the Governance of Listed Companies. The Company admits, however, that in the light of the text in question, it may be understood that there has not been a complete response to the Recommendation concerning the individual discrimination of remuneration paid to the Members of the Board of Directors. In this respect, the Company maintains the view that there are other options for verifying the internal distribution of remuneration and assessing the relationship between the performance of each Company sector and the level of remuneration of the Members of the Board of Directors who are responsible for supervising these sectors. Such a requirement can be obtained by indicating the overall remuneration paid to Executive Members, on the one hand, and the Non-Executive Members, on the other. In addition, the Board of Directors believes that the internal and external sensitivity that such a disclosure could cause in no way contributes towards improving the performance of the Board Members. Therefore, the Recommendation has been adopted as far as remunerations in collective terms are concerned, and by discriminating the amounts paid to Executive Members and Non-Executive Members, with reference to both the fixed and variable parts.

0. DECLARATION OF COMPLIANCE


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1.1. Organizational Structure and Distribution of Responsibilities The Jerónimo Martins Group is organized into three business areas – (i) Food Distribution, (ii) Manufacturing and (iii) Representation, Marketing and Restaurant Services. The former, in its turn, is organized into two geographical areas and Operating Divisions. 1.1.1. Operating Divisions The organizational model of the Jerónimo Martins Group is aimed mainly at ensuring specialization in the various Group businesses by creating geographical areas and Operating Divisions that guarantee the necessary proximity to the different markets. The Food Distribution business is divided into geographical areas and currently has four Operating Divisions in Portugal - Pingo Doce (supermarkets), Feira Nova (hypermarkets), Recheio (cash & carry) and Madeira (supermarkets and cash & carry’s) – and an Operating Division in Poland - Biedronka (food stores).

1. DISCLOSURE OF INFORMATION

Functional Divisions Corporate Center

Services ManufacturingFood Distribution

Portugal

Functional DirectionsOperational Support

Poland

Executive Officer of the Board

Biedronka

JM Restauração e Serviços

Hussel JMD

LeverElida IgloOla FimaVG

Pingo Doce Madeira Feira Nova Recheio

Lever Iglo Fima Bestfoods

Jerónimo Martins, SGPS, SA


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The Manufacturing business comprises a joint venture with Unilever, in the Companies FimaVG (Food Products, including Bestfoods), LeverElida (Personal and Home Care) and IgloOlá (Ice-Creams and Frozen Food). Within the portfolio of the Group there is also a business area dedicated to Representation, Marketing and Restaurant Services, which includes: (i) JMD, dealing with the representation in Portugal of important international brands, some of which are market leaders, of fast-moving food products, some cosmetics premium brands and also mass market brands. JMD also includes Caterplus, specialists in the trade and distribution of specific foodstuffs for Food Service; (ii) Hussel, a retail chain specialized in chocolates and confectionary, with 18 stores nationally; and (iii) Jerónimo Martins Restauração e Serviços, with the chain of coffee kiosks Jeronymo, the ice-cream stores Ben & Jerry’s and Olá and also the Subway stores, which provide light, fast, healthy meals under the concept eat fresh. 1.1.2. Functional Divisions of Operational Support The Functional Divisions at operational level ensure that Group synergies are maximized through the sharing of resources and functions across the main markets, in order to optimize the efficiency of the Organization and the sharing of relevant skills and know-how. The Functional Divisions of Operational Support are: Sourcing, Logistics, Quality and Environmental Control, Financial and Information Systems. The Functional Divisions are responsible for providing services to the various operating divisions of distribution in Portugal, in accordance with the guidelines given by the Group’s Holding Company. They are also responsible for ensuring standard of policies and procedures. 1.1.3. Functional Divisions of the Holding

Legal Affairs António Neto Alves

Internal Audit Nuno Sereno

Communication Ana Vidal

Consolidation and Accounts António Pereira

Development and Strategy Margarida Martins Ramalho

Financial Operations Conceição Tavares

Planning and Control Ana Luísa Virginia

Special Projects Francisco Martins

Human Resources Inês Cavalleri

Security Eduardo Dias Costa

Fiscal Affairs Rita Marques

GRUPO JERÓNIMO MARTINS Functional Divisions of Corporate Support

Investor Relations Cláudia Falcão


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As the Holding Company of the Group, Jerónimo Martins SGPS, S.A. is responsible for ensuring consistency between the established objectives and the available resources. The Holding Company is responsible for (i) defining and implementing the development strategy of the Group’s portfolio, strategic, (ii) planning and control of the various businesses and its consistency with global objectives, (iii) defining and controlling financial policies and (iv) defining human resources policy, with direct responsibility for implementing the Management Development Policy. The Functional Divisions of the Holding provide support to the corporate centre and rend services to the Group’s operating and functional divisions. They are organized in the following way:

Legal Affairs – Responsible for supervising the Group’s corporate matters and for ensures strict compliance by all its Companies with the legal obligations. Legal Affairs also assists the Board of Directors in preparing and negotiating contracts in which Jerónimo Martins is a party and heads the development and implementation of strategies for the protection of the Group’s interests in the case of legal disputes, and managing external counselling.

In 2005, the Division focused its activity on overseeing compliance with company obligations; on the coordination of the adoption of recommendations regarding the Governance of the Company; and on overseeing the restructuring and expansion plans of the Group.

Internal Audit – Assesses the quality and efficiency of the systems (both operational and non-operational) of internal control and risk control established by the Board of Directors, and ensures conformity with the Group’s Manual of Procedures; The Division also guarantees full compliance with the procedures laid out in the Operations Manual of each business unit and works for compliance with the legislation and regulations applicable to the respective operations. This Division reports direct and functionally to the President of the Board of Directors. The activities carried out by this Functional Division are detailed in point 1.3. of this chapter. Communication – Proposes and implements strategies for external and internal communication. It is also responsible for the areas of: Media Advisor of the Holding and its companies, Internal Communications, Patronage, communication in the area of Social Responsibility and the development of any article or event which may involve the image of Jerónimo Martins. 2005 was noteworthy for the four events which were held using Media agents and Directors of the Jerónimo Martins Board, the preparations for the publishing of the Annual Report in digital format, which was an innovation in terms of the communication methods used by companies quoted on the PSI-20, and for the graphics work developed for the Jerónimo Martins Training School and the My.JM.pt Portal. During the year the Company also worked to heighten awareness on the theme of Social Responsibility, with a permanent


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insert in the Internal Magazine, as well as an edition dedicated to the theme in the Group’s mangers magazine.

Consolidation and Accounts – Prepares consolidated financial information to comply with legal obligations and supports the Board of Directors, by implementing and monitoring the policies and the accounting principles adopted by the Board and common to all the Companies of the Group. The Division also verifies compliance with the respective statutory obligations.

In 2005, activity was centred on supervising conformity with the accounting standards followed by the Group, supporting the Companies in the accounting assessment of all non recurrent transactions, as well as in the restructuring and expansion activities of the Group.

The efforts made by the Jerónimo Martins Group in recent years in complying with the international standards have allowed us to be assured that the financial information released throughout 2005, as well as that presented in the Annual Report, are consistent and entirely comparable to previous years.

Development and Strategy – Guarantees the continual evaluation of the strategic priorities, which provide sustainability to the Group’s business; the alignment of the three-year plans of the several business areas with the strategic priorities; and the widespread and general understanding of the main challenges facing the Organization. The Division also assured the efficient implementation of the Balanced Scorecard, focussing the Management on critical projects selected according to the main goals of each business area’s plan, to the demands for the evaluation of innovative alternatives and new business, and to the development needs of the Organization, its policies, practices and processes. The Division promotes debate based on both internal and external information, which leads to change initiatives and so to maximise the capacity for value creation. In addition, it accompanies the evolution both of the market and of the most relevant companies, providing support to the strategic planning area of the Group, both in the sectors and geographical areas in which it operates and in the business areas in which it may invest. In 2005, the Division was focused on the consolidation of strategic planning processes, especially at the level of Market Benchmarking, and on the elaboration of the “Orienting Management for Value Creation” programme, with awareness-raising actions on Innovation and on the importance of value creation to stakeholders.

Fiscal Affairs – Provides all the Group’s Companies with assistance in fiscal matters, ensuring compliance with the current legislation as well as optimizing the business unit’s management activities from a fiscal point of view. The Division also manages the Group’s tax disputes and its relations with external consultants and tax authorities.

In the course of its work in 2005, the Fiscal Affairs Department provided assistance in the company’s restructuring operations. In addition, special work was done on Value Added Tax (IVA) and Customs Rights, with a view to making uniform the policies adopted by the various Companies in the Jerónimo Martins Group.


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Finally, over the year 2005, the Fiscal Department created various procedural actions to better defend the interests of the Group before the Tax Authorities. Financial Operations – This Division includes two distinct areas: Risk Management and Treasury Management. The area of Risk Management is dealt with in detail in point 1.3 of this chapter.

Treasury Management includes operational management of payment processes, treasury planning and cash management of all the distribution companies of the Jeronimo Martins Group in Portugal, carrying out individual as well as consolidated planning, and generating the financial resources necessary according to this planning. One of the main functions of treasury planning is to find the most suitable sources of financing for a given investment profile. This is done by analyzing deadlines, type of financing, cost, contractual conditions and the entities involved, and assessing whether all these parameters match the policies defined by the Executive Committee. This team is also responsible for managing contacts between the financial bodies and evaluating potential relationships in this area. In what payments is concern, it includes the management of all cash outflows regarding the treasury planning. In 2005 the treasuries finished their integration, which occurred at the end of 2004, and which led to the optimization of various IT developments, achieving a significant reduction in operational costs and also savings from the synergies acquired in the central processing of payments for the various companies of the Group.

Planning and Control – Responsible for ensuring the definition and implementation of processes, policies and procedures in the area of planning and control (plans, budgets and investments). The Division also coordinates and supports the acquisition and sale of companies and businesses and company restructuring operations.

In the year 2005 emphasis was placed on the analysis of investment proposals, as a result of the speeding up of Retail expansion plans in Portugal and Poland. In order to simplify and speed up the system for analyzing and approving investment proposals in Poland, an equally rigorous yet quicker to reach approval process was created together with the Polish team.

In what regards company restructuring, operational and financial assets were transferred from Companies, which no longer added value and/or which introduced complexity into the administrative systems and processes, allocating these assets more efficiently for the Group. In addition, occasional acquisitions of stores were made.


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Special Projects – In collaboration with the various Operating Divisions of Food Distribution in Portugal, the Division’s main objectives are to establish priorities and to optimize existing processes within the Companies, as well as to recognize new opportunities that may add value for customers, increase business profitability, increase productivity and improve competition in the markets in which they are present. It also aims to provide innovative processes, promote responsibility in those involved and integrate businesses and new information technologies. The activities carried out by this Functional Division can be found in detail on the Consolidated Management Report chapter. Human Resources – Proposes and implements global strategies and policies for Human Resources to be applied to the whole Group, in particular to managers. It is therefore responsible for drawing up Human Resources strategies, policies, standards and procedures, namely in the areas of recruitment, training, performance management, career management and the salaries and benefits of the Group’s Management staff. The Division is also responsible for coordinating new projects and for compliance with good Human Resources practices.

The activities carried out by this Functional Division can be found detailed on the Consolidated Management Report and Social Responsibility chapters. Investor Relations – This Division is the interlocutor with all the investors – institutional and private, national and foreign – as well as the analysts who formulate opinions and recommendations regarding Jerónimo Martins. Besides guaranteeing the availability, through institutional channels, namely the website of the Securities Exchange Commission, of all information which may influence the price of stocks, the Division is responsible for providing clarification regarding the different Business Areas and providing general information. The activities carried out by this Functional Division can be found in detail in this chapter in point 1.8.. Security – Defines and controls procedures aimed at preserving the security of personnel and assets within the Group and monitors any matters involving the police or legal authorities, when justified. The Department is also responsible for supporting the audit of security systems and risk prevention. In 2005, the Security Department paid special attention to assessing the practices used in the various Operating Divisions, with a view to optimizing the security procedures adopted. The activities carried out by this Functional Division can be found in detail in this chapter in point 1.3.2..


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While their functions are carried out collegially, each Member of the Executive Committee holds supervisory responsibilities in certain specific areas, as follows: Luís Palha da Silva (President): Development and Strategy, Financial Area, Reporting and Operational Control, Investor Relations, Legal Affairs, Fiscal Affairs, Human Resources and Communication. Pedro Soares dos Santos: Food Distribution Operations, including Sourcing, Logistics, Quality Control, Human Resources, Security and Information Systems. José Soares dos Santos: Manufacturing Operations, Representation, Marketing and Restaurant Services. 1.2. Specific Committees 1.2.1. The Ethics Committee The Ethics Committee of the Jerónimo Martins Group currently comprises Ana Vidal (Communication Director), who presides, Hugo Cunha (JMR’s Director of Human Resources), and António Neto Alves (Director of the Legal Department). Its mission is to provide independent supervision of the disclosure of, and compliance with, the Code of Conduct of the Jerónimo Martins Group in all its Companies. This Committee reports to the President of Board of Directors. In performing its duties, the Ethics Committee: (i) establishes channels of communication with the addressees of the Code of Conduct of the Jerónimo Martins Group and gather information sent for this purpose; (ii) supervises the setting up of a suitable system of internal control of compliance with the Code of Conduct and assesses the recommendations arising from these controls; (iii) evaluates the questions which, in terms of compliance with the Code of Conduct of the Jerónimo Martins Group, may be submitted to it by the Board of Directors and by the Audit Committee, as well as makes an abstract analysis of those questions that may be raised by any employee, customer or business partner; and (iv) submits to the Company’s Board of Directors any measures it considers appropriate for adoption in this area, including the reviewing of internal procedures, as well as proposals for changing the Code of Conduct of the Jerónimo Martins Group.

In the course of 2005, the Ethics Committee met five times, and examined various questions, which were put to it by the Executive Committee or by the Group’s employees. This year, a new system was introduced to improve communication of alleged irregularities within the Company, which it is hoped will be swift and efficient. This point is detailed in point 4.6. in this chapter. 1.2.2. The Internal Control Committee The Internal Control Committee, appointed by the Board of Directors and reporting to the Audit Committee, has the specific responsibilities of assessing the quality and reliability of the internal control system and the process of preparing financial statements, as well as assessing the quality of the monitoring process being used in the Companies of the Jerónimo Martins Group, with a view to assure compliance with the laws and regulations to which they are subject.


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In performing its tasks of assessing the quality of the monitoring process being used in the Companies of the Group, with the aim of ensuring compliance with the laws and regulations to which they are subject, the Internal Control Committee must obtain regular information on the legal and fiscal contingencies that affect the Group’s Companies. The Internal Control Committee meets once a month and consists of a Chairperson (Mr. David Duarte) and three non-executive members (Mr. José Gomes Miguel, Mr. Nuno Sereno and Mr. Henrique Santos), none of whom is a Company Director. In 2005, the Internal Control Committee met ten times to carry out its activities of supervision and assessment of risks and critical processes and to review the reports prepared by the Internal Auditing Department. Since a representative of the External Auditing Board is invited to attend these meetings, the Committee is informed of the conclusions of the external auditing work that takes place over the year. Using this information, it is therefore possible to constantly assess the practicality of the Internal Auditing Department’s plan of activities. 1.2.3. Audit Committee An Audit Committee was formed in 2004, within the scope of the Board of Directors, which is responsible for assessing corporate structure and governance and supervising risk management processes. In particular, in performing its duties of assessing the corporate structure and governance of the Jerónimo Martins Group, the Audit Committee has to submit to the Board of Directors the policy and measures of corporate governance to be adopted by the Group. In addition, this Committee supervises the accounting report of the Group. In supervising the risk management process, it is responsible for approving activity plans in this field, supervising the carrying out of these plans and creating a suitable system of internal risk management control with a view to meeting its objectives effectively. The Audit Committee currently comprises three Non-Executive members - Alexandre Soares dos Santos (President), Artur Santos Silva e Prof. António Borges, the last one is considered an independent member, according to number 2 of Article 1 of the Regulation 07/2001, as changed by Regulation 10/2005 -, met four times during 2005, and was particularly focused on questions related to risk control and the monitoring of the work of the Internal Control Committee. 1.3. Risk Control System 1.3.1. Risk Management Process The Company, and in particular the Board of Directors, dedicate a good deal of attention to the risks affecting their business. The continuity of the business depends in a critical way on the elimination or control of risks, which may materially affect its assets (people, information, equipment, facilities), thereby jeopardising the strategic objectives they have set. Because of the size and geographical dispersal of the Jerónimo Martins Group’s activities, the success of risk management depends on the participation of all of its staff, who should embed it as an integral part of their jobs, namely through the identification and reporting of risks associated with their area. All activities must be carried out with an understanding of what risk is and an awareness of the potential impact of unexpected events on the Company and its reputation.


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Risk Management Objectives In the Jerónimo Martins Group, Risk Management aims to meet the following objectives: • To promote the identification, evaluation, treatment and monitoring of risks, in

accordance with methodology common to the whole Group.; • To assess regularly the strengths and weaknesses of key value drivers; • To develop and implement programmes to cover and prevent risk; • To integrate Risk Management into business planning; • To promote the awareness of the workforce with regard to risks and the positive

and negative effects of all processes which help to create value; • To improve the decision-making process and priority-setting, through the

structured understanding of the business processes of the Group, their volatility, opportunities and threats.

The Risk Management Process (RMP) The RMP is cyclical in nature, and considers (i) the identification and evaluation of risks; (ii) the definition of management strategies; (iii) the implementation of control processes; and (iv) monitoring the process. The RMP at the Jerónimo Martins Group is in line with the standard of the Federation of European Risk Management Associations (FERMA), because it is seen as a model of good practice. The objectives set during the process of strategic and operational planning are the starting point for the RMP. At that point, internal and external factors, which may compromise the achievement of those goals, are identified and evaluated. This approach is centred on the concept of Economic Value Added (EVA). It begins with the analysis of the key value drivers of both of the operating profit and the cost of capital, in an attempt to identify the factors of uncertainty, which may negatively influence the generation of value. In this manner, a systematized, interconnected perspective of the risks inherent to processes, functions and organizational divisions is developed. The evaluation of risks aims, essentially, to distinguish irrelevant risks from material risks given that only the later require active management. It involves a consideration of the sources of risk, the probability and the consequences of occurrence in the context of the control environment. Controls may affect both the probability of occurrence of an event and the extent of its consequences. 1.3.2. Organization of Risk Control The risk areas whose management required the allocation to specific departments are as follows:


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Facilities and Equipment The Companies Technical Teams, in strict collaboration with the respective Operating Divisions, have the responsibility of guaranteeing the integrity of the facilities and the definition of regular maintenance programmes, in order to meet operational needs as well as to manage the process which aims to reduce to the minimum the negative impacts on operations caused by maintenance and repair of equipment. In this area of risk the Technical Managers are also involved in the supervision of the state of electrical equipment, the management of the means of protection and detection of fires as well as the storage of flammable material. Safety and Hygiene at Work This area operates under the principle of “zero tolerance”. In order to ensure compliance with this principle, audits to safety and hygiene at work are regularly carried out, and are especially aimed at professional risk factors, as regards both to prevention and protection, at safety in the workplace and the assessment of facilities and equipment. The probability and the impact of risks in this area are permanently assessed through accident reports whose aim is to ascertain causes and applicable corrective measures. The equipment used is also subject to regular tests , in order to guarantee its conformity with legal requirements. Training programmes on First Aid, Fire Fighting, Building Evacuation and Load Movement are one way to mitigate risk in this area. In the Food Distribution area in Portugal, the coordination of the risk management process is headed by the Director of Safety and Hygiene at Work, integrated in the structure of Gestiretalho. In Poland, this responsibility is decentralized among the regions. In Manufacturing, this area is managed by different structures according to the Companies involved. Security of People and Property The physical integrity of people and property is one of the main concerns of the Group. In order to provide a response to the needs, which arise in this area, there is a Security Department, which intervenes in cases of robbery or break-in, as well as fraud, or other illicit and/or violent activities perpetrated on the premises of, or against the employees of, the Jerónimo Martins Group. Among the responsibilities of the Security Department are: i) the definition and checking of procedures, in terms of prevention, regarding the security of people and property of the Group, including the supervision of the performance and strategies of the security/surveillance firms hired; ii) the follow up, when deemed necessary, of affairs involving the police or judicial authorities; iii) providing support to the security systems and risk prevention audits. Investments made in this area are always subject to the most rigorous cost benefit analysis, which compares the costs of implementation with the financial and other impacts of potential losses.


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The Security Department is part of the Functional Divisions, which make up the Corporate Centre of the Company and reports directly to a member of the Executive Committee. In the course of its operations, the Department is in close contact with the Operational, Legal Affairs, Internal Audit and Risk Management Divisions. Quality, Food Safety and the Environment This area is coordinated by the Quality and Environmental Control Department, which in collaboration with other areas of the Companies, plays a preventive role in the chains of production and distribution, from the origin of the raw materials to the sale of the product to the customer. The management of this area of risk follows the principles of prevention, vigilance and training.

In 2005, noteworthy events include the work done towards certification of the Recheio stores (HACCP according to the Codex Alimentarius), of the Distribution Centres (HACCP according to DS 3027 and Environmental Management ISO 14001) and of the Food Service platform. To this end, and with a view to the Quality, Food Safety and Environmental Protection of the Group’s Companies in the Distribution area, Quality Control is present from the moment suppliers are being selected. Later in the process its presence is felt while checking the products as they enter the Distribution Centres and last when the products are displayed in the stores,. The highlights regarding risk reduction initiatives in the Quality and Food Safety area are audits and specific visits to the stores, and training initiatives, especially in the area of perishables, as well as the processing of lab analyses and supplier audits, especially of Private Labels suppliers. Efforts are made to ensure that existing or future facilities and equipment (both for conservation and transportation) are adequate. The Department also aims to ensure that the policies and procedures put in place are checked, reviewed, implemented and divulged to employees, through continual training. This promotes a consolidation of the market positioning of the Group’s brands, as well as dynamism in defence of the environment and the employment of good practice in Food Distribution, in order to protect consumer health.

Financial Risks In this risk area, the Jerónimo Martins Group is mainly exposed to Euro denominated interest rate risk and the depreciation of the Polish Zloty. In material terms, ignoring the existent hedging operations: (i) an increase of 1% in Euro interest rates would have an impact in the consolidated accounts of Euro 6 million pre-tax; and (ii) an adverse variation of 10% on the EUR/PLN would have a negative impact of Euro 14 million in the consolidated accounts. Management of such risks is governed by principles defined at the level of the Executive Committee, with the following objectives appearing on the Strategic Scorecard of the Group: (i) hedge 75% of the financial debt issued at variable interest rate maturing after 31st December 2006; (ii) hedge 75% of the net investment in Poland. In order to manage these risks, the Risk Management Department is aided by specific software, allowing not only validation of the accounting records, but also an


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analysis of the proposals and quotes presented by the financial counterparties with whom it deals. The interest rate risk is managed by recourse to operations involving more or less structured financial derivatives, contracted at zero cost. At the end of the year, the notional amount of interest rate derivatives was Euro 187.5 million. As of 31st December 2005, the fair value of the hedging instruments was minus Euro 3.27 million. These transactions generated over the year negative cash flows of Euro 423 thousand, largely due to the interest associated with the plain vanilla interest rate swaps (Euro 915 thousand). As the rational behind these operations is to protect against interest rate rises, these negative impacts are the result of the evolution in Euro interest rates over the year:

Period Euribor 6M € 2Y IRS € 5Y IRS € 10Y IRS 31/Dec/04 2,22% 2,63% 3,17% 3,76% 31/Dec/05 2,64% 3,07% 3,22% 3,46%

∆ b.p. +42 +44 +5 -30 Average 2004 2,15% 2,62% 3,44% 4,17% Average 2005 2,23% 2,53% 2,97% 3,47%

∆ b.p. +8 -9 -47 -70 With regard to the goal set in the Strategic Scorecard, which entailed hedging 75% of the debt maturing beyond December 2006, and bearing in mind the path interest rates followed, it was decided not to complete the objective in 2005. Given that these instruments were traded at zero cost, the performance of the portfolio will be quite efficient provided that the rates do not swing more than 175 base points in the face of the forward levels implicit at the end of the year. Assuming parallel shifts to the interest rate curves to which the Group is exposed (EUR, USD and CHF) through the financial derivatives traded, the financial impacts (in millions of Euros) would be, in comparative terms, the following:

Shift With hedges Without hedges Difference -25bp -2,9 -4,1 1,2 +25bp +3,1 +4,1 -1,0 +50bp +6,2 +8,1 -1,9 +75bp +9,1 +12,2 -3,1 +100bp +12,0 +16,2 -4,3 +125bp +15,2 +20,3 -5,1 +150bp +18,8 +24,4 -5,5

In terms of exchange risk, and whenever possible, attempts are made to manage exposure through natural hedges, namely through the issuance of financial debt in local currency. When this is not possible, the risk is managed through, more or less structured, zero cost transactions. At the end of 2005, there were two significant cross currency swaps: (i) hedging of the Polish net investment worth Zloty 400 million; (ii) full hedge of debt issued in dollars in 2004worth 180 million US Dollars.


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The hedging of the Zloty, which represents close to 70% of the net value of invested capital, allows to reduce to 4 million euros, the impact of a 10%, negative change in the EUR/PLN. Information Security The Information Security Policy (ISP) has as its objectives the formal definition of the rules of use and the maintenance of the Information assets of the Jerónimo Martins Group, and providing a clear perspective to all of the Group’s employees regarding their responsibilities in the use and protection of Information and Information Systems. The objective of this policy is the establishment of foundations ensuring:

• Controlled accessibility and availability of the systems, in accordance with the information value they process, store and transmit;

• The confidentiality, integrity and availability of information in any format; • The continuity of the business.

Compliance with the ISP is compulsory, a result of the commitment of the Executive Committee to all stakeholders with regard to the protection of its Information assets, and to comply with all current legal principles and norms, in accordance with the international standards in force. This Policy applies to all employees, workers, consultants, suppliers and commercial partners of the Jerónimo Martins Group, and with regard to all Information formats, including digital, paper, voice, and all the information systems which create, process and transmit information data. Nonetheless, and because of the basic principle of the necessity of knowledge, the information is only available to those who require knowledge of it. The ISP, made up of 12 directives, is supported by a series of Norms and Procedures, which detail the information security initiatives to be applied at the level of all the Companies of the Group. Information Security includes the following areas of intervention:

• Defining ownership and classification of information assets; • The protection of personal privacy, business information and intellectual

property; • The normalization and divulgence of policies, norms and procedures of

security; • The evaluation, control and minimization of risks associated with Information

protection. In the second semester of 2005 the Department of Information Security was created, allowing the Group to eliminate the most critical areas of vulnerability in terms of information security through the monitoring and following of the proposed recommendations. The same semester saw the beginning of several publicity initiatives for the Information Security Policy. The Information Security Department is the body responsible for the planned, organized development and implementation of Information Security initiatives, as well as for the definition and maintenance of a structure of policies, norms and procedures, which support Information Security initiatives. This Organization is supported by the work of the Information Security Officer, who is supported in the


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pursuit of his objectives by the Information Systems, Security and Internal Audit Divisions. In 2006, there will be continued work from the Department in order to make information security matters known within the Group, as well as to develop and coordinate plans for implementing security checks in the information systems and outsourced technological partners, with the structuring of security norms for classifying and protecting information. Also planned are the review and testing of the recovery of information systems, included in the continuity plan of the business for Pingo Doce. Legal Compliance Compliance with legal obligations is ensured by the Legal Departments at Company level. As for the Holding of the Group, the Legal Department guarantees the coordination and implementation of strategies aimed at protecting the Group’s interests in case of legal dispute and also the coordination with external advice it may need to resort to. In order to ensure the fulfilment of tax obligations and also to mitigate tax risk due to inadequate checks and balances, the Tax Department of the Holding advises all the Group’s Companies, and also manages their legal tax issues.

Process Risks The area of Process Risks includes the following classes: Operating Risks, Human Resources, Information Systems and Information Risks to Decision-making. The management of some risks classified in these classes is, given its transversal nature with the various critical processes of the business, divided into different functional areas in the Group’s Companies. The Operating Risks class considers those risks related to sourcing, the supply chain, transport, stock damage, obsolescence, rupture, level of service, customer satisfaction, pricing, cash collection, investments, business interruption and fraud. Among the risks relative to Human Resources, are risks associated with salary processing, authorization levels and ethical behaviour. Within Information Risks to Decision-making are considered accounting or financial report risks. The Systems Risk class includes access risks, communications, and infrastructure and disaster recovery. In this class information security risks were segregated upon the creation of the Information Security Organization, in 2005. 1.3.3. Communication, Report and Risk Management Process Monitoring Risk Management process monitoring involves the Board of Directors, the Operating Divisions, the Functional Divisions of the Operation, the Audit Committee and members of Risk Management and Internal Audit. Specifically, the Board of Directors, as the body responsible for the Group’s strategy, has the following objectives and responsibilities:

• To establish the most significant risks affecting the Group; • To ensure that the Group possesses appropriate levels of knowledge of the

risks affecting operations, and how to manage them;


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• To ensure the widespread promotion of the Group’s Risk Strategy at all hierarchical levels;

• To ensure that the Group is able to minimize the probability and the impact of risks to the business;

• To ensure that the Group can react to crisis situations; • To ensure that the Risk Management process is adequate and that those

responsible maintain strict monitoring of those risks which have the highest probability of occurrence or impact on the Group’s activities.

Those responsible for critical processes of the business, along with members of the Risk Management Department, design and implement the risk control mechanisms. The Internal Audit of the Group in turn, evaluates the efficiency of these mechanisms. Evaluation of the Internal Control System The activity plan of the Internal Audit Department, approved annually by the Internal Control Committee, establishes the nature of the audits to be carried out, in order to evaluate the quality of the control processes which aim to achieve the objectives of the Internal Control System, namely those who ensure the efficiency of operations, the integrity of financial and operational reports and respect for the laws and regulations. To this end, process and conformity audits were carried out, as well as financial audits and information systems audits where the associated risks presented a high probability of occurrence and/or potential impact on operations. This approach helps make the process of internal auditing of the Group more efficient and contributes to increase the awareness of those responsible to the prompt implementation of calendarized recommendations. The results of these consultations and the evaluation of operating risks are made available by the Internal Audit Department to the Audit Committee, to the Internal Control Committee and to the Executive Members of the Group’s Board via a quarterly Audit Letter. The work of the Internal Audit Department was aimed in 2005 at evaluating to what extent the Internal Control System of the Group’s Companies can cover the effect of identified risks, both in terms of likelihood and of impact on operations. This evaluation of the control processes allowed the updating of a database of risks, which affect or may come to affect the Group’s Companies. In accordance with the plan of activities and also in light of the updating of the models of operating risks and critical business processes applicable to each Company in the Group, audits were carried out on processes related to stock damage and obsolescence risks, cash collection, supply chain and level of service, transport, investments and assets safeguards. In the area of Human Resources, audits were carried out on risks related to salary processing and time control. In the area of information systems, evaluation audits were carried out on risks in access, communications and information integrity, while at the same time promoting the update of the conclusions reached the previous year regarding the general controls of information systems, especially regarding disaster recovery.


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1.4. Share Price Performance The main Portuguese share price index – the PSI-20- was up 13% in 2005. This performance was below the gains of the biggest European markets, namely the Dax and the CAC40, which rose 27% and 23% respectively. Pan-European indexes such as the Stoxx 50 also posted increases of almost 20%. During the year, the stock markets performance was influenced by factors such as the new high record oil price, the performance of the Euro against the Dollar and the increase in the reference interest rates of some of the leading world economies. There was also strong growth in the companies results area, mainly in sectors such as Banking and Energy, and the likelihood of improved future results, allied to increased dynamism in the area of Mergers and Acquisitions in Europe and the USA (large scale businesses with significant volumes), allowed the markets to achieve identical growth rates to those of 2001. More specifically, the Portuguese stock market registered 15 rises, some of which were significant, such as in the case of Altri, a newcomer to the Portuguese Stock Market, which showed strong growth, Mota Engil and Semapa. Jerónimo Martins, the Sonae Group, Media Capital, Cofina and Banco BPI, all showing gains of more than 30% and contributing to the positive balance of 2005, also enjoyed good share performance. Throughout the year, the PSI-20 showed positive, linear growth, except between June and July, when it was trading at lower prices than at the end of 2004. By December 2005, annual highs were again reached in various stocks, with many returning to 2001 levels.


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1.4.1. Performance of Jerónimo Martins Share

Since the first months of 2005, the Jerónimo Martins share has seen a trend for growth, in line with the PSI-20. The low of the year was on 3rd January (9.85 Euros), and the high on 19th December (12.84 Euros). The biggest increases in the share price coincided with the publication of preliminary trading figures for 2004 in the second week of January, with the announcement of dividends payment in the first week of April, and with the third quarter 2005 results disclosure and the Investors’ Day in Poland, in the last week of October and in the first week of November, respectively. During the fourth quarter of the year, the Jerónimo Martins share price has matched the positive trends shown by the PSI-20, with the final share price on 31st December being 12.70 Euros, or a 3 Euro (31%) increase over the year. Also the beginning of 2006 showed increases on share price of Jerónimo Martins and by the end of January the share reached 13.09 Euros, an increased of 3.1% over the month. In terms of liquidity, the share saw an average daily transaction rate in 2005 of 134 thousand shares, around 20% up on 2004, which shows the interest aroused in investors by the Group’s actions.


39

JM Shares Price & Index Performance

20

40

60

80

100

120

140

Dez

-04

Jan-

05

Fev-

05

Mar

-05

Abr

-05

Mai

-05

Jun-

05

Jul-0

5

Ago

-05

Set

-05

Out

-05

Nov

-05

Dez

-05

0

200.000

400.000

600.000

800.000

1.000.000

1.200.000

1.400.000

1.600.000

VOLUME JM PSI20

Results2004 Results

1Q05Results3Q05

Results1H05

Investor's Day

Preliminary Sales2004


40

1.4.2. Publication of Market Results Throughout the year, the Investor Relations Office continued to ensure the announcement and updating of the performance indicators of the various businesses. It also disclosed the Group’s quarterly results so as to keep analysts and investors informed as to the development of Jerónimo Martins’ operational and financial activity.

Information was given to all financial analysts and investors that contacted the Office by telephone or e-mail at [email protected]. The financial statements were released to the market on the following dates:

10-01-2005

09-03-2005

27-04-2005

03-08-2005

26-10-2005

Preliminary Sales 2004

FY 2004 Results

1st Quarter 05 Results

1st Half 05 Results

3rd Quarter 05 Results

1.4.3. Shareholder Structure

Shareholder Structure

18,2%

25,9%

55,9%

Soc. Francisco Manuel dos Santos

BPP (Strand Ventures+Multiplus+FitronManagement)

Floating and Own Shares

In 2005, the Companies whose rights to vote under the terms of Article 20, paragraph 1 of the Securities and Exchange Code are attributable to Banco Privado Português are identified in the note that refers the List of Qualified Shareholders on December 31st 2005, included in the Appendix to chapter III (Consolidated Management Report of this Report).


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1.4.4. Plan for Own Share Acquisition During 2005, there were no transactions involving of own shares and Jerónimo Martins SGPS, S.A. maintained 171,800 own shares in its portfolio, acquired in 1999 at an average price of 35.28 euros, and representing 0.14% of its share capital. 1.5. Dividend Distribution Policy The Board of Directors of Jerónimo Martins SGPS, S.A. established a policy of dividend distribution based on the following rules:

The value of the dividend distributed should be between 40% and 50% of ordinary consolidated earnings.

If, as a result of the application of criterium 1, there is a drop in the dividend of a certain year compared to that of the previous year and the Board of Directors considers that this decrease is a result of abnormal and merely circumstantial situations, it may propose that the value from the previous year should be maintained. It may even resort to existing free reserves, providing that the use of these reserves does not jeopardise the principles adopted in terms of balance sheet management.

In 2004 the gross dividend paid to shareholders was 0.36 euros per share, decided accordingly to the rules above mentioned. In view of the net results of this financial year and of the established policy, the Board of Directors will propose, at the General Shareholders Meeting, the distribution of a gross dividend pf 0.42 euros per share, excluding owned shares. This proposal represents an increase of 16.7% on 2004 dividend, corresponding to a dividend yield of 3.6% versus the average share price in 2005 – 11.76 euros. 1.6. Stock Options Plan By decision of the respective beneficiaries, the Jerónimo Martins Stock Option Plan Trust was dissolved, a decision which went back to that taken on 9th August, 1996 by the General Meeting of the Company, which conferred upon the Board Members full powers to establish the terms and conditions of a capital participation plan. This decision results from the realization by the Company that the incentive subjacent to the plan did not meet, for several years, the objectives defined at its conception, of maintaining a high performance level of the Group’s Employees in the carrying out of defined strategic objectives. Because new instruments have been applied, which allow a fairer and more efficient configuration of a management system by objectives, governed by analysis indicators of profitability, business growth, and value generation for the shareholders, the Plan’s members decided on its dissolution. In 2005, no share options were attributed according to the referred programme.


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1.7. Business between the Company and the Members of the Board, Holders of Qualified Stakes and Companies in a Parent-Subsidiary or Group Relationship During 2005, no business or operations were carried out between the Company and members of its Administrative or Assessory Bodies, or holders of Qualified Stakes. Regarding the Companies in a Parent-Subsidiary or Group relationship, the business carried out was done so in the normal running of its business and under arms length conditions. 1.8. Investor Relations Office With the aim of giving the market an up-to-the-minute, clear view of the Jerónimo Martins Group’s strategy regarding the various Business Areas, the Investor Relations Office produces an annual Financial Markets Communication Plan. This Plan, incorporated into the global communication strategy of the Group, considers a series of events organized with a view to publicising the various businesses of the Group, their strategies and future projections and, at the same time, accompanying the development of the year’s business activity, clearing up doubts. The activities carried out by the Office during 2005 are listed in the following table:

10 January

9 March 14-15 March

30 March 6-7 April 21 April

27 April 5 May 30 May 6 June 17 June 20 June 3 August 3 October

21 October 26 October 4 November

23-24 November 5-6 December 7-9 December

Release – Preliminary Sales 2004 Release – FY 2004 Results Roadshow London Release – Dividends Payment Roadshow Madrid UBS Continental Europe Small & Mid Cap Conference 2005 -

Frankfurt Release – 1st Quarter 05 Results Roadshow Lisbon Roadshow Madrid Global Retail Conference (Deutsche Bank) – Paris Investor’s Presentation Lisbon Iberian Mid & Small Cap Conference (BPI) – Madrid Release - 1st Half 05 Results UBS Southern European Small & Mid Cap Conference 2005 -

Palermo European Retailing Conference (IXIS Securities) – Paris Release - 3rd Quarter 05 Results Investor’s Day - Poland Espírito Santo Investment Iberian Event - Madrid Roadshow London Roadshow Boston and New York


43

Besides the events mentioned, the Office also promotes other contacts, through:

• Meetings with analysts/investors; • Answering questions sent by e mail and directed to the Office; • Telephone – answering calls and clearing up doubts; • The publication of announcements to the market through CMVM (Securities

and Exchange Commission) extranet at the Jerónimo Martins site, Euronext Lisbon and the mail shot aimed at all our investors/analysts who make up the database created and updated by the Office.

• Presentations for the financial community, the presentation of results, roadshows, General Meeting and conferences.

Contact with the Office is possible not only through the Representative of Investor Relations and Head of the Investor Relations Office – Cláudia Falcão -, but also via the e-mail address – [email protected]. The communications issued regularly by the Office are fully available on the Group’s site, at www.jeronimomartins.com, which aims to create more readily available information to all those interested. The site not only posts compulsory information, according to Article 3º -A of the CMVM (Securities and Exchange Commission) nr. 11/2003 Regulations, but also generic information about the Jerónimo Martins Group and its Companies, as well as other relevant data, namely:

• Announcements to the market on relevant facts; • The Group annual, semester and quarterly results; • Economic and financial indicators and statistical data, updated once or twice

a year according to the Company or Business Area; • Annual Reports of the Group’s Companies with listed securities; • The most recent presentation of the Group to the financial community; • Information about the performance of the stock on the stock market; • The annual calendar of company events, at the beginning of every year,

including, among others, Shareholders’ General Meetings, the disclosure of annual, semester, or, if applicable, quarterly, results;

• Information regarding the Shareholders’ General Meeting; • Information about Corporate Governance; • The Code of Conduct of the Jerónimo Martins Group.

The site also has a contact/information request form, which allows rapid interaction, via email, with the Company and the inclusion on the mailing list of the addressees of the information sent. The principal access coordinates of the Office are:

Address: Rua Actor António Silva, n.º 7, 14.º andar, 1600-404, Lisboa Telephone: +351 21 752 61 05 Fax: +351 21 752 61 65 E-mail: [email protected]

It is also the responsibility of the Office to produce the Annual Report, which is well known as a fundamental document for communicating with financial markets among others. The Office strives for the transparency and completeness of the information published in relation to the various Business Areas of the Group, and so to transmit clearly, completely and coherently the progress of the different businesses. The efforts of the whole Jerónimo Martins team in creating this document were rewarded with an honourable mention for the Annual Report 2004, in the category


44

of Non-Financial Companies, awarded at the Investor Relations Awards ’05 Ceremony, organized by Deloitte and by the newspapers Semanário Económico and Diário Económico. 1.9. Remuneration Committee The Annual General Meeting for 2004 elected a Remuneration Committee, made up of the shareholders António Sousa Gomes, José Queirós Lopes Raimundo and Arlindo do Amaral, none of whom is a Member of the Board of the Group, nor has any spouse, or relative in such circumstances. This Committee, in accordance with legal requirements, determines the earnings of the Members of the Board of Directors. During 2005, the Remuneration Committee met twice. 1.10. Yearly Amount paid to External Auditor The total remunerations paid to the External Auditor over the year were 663,826.00 Euros, not including expenses referring to travel and other costs supported directly by the Companies of the Group. In percentage terms, the amount referred to is divided as follows:

1) Services of legal accounts audit: 98%; 2) Other services (not legal accounts audits or External audits): 2%.

The services not included in the legal account certification, on a total of 13,986.00 Euros, are related to access to a fiscal database and to the revision of subsidiary accounts, as a part of commercial transactions with third parties. All these services are completely lateral to the work of the auditors and are carried out by employees who do not participate in any auditing work for the Group.


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2.1. Statutory Rules on Exercising the Right to Vote The right to vote by representation and the way in which this right is exercised are fully ensured in accordance with the law and Company articles of association, under the terms set down in the respective notices convening General Meetings. Moreover, the Company is actively committed to promoting the shareholders’ exercise of voting rights, namely through votes submitted by mail. The Company provides adequate information to enable the represented Shareholders to give voting instructions, namely by providing them with the proposals to be submitted at the General Meeting within the legally established time limits. Since 2003, the preparatory information for the General Meetings has also been made available on the Group’s institutional site. In accordance with the Company’s articles of association, shareholders with the right to vote may participate in the General Meeting provided that their shares are registered under their name in a securities account, or deposited in the Company’s safes or those of a credit institution at least five working days prior to the meeting. In the latter case, there must be proof of this deposit by means of a letter issued by the respective credit institution, which must also reach the Company’s Head Office within the same deadline of five working days. Shareholders owning a small number of shares may form a group to complete the minimum number of one hundred shares equivalent to one vote and may be represented by one of the members of the group. A Member of the Company’s Board of Directors or other shareholder may also represent shareholders at the General Meeting. In the case of an individual, the person appointed for the effect may be a spouse, an ascendant or descendant, or, in the case of a company a person appointed for that purpose. The instruments of shareholder representation must be addressed to the Chairman of the General Meeting, indicating the representative name and address and the date of the meeting, and delivered until the start of the proceedings. 2.1.1. Postal Vote The Company has established the right to vote by mail in accordance with the form provided in the latest convening notices. This form aims to facilitate voting in this manner and make it secure. Since 2004, the Company has provided the shareholders with ballot papers so as to facilitate this procedure. 2.1.2. Electronic Voting The Company recognises that the use of new technologies promotes the exercise of voting rights, especially in the case of electronic voting, so it will institute this mechanism in 2006.

2. EXERCISE OF SHAREHOLDER VOTING AND REPRESENTATION RIGHTS


46

2.2. Required Deadline for Depositing or Blocking Shares In accordance with the Company’s articles of association, shareholders with the right to vote may participate in the General Meeting provided that their shares are registered under their name in a securities account, or deposited in the Company’s safes or those of a credit institution, at least five working days prior to the meeting. 2.3. Deadline for Receiving Postal Votes As the Company articles of association fail to provide an indication in this matter, the Company has established a deadline of 48 hours prior to the General Meeting for the reception of postal votes, thus complying with and, to a certain extent, surpassing the recommendations of the Securities and Exchange Commission in this respect. 2.4. Number of Shares Corresponding to One Vote In accordance with Company articles of association, each block of one hundred shares corresponds to one vote.


47

3.1. Code of Conduct and Internal Regulations The Company must comply with current legislation and the rules of behaviour appropriate to its activity, adopting codes of conduct and internal regulations whenever the issues involved so call for them. The Jerónimo Martins Group has always acted upon principles of absolute respect for the rules of good conduct in the management of conflict of interests, incompatibilities and confidentiality and in ensuring that Members of the Board of Directors and Managers do not use inside information. To this end the Company has a regularly updated list of people that may access to inside information Although the existing instruments and practices have proved adequate in regulating these matters, it was decided that a code should be drawn up for the existing rules concerning the aforementioned issues, as well as others that are specifically related to the activities of the Jerónimo Martins Group companies. The aim of this code is to formalise commitments that require a high standard of conduct from everyone within the Group and provide a tool for optimising management. To this end, and besides the Code of Conduct that was approved by the Board of Directors on 30th July 2003, there are currently in force Regulations for the Board of Directors, the Executive Committee, the Audit Committee and the Internal Control Committee, which regulate the competence and functioning of the respective bodies. The above-mentioned Codes and Regulations can be consulted on the site of the Group at www.jeronimomartins.com, or requested at the Investor Relations Office.

3.2 Internal Procedures for Risk Control in Company Activity This matter is developed in point 1.3 of this chapter.

3.3. Measures Likely to Interfere with Public Tender Offers

No special rights or restraints on the exercise of voting rights are provided for in the Company articles of association. The Board of Directors knows of no agreements or any other means that could interfere with public tender offers. It also feels that clear information must be provided in this matter and recognises that such limitations may not be in the interest of shareholders.

3. COMPANY RULES


48

4.1. Description of the Board of Directors Since its election at the General Meeting on 15th April 2004, the Board of Directors of the Company has consisted of nine Members, of which three are Executive - Mr. Luís Palha da Silva, Mr. Pedro Soares dos Santos and Mr. José Soares dos Santos – and six are Non-Executive – Mr. Elísio Alexandre Soares dos Santos (Chairperson of the Board of Directors), Mr. António Borges, Mr. Rui Patrício, Mr. Hans Eggerstedt, Mr. Artur Santos Silva and Mr. Manuel Alves Monteiro. Mr Álvaro Troncoso was also elected as substitute. In accordance with the principles by which the Company is run, all Board Members are accountable to all shareholders equally. However, the independence of the Board of Directors in relation to shareholders is further reinforced by the existence of Independent Board Members. In light of the new amendment to Article 1, paragraph 2 of Regulations 07/2001 of Securities and Exchange Commission (CMVM), as altered by Regulation 10/2005, the Board Members Mr. António Borges, Mr. Rui Patrício, Hans Eggerstedt and Mr. Manuel Alves Monteiro are regarded as Independent Members. The Members of the Board of Directors also hold positions in other companies, namely:

Elísio Alexandre Soares dos Santos Member of the Supervisory Board of Banco Comercial Português, S.A. Director of Sindcom, SGPS, S.A. Director of the Company Francisco Manuel dos Santos, SGPS,S.A.

Luís Palha da Silva

Director of Jerónimo Martins Serviços, S.A.* Director of JMR - Gestão de Empresas de Retalho, SGPS, S.A.* Director of Lidosol II - Distribuição de Produtos Alimentares, S.A.* Director of Funchalgest - Sociedade Gestora de Participações Sociais, S.A.* Director of Lidinvest - Gestão de Imóveis, S.A.* Director of João Gomes Camacho, S.A.* Manager of Desimo - Desenvolvimento e Gestão Imobiliária, Lda.* Manager of EVA - Sociedade de Investimentos Mobiliários e Imobiliários, Lda.* Manager of Friedman - Consultoria e Serviços, Lda.* Manager of Hermes - Sociedade de Investimentos Mobiliários e Imobiliários, Lda.* Manager of Idole - Utilidades, Equipamentos e Investimentos Imobiliários, Lda.* Manager of PSQ - Sociedade de Investimentos Mobiliários e Imobiliários, Lda.*

* Companies that are part of the Jerónimo Martins Group.

4. BOARD OF DIRECTORS


49

Pedro Soares dos Santos

Director of Jerónimo Martins Serviços, S.A.* Director of Imocash - Imobiliário de Distribuição, S.A.* Director of Recheio Cash & Carry, S.A.* Director of Recheio, SGPS, S.A.* Director of Sindcom, SGPS, S.A. Director of Lidosol II - Distribuição de Produtos Alimentares, S.A.* Director of Funchalgest - Sociedade Gestora de Participações Sociais, S.A.* Director of Lidinvest - Gestão de Imóveis, S.A.* Director of Larantigo - Sociedade de Construções, S.A.* Manager of Idole - Utilidades, Equipamentos e Investimentos Imobiliários, Lda.* Director of João Gomes Camacho, S.A.* Director of JMR - Gestão de Empresas de Retalho, SGPS, S.A.* Director of Feira Nova - Hipermercados, S.A.* Director of Comespa - Gestão de Espaços Comerciais, S.A.* Director of Gestiretalho - Gestão e Consultoria para a Distribuição a Retalho, S.A.* Director of Supertur - Imobiliária, Comércio e Turismo, S.A.* Director of Imoretalho - Gestão de Imóveis, S.A.* Director of Cunha & Branco - Distribuição Alimentar, S.A.* Director of Moser & Branco - Distribuição Alimentar, S.A.* Director of Dantas & Vale, S.A.* Director of Pingo Doce - Distribuição Alimentar, S.A.* Director of Casal de S. Pedro - Administração de Bens, S.A.* Manager of Friedman - Consultoria e Serviços, Lda.* Manager of Hermes - Soc. de Investimentos Mobiliários e Imobiliários, Lda.* Manager of Servicompra - Consultores de Aprovisionamento, Lda.*

José Soares dos Santos

Manager of Fima/VG - Distribuição de Produtos Alimentares, Lda. * Director of Fima - Produtos Alimentares, S.A. * Director of Victor Guedes Indústria e Comércio, S.A. * Manager of LeverElida - Distribuição de Produtos de Limpeza e Higiene Pessoal, Lda.* Director of Indústrias Lever Portuguesa, S.A. * Manager of IgloOlá - Distribuição de Gelados e de Ultracongelados, Lda. * Director of Iglo - Indústrias de Gelados, S.A. * Director of Gelcasa - Comercialização de Gelados e Ultracongelados, S.A. *

Director of Sindcom, SGPS, S.A. Director of Sociedade Francisco Manuel dos Santos, SGPS, S.A. Manager of Transportadora Central do Infante, Lda.

* Companies that are part of the Jerónimo Martins Group.


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António Borges

Vice-chairman of Goldman Sachs International Member of the Board of Directors of Sonae.com Chairman of the Supervisory Board of Banco Santander de Negócios Portugal Member of the Board of Directors of Heidrick & Struggles (USA) Member of the Board of Directors of CNP Assurances (France) Member of the Board of Directors of SCOR (France) Member of the Board of Directors of Caixa Seguros (Brazil)

President of the European Corporate Governance Institute

Rui Patrício

Member of the Board of Directors of Monteiro Aranha, S.A. Member of the Board of Directors of Monteiro Aranha Participações, S.A. Member of the Board of Directors of Companhia Industrial São Paulo and Rio Member of the Board of Directors of Portugal Telecom in Brazil Member of the Board of Directors of Espírito Santo International Holding

Hans Eggerstedt

Member of the Supervisory Board of Rodamco Europe N.V. Member of the Supervisory Board of Unilever Deutschland Gmbh Non-Executive Director of Colt Telecom Group, Plc. Member of the Advisory Board of ING Group Member of the Advisory Board of the Amsterdam Institute of Finance

Artur Santos Silva

Chairman of the Board of Directors of Banco BPI, S.A. Chairman of the Board of Directors of Banco Português de Investimento, S.A. Manager of Viacer – Sociedade de Participações Sociais, Lda. Member of the Board of Directors of Banco BPI Cayman Director of Sindcom, SGPS, S.A. Member of the Board of Directors of the Calouste Gulbenkian Foundation Member of the Board of Cotec Portugal – Business Association for Innovation Chairman of the Board of Inter-Risco, S.A.

Manuel Alves Monteiro

Chairperson of the Board of Directors of the Portuguese Association of Financial Analysts - APAF Non-Executive Director of Sociedade Douro Azul, S.G.P.S., S.A. Non-Executive Director of CIN - Corporação Industrial do Norte, S.A. President of the Direction of IPCG - Portuguese Institute of Corporate

Governance

Álvaro Troncoso Does not hold any other company post.

The current Chairman of the Board of Directors, Elísio Alexandre Soares dos Santos, began his career in 1957, joining Unilever. From 1964 to 1967, he took up a position as Marketing Director for Unilever Brazil. In 1968, he joined the Board of Jerónimo Martins as a Deputy Director, a post he combined with that of Jerónimo Martin’s representative in the joint venture with Unilever. He has been President of the Group since February 1996 and his current mandate expires in 2006.


51

Luís Palha da Silva, President of the Executive Committee, has a degree in Company Management from the Universidade Católica Portuguesa and another in Economics from the Instituto Superior de Economia e Gestão. He was an Assistant at the Universidade Católica between 1985 and 1992. From 1987 on he took on Director’s functions at diverse Companies, among which were Covina, SEFIS, EGF, CELBI, SOGEFI and IPE. He was Secretary of State for Trade, between 1992 and 1995, and Director of Cimpor between 1998 and 2001. He has been an Executive Director of the Company since 29th June 2001 and President of the Executive Committee since 2004. His current mandate expires in 2006. The Executive Director Pedro Soares dos Santos joined the Operating Division of Pingo Doce in 1983. In 1985, he joined the Sales and Marketing Department of Iglo/Unilever and, five years later, he takes up the post of Assistant Director of Recheio Operations. In 1995, he is nominated General Manager of the Company. Between 1999 and 2000 he takes on the responsibility for operations in Poland and Brazil. In 2001, he also takes on the area of operations for Food Distribution in Portugal. He has been Executive Director of Jerónimo Martins SGPS, S.A. since 31st March 1995. His current mandate expires in 2006. The Executive Director José Soares dos Santos, who holds a Biology Degree from the Universidade Clássica de Lisboa, joined Svea Lab AB in Sweden, in 1985, before in 1987 going on to work for Url Colwort laboratory. In 1988 he joined the human resources Department of FimaVG - Distribuição Produtos Alimentares, Lda. And in 1990 was named Product Director. Between 1992 and 1995 he worked for Brooke Bond Foods. He was Executive Director of Jerónimo Martins SGPS, S.A. between 31st March 1995 and 29th June 2001, and has been one again since 15th April 2004. His present mandate expires in 2006. The Non-Executive Director António Borges, who has a degree in Economics from the Universidade Técnica de Lisboa and a doctorate in Economics from Stanford University, joined INSEAD in 1980. In 1990 he was nominated Vice-governor of the Bank of Portugal and in 1995 Dean of INSEAD, as well as being a Lecturer at the Universidade Católica and Standford University and a Consultant of the Treasury Department of the USA, the OCDE and the Portuguese Government. He has held various administrative posts, including at Citibank Portugal, Petrogal, Vista Alegre, Paribas and SONAE. He has been a Non-Executive Director of the Company since 29th June 2001 and his current mandate expires in 2006. The Non-Executive Director Hans Eggerstedt, who has a degree in Economics from the University of Hamburg, joined Unilever in 1964, where he developed his career. Among other positions, he has been Director of Operations for Retail, Ice Creams and Frozen Foods in Germany, President and CEO of Unilever Turkey, Regional Director for Central and Eastern Europe, Financial, Information and Technology Director of Unilever. He was nominated for the Board of Directors of Unilever N.V and Unilever PLC in 1985, a position he held until 1999. He has been Non-Executive Director of Jerónimo Martins SGPS, S.A. since 29th June 2001, and his current mandate expires in 2006. The Non-Executive Director Rui Patrício has a degree in Law from the Law School of the Universidade de Lisboa, where he was an Assistant from 1958 to 1963. In 1970 he was named Sub-Secretary of State for Foreign Development. He was Vice-President of the Monteiro Aranha Group between 1976 and 1991, at which point he took up administrative functions at various Brazilian companies, among which were Monteiro Aranha, a Masa-Alsthom, Hochtief, Ericsson, Telesp Celular, and Axa


52

Seguros. He was also a Consultant for the Grupo Espírito Santo. He has been a Non-Executive Director of the Company since 2001, and his current mandate expires in 2006. The Non-Executive Director Artur Santos Silva has a degree in law from the Universidade de Coimbra. He was Director of the Banco Português do Atlântico, from 1968 to 1975, and Secretary of State for the Treasury, between 1975 and 1976. From 1977 to 1978, he was Vice-Governor of the Bank of Portugal. He has been President of the Grupo BPI since 1981, member of the Board of Directors of the Calouste Gulbenkian Foundation since 2002, member of the Consulting Committee of Portuguese Technologic Plan and member of the Consulting Council of the CMVM. He has been Non-Executive Director of the Company since 15th April 2004, and his current mandate expires in 2006. The Non-Executive Director Manuel Alves Monteiro holds a degree in Law from the Universidade de Coimbra. He was Spokesman for the – The Stock Market Committee, from 1991 to 2003, and Director Delegate of the Porto Stock Market and the Porto Derivatives Market from 1992 to 1999. He was spokesman for the Board of Directors of the IMC– Instituto Mercado de Capitais, between 1994 and 2003. He was a Member of the Founding Committee of the IFCI– International Finance and Commodities Institute (London), between 1996 and 2003, Chairman of the Board of Directors of Euronext Lisbon (Portugal) and Spokesman for the Board of Directors of Euronext Holding (Holland), Euronext Amsterdam (Holland), Euronext Brussels (Belgium), Euronext Paris (Paris) and Clearnet (France), between 2002 and 2003. From 2003 to 2004, he took on the Presidency of the Board of Directors of the Porto Casa da Música/ Porto 2001. He has been Non-Executive Director of the Company since 15th April 2004, and his current mandate expires in 2006. Álvaro Troncoso has worked for the Jerónimo Martins Group since 1961, having held diverse management positions in Manufacturing and Distribution, in particular in the areas of sales and human resources, having been General Manager of Recheio SGPS, S.A. and Director Delegate of Pingo Doce – Distribuição Alimentar, S.A and Feira Nova - Hipermercados, S.A. He was President of UNIARME – União de Armazenistas de Mercearia, Crl. until 2003. He has been Director of the Company since 31st March 1995, and his current mandate expires in 2006. 4.2. Executive Committee The main role of the Company’s Executive Committee is to assist the Board of Directors in its management functions. As a delegate body of the Board of Directors, and in accordance with its regulations, the Executive Committee is responsible for the following functions: • Monitoring the implementation by the Group’s Companies of the strategic

guidelines and policies outlined by the Board of Directors;

• Financial and accounting control of the Group and its Companies;

• Top-level coordination of the operational activities under the responsibility of the various Group Companies, whether or not integrated into business areas;

• Supervision of new business, during its launch phase and while the respective Companies are not integrated into a business area;


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• Implementation of the Human Resources management policy outlined for the entire Group’s executive staff.

The Executive Committee meets at the Company’s Head Office, or at any other location. The Chairperson is responsible for convening and running the meetings, setting the respective date and time and establishing an agenda. In 2005, the Executive Committee met 36 times.

4.3. Structure and Role of the Board of Directors Under the terms of the articles of association, the Board of Directors consists of an odd number of effective Members, with a minimum of seven and a maximum of twenty-one, and three substitutes. At present, the Board of Directors consists of nine Members, of which three are Executive and six Non-Executive. Since the Board of Directors has Independent Members and Non-Executive Members, it is endowed with a range of skills that enriches Company management, reflecting a desire and an interest in bringing together a wide range of technical skills, contact networks and connections with national and international entities, which optimises the Board’s contribution to the governance of the Jerónimo Martins Group from the standpoint of creating value for shareholders and defending their interests. For this same purpose, since the election of the Board of Directors for the three-year period 2004-2006, there has been an increase in the number of Independent Members, at present totalling four of the nine Members. Furthermore, the practices of Corporate Governance have been reinforced and the Chair of the Board of Directors (under the responsibility of Mr. Soares dos Santos) has been separated from the Chair of the Executive Committee (under the responsibility of Mr. Luís Palha da Silva). The Board of Directors meets at least four times a year and another Member, by means of a letter addressed to the Chairperson, may represent any Member at the Board meetings. Except when otherwise provided, decisions are carried by majority vote. In the event of a tie, the Chairperson has the casting vote. The duties of the Board of Directors are described in article 12 of the Company by-laws. The matters referred to in article 407, paragraph 4 of the Commercial Companies Code are denied to the Executive Committee. As set down in specific regulations, the Board of Directors has delegated several duties to the Executive Committee, such as management of corporate business within the ambit of the day-to-day running of the Company. This includes approving expansion plans, representing the Company and financial management of the Group, among others. However, the Board of Directors has effective control over the company’s life, always seeking to be duly informed and ensuring supervision of Company management. For this purpose, it meets at regular intervals and held five meetings in 2005.


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To this end, the Board of Directors has at its disposal the minutes of the Executive Committee meetings, in which the matters discussed and the decisions taken are recorded. At each Board meeting, the Executive Committee reports on Company activity since the last meeting, and is ready to provide any further clarification that the Non-Executive Members may require. 4.4. Remuneration Policy of Board of Directors Under the terms of its obligations, the Remuneration Committee established the parameters of the aforementioned payment as having a fixed component and a variable one, with the aim of making it more competitive in market terms. It will also serve as a motivating element for high individual and collective performance, allowing aggressive objectives of fast growth to be established and obtained. The variable component is approved annually by the Remuneration Committee, according to the proposal submitted by the Chairman of the Board of Directors, who will take into account the extent to which the Executive Committee has brought about business evolution (EVA) and increased share prices over the previous year. The Remuneration Committee, under these guiding principles, defines the norms for the attribution of performance bonuses to Executive Directors, bearing in mind how far personal and Company objectives have been met, in discussion with the Chairman of the Board of Directors. The Remuneration Committee deliberated that Non-Executive Directors should be remunerated through vouchers of attendance, with the exception of the Chairman of the Board of Directors, that given his representative functions within the Group, receives a fixed and a variable amount, considering that he is responsible in accordance with the Regulations of the Board for the following up of deliberations made by this body, for the definition of the global strategy for the Group and for the management development. There is no type of deal or defined policy in place dealing with possible compensation to be paid to the Companies’ Directors in the case of breaking or ceasing contracts, and such a situation has never, in fact, arisen. 4.5. Remuneration of the Members of the Board The remuneration paid to the Members of the Board in 2005 was 3,250,364.60 euros, with the Executive Directors paid 1,968,424.20 Euros (1,228,254.72 Euros fixed payment and Euro 740,169.48 variable payment). Non-Executive Directors received 1,281,940.40 Euros (839,007.20 Euros fixed and 442,933.02 Euros variable). The criteria for attributing the variable on the part of the Members of the Board remuneration were defined in the previous point of this chapter. In concrete terms, the Remuneration Committee, at a meeting held on 10th March, 2005, decided on the attribution of the above values, based on results obtained, the share performance, the work carried out in 2004 and the criteria applied to the attribution of variable payments to the Company Senior Management There were no share or share options attributed to any member of the Board (vide 1.6. in this chapter).


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In the same way, no remuneration was paid as profit sharing, nor was any compensation paid to former directors, executive or not, related to the cessation of his duties, existing no outstanding debt in the Company in this respect. The Group’s Directors did not receive any other amount from any Company in a parent/subsidiary or Group relationship with the Company. Regarding complementary pension or retirement schemes, under the terms of the Regulations in force, Directors have the right to a Complement to the Directors’ Retirement plan, providing that they (i) are over 60 years of age, (ii) they carry out Executive functions, and (iii) they have held a Directorship for more than 10 years. At the Annual General Meeting in 2005, a retirement pension plan was approved. It is a fixed-contribution Pension Plan, with a pre-determined contribution value, with the value of benefits depending on earnings received. The Remuneration Committee defines the contribution rate of the company and of the initial contribution. Participants in the Plan are the Executive Directors of the Company, and those Directors who opted for the current Pension Plan forewent eligibility for the Retirement Complement Plan, which had to be expressly and irretrievably renounced. Retirement date is defined as either the actual day or the first day of the month following the natural age of retirement as established by the General Social Security Regime (currently 65 years). A Participant will be considered to be in a state of total and permanent invalidity if the Portuguese Social Security Authorities acknowledge so. Pensionable salary is the gross monthly base salary multiplied by 14 and divided by 12. To this monthly value is added, at the end of the civil year, a variable amount made up of all variable payments received. The annual amount of the variable payments in question is a maximum of 20% of the gross base monthly salary, based on the final month of the year, multiplied by 14.

4.6. Communications Policy for Alleged Irregularities Occurring within the Company (Whistleblower Procedure) Since 2004, the Ethics Committee of the Jerónimo Martins Group has implemented a system of bottom-up communication which guaranties every Employee at every level the opportunity to access those communications channels to reach contact with recognized addressees regarding possible irregularities occurring within the Group, as well as any other comments or suggestions they may wish to make, particularly with respect to compliance with the procedural manuals in force, especially the Code of Ethics. This measure clarifies guidelines on questions as diverse as compliance with current legislation, respect for the principles of non-discrimination and equal opportunities, environmental concerns, business transparency and the integrity of relations with suppliers, customers and official entities, among other questions, which are fundamental to achieve the Jerónimo Martins mission. So that no doubt remains unanswered regarding these principles, and so that any non-compliance with established conduct may be swiftly corrected, the Ethics


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Committee forwarded a message to all Employees of the Group to the effect that, if necessary, they could communicate with the Committee via: (i) a prepaid letter, (ii) the internal or external mail system with a dedicated address or (iii) requesting from the respective General Director or Functional Director necessary clarification of the norms in force and their application, or informing the Director of any situation which may broach their terms. Whichever communication channel is used, anonymity is assured for anyone who so wishes.

III. Consolidated Management Report

58 0. Relevant Facts of the Year 60 1. Macroeconomic Environment 60 1.1. The World Economy

61 1.2. Portugal 62 1.3. Poland

63 2. Sectorial Environment 63 2.1. The International Food Distribution Market 64 2.2. The Retail Food Market – Portugal 65 2.3. Wholesale Food Market – Portugal 65 2.4. Retail Food Market – Poland

66 3. Overview of the Group’s Consolidated Activity

66 3.1. Consolidated Sales 69 3.2 Operating Results 71 3.3. Net Profit 72 3.4. Balance Sheet 74 3.5. ROIC Before Tax 74 3.6. Jerónimo Martins on the Stock Exchange Market

76 3.7. Financial Performance 2001-2005

77 4. Food Distribution - Portugal

77 4.1. Pingo Doce 78 4.2. Feira Nova 80 4.3. Recheio

82 4.4. Madeira 83 4.5. Functional Operations Management 87 4.6. Customer Ombudsman

88 5. Food Distribution - Poland

88 5.1. Biedronka 91 6. Manufacturing

91 6.1. FimaVG 92 6.2. LeverElida 95 6.3. IgloOlá

97 7. Marketing Services, Representation and Restaurant

97 7.1. Jerónimo Martins Distribution 99 7.2. Hussel 99 7.3. Jerónimo Martins Restaurant and Services

101 8. Human Resources

102 9. Simplification of Internal Management Processes

102 9.1. Distribution in Portugal 102 9.2. Distribution in Poland 103 9.3. Manufacturing

105 10. Group Investment Programme

105 10.1. Investments 107 10.2. Disinvestments

108 11. Perspectives for 2006

108 11.1. Economic and Sectorial Environment 111 11.2. Jerónimo Martins

113 12. Events after Balance Sheet Date

114 13. Results Appropriation Proposal

115 14. Consolidated Management Report Annex

117 15. Financial Glossary

119 16. Contacts

Annual Report’05 – Consolidated Management Report

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Operating Activity January

• Integration of Bestfoods Portugal into FimaVG • Closure of the Carvalhido Pingo Doce store

March • Opening of the fifth Distribution Centre in Poland (Kostrzyn)

April • Opening of a Pingo Doce store in Madeira Forum • Transfer of the Arrifana Feira Nova store to Pingo Doce

May • Transfer of the Pingo Doce store in Seia to Feira Nova • Lipton Ice Tea enters McDonalds • Beginning of the “Só?” Campaign in Feira Nova

June • Outsourcing of the distribution centres of JM Representação e Serviços • 10 year anniversary of Jerónimo Martins in Poland • Biedronka wins third place in the “European Logistic Perfection Awards”

July • The opening of the Pingo Doce store in Santarém (purchased from Imocom) • The opening of the first two Olá stores managed by the Jerónimo Martins

Group, at the Algarve Shopping and Arrábida Shopping Centres • The launch of “Becel Pro Activ blood pressure” by FimaVG

August

• The opening of the Pingo Doce store in Leça da Palmeira • The opening of the first Ben & Jerry’s in Cascais • The issue of two Bond Loans of 25 million Euros each, with a variable base

rate indexed to 6 month Euribor and a spread indexed to the Net Debt/EBITDA ratio, maturing at 4 and 5 years respectively.

• The Group signed an IT outsourcing contract with Fujitsu and HP

September • The opening of the one thousandth Jerónimo Martins Group store, the Feira

Nova store in Viseu • The beginning of representation of the Canderel and Denim brands by JM

Distribuição de Produtos de Consumo • Transfer of the production of Knorr Savoury to the FimaVG production unit

October • Opening of the first Subway store managed by the Jerónimo Martins Group,

in Rua da Misericórdia, in Lisbon • The Jerónimo Martins Group is awarded the Prize “Best European Business”

in the New Europe category, at an event run by Roland Berger, The Financial Times and the Universidade Nova de Lisboa

0. RELEVANT FACTS FOR THE YEAR


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November • Opening of the Carlos Mardel Pingo Doce, in Lisbon

December • Opening of the eight-hundredth Biedronka store in Poland


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1.1. The World Economy The rate of growth of world economic activity slowed in 2005, but continued to show a high average rate, particularly due to dynamism in the US and Asian economies. The projections of the International Monetary Fund (IMF) available at the end of the year show growth of 4.3%, down on the 5.1% in 2004, and international trade growth of 7%. This moderation in the rates of world economic growth extended across all geographical areas, however regional differences continued to be present. The big expansion of economic activity in China, which should surpass the 9% predicted by the IMF, continues to be based on strong dynamism in exports and investment. Another prediction is that India will show high growth, around 7%. In Central and Eastern Europe the forecast is for a slowdown in economic activity to around 4.3%, compared with 6.5% seen in 2004. Among the advanced economies, the US continued to show above-average growth, estimated at 3.5%, in an environment characterized by high consumer dynamism and private investment and a big increase in productivity, despite the serious situations caused by the hurricanes and power cuts. In Japan, economic activity has begun to recover from the levels seen in the second half of 2004, with predicted economic growth of around 2% for 2005. The Euro Zone, despite some improvements in economic indicators at the end of the year, should continue to show the least dynamic growth rates of any of the advanced economies (between 1.2% and 1.6%). The year of 2005 was essentially marked by the increase in the oil price, which hit record highs in September 2005, and with average prices for Brent crude of 55 dollars a barrel, representing an average annual increase of 45%. The oil price rises have led to ever bigger trade surpluses in the oil-producing countries, and deficits in the importing countries. After the strong growth seen in 2004, there was continued upward pressure on the prices of non-energetic raw materials (5,8%), although to a much more moderate extent than in the energy area. Inflation in the advanced economies has remained, in general, under control, with values sitting slightly above 2%. The fall in import prices of various consumer goods, due to the increased participation in the world market of low-cost producers, compensated partially for the impact of the oil-price increase on inflation. Salary increases have also been moderate in most countries. In the US, the Federal Reserve gradually increased the referential interest rate, which reached 4.25% at the end of the year. This measure was taken as a way of continuing with the rate of business expansion and in answer to an increase in inflationist pressures due to the high-energy prices. In the Euro Zone, and for the first time since 2003, the European Central Bank announced at the beginning of December an increase of 25 base points in the minimum interest rate applicable to principle refinancing operations of the Eurosystem (which moved to 2.25%), with the aim of anchoring expectations of inflation at a level consistent with price stability.

1. MACROECONOMIC ENVIRONMENT*


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In general, the financial markets continued to register favourable progress, reflecting high profits expectations. In the Euro Zone, most business sectors saw increases in share price, in particular the Energy sector. In the US, price rises were focused on the energy and technology sectors. At the end of the year, there was a generalized fall in stocks due to lower than expected profit announcements from companies, hit by high oil prices and volatility, as well as the higher forecast for interest rates in the Eurozone and the US. On the foreign exchange markets, despite the worsening of the US balance of payments, there was solid strengthening of the Dollar against the Euro, coinciding with higher expectations of economic growth in the US relative to the EuroZone (the US Dollar closed the year up 15.5% on the Euro according to the BCE fixings of 31st December). Factors of political uncertainty related to the rejection of the European Constitutional Treaty in France and the Netherlands, and the election results in Germany, also affected the strength of the Euro. In China, the exchange rate system was altered, with the abandonment of ties to the Dollar, to take up a managed floating exchange rate system (where management of the exchange rate is via a pre-defined basket of other currencies). Also in China, there was an upgrading of the currency of 2.1%. In May 2005, Cyprus, Latvia and Malta joined the new exchange rate mechanism MTC2, which replaced the old European Monetary System (EMS), dissolved upon the introduction of the Euro. These three countries joined Estonia, Lithuania and Slovenia, who had already joined the MTC 2 in 2004. 1.2. Portugal In 2005, imbalances in the Portuguese economy continued to worsen and, according to the Winter Economic Bulletin of the Bank of Portugal, the country should register economic growth in the region of 0.3%, down on the 1.3% registered in 2004. This is among the lowest rates of the European Union, and is due mainly to poor performance in Gross Fixed Capital Formation, which saw an estimated 3.2% fall, and exports, which after growth of 5.4% in 2004, are now showing around the 1.8% mark. There is, then, a real divergence of the Portuguese economy from that of the European Union, which has been seen since 2000 and is a consequence of poor productivity levels in the Country. Despite the worsening of the situation in the labour market, and the marked reduction in consumer confidence seen over the second half of the year, it was the area of private and public consumption which saw most dynamism in terms of global demand, with annual growth rates above those of general economic activity. Although the second half of the year saw a clear slowdown, mostly reflected in a fall in consumer durable goods, private consumption is forecast to be at 1.8%, down from 2.3% last year, while public consumption rose 1.1% compared to 2.6% in 2004. Forecasts for 2005 are for a high level of debt on the part of private consumers as a percentage of available income, and that the public budget deficit will grow to 6% of GDP, despite corrective measures taken mid-year. According to the Bank of Portugal, the average annual inflation rate is around 2.1%, a reduction of 0.4 p.p. on the previous year. The impacts of the increase in the VAT rate and the price of oil were mitigated by favourable results in the price of imports, fuel excepted, and the prices of non-transformed food goods. The unemployment rate increased, especially in the first half of the year, with the rate


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at around 7.4% at mid-year. Forecasts are for private sector salary increases of 2.8%, which is only 0.7% in real terms. In the year under analysis, the Portuguese stock market continued to show an upward trend for the fourth consecutive year, with the main index of the Lisbon Stock Exchange Market up by around 13.4%, a result largely of the favourable World economic environment, in the same way as other EuroZone countries. 1.3. Poland The Polish economy’s growth rate is between 3.0% and 3.3%, down on initial forecasts of 5%. In 2005, economic growth was below expectations due to a slowing down of internal demand, together with the uncertainty caused by the elections, which also caused lower than expected investment levels. Despite the less favourable result, the Polish convergence programme does not forecast a worsening in the budget deficit as a percentage of GDP. However, spending reforms continue to be one of the priorities for guaranteeing sustainability, on time, of public spending. The commitments made by the new government, elected in October, should allow a more flexible monetary policy than the one that has been operating in recent years. Annual average inflation is 2.2%, below the initial prediction of 3.3%, due mainly to the price policy followed by the operators in the food and fast-moving goods areas. The Zloty continues to rise against the Euro, with an average increase of 12.6%. The unemployment rate continued to improve, at around 17.5%, compared to initial forecasts of 18.2% The Central Bank of Poland fixed its interest rate at 4.5%, considerably below initial expectations. * Sources: Autumn predictions of the European Commission, Economic bulletins of the Bank of Portugal for Autumn and Winter 2005, OECD Economic Outlook nº 78, Thematic Report Nº 2 - CEA – FCEE of the Universidade Católica, The Polish Government, MPC, Citibank Handlowy, BRE Bank, The European Forecasting Network.


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2.1. The International Food Distribution Market The Food Distribution sector showed healthy growth. The general improvement in results was not only due to the favourable international economic environment, but also to efforts at restructuring by various operators in recent years, in order to increase scales of activity, focusing on key competencies and taking advantage of investments in new technologies and information systems, as well as optimizing and simplifying structures and processes. Investments made in recent years in emerging markets are starting to bear fruit as well. According to “Planet Retail”, the main source of data on the sector, the five biggest world retailers continue to have a market share of around 12.5%, and were present in 113 geographical areas at the end of 2005 (104 in 2004). Faced by macro-economic and market scenarios of uncertainty, retailers tend towards caution in their investments. The sector shows clear signs of an increase in partnership deals, mergers and acquisitions and international expansion, but operators have also opted to abandon formats and geographical areas where they do not have competitive advantage. The acquisition of Gillette by Procter and Gamble, the fusion of Boots and Alliance Unichem and the global store swap between Tesco and Carrefour (Swapping of stores by Tesco in Taiwan, for the Carrefour stores in the Czech Republic and Slovakia), where some of the relevant sectorial events in 2005. In terms of international expansion, Central and Eastern Europe, China and other emerging markets in Asia, were the regions, which sparked most interest in Food Distribution. It is interesting, as well, the entrance of Aldi in Slovenia, the first Central or Eastern European country where the operator is present. Increased saturation of the main markets and the global macro-economic scenario continue to put strong pressure on prices. Consequently, the discount format has continued to show strong international dynamism, presenting a limited choice of food and focusing on private labels, with some quick-rotation perishable articles and some market leader Manufacturers as well as a wide range of new non-food categories. The Hypermarket format has also been under a good deal of pressure, not only because of the widespread growth of non-food category-killers and discount food stores, but also by the reaction of similar formats, who are carrying out range changes and testing new store formats which are quite similar to discount formats. The panorama for Purchasing Centres in Western Europe is undergoing changes due mainly to the independent French operators, who are taking up positions following the Dutreil Law, in force since January 2006, which aims to add price flexibility to the sector. The sourcing of goods is becoming more and more widespread, with Asia, and namely China, being one of the main non-food suppliers. The most recent new members of the European Union are playing an ever more active role in Pan-European sourcing.

2. SECTORIAL ENVIRONMENT **


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2.2. The Retail Food Market – Portugal According to the Portuguese Association of Distribution Companies (APED), estimates are for growth in Organized Retail sales in 2005, despite economic slowdown and effective price deflation in the Food Area, because of the sales aggression of the Brands, led by the discounts, and the price repositioning of market leading brands, to respond to the growth in private labels. The recent increase in VAT from 19% to 21% placed more pressure on operating margins, with sales cooling at the time of the change in the non-Food area and durable goods. Again according to the APED, 104 new stores opened in Organized Retail in 2005, with a total sales area of more than 125,000 sqm, 50% of which relative to food business and the rest dedicated to the non-food products business. More specifically in Food Retail, the opening of more 50 points of sale during the year, in a Euro 200 million investment calculated by APED, represent a rise in sales area of around 6.5%, which is particularly strong given the moderate growth rate in consumption. Discount stores led the openings, and there were two hypermarkets and six mini-hypers. In accordance with the last update of the Direcção-Geral da Empresa (DGE), dated of 13th January 2006, there were a total of 526 licences granted, 278 more than at the end of March 2005, and 186 more than in July 2005. The strong dynamic in licensing has led operators to find the best locations, with obvious inflationary effects at the level of land and building prices. In Food Retail, at the beginning of 2006 there were a total of 258 licences since the introduction of the new licensing law, of which 217 were for the opening of new stores and 41 for alterations of area, localization or other motive. Around 59% of the licences for the opening of new stores were attributed to discount stores and 26& to compact-hypers mainly in provincial cities. Besides the three hypermarkets opened in 2005, there were only three more licences awarded to the hypermarket sector (one under the new licensing law and the others under the old law). The rest of the licences were attributable to supermarket operators.

The year of 2005 also saw the announcement of two new operators in the Portuguese market: Netto, a chain of discount stores of the Os Mosqueteiros Group, and Aldi, the German discount chain, already operating in Spain. In April, and following the positive decision of the Competition Authority, the Government authorised the building of petrol stations near shopping areas, revoking previous legislation. The majority of operators publicly expressed interest in making such services available to their customers. In October, the Government published a missive that authorizes the sale of non-prescription medicines and defines the rules of the business. The Distribution sector is now able to sell this type of products, although there are a number of requirements to be met (namely, having a specific space for the purpose and sales assistance, as well as several conditions at the level of storage and conservation). At the end of the year, there were 30 establishments authorized by the National Pharmacy and Medicines Institute (INFM) to sell non-prescription medicines, but only one store opened.


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2.3. Wholesale Food Market – Portugal

The global activity of cash & carry’s in Portugal showed negative growth in 2005, with the trend of 2004 worsening. It is a highly concentrated market, in which the five main operators represent around 70% of the wholesale market, and estimates are that the three largest operators showed losses in sales above 2%. In an environment of economic slowdown and effective price deflation for many food products, the aggressiveness and positioning efforts of the majority of operators have not been enough to invert the strong trend of a reduction in purchases by a significant section of the customers. The decrease is due essentially to the evolution in Traditional Retail. The price aggressiveness of the Organized Retail Brands, led by the discount operators, together with the price repositioning of market leading brands, led to a deterioration in 2005 of the competitive capability of Traditional Retail, which brought about negative sales figures in the year under analysis. The reduction in the number of traditional retailers establishments has been a reality for several years, with the Nielsen 2004 census confirming that in ten years around 10,000 grocers had disappeared, at an average of around 1,000 sales points per year. The crisis felt since 2004 in the HoReCa channel, which was shown in a significant decrease in sales, despite the Euro 2004 and Rock in Rio events, seems to have been overcome in the second half of 2005, with expectations for an average sales increase in the sector of around 2%, despite the effects of the VAT increase. The growth seen in this sector was not, however, sufficient to compensate for the negative trend seen in Traditional Retail. 2.4. Retail Food Market - Poland

Organized retail in Poland continued to reveal significant dynamism, marked by the continued opening of new shopping spaces, despite a slowdown in economic growth and private consumption.

In 2005, it is estimated 250 new stores in the market, with the discount format remaining the strongest performer, with over 180 new stores. Growth rates registered in the hypermarket format are identical to those of previous years, with 44 new stores opening.

Although the dynamism of the Organized Retail business, Traditional Retail continues to represent 58% of the Polish market.

In terms of licensing, the delay in answering requests for new stores on the part of the authorities increased substantially, from two to six months, while bureaucracy seems to have increased with regard to such processes.

Despite many operators not yet having demonstrated positive results, prices continued to come under great pressure, with the last quarter showing a pressure peak on prices, due to the hypermarkets. ** Information Sources: APED, Planet Retail, Cies, CAL Desk Resarch, GUS Data and Specialised Press


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The year 2005 has borne out the success of the strategies followed by the Group’s three retail chains - Pingo Doce, Feira Nova and Biedronka – translated into strong sales performances. Although in both Portugal and Poland consumer consumption was below what had been expected at the beginning of the year, the Group’s brands implemented aggressive policies and managed to strengthen their presence in the markets in which they operate. 3.1. Consolidated Sales

The consolidated sales of the Group grew by 9.5% (5.4%, excluding the exchange rate effect), propelled by the strong performance of the Retail chains in Portugal and Poland.

3. OVERVIEW OF THE GROUP’S CONSOLIDATED ACTIVITY

Sales 2005

Cash & Carry15%

Madeira3%

Biedronka35%

M anufacturing, Services and

Others7%

Retail Portugal

40%

Sales 2004

M anufacturing, Serv ices and

Others9%

B iedro nka30%

M adeira3% C ash & C arry

17%

R etail P o rtugal41%


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For Pingo Doce, 2005 represented the continuity of the implementation of a clear, well-defined and consistent strategy. After four years of reducing prices and marketing the new position, 2005 was dedicated to improve customer perceptions of the aggressive sales stance of the Brand. A concept combining low prices, convenience and a good range of perishables, with Private Label differentiation, has clearly been successful, with like-for-like sales growth of 4.6% in value, which corresponds to sales volume growth of more than 8%, a result of the deflationary price policy implemented by the Group in its average shopping basket prices. The strategic focus on Private Labels, which has resulted in an important differentiation factor for the Group, helped forge impressive sales growth of 45.5% for this category on 2004. With continuing attention paid to the quality of its store network, Pingo Doce remodelled 13 units and opened four new stores. For Feira Nova, the year began with the implementation of a new pricing policy. The dynamism of this repositioning, involving average deflation of 3.4%, but including double-figure price drops in some categories, as well as the efficiency of the marketing campaign, helped the middle-sized stores to consolidate their market presence throughout the year, and to post significant like-for-like sales growth of 5.3% in the last quarter of 2005, compared to the same period in 2004 (+2.2% for the full year). Throughout 2005, the chain’s large hypermarkets were able to buck the sales trend, and represented a yearly like-for-like sales of -0.8% (+0.8% in the final quarter of 2005). Feira Nova continued over the course of the year to adjust its chosen format in order to reinforce its market position: a food store with a wide range of products, strong in perishables and whose non-Food ranges rely on the exclusive brands New Code (textiles) and ElectricCo (Electrical Goods). Perishables was an area that received special attention, with the layout of the stores’ sales areas for this category being redefined, in order to give better product visibility. The effectiveness of these measures was seen in overall yearly sales growth of 10% for this area. In September, the new Viseu Feira Nova mini-hypermarket opened in the city of Viseu, bringing to 20 the number of stores of this format run by the Group.


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With regard to the wholesale market, the decrease in sales to traditional retailers posted by Recheio is a reflection of the downward trend seen in this segment, in a year, which proved especially difficult with the increasing aggressiveness of the price policies of the Organized Retail players. The HoReCa market (Hotels, Restaurants and Coffee Shops) performed weakly in the first quarter, only really beginning to show signs of recovery in May. Despite sales growth of 2.2% on 2004 for the Group’s cash & carry chain, the rise was not enough to outweigh the fall seen in the traditional channel. In Madeira the year 2005 was extremely competitive, with the Company increasing total sales by 2.7% in relation to 2004. In April, the Group’s supermarket chain in Madeira opened a new store, which together with two new competitor stores affected the development of like-for-like sales, which fell by 4.8%. The Group’s Polish Retail chain– Biedronka – reinforced once more its leadership status in its format, posting like-for-like sales growth of 5.4% over the year, clearly outperforming the sector competitors. The solidity of the business format and the experience acquired over ten years in Poland allowed efforts to be concentrated on the expansion of the chain. Having announced for 2005 a plan for 60 to 80 new stores, the Company opened in fact 84 stores, above the highest predicted figure. The opening of these new stores, together with a like-for-like growth in sales, pushed total sales growth to 13.4% in Zloty (27.3% in Euros), compared to the same period in 2004. The increase in the size of the business in Poland led to an increase in the total weight of Biedronka’s sales in the consolidated sales figures, from 30% in 2004 to 35% in 2005. For the Companies in the Manufacturing area, 2005 was marked by the success of Bestfood’s integration into FimaVG, and by the repositioning of some of the main brands in the Companies’ portfolio. Sales in this Business Area grew by 1.9%, with different contributions results from the several joint-venture brands. It is worth remembering, however, that as of 1st January 2005, the Companies in the Manufacturing area began deducting from sales figures certain discounts and rebates which, until then, had been classified as costs. When applying the same accounting criteria used in the 2004 figures, the growth in this business area was of 4.5%. At FimaVG, despite the very positive contribution of the Bestfoods brands, this was offset by the Olive Oil category, in which the Company’s leaders, and which represents 25% of sales. This category was heavily affected by the increase in competitive pressure. LeverElida successfully implemented repositioning projects for some of its most important brands, with very positive sales performance in volume terms, although the value increase reflects the price repositioning policy.


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IgloOlá’s sales growth was the result of behaviour in the categories making up the Company’s business. While Ice cream grew, the Frozen Foods category saw many of its brands strongly hit by competition from the Private Labels Distribution companies. In the Marketing, Representation and Restaurant Services area, there was a diversification in the Company’s portfolio, with the entry of two important brands - Canderel and Denim, as well as with the franchise in Portugal of the first Ben & Jerry’s ice cream stores, the Subway and Olá stores. 3.2. Operating Results

EBITDA was Euro 308.3 million, an increase of 1.1% on 2004, and dropped from 8.7% of sales in 2004 to 8.1% in 2005. This evolution in the operating margin reflects i) the new price positioning of the Retail chains in Portugal, ii) the increase in the relative weight of Biedronka’s operating cash flow (from 17.1% in 2004 to 22.2% in 2005) and consequent dilution effect due to the chain’s lower margin when compared to the average for

EBITDA 2005

Cash & Carry13%

Madeira3%

Biedronka22%

Manufacturing & Services

14%

Others0%

Retail Portugal

48%

EBITDA 2004

Cash & Carry15%

Madeira3%

Biedronka17%

M anufacturing & Services

15%

Others1%

Retail Portugal

49%


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the Group, which corresponded to 0.24b.p. of the consolidated margin and iii) the revamping programme deployed by the Group’s various distribution chains.

EBITDA margin from Portugal Retail, which in 2004 had exceptionally reached 10.4% of sales, has declined this year to 9.7%. On one hand, this reflects the strategic option taken, and on the other the revamping programme undertaken by Pingo Doce (13 stores) and Feira Nova (6 stores), which meant closing down these stores for an average period of one month each. Biedronka, operating 805 stores and 5 distributions centres, kept up its upward trend in business profits, pushing up the EBITDA margin to 5.1% of sales in 2005. This growth, combined with the increased size of the business in Poland, led to an increase in operating cash flow of 17.0% in Zloty (31.1% in Euros). Recheio’s EBITDA figure is a result of the mentioned difficulties in the Traditional Retailers channel, which led to several investments in price. In Manufacturing, the integration of Bestfoods gave an important boost to profitability, which was mitigated by the heavy pressure on prices of some leader products, as well as by the launch of product lines at competitive prices.

EBITDA Margin

8,7%8,1%

4,9%

7,5%

10,4%

8,5%

4,9%

17,4%

2,3%

17,7%

5,1%

8,0%

6,7%

9,7%

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

14,0%

16,0%

18,0%

RetailPortugal

Cash & Carry Madeira Biedronka Manufacturing Services JMConsolidated

2004 2005


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3.3. Net Profit

Non-recurrent items in 2005 include asset impairments, in accordance with the IAS/IFRS (International Accounting Standards/International Financial Reporting Standards), the end of the stock option plan, and the release of provisions, among others. The decline in cash flow per share (-11.9%) reflects the capital increase (30 million new shares) that took place in June 2004 (this ratio considers the average number of shares in the period). Consolidated Net Profit for Jerónimo Martins was Euro 110.4 million, an increase of 19.3% on 2004.


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3.4. Balance Sheet

3.4.1. Investment

The increase in the fixed assets translates the acceleration of the expansion plan in Poland, the investment made in 2005 in expanding the retail chains in Portugal – with store openings scheduled to start in early 2006 - and also the integration of Bestfoods into FimaVG (disbursement had been offset in 2004 and accounted, in that year, as financial investment).

Of the amount invested over the year – Euro 168.5 million -, 55% was invested in the Distribution chains in Portugal and 43% in Poland. The commitment to growth can clearly be seen in the Euro 88 million invested in the expansion plans of the Group’s businesses in 2005. The reinforcement of the balance sheet’s structure through the strengthening of shareholders’ equity and debt reduction allowed the Group to pay dividends

CAPEX 2005

R etail P o rtugal

47,3%

Others2,5%

B iedro nka42,7%

M adeira2 ,1% C ash & C arry

5,3 %


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according to the established policy and the gearing to drop from 107.5% in 2004 to 74.2% in 2005. 3.4.2. Debt Between 2004 and 2005, consolidated debt fell by Euro 115 million, even with the significant level of investment, which hit Euro 168.5 million in 2005, and the recommencement of dividend payment (Euro 45 Euros distributed in 2005) to the Jerónimo Martins shareholders.

Reflecting the concern to match the financing structures to the maturity of assets, the debt maturity period increased in 2005 to 4.3 years against 3.7 years in 2004.

Financial Results Eur Thousand

2005 2004 ∆%

Net Interest 39.323 42.081 -6,6%

Exchange Differences 1.735 -652 -366,1%

Hedging 3.551 1.975 79,8%

Others 1.711 7.230 -76,3%

Total 46.320 50.634 -8,5%


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Regarding debt structure, it is important to highlight the financing in Zloty of the Polish operation (obtained in the last quarter of 2004), which contributed 11.9% to the consolidated debt figure. This financing in the Polish currency, despite the negative impact of Poalnd’s higher interest rates, has the advantage of providing a natural hedging for foreign exchange differences. 3.5. ROIC before tax Biedronka, with its very positive contribution to the returns of the Group, showed extraordinary rises in profitability, with its 14.0% ROIC in 2004 moving to 20.2% in 2005, as a result of the increase in margins, but also, and fundamentally, of the improvement seen in the capital turnover. The return on invested capital of the Group went from 17.9% in 2004 to 16.7% in 2005, reflecting the increase in the Invested Capital of the Group due to expansion and remodelling investment not totally reflected in the sales of the year.

With the Retail sector in Portugal following a clear strategy of price aggressiveness, there has been an improvement in capital turnover, which will become a source of value creation. While in the short term its diluting effect on the ROIC has been its most visible result, this strategy has enabled the consolidation of the sales base as a fundamental platform for the success of the new store openings to come in 2006.

3.6. Jerónimo Martins on the Stock Exchange Market Throughout 2005, the solid performance of the several Jerónimo Martins Group business areas and the special interest aroused by the Polish operation’s, as well as

PreTax ROIC

12,3%

29,3%

14,1% 14,0%11,5%

23,5%

12,9%

20,2%

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

30,0%

35,0%

Retail Portugal Cash&Carry Madeira Biedronka

2004 2005


75

a transparent, consistent communication policy, have led four financial analysts to begin coverage of the Jerónimo Martins share.

Nr. of Recommendations

0

2

4

6

8

10

12

2003 2004 2005

Underperform/Reduce Hold/Neutral Buy/Accumulate/Add


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4.1. Pingo Doce Message from the General Manager – Eduardo Cid Correia «In Pingo Doce’s 25th anniversary year its position of price competitiveness was consolidated, proving the success of the strategy defined by the company in 2002.» Mission Statement To be the best supermarket chain operating in perishables in Portugal, with the capacity to provide the consumer with a quality food solution for all the family, at stable, competitive prices, while maintaining a long-term relationship of trust. In 2005, Pingo Doce continued to follow the strategy established in 2002: to be the best supermarket chain operating in Perishables in Portugal, increasing its market share in non-fresh products by the conversion of peripheral customers into nuclear customers, by reducing barriers to an increase in shopping items purchased. In 2005, the positioning success of the chain was seen in like-for-like sales growth of 4.6%. The total volume of business was Euro 853.4 million, up 5.3% on 2004, largely due to an increase of 5.5% in the number of transactions. These results were achieved in a difficult competitive and macro-economic environment, with strong pressure on prices, especially on the part of the discount operators. The prices practised by Pingo Doce in 2005 showed deflation of 3.6% on 2004, compared with an average variation over the last twelve months in the Consumer Retail Price Index of +2.3%. The investment in marketing over the year consolidated the perception of the price decrease at Pingo Doce and reinforced the brand image in its areas of market differentiation: Perishables and Private Labels. The strategic investment in Private Labels was in evidence beyond the Pingo Doce brand, with other Group private label launches, such as the brands Ultra Pro, in the area of Detergents and Cleaning Products, and ActivPet, in Pet Foods. Private Label sales grew 45.5% on 2004, with deflation above 9%. Pingo Doce ended 2005 with a range of products that is satisfying its customers, competitive prices compared to hypermarkets in a wide range of products, and greater efficiency of operations. With an objective of excellence in the quality of customer service, the Customer Support Service was created, for dealing with customer suggestions, information requests and complaints. Over the course of the year, four new stores were opened - Leça da Palmeira, Santarém, Arrifana and Carlos Mardel (Lisbon) – followed by an ambitious remodelling plan affecting 13 stores. Under the new Commercial Licensing law, twenty licences were granted to Pingo Doce for supermarket openings. In 2006 Pingo Doce will continue to carry out its business in line with the defined strategy, with one of its key areas for action being the push for growth in the number of nuclear customers, namely in the categories where the Brand has least

4. FOOD DISTRIBUTION - PORTUGAL


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penetration, along with experience building and efficiency gains in the areas of category and operations management. 4.2. Feira Nova Message from the General Manager - João Queimado «”The plans we had made for the Company this year were ambitious: we aimed to achieve leadership status in low prices, quality of fresh products and sufficient range for everyday and monthly shopping. We are investing in the medium-sized store format because it has proven to be a winning format, which meets the needs of the modern consumer, by combining the qualities of a hypermarket with the advantages of proximity and practicality, in an effective food store, Feira Nova, complemented by the specialized non-food brands - Electric Co and New Code. We continued the remodelling plans begun two years ago, in order to update our store network, enabling us to face up to the encroaching competition and to lay the groundwork for the start of our medium-sized store expansion, which will begin in earnest in 2006. Our mission is put into practice, every day, through our more than 4,000 employees, who make Feira Nova unique and deliver the promise we make to our customers. And the results are there for all to see, with all the hard work beginning to bear fruit.”» Mission Statement To be the brand to trust for Portuguese consumers, where they can always find the best priced food products with high quality levels in fresh foods and a sufficient selection for everyday or one-stop shopping. Feira Nova is strongly involved with the local community. For 2005, Feira Nova defined as its main strategic guidelines for action now, and to be sustained in the future: (i) heavy investment in winning market leadership in perceptions of low price by consumers. (ii) increased perceptions of quality in perishables, and (iii) investment in remodelling and modernization of the store network, namely the medium-sized stores and respective satellite stores, for Textiles, with the New Code brand, and for Electrical Goods and New Technology, with the Electric Co brand. At the same time, we continued to focus on operational efficiency with the aim of freeing up resources and allowing customers to benefit from the resulting savings. The year also saw the beginning of a new phase in the big expansion programme for Feira Nova, which will go into action in the next few years, mainly through the medium-sized store format, accepted as the format which is currently best suited to the market and in which the brand has the skills to enable it to be market leader in the geographical areas in which it operates. Price repositioning entailed a reformulation of the commercial policy of the Company, with a decrease in prices in the product categories that are most sensitive to this factor and in which other formats have been gaining an important foothold. This strategic orientation resulted in accumulated deflation of around 3.4%, which did not prevent, however, Feira Nova’s increasing like-for-like sales


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+0.5% compared with 2004 and achieving total growth of 3.5%, despite periods in which stores undergoing remodelling were closed. One of the fundamental vectors of the new sales policy was also the investment in new Private Label products, in which, while maintaining high levels of quality, prices were lowered in order to provide the customer with “the best of both worlds”: quality at the lowest price in every product category. This repositioning has been accompanied by the Communications Area, involving a review of in-store signing and all the corporate and promotional material, as well as an option for a new communications direction, based around the message “SÓ”, which attempted to convey all the Brand’s pillars: PRICE, in first place, QUALITY in fresh products; and VARIETY in all types of shopping. The result of the policy was sales growth, the attraction of new customers (internal studies point to a 25% increase in families who regularly do their shopping at Feira Nova, with an increase too of 6.6% in transactions), and above all the increased perception of Price in the public’s global picture of Feira Nova. Regarding Private Label, sales growth in terms of volume was around 29%, validating the strategy adopted and confirming the value placed on Private Labels by the consumer as a regular shopping purchase, which is sustained by the quality-low price maxim. The differentiation intended for Feira Nova through the reinforcement of the quality of its fresh products also had a major impact, and is now one of the three main reasons for the choice of Feira Nova by our customers. Sales in this Area showed extraordinary growth, of around 10%, and its share of total sales went up 130 b.p., showing the attraction of the customers and confirming the Fresh Foods Area as one of the engines for future growth. This work is supported by both the marketing campaigns mentioned above and a new in-store Communication project whose main axis were the humanization of this Area and an exhaustive specific training programme, to be continued in the near future. In the space of two years, Feira Nova proceeded to 26 refurbishing (8 medium-sized Feira Nova stores, 10 Electric Co stores and 8 New Code stores) renewing a store network, which had become tired, and implementing a uniform store concept for the whole Company. Currently, Feira Nova has a chain of stores in a format, which shows strong growth potential, supported by a well-defined concept with proven effectiveness. In 2005, total sales growth in this format was of 10.3%, with average sales growth after remodelling above 7%. This remodelling includes specialized Textile and Electrical Goods stores, shaping both Brands to a position whereby, given the potential they have demonstrated, they will surely pay off over the next few years: the Electric Co stores, after remodelling, showed sales growth of around 20% and Textiles (New Code, plus the clothing area inside the big hypermarkets) grew 8% in total. In addition, a new medium-sized store was opened in Viseu, which was the 1000th Jerónimo Martins Group store, and which marks the start of a new brand expansion phase, whose continuity is assured following the issuing of a number of licences, under the recent legislation, which guarantees regular growth in our number of stores over the coming years.


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In terms of the hypermarket format, and besides being the most affected by new openings – whether nearby food stores, discount stores, or large Specialist Retail stores – it has shown signs of great resistance, particularly in the area of fresh products, with great help from a big promotional push, with Feira Nova being the only brand in this format to practically maintain its quota per sqm. None of these developments would have been possible without a highly efficient cost control programme in place, and the adoption of business simplification processes, allowing the efficient management of the Company operating margins. 2006 and subsequent years will be marked by three key-words:

CONSOLIDATION- of price positioning and the strengthened perception of Feira Nova’s low prices.

DIFFERENTIATION- through the Area of excellence and of great potential – fresh produces.

EXPANSION- of the middle-sized store and the Non-food Brands Electric Co and New Code, in order to gain the critical mass which will allow to operate on the same scale as some of the chief competitors in this format.

4.3. Recheio Message from the General Manager - Jorge Santos Dias «”Leadership in the wholesale market, achieved by Recheio at the end of 2003, constituted a key point in the Company’s history. It was the result of a strategy mapped out over ten years ago, and which was built with unshakeable determination and with a passion for business felt by all our employees and transmitted, daily, to our customers. While it is true that the fact that we are market leaders fills us with enormous pride, it is also true that this brings with it added responsibility. To be a market leader means being first… being in front… being the reference. Being in front in terms of innovation. Being a byword for quality of the products we sell and of the service we provide to our customers. Being first from the point of view of meeting Food Safety norms. It was based on this idea that in 2005 we decided to take another pioneering step in the Food Distribution sector in Portugal - Recheio is the first Distribution Company to be certified in Food Safety – Hazard Analysis and Critical Control Point (HACCP). Operators in the food area know that compromise solutions never work well. In other words, the guarantee that Recheio gives its customers – to continue to work towards deserving the custom and trust shown by all the food professionals who it has been our honour, over the years, to serve.» Mission Statement To answer all the needs of the traditional retail customers and of the HoReCa channel. To give customers value for money and, at the same time, to believe in long-term relationships with them, offering each segment the best value solution for their needs. Recheio’s staff, their motivation, competence and dedication are the best building tool for such relationships, whether with customers or suppliers.


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Everyone’s focus on the customer and on the company’s efficiency, are the best ways to guarantee profitability and a return on the Shareholders’ investments. In 2005, marked by the intensification of competitive aggression in all the modern Food Distribution formats, and by the slowdown in private consumption, Recheio has managed once again to consolidate its leadership in the food wholesale market, and is the byword for supplying food to professionals in the catering industry – Hotel Industry and Traditional Retail. This leadership is reinforced by the fact that as of 9th September 2005, Recheio is the first Distribution Company in Portugal with Certification in Hazard Analysis and Critical Control Point (HACCP). This system implies the continual improvement of our operations and processes, subject to audits by an external company, as a way to guarantee to our customers our rigorous adherence to all the Food Safety norms. In the first phase of this process, 19 Recheio units were involved. On 28 December 2005 two Food Service platforms were certified, with the remaining units to be certified shortly. Despite net sales having fallen 2.4% on the previous year, Recheio increased its market share considering that the wholesale market as a whole was down in 2005 by around 4% on 20041. A brief analysis of the performance of each business channel shows that:

• The Retail channel registered a fall in sales of 6.4% on 2004, a result of the increase in competitive pressure from modern retailers on the traditional retailers (with 25 new openings, among discount stores, hypermarkets and supermarkets);

• The HoReCa channel grew 2.2% on 2004, in a particularly unfavourable year such as 2005, marked by the reduction in private consumption and by weak consumer confidence. The growth obtained, at a difficult juncture, betrays the success of the strategy adopted by Recheio for the HoReCa channel, which is based on the concept of differentiation for each segment of customers. Excluding the first third of the year, still conditioned by the climate of political instability, growth registered would have been be around 4.1%

During 2005, Recheio continued its policy of remodelling, with five Recheio/MasterChef stores being remodelled, with the aim of improving and enlarging the stands in Fresh Produce, enabling more variety and the perfect environment for hygiene and food safety. EBITDA grew in 2005, to 38.6 million Euros, which corresponds to 6.7% of sales, with the Company showing profit figures well above the sector average. In 2006, Recheio intends to recommence with expansion, through the opening of two new units, whose respective applications are underway.

1 Internal Estimatives


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4.4. Madeira Message from the General Manager- Pedro Sá «Madeira’s Jerónimo Martins team is highly motivated to win the custom of Madeira consumers. Using the best practices and experiences available within a big Group such as ours, the focus of operations in Madeira will be the increase in our market share through an aggressive price policy, the quality of our perishable and an increasingly stronger bet on Private Label products and innovative services. Our company posture, as ever, will be to continue to foster a strong relationship with the local community, with attention paid to their specific needs, thereby actively participating in the development of the Region of Madeira.» Mission Statement Provide Madeira families with the best food solutions, both in-home and out-of-home. To commercialize products, through the Pingo Doce chain, of high quality at the best prices in the Region, but also to meet the needs of the HoReCa channel and those of traditional retail through Recheio, offering to unequalled quality, service and price. Throughout 2005, Pingo Doce in Madeira followed a sustained policy of low, stable prices, guaranteeing its competitiveness through the monthly checking of prices of around 1,500 reference products against competitors. Pingo Doce kept its promise of not increasing its prices after the increase in VAT and for the second year running, the chain showed price deflation (monthly average deflation 1.8%), against average variation in the Consumer Retail Price Index of 2.3% in 2005. In 2005, another of the Group’s major projects was the opening of the new Pingo Doce store, in April, at the Forum Madeira shopping centre. In an ever more competitive environment, the current network of 13 stores achieved sales of Euro 76.5 million, which represents growth of 3.8% on the previous year. Of particular note was the performance of the Calheta and Cancela stores, and also the potential shown at the Forum Madeira and Machico stores, which was clearly demonstrated in our November and December sales figures. The year 2005 was characterized by increased levels of competition in the retail market in Madeira, which apart, from the opening of two competitor stores, namely in Porto Santo and Sto. António, was registered aggressive promotional campaigns, from competitors, copying models already used on the mainland. The installation of the WPMS logistical software in all our Madeira warehouses, the consolidation of the range renewal process, the remodelling of the Porto Santo store and the initial stages of new solutions for displays to add ever more efficiency, allowed us to perform well in the area of operating costs, as these measures reduced complexity, drastically reduced order errors, and improved planning of logistical production control and a fall in out-of-stock occurrences. Despite the generalized fall in the Traditional Retail business, Recheio in Madeira consolidated its market leadership in 2005, achieving sales of 28.6 million Euros, a value comparable to the year before. The increase in operating and structural efficiency helped us to manage a positive performance in terms of annual profit. Among the factors to consider is the consolidation and signing of new supplier contracts to the main hotel and restaurant groups in Madeira.


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For 2006, the main focus of Pingo Doce Madeira is for sales growth and an increase in market share, through a policy of ever more aggressive pricing and an attractive range of products for the Madeira population. Recheio should continue to develop solutions, which are constantly adapting and wide reaching directed at the HoReCa segment, thereby reinforcing its leadership of the wholesale sector. 4.5. Functional Operations Management Gestiretalho is the Company within the Group, which brings together the management of the different operational service sectors for Distribution in Portugal, and works transversally for the various Food Distribution Brands. The Functional Management groups which make up Gestiretalho are Sourcing, Logistics, Quality and Environmental Control, Finance and IT Systems. Their mission is to maximize synergies across the group through the sharing of resources and know-how in relevant markets, in order to optimize the efficiency of the Organization and the scale of the Group. Description of the role of the Functional Management Groups and their activities during 2004: 4.5.1. Sourcing Mission Statement To generate value for the Group and its Operating Divisions, namely through the following operating principles: (i) to create know-how in the key areas of competitive differentiation – Fresh Produce and Private Labels; (ii) to provide leverage to the Group’s negotiation capacity through the establishment of deals with the main manufacturers; and (iii) to develop a programme of sales synergies with selected partners. 2005 was marked by accelerating growth in the Jerónimo Martins brands, which is a vindication of the focus strategy that had been underway for two years. The adoption of a single Brand for Retail, permanent research into the best Sourcing options, the launch of successful products in new categories and the implementation of efficient operating solutions, all played a part in reinforcing the competitiveness and innovation of the Group’s Private Labels, which showed solid growth in double figures for all the Brands (especially noteworthy was the 45.5% growth in Pingo Doce Private Labels). Another area chosen as being vital for competitive differentiation was that of perishable produce. Here too, 2005 saw a series of important programmes, among which were the increase in purchasing at source, the adoption of standards of operational excellence in the area of packaging, selective reinforcement in selection, and the move into innovative areas. Performance in Fresh Produce was also noteworthy, with double the percentage rise compared to the sum of Brands. One final note is for the development of joint-buying operations with the Polish Biedronka chain, which had already been given a dry run in previous years. As a result of this cooperation, we were able to bring to the Portuguese market quality


84

products at extremely competitive prices, and simultaneously to develop the export of Portuguese food products to Poland. 4.5.2. Logistics Mission Statement To support the buying, transportation and storage departments of the Group’s Brands, while respecting the individual business needs and decisions of each. GestiRetalho, as a logistics company, operates at low cost, according to the standard and level of service required of it. We hold dear the principles of operational discipline and of respect for people. The management operates within the following physical platform:

Area (sqm) Description

Azambuja Distribution Centre 48,000

Non-Perishable products, fruit & vegetables, meat, dairy products and fish.

Guardeiras Distribution Centre 12,500

Non-Perishable products.

Modivas - Vila do Conde Distribution Centre 20,900

Fruits & vegetables, meat, dairy products, frozen food, fish.

Heavy Bazaar Distribution Centre 4.000

Heavy bazaar products.

In 2005, a number of modifications were successfully implemented in the organizational and operational structures of the logistics area. In organizational terms, the management of Quality Control and Invoice Checking moved to the Logistical Department. In the operational area, the Light Bazaar Area of Feira Nova was centralized and the centralization of the (Non-Perishable) Food Areas of the Feira Nova mini-hypers was initiated. In the Quality, Environment and Food Safety area should be underlined the interventional posture of the Quality Control Department throughout the whole Organization, with the emphasis on the continual training of all links in the chain of supply, especially in the Perishables Area. In Environment and Food Safety, besides the continued updating of all links in the logistic chain, extensive work was carried out in the attempt to obtain Certification (NP EN ISO 14001:2004 e DS 3027:2002E). The priority given to the areas of Quality and Food Safety was also reflected in the investment made in South Region Fruit and Vegetables and Guardeiras Non Perishables, in order to make them better adapted to the best preservation and quality of the food received and distributed.


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In the Supply Chain area, great effort was needed to move some of the handled Non Perishables towards Jus-In-Time (JIT)2 management, which allowed us to reduce not only circulating capital, but also to free up space and so advance with the centralization of mini-hyper format stores at Feira Nova. Continued integration between Jerónimo Martins and its suppliers, via the JM Direct Portal, was seen in the 220 take-ups, of which 112 have the whole process of integrated messages, including electronic billing. 2006 will be marked by the initiation of the expansion project for the Retail Brands of the Group in Portugal, which will demand excellence from the logistics team, with the increase in JIT and cross-docking3, the application processes for Certification in Food and Environmental Safety, an increase in activity with suppliers through the JM Portal, the continued Centralization of Foods adopted by Feira Nova and the introduction of refrigeration equipment at the Northern Region Fruit Warehouse. Besides ongoing projects, there was also the review project for logistic structure, which is of great importance and whose objective is the resizing of logistical operations, in order to deal with the levels of growth predicted for the Group over the coming years. 4.5.3. Quality and Environmental Control Mission Statement To guarantee the Food Quality and Safety of the products sold in the stores of the Group and their inherent operational procedures, in order to satisfy the needs and expectations of the customer, through fully respecting the rules of environmental protection. In 2005, the Quality and Environmental Control Division prioritized the conclusion of those projects begun in 2004 for the certification of Food and Environmental Safety systems of several of the Distribution Companies: Recheio Cash & Carry – received certification for its HACCP system, according to the Codex Alimentarius CAC/RCP-1-1969, Rev.4 (2003), in 19 stores, making it the first multi-site certification in HACCP in Portugal to a Wholesale Distribution chain. Gestiretalho Warehouses – received certification of conformity by APCER, for the Integrated Management System (the management of HACCP food safety according to standard DS 3027E: 2002 and the environmental management standard NP EN ISO 14001:2004), implemented at the warehouses in Guardeiras, Vila do Conde and Azambuja. The logistic centres of the Group are the first Modern Distribution warehouses in Portugal to obtain this certification. Recheio/Masterchef Food Service Platforms (Porto and Lisbon) – received a certification for Food Safety with the Codex Alimentarius CAC/RCP-1-1969, Rev.4 (2003). With regard to the certification of the service itself, the reference system, which governs the service provided by the platforms to their customers, was

2 Consist in the operations replenishment through the centralized logistic platform, within 24, 36 or 72 hours counting from the day of the order. The goal is to have no stocks at the warehouses by the end of the replenishment cycle, allowing a much more efficient stock management and reducing the investment in working capital. 3A similar concept to Just-in-Time, which allows the suppliers’ store orders to be prepared and placed on the logistical platforms of the Group, to be joined with other orders from the Distribution Centres transported to the stores.


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approved and registered by the certification board. With the documentation complete, the system was mostly implemented. Nevertheless, the Management of the Company consider important that the system gains added maturity, with the result that the concession audit will now be held in the near future. Together with the necessary work involved in the certification projects for Food and Environmental Safety certification, the Evaluation and Selection of Suppliers Manual was also revised. Various workshops were organized with Private Label and Perishables suppliers, with the following aims: (i) to advise and explain to our business partners the new evaluation and selection criteria for suppliers; (ii) to announce the contents of the Food and Environmental Safety Technical Norms of the Jerónimo Martins Group; and (iii) to make them aware of the impact their work has on the Group’s levels of Quality, Food Safety and Environmental Management. 4.5.4. Finance Mission Statement To register with precision and efficiency the accounting records of all JMR’s operational Companies, according to the accounting and reporting principles defined by the Jerónimo Martins Group, and according to the tax and statutory rules of Portugal. The Financial Management Division of JMR (DAF) is made up of the following areas: Accounting (Sales and General Accounting), Consolidation and Reporting, Controlling and Patrimony Management. DAF controls and monitors on a daily basis all transactions and operations related to total margin, store takings versus sales, gross margin, inventory losses, stocks, services and real estate transactions. The Financial Management Division is responsible for all accounting documentation of the operational Companies of JMR, which are reported on a consolidated and monthly basis for both shareholders – Jerónimo Martins and Ahold. The financial management information produced by DAF is also vital for the Operating Divisions, being the main source of information for decision-making on the part of the respective Brands. 4.5.5. IT Systems Mission Statement To develop and provide information processing systems to the Operational Divisions, according to their business objectives, and to use the most secure and efficient technology, thereby contributing to operational improvements. The year of 2005 was marked by the start of the outsourcing programme for the Information Systems infrastructure, and by preparations for the SAP R/3 system upgrade. In July, 2005, two outsourcing contracts were signed which cover (i) the supply and management of necessary infrastructures for central systems, IT centres and disaster recovery; (ii) support services for users and management; and (iii) the renewal of distributed services (servers, local networks, PCs and printers). This


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decision allows easy access to specialized know-how and savings of around 20%, including operating costs and investment in the relevant areas. During Feira Nova’s logistical centralization, new application processes were introduced, namely cross-docking, JIT (Just In Time) Multi lead-time, the introduction of Electronic Delivery and Tracking Orders, which use was later extended to the rest of the Group’s Companies. Evaluations and detailed planning of the SAP R/3 upgrade project, in collaboration with the software supplier, which will begin in the first quarter of 2006. In accordance with the commitment to risk reduction, an Information Security Organization was created, centralizing responsibility for this area, which were previously spread among several departments. This Organization has the main aim of evaluating and constantly improving the information security level, and they have already completed a project to agglomerate the existing norms and instigate a General Information Security Policy. For 2006, the main objectives of the Division are to complete the upgrade in the SAP R/3 system, and to overhaul the entire system’s infrastructure, including the change to a new information centre. The implementation of these projects will provide us with a more functional Information System, capable of dealing with the Group’s organic growth. 4.6. Customer Ombudsman With the aim of ensuring central management of customer satisfaction, 2005 saw the creation in the Retail Sector in Portugal of a Customer Ombudsman, whose main function is the defense and promotion of the rights, guarantees and legitimate interests of our customers, with the aim of serving as an efficient communications bridge between customers and Pingo Doce or Feira Nova. The Customer Ombudsman is, then, the representative of the Customer inside the Companies, fighting for Customers’ voices to be heard and their interests to be considered. Requests for Pingo Doce or Feira Nova resolves information, complaints and issues forwarded by Customers through their Customer Support desks, to which the Ombudsman channels questions that have been directly put to him/her, along with his/her opinion where appropriate. The work of the Customer Ombudsman is not limited to providing analysis and opinion regarding complaints, and may be called on to listen to Customers regarding any relevant subject they may wish to be considered. This being the case, the Ombudsman may promote initiatives, which contribute to the improvement of the all-round service provided by the Companies to their customers.


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5.1. Biedronka Message from the General Manager – Pedro Silva «2005 saw the beginning of a new cycle, with the focus on organic growth and with the help of the operational excellence developed over recent years. The less than expected favourable economic climate helped stimulate and reinforce the leadership position of what is the largest Retail Food Company in Poland, and it was particularly gratifying to see this confirmed by the 360 million visits to our stores during 2005. Achieving these goals was only possible with the outstanding hard work, professionalism and mission spirit of all our employees. » Mission Statement To offer a limited range of carefully selected, high quality products, in order to satisfy the daily requirements of our customers, at an everyday low price. All our employees should guarantee that the company works with supreme efficiency and at low cost. 2005, being a year of macro-economic adversity, was an interesting test for the operational excellence of Biedronka, developed over recent years. As a result, the predicted economic growth figures for Poland in the year after it’s joining the European Union were not fully achieved. Indicators such as the GDP and Investment figures were significantly down on initially budgeted figures for 2005, with a consequent impact on private consumption. Despite all this, the macro-economic environment did not in any way inhibit the value generation aims that Biedronka established for the year 2005. In truth, the situation reinforced the leadership position in the Polish Food Retail market, with the reinforcement and acceleration of our organic expansion programme, as well as the leadership in price and range innovation, fitting in with the principle “ Quality at low prices, every day”. In the course of 2005, 84 new stores were opened, which enabled the brand to end the year with a network of 805 units. The increase in the number of stores was one of the main strategic priorities defined for 2005, and was assured by the creation in the first quarter of the year of an Expansion Department exclusively made up of experienced professionals of the Real Estate business. The aim of this expansion was to start a new phase in the evolution of the Company, and the success of the organizational and operational restructuring and optimization process carried out in previous years prepared the ground for a new phase in its rate of expansion. The opening of the 800th stores in December was the best possible end to the 10th anniversary celebrations of Biedronka in the Polish market.

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Simultaneously, more 64 stores were remodelled, a result of the continued investment in the development and homogenization of the image of the shopping areas, as well as the increase in sales area. To sustain the development of the store network, in March 2005 the fifth Biedronka Distribution Centre was opened in Kostrzyn. This new logistical infrastructure employed innovative concepts, closely adapted to Biedronka’s operations, including a covered area of 23,000m2. This is not to forget the future logistical needs inherent to the expansion plan. 2005 saw the beginning of the building project for the sixth Distribution Centre of the Brand. Along the same lines, and with the aim of supporting the dynamics of its growth development, the Company decided to invest in two new, modern Data Processing Centres, opened in April 2005. This investment resulted in the reinforcement and expansion of the information processing capacity, and the increased flexibility and automization of operations, thereby reinforcing the competitive advantage in this area. In the commercial area, the rationalizing and optimizing of the assortment continued, in line with consumer expectations, with the launch of 117 new products and the relaunch of 208. The aim of these measures was to include in the range an increase in quality, with very attractive packaging, and to develop products in premium categories. In line with its strategy, Biedronka continued to strengthen the value and attractiveness of its range of Perishables and Non-Food products. Biedronka also wanted to encourage innovation and differentiation within the assortment through increasing the number of tested concepts, without compromising the rationalization of the range. In line with expectations, there was no change in the partnership work carried out with the suppliers in 2005, and Biedronka continued to source 90% of the permanent products from local companies. The consolidation of such medium- and long-term partnerships has allowed developing critical skills:

• Quality standards of products and ingredients, with special emphasis on all aspects of Food Safety;

• The permanent quality control of production processes and the logistic chain;

• The rapid adaptation and innovation of products, using new technologies; • Economies of scale and price efficiency, through the use of modern

production processes. In this way, it was possible to ensure stricter collaboration with the Quality Control structures of Biedronka, who reinforced their work through audits on partners’ factory units and permanent lab tests of the products for the range. This work was complemented with an improvement in store layout, with the aim of making it more stimulating and attractive to consumers. In addition, investment


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was made in larger display areas for the Non-food range and refrigeration equipment. Consumers recognised and valued the operational dynamics and the consistency of the measures implemented, which led to sales growth of 13.4% for Biedronka on 2004, with like-for-like growth of 5.4%. Over the year there were more than 360 million customer visits to the stores, which is a 12.6% increase on 2004. Finally, one of the major investments of the Company continued to be the development of its human resources, as a mean to sustain its growth efforts and to be able to meet future needs for skills and knowledge. During 2005, Biedronka provided 898,529 hours of training, with the continuation of programmes related to the “Employees’ Academy” and the Executive MBA, promoted for senior staff and involving over 130 participants. Also beginning in 2005 was a new training project called “Biedronka Management Academy”, exclusively tailored for training up store managers, and involving over 780 participants. Preparation for future managers was consolidated through the selection and recruitment of 21 new trainee managers.


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Mission Statement TO GIVE LIFE MORE VITALITY. Every day we satisfy our customers’ needs with brands that help them to feel good and attractive, and to make the most of life. 6.1. FimaVG Message from the General Manager - Fátima Aveiro «We became to the end of 2005 with the conviction that we had taken a leader’s stance, reinforcing the strength of our brands. A winning attitude, which accepts the passion for growth, the will to innovate, the courage to take risks, with an unshakeable commitment to working for the continuing trust of all our stakeholders and to always being the number 1 choice for our consumers. » 2005 was a year in which FimaVG faced up to great challenges and emerged with an overall positive level of performance. Net sales were Euro 285.0 million, reflecting the integration of Bestfoods. The change in profits was, however, different in that the improvement in cost structures and the profitability of the majority of categories were offset by the losses in Olive and Seed Oils. The year was undoubtedly marked by the particularly adverse conditions the Company had to face in the Olive Oil market. In the first half of the year, FimaVG was confronted by an attack on the part of a main competitor for the market leadership in packaged olive oils, to which the Company responded with an aggressive promotional and price plan. This plan was executed successfully, with the regaining and reinforcement of leadership status by the end of September. On the other hand, and as a result of this competitive climate, the profitability of this business was affected. Towards the end of the year, the results of this category were again affected, this time by the unprecedented rise in raw materials prices, due to the extreme drought that hit the Iberian Peninsula during the year. The overall impact of these two factors was responsible for the fall in profitability of the Company compared to 2004; a situation, which we do not believe, will be repeated in 2006. The development of the other categories of FimaVG was good, with special mention for the Knorr and Becel brands. Becel continued to show considerable growth (+17%) following on from the success of the Pro-Activ products, whose range increased with new launches in the area of foods to aid with high blood pressure. In relation to Knorr, which as from the beginning of the year became fully integrated into FimaVG, its market positions were maintained, with continuing notable growth of 9%. In parallel with this, the first steps were taken towards brand renewal, which should continue in 2006. Throughout the year, pressure intensified in the Fizzy Drinks and Sauces markets, with great price/promotional aggressiveness on the part of the main operators, a sign of the stagnation or even reduction in the market. FimaVG remained ever alert

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to these changes, and carried out large-scale seasonal programmes in the Fizzy Drinks Area and the changing of its Sauce prices to reflect the new competitive reality. Such measures allowed the Company to keep up with the competition and to reinforce its market positions in Fizzy Drinks and Sauces. The Food Solutions business demonstrated in 2005 growth figures of 3.9% over 2004. This performance reveals a deceleration in the average growth of the last five years, but this belies the continual gains made in market share with the HoReCa channel, which also came under heavy pressure during the year. It is worth noting that large-scale innovation in the Sauces and Desserts categories was paramount in the growth levels achieved. The sustained reduction in costs, through the optimization of resources, and with the exception of the Olive Oil business, mentioned above, allowed us to maintain the profitability of the Company at high levels, clearly above the sector average. Efficiency gains in the areas of Production and Distribution continued to be an essential element in the Company’s strategy. Transferring production of savoury during the year to the Santa Iria production unit, and the subsequent closure of the Carregado factory, were fundamental. Besides the synergies this move created, it allowed too to keep the production of Knorr in Portugal. FimaVG developed for 2006 an ambitious growth plan, structured around the following strategic priorities:

Innovation in Knorr; Strengthening the market leadership position of Becel in the heart health

segment; Recovering the profit levels for the Olive Oil category in the local market,

and also accelerating the growth rate of the Brazilian market; Growth in the Lipton brand; Strengthening our leadership of the Spreads and Cooking category.

The Company will restate its commitment to sustained growth, based on a philosophy and culture of Innovation and the rigorous application of its plans, which have transversal objectives for the whole Organization. Obtain the results that the company is aiming for, development opportunities will also arise, and FimaVG will continue to build on its history of success. 6.2. LeverElida Message from the General Director – Javier Roza «2005 was a successful year, in which we regained our strength, made gains in our market share, and began the journey towards becoming a high performance Company. It was a year in which we completed the first stage of our vision: to be the number 1 home and personal care Company. » During 2005, due to an extremely competitive market, explicable by the unfavourable economic environment, LeverElida’s total sales (excluding the effect of the disposal of Denim and Vim) were kept at the previous year level, but posting an increase of 2.0% in the home market. However, the market share increased and consumption of the company brands also grew by 7% in volume. This performance is the result of the strategy followed and the measures taken a year ago: to focus on key brands to enable us to gain and reinforce market


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leadership status in the respective categories, to reactivate support for brands and to review prices in order to increase the value perception of the consumers. As for operating results, and despite a significant investment in the brands, it was possible to maintain the profit levels seen in 2004. Throughout 2005, the Company carried out a process of restructuring in order to align the Organization with the new, not only quantitative, but also qualitative, market conditions. This process was carried out without interruption and contributed to a reduction in the cost structure and the increased agility of the company. On analysis of results by category, it can be seen that recuperation was particularly strong in the Home Care market, in which the Company had high, yet under pressure, market share, and where the challenges were even greater due to price pressure and market shrinkage. The increase in market share was, then, 2 more percentage points, a result of the growth in key-brands in different categories: Skip, Comfort, Cif and Sun. Skip, the biggest brand in the Group’s portfolio and one of the customers’ most important brands, was the main reason behind the success in 2005. Skip gained 2 percentage points in its market share, with occasional peaks in share of 51%. This result was possible thanks to a number of factors, such as the success of the variety Natural Laundry Soap, which added extra volume to the brand with an attractive product, or the advertising campaign “It’s good to get dirty”, which was an unique way to approach advertising in the Detergent category. This positioning brought new ways to contact consumers in the category, including through large events in the main cities of Portugal, where families were invited to have fun doing outdoor activities. In parallel, Skip also produced some of its products in limited editions, with the aim of satisfying the specific needs of consumers at specific times of the year: Sunshine, for automatic and hand washing in the summer; and Ice, for washing in the low temperatures of winter. The Company believes that Innovation is achieved not only through new products, but also through new ways of looking at the market. This applies to Fabric Detergents but also to markets such as Fabric Conditioners, in which the Comfort brand, with the relaunch of the blue variety and the launch of new characters in the clothes area, was able to achieve market share highs of 32%, a figure never before achieved. In the highly dynamic Home Care market, Cif performed excellently, with double-figure growth figures, as a result of the refocusing on its core brand (Cif cream) and the launch of new, innovative concepts based on sprays. Despite having been under strong attack from its new competitors, Cif became market leader in the Modern Retail market. Sun, the dishwasher detergent, also had a very positive year, with the help of the 4-in-1 tablets with glass protection and of the launch of Sun 4-in-1 Plus, the first tablets with a soluble film. This important innovation, which prevents the skin from coming into contact with the product when placed in the dishwasher, put Sun at the forefront of the market and contributed to the leadership of the brand in the Modern Retail sector.


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In Personal Care, 2005 was a year of mixed performances. Good levels of growth were seen in key-brands, but the unsupported brands, whose presence in the portfolio is still significant, suffered from rapid decline. Dove, the most important Personal Care brand in the Company’s portfolio, had a historic year, with the launch of the “campaign for natural beauty”. Dove’s mission is to make the brand a byword for women, and it has positioned itself directly opposed to artificiality and in favour of natural beauty, which needs to be cared for, and highlighted, not hidden or transformed. All over the world, as in Portugal, Women receive this concept in a very positive way, which emphasizes the importance of the brand. The development of Dove was especially positive in Deodorants and Hair Care, a strongly-growing market in which the launch of new concepts dedicated to the care of problem hair allowed to reinforce the market shares. The Vasenol brand showed good results in 2005, based on the renewal of advertising support for the new Retardine anti-ageing variety, and a new moisturizing product. As a consequence, the Shower Gel made gains in its market share of 0.5%. In Deodorants, a market in which LeverElida holds a dominant position with almost 50% of the market share and 4 brands, there was good growth for Rexona, which moved up to a clear second place in the market, with clear potential to become market leader. Finally, in the Shampoo market, 2005 brought good news in the recuperation of the Linic brand, which has made gains in market share and has consolidated its position as the biggest anti-dandruff brand on the Portuguese market. During 2005, Organics relaunched its packaging in order to better meet the needs of any hair-type. The “Monsters” media campaign was a novel way of dramatizing hair problems and increasing the visibility of the solutions offered by Organics. Customer management was an important area for the Company throughout 2005, in its attempts to adapt to the decline in traditional commerce. There was also a better alignment between the customer strategy and the Organization, which helped strengthen the Company’s position in relation to the principle retailers, and thus to be better placed to develop new levels of collaboration. 2005 was also the year in which cultural aspects of the Organization received more focus, with the reasoning that the market challenges facing us can not be overcome successfully unless employees are motivate to adopt a more daring, interdependent posture, oriented towards results. In 2006, LeverElida will continue to follow its growth momentum, reinvesting the benefits of this momentum in the strengthening of its brands. However, in the current unfavourable macro-economic climate, the Company predicts moderate growth mainly through the recovering of sales in the Personal Care and the continuing good performance of the Home Care Business Area.


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6.3. IgloOlá Message from the General Manager – Carlos Vicente «As a leader, IgloOlá’s mission is to surprise our consumers, customers and business partners, with relevant innovative solutions which foster sustained market growth and contribute to the day-to-day pleasure of our consumers.» IgloOlá’s plans for 2005 were to focus on the core area of the business through strong investment in the brands and the continued range of relevant innovations for the consumer. IgloOlá’s total sales were Euro 128.3 million, representing growth of 0.2% on the year before (excluding the effect of selling the Pizza business). The Company’s activities were limited somewhat by the difficult socio-economic situation, which had adverse effects, particularly with regard to consumption, the strong business pressures in organized retail and the aggressive competitive activities within the markets, despite the good weather seen, mainly in the Summer. Regarding operating results, once more IgloOlá showed its capacity to assure high levels of business profitability, without affecting its competitive market position. In 2005, in the Home consumption market, the business of the Olá brand (excluding exports) registered an increase in volume of 14%, thereby reinforcing its respective share of the market. Price continued to be the main competitive variable on the market, heightened by the aggressive expansion of the hard discounters. At the end of 2005, IgloOlá began a launch programme for more competitively priced products, in order to meet consumers’ economic needs. Among the launches, and well received by customers, was “Olá Original” at a very competitive price, which helped it gain 10% of the hypermarket volume share. Products for Children were another area of strong growth, supported by a forceful marketing campaign, highlighting the healthy qualities of ice cream. Magnum and Carte D’Or also strengthened their positions through intense communications and innovation activity. The Frozen Foods business had a particularly difficult year, especially with regard to pressure from Private Labels. IgloOlá strengthened its investments in the market, namely in promotional activities at point of sale. Innovation came mainly in the Capitão Iglo and Refeições 4 Salti ranges, with investment in convenience foods. The Vegetable section also had marketing support, and recent value propositions have been launched for peas. The market share of Iglo-branded frozen foods remained at 18.4%. In the Out of Home segment, IgloOlá posted a sales increase, in volume, in the Portuguese market of 4%, defending its market leadership position with a share of 70%. In 2005, the main initiative was the launch of limited editions of Magnum 5 Senses, which led to growth of 24% in the Magnum brand on 2004. The total sales volume of impulse-bought ice creams increased, although below expectations, given the favourable weather seen in the summer. Carte D’Or scooping had another successful year, with sales volume up 12%.


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In 2005, the Olá brand innovated through an intense Summer campaign, based on a system of SMS communication. Also, in a continuation of activities from previous years, there was the now regular Olá Love2Dance event, which once more surpassed expectations and made a significant contribution to the approximation of the brand to younger people. The year of 2005 also saw the launch in Portugal of a new brand of ice-creams - Ben & Jerry’s, with the opening of three franchises of these ice creams, and more openings predicted for the coming years. The Santa Iria ice-cream factory maintained its international role as a supplier of ice creams, with exports achieving 27% of total production. From the operational point of view, the factory unit continued to benefit from the Total Productive Maintenance (TPM) programme, which reduced transformation costs by around 8% and reinforced productivity levels. Finally, in the area of working capital management, IgloOlá improved significantly, reducing the annual average by around 38%. Much of this is due to reductions in stock levels, achieved in a joint effort between the factories and the commercial unit, in order to ensure the strict management of the quantities of stored products. In 2006, the innovation and support activities of the Company were concentrated on the key products of the business: Ice creams and Frozen Foods. The Company will continue with the mission to promote the nutritional qualities of ice cream, namely with a view to promoting increased frequency of “Home” consumption in Portuguese homes. Based on the success of “Olá Original”, the plan also pays special attention to more reasonably priced products, bearing in mind the current macroeconomic climate. The objective for 2006 is moderate growth with sustainable profit, as well as to defend and consolidate IgloOlá’s market position.


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Message from the General Manager - Pedro Veloso «2005 saw the beginning of a new cycle of innovation in JMD. We launched new concepts in Restaurants and began to work with new Brands of great prestige. 2006 is predicted to be the year of consolidation of the operations begun and will also see the preparation of a second wave of new projects launched in the Restaurant sphere » Mission Statement To build leadership positions in the Portuguese market, for the brands represented, sustained by excellent standards of service at a very competitive cost. To identify, develop and implement Specialized Retail concepts whose value propositions meet the profit criteria of the Jerónimo Martins Group. 7.1. Jerónimo Martins Distribution 2005 was a year of transition for JMD. After the shedding from its portfolio at the end of 2004 of a leading brand, the Company showed its capacity for renewal, through the entrance of other partners, of relevant size, to its representation business. The results achieved reflect the difficulties felt as a result of the above-mentioned changes in the portfolio, nevertheless future growth directives, in line with recent years, were already launched in 2006. 7.1.1. Food Division The impact of Kit Kat’s departure due to international realignment was certainly felt, as expected, in Food Division sales. The behaviour of the main markets in which the Company operates – Cereals, Tomatoes, Biscuits and Confectionary – was also a negative factor in the sales of the Division. Markets, which had seen healthy growth such as Cereals and Tomato Products, stagnated, and despite the good performance in market share growth, sales growth was not seen. One of the standout events of 2005 was the agreement on representation for Canderel (Merisan Group). This meant working with another prestige brand, the undisputed leader in its market. The Company is convinced that this range will be one of the biggest dynamos for growth in the Division in the coming years. With regard to the other brands in the Food Division, it is worth noting the excellent performance of Happydent (Perfetti Group) and of practically all the chocolate brands represented (namely the Merci, Storck and Droste ranges). 7.1.2. Cosmetics Division The Cosmetics Division had a really positive year, with notable sales growth. After a quiet first quarter, the new launch of Calvin Klein - Euphoria -, was a great success, surpassing all expectations. In a highly fragmented market with high levels of innovation, the launch of the year is vital to the performance of the brand, and in 2005, once again Calvin Klein presented a new product, which surprised Portuguese

7. MARKETING SERVICES, REPRESENTATION AND RESTAURANT


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customers. The vitality of the brand continues to show, as does its capacity for innovation. The Division’s success brings good expectations for 2006 sales. In organizational terms, there was the closure of the JMD logistics operation. Quite apart from the savings made, this option has the added benefit of enabling the Company to meet future needs, which are constantly mutating for both partners and, principally, for customers. This logistical outsourcing will increase not only logistical flexibility and efficiency but also the level of customer service. In terms of business costs, there was a continuation of cost structure rationalization and cost control in the rest of the operational areas. It was this cost and process rationalization policy that allowed the operation to consolidate, and to become more flexible to changes in the business portfolio. For 2006, the priorities remain clear: (i) to continue the selective search for new business partners, both for the Food Division and the Cosmetics Division; (ii) to continue investing in the rationalization of processes and new information technologies. The resulting efficiency gains will allow us to reinforce the sales structures in order to guarantee that the Company provide an excellent service to all business partners. PGJM This was the first full year of the joint venture with the Puig Group. There are two determining factors for the good sales performance of 2005: first and foremost, the great success of the most ambitious sales event of the year – the launch of the Spirit fragrance, by Antonio Banderas -, and secondly, the representation of one of the most emblematic brands on the Portuguese mass market – the Denim Range. The behaviour of the other brands was clearly good, and together with the effective partnership with the Puig Group, these two factors justify the sales success of 2005. In 2006, the sales structure will be reinforced, while at the same time, the JMD sales structure will be broadened in scope and closely followed in the indirect channels. 7.1.3. Caterplus The Restaurant sector was one of the most affected by the unfavourable economic situation, with customers having difficulties in paying and some even closing for business. It was in this difficult context that the Food Service Company operated in 2005, a fact, which makes the year results positive. Sales grew, and customer account balances were kept under control, as were operating costs. Those series of circumstances are a reflection of the rigour with which the Company implemented its management throughout the year. Next year is not expected to be competitively less aggressive, and Caterplus will be faced by two big challenges: (i) to restructure operations in order to work with more profitable margins; (ii) to guarantee an increase in market coverage, thus


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increasing capillary sales. This last point would imply the strengthening of the sales structure, so that the Company has the capacity to grow and develop the business, even in adverse competitive situations. 7.2. Hussel In 2005, Hussel was confronted by very difficult market conditions, with adverse competitive circumstances allied to a shrinking in consumption by the chain’s customers. Nevertheless, performance overall was positive, with growth in total and like-for-like sales. Regarding expansion, a new store was opened in Viseu, and preparations were made for a new store in the Loures Shopping centre, which will open in the beginning of 2006. 7.3. Jerónimo Martins Restaurant and Services This area demonstrates an innovative dynamic, with the launch of new concepts on the Portuguese market. The diversity and concepts of the portfolio have been identified as critical business success factors, in an area in which the aim is to be a key operator in Portuguese Restaurant area. During this development phase, the focus was on the careful selection of business partners with the required size, know-how, and concepts capable of being transferred to other realities and cultures compatible with the Company. The main priority for next year is to validate and consolidate the projects launched in 2005, in order to ensure sustained growth in an area of business considered strategic for the diversification of Jerónimo Martins Distribution activities. 2005 was frankly good for the chain of coffee kiosks –Jeronymo – with important positive like-for-like growth in sales. During the year a new store was opened and a distribution deal was done with the Pingo Doce chain for the supply of Jeronymo branded goods to all its coffees (around 60 points of sale). The priority for 2006 is to open new units, with a special focus on shopping centres due to open in 2006. The year of 2005 was the year in which JM Restauração & Serviços began its management of Olá ice-cream stores. The year closed with eight stores operating under the direct control of the Company, and in 2006, the priority is for expansion. New locations have been identified, continuing our search for new sales points. On 30th August 2005, the first Ben & Jerry’s store was opened in Portugal, followed by the opening of two more stores in the Lisbon area. These first units make up the pilot-store group, whose aim is to test the popularity of this premium ice-cream concept in Portugal.


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The first Subway store under the Company’s management was opened in October 2005 in Lisbon. Following on from this, two more units were opened in Covilhã and Loures. The main objective is to evaluate the popularity in Portugal of this concept of healthy sandwiches, and to promote possible adaptations and fine-tuning dictated by Portuguese consumers, before beginning a more aggressive expansion plan.


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Guarantee the alignment of the business and individual aims of each employee with the strategic aims of the Group, bearing in mind the excellence of the level of service to customers and consumers, have been a continual policy of the Jerónimo Martins Group. To this end, strict cooperation between the Human Resources and Organizational Divisions of the Holding and the Human Resources Departments of the Operating Companies is a critical factor. In this way, can be ensured the horizontal application of the strategies, policies, norms and procedures for every employee, as well as improving on the success of functional projects.

In 2005, the process of development, innovation and reinforcement of Human Resources policies was continued. In the area of Food Distribution in Portugal, and as a privileged way of reinforcing and renewing the current Employee base with professionals with a high potential for evolution, 13 graduates were taken on, mainly in the area of Food Engineering or similar. January was marked by the opening of the Jerónimo Martins Training School in Portugal, which in 2005 provided 16,889 hours of training, within 97 training programmes, to 1,209 trainees from various Group Companies. The majority of the training programmes were developed and taught by the approximately 70 internal trainers who took the Trainer Training Course. In terms of remuneration policies, the systems of variable remuneration underway at the various Group Companies were optimized, and there was a redefinition of the benefits existing for middle and upper management, due to the implementation of new management tools in Human Resources. With the principle of zero tolerance ever in mind, and the existence of working practices and conditions that are safe and healthy, the area of Safety and Hygiene at work continued to invest in training, information and awareness programmes, as well as the acquisition of individual protection equipment and safety equipment in our facilities. The area of Human Resources is described in detail in point 3 of the chapter related to Social Responsibility. Jerónimo Martins Group Employees as of 31st December 2005

Holding 71

Distribution – Portugal 15.866

Distribution – Poland 13.472

Manufacturing and Services 1.344

TOTAL 30.753

8. HUMAN RESOURCES


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The strategic orientation of Jerónimo Martins and the business areas, which make up the Group, is for profitable growth. The future sustainability of the new growth phase underway in the various areas of the Group in 2005 depends on the degree of competitiveness of the respective business models. In this context, the Simplification Project for Internal Management (SPGI), begun in 2003, continues as a transversal project to the Organization, with the aim of finding and correcting inefficiencies but also to consider new ways of managing the business. 9.1. Distribution in Portugal In 2005, the majority of projects identified in 2003/4 were concluded. These projects were mentioned in the Report relative to 2004 and were integrated in the Strategic Scorecard of the Group. Of these projects, the following can be highlighted:

The implementation of an outsourcing process for stationary, Marketing products and services and articles for the stores;

The signing of an outsourcing contract with HP, which covered the supply and management of the Information Systems infrastructure, namely in the central systems (data centres) and the continuity of operations (disaster recovery). Still in this area, a contract was signed with Fujitsu to provide services to users, namely in the area of distributed systems (servers, local networks, PC’s and printers);

The continuation of the breakage prevention programme begun in 2004;

The optimization of administrative processes related to Pingo Doce or Feira Nova operations;

The optimization of processes in the sales and logistic areas, namely the implementation of a workflow system for articles (phase I), as well as the definition and launch of the Feira Nova centralization programme;

Due to their specific nature, some of the processes still underway will continue in 2006, at the same time as the introduction of a new version of SAP Retail. 9.2. Distribution in Poland As well as on operating performance, the Company continued throughout the year to focus on the development of operating and organizational efficiency. Logistical productivity continued to grow, through the optimization and standardization of restocking processes for Storage and Transportation. Recognition of this work came with the third place achieved in the “European Logistic Perfection Awards” (Eurolog 2005), confirming once again the skills acquired in this area.

9. SIMPLIFICATION OF INTERNAL MANAGEMENT PROCESSES


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The development of “mixed packaging” and the perfection of store restocking methods had a very positive effect, not only on operational productivity, but also on the reduction of stock levels, so improving Working Capital. In the area of organizational optimization, the following projects may be highlighted:

The strengthening of regional skills and the simplification of business processes; The development of internal flows for electronic documents,

eliminating the need for paper transfer for various administrative processes; The optimization and development of external document exchange

with suppliers (Purchase Orders, Delivery Receipts, Invoices), covering 94% of merchandise suppliers; The merger, within Jerónimo Martins Dystrybucja, of its subsidiary

companies, allowing the simplification and efficiency increase of administrative processing; The implementation of a SAP salary processing module, giving

viability and regional decentralization to this process and enabling integration with the rest of the functional areas, from a single transactional platform.

9.3. Manufacturing 2005 was a year of consolidation for several projects, which had already begun, as well as the launch of new initiatives, both having as their main goal the increased simplification of processes and respective efficiency gains. In this area, there was the conclusion of the “One Face to the Customer” organization, including all three Companies. Begun four years ago, this project was characterized by the gradual alignment of the responsibilities, processes, procedures and systems, so that this area of support for the business began to be organized by customer, thereby strengthening the role played by the customer in this processes. In the Financial area, the project of digitalization, OCR and workflow is noteworthy, as it allowed obtaining extremely significant efficiency and productivity gains, making the transactional operation in Portugal one of the most competitive in Unilever’s European operations. As regards Outbound Logistics, the implementation of the "SAP Warehouse Management" programme at the Finished Product Warehouse in Abrantes, along with the installation of a radio frequency for picking at this centre as well as Stª Iria. Also, the EAN128/Traceability application was finished, for all the Finished Product Warehouses in the Group. At the plant level, it is worth noting the retaining of Knorr production in Portugal, transferred from the Carregado factory to the Stª Iria Manufacturing Complex, which now produces Fima Margarines, Olá Ice-creams and, since last September, Knorr Stock Cubes.


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Also noteworthy was the increase in competitiveness of the Lever factory at Sacavém, achieved through a package of various improvement measures which led to significant cost reductions, in parallel with the development of a relevant innovation programme directed at the local market. Finally, a special note for the Olá Ice-cream factory in Stª Iria, which was awarded with the “Best Practice Award for Energy Management 2005”, and also for the Victor Guedes factory, in Abrantes, which won the “TPM Excellence - First Category” prize, awarded by the Japanese Institute of Plant Maintenance (JIPM).


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10.1. Investments The Group’s determination to ensure leadership positions in the business areas it operates in means that the investments area plays a key role in the growth strategy of Jerónimo Martins. To meet these objectives, the technical and expansion areas of the Companies have been constantly reinforced with human and technical resources required to achieve the goals established, and the audit departments have been provided with the necessary and ever more demanding evaluation mechanisms to guarantee the maximum value return for the shareholders.

In Portugal, the alterations to the Commercial Licensing Law created new investment opportunities, redoubling growth expectations and allowing the Group to strengthen its market leadership in Food Retail. In fact, the last two years have seen the opening of 14 stores in the Retail chain area (9 Pingo Doce and 5 Feira Nova), whereas the new legal situation has placed the objective for new stores over the coming 3 years at 50 (25 Pingo Doce and 25 Feira Nova). In Poland, 84 units were opened, surpassing the objective of opening the 800th store in 2005. For the coming years, the goal is to maintain the same rates of new store openings. In its efforts to meet the defined objectives, the Jerónimo Martins Group channelled the majority of its 2005 cash flow into investment activities – the equivalent of 55% of EBITDA. Part of this value includes investments in stores to open in future years, which is proof of the efforts to encourage significant, sustained sales growth in the retail area for the future. While remaining conscious of the challenge represented by expansion, the concept of growth is seen with a good deal of optimism and enthusiasm. As a result of all the work done in recent years in the optimization of processes and the perfecting of the store concepts, Jerónimo Martins believes it has the formats which best meet the needs of the countries in which it is present.

10. GROUP INVESTMENT PROGRAMME


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The value of investment per square metre also deserved special attention on the part of the technical and expansion teams. While constantly being aware of the stores’ environment and the food safety of the products, the aim is to open stores at lower investment cost, in order to supply the Chains with competitive units, which are less vulnerable to price of sale pressures. In addition to the viability studies and the strict justification of investments in the Operating Division, the internal procedures of the Group dictate that high value investment projects must be submitted to the Planning and Control Department (DPC), for a review of the principles that support them. This Department, after carrying out consistency tests and sensitivity analyses, issue an opinion on the investment, before submitting it for final appreciation to the Executive Committee. Attentive to the new store and store remodelling programme in Poland, the Executive Committee decided during the year to grant more autonomy to the Board of Directors in Poland in the approval of investment projects, while upgrading the assessment of the investments. This measure has made the process more agile and significantly reduced the number of investment proposals to be submitted to the Executive Committee of Jerónimo Martins. Even still, the DPC analysed 239 investment proposals, to a total value of 355 million Euros, of which Euro 268 million related to investments in Pingo Doce and Feira Nova stores, with a significant part of these for investments over the coming years as a result of the increased number of licences applied for under the new Commercial Licensing Law. As in recent years, the modernization and maintenance of the stores continues to be one of Jerónimo Martins’ investment priorities, guaranteeing that the current

(euro million)Business Area

Expansion1 Others2 Total Total

Retail Mainland 35,7 44,1 79,8 49,4 Pingo Doce 19,1 21,9 41,1 16,1 Feira Nova 16,1 17,8 33,8 28,4 Logistics and Head Office 0,5 4,4 4,9 4,9

Cash & Carry 0,1 8,9 9,0 6,9

Madeira 2,4 1,1 3,6 2,2

Food Distribution Portugal 38,2 54,1 92,3 58,5

Poland 48,6 23,4 72,0 41,0 p.m PLN '000 194,9 93,9 288,8 167,6 Biedronka 43,2 19,2 62,4 36,9 Logistics and Head Office 5,4 4,2 9,6 4,2

Total Food Distribution 86,8 77,5 164,3 99,6

Manufacturing and Services 1,2 3,0 4,2 3,8 Bestfoods 0,0 77,7

Total JM 88,0 80,5 168,5 181,0

1 New stores2 Refurbishing, maintenance and others

2005 2004


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stores meet the required conditions and allowing all the Chains to maintain a homogenous collection of units, which meet defined standards. Hence, as from the end of 2005, Feira Nova operated a completely remodelled network of stores (the average age of the stores is 3.3 years), while Pingo Doce intensified their remodelling efforts, with 14 major remodelling jobs. Biedronka continued its programme of remodelling, with 64 stores remodelled in 2005. The year of 2005 was also dedicated to the development of new projects, with investments made in the area of restaurants (3 Ben & Jerry’s, 3 Subways and 8 Olá stores), and intensified investment in the Non-food area (ElectriCo, New Code), as well as carrying out tests on new store concepts (in the case of the Masterchef store of the Recheio chain, for example). 10.2. Disinvestments As with previous years, the policy of assessing the performance and contribution of each store was continued, and closure decided upon in cases where the trend for value destruction is irreversible or when a store is not in line with the positioning of the Chain. This resulted in the closure of 4 Biedronka stores, 3 Pingo Doce stores and 1 Feira Nova store in 2005.


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11.1. Economic and Sectorial Environment *** 11.1.1. International According to economic experts, it is likely that current levels of economic growth will continue unaltered in 2006, due to: (i) continuing predictions of price stability; (ii) continuing dynamism in the US and Asian economies; and (iii) the gradual recovery of the European economies. World economic growth is estimated, then, at around 5%. According to the Winter Economic Report of the Bank of Portugal, oil prices are expected to register average annual increases of around 10%, down largely to robust world demand, reduced production capacity and the resulting uncertainty regarding supply. Inflation in the average prices of non-energy raw materials is expected to be between 4% and 5%. In the EuroZone, again according to the Bank of Portugal, economic growth should fall between 1.4% and 2.4%. Salary increases should be modest, gradual increases in productivity are expected and inflation predictions are for the continuation of levels compatible with price stability. In these circumstances, keeping the official interest rates at current levels should be viable, and would support the economic recovery of the EuroZone. Despite this, Reuters estimates at the beginning of 2006 pointed to an increase in interest rates in the first quarter, with the figure stabilizing at 2.75% by the end of the year. Reuters also predicted renewed strength of the Euro against the Dollar, which they predict will tend to lose ground against the Yen and Sterling as well. This macro-economic scenario does, however, hide considerable risks. Volatility in the oil price, along with the increased pattern of global imbalance - with US foreign debt hitting 7% of GDP by 2007 and China and Japan showing high foreign surplus and external balance figures - may force the restructuring of foreign exchange and interest rate policies. The appearance of protectionist feelings in several countries, due to the increase in competitive pressures in countries with low production costs, may be a risk factor for world growth. In addition, the sustainability of the public finances of the EuroZone depends on capacity for instigating structural reforms, which will improve economic performance and resistance to economic shocks. In the Food Distribution sector, it is likely that merger and acquisition processes will intensify in the more mature markets, while Central and Eastern European and Asian markets are expected to expand. India may offer significant growth opportunities, due to the long-awaited alterations in the Country’s current regulations, which should enable more concrete integration of the Indian economy in world trade. Discount stores are also expected to show continuing growth. Estimates are that operators which are already established in the market will develop their business concepts, and that new retailers will invest in this format. In general, operators will continue to be focussed on cost optimization and productivity gains, through investment in new technologies and the development of

11. PERSPECTIVES FOR 2006


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their information and logistic systems. Outsourcing of those operations that lie outside the core activity of Companies will allow fixed costs to be converted into variable costs, and will imbue organizations with greater capacity for flexibility to enable them to adjust to business cycles. Food Safety, Risk Management and Social and Environmental Responsibility are ever more present in the sector’s businesses. The main demographic and consumption trends will guide supply decisions. Increased importance placed on health and well being, the increasing importance of convenience, an aging and more racially-diverse population - these are all factors to be considered. Following on from the rationalization of formats and respective value creation, operators will probably develop innovative programmes to provide incentives to consumption, guided by those factors which customers have stated as being of worth. In the Portuguese and Polish markets, where the Jerónimo martins Group currently operates, macro-economic and market predictions are as follows:

11.1.2. Portugal According to the Bank of Portugal, growth in GDP in 2006 will remain extremely modest, at around 0.8%, continuing below average growth for the EuroZone. The recovery of the growth rate of the country depends largely on maintaining internal demand and increasing the growth rate for exports (from 1.8% in 2005 to 4.0% in 2006), although the increasing integration into the world economy on the part of some Eastern European and Asian countries could cause increased difficulties for Portugal, as these countries possess extremely competitive export structures, and have managed to attract significant flows of foreign investment. The Bank of Portugal also estimates a reduction in Gross Fixed Capital Formation, but this reduction should be at a lower rate than that registered in 2005 (-1.1%, as opposed to -3.1% in 2005). The growth in private consumption should be slightly above 1%, judging from expectations of lower growth in families’ disposable income and an equally pessimistic outlook for the work market. The growth rate for imports should increase, but only slightly. In 2006, the inflation rate should increase to around 2004 values (2.5%), as a result of the increase in energy prices. The effects of the increase in VAT from 19% to 21%, which occurred in July, 2005, will continue to be felt throughout 2006, and will be amplified by the increase in other indirect taxes presented in the 2006 Budget. Balancing the Budget is the priority challenge, with an expected reduction in the budget deficit of 1.2 percentage points (4.8% of GDP), through the increase in taxes, the freezing of expenditure and structural reforms in public spending. The behaviour of the Portuguese economy is largely tied up with the climate of high uncertainty, mainly caused by doubts about oil price increases, about the best way to redress the imbalances that have hit the economy, and about to what extent Portugal will be able to restructure the profile of its exports in order to increase its share of international trade. Interest Rates may also continue their rising trend, which may impact on business investment, and will certainly compund the difficulties of families, who in general continue to shoulder large debts.


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The financial markets should, however, continue the positive trend seen in 2005. New privatizations may further animate the Portuguese financial market. In Organized Food Retail, with more stores operating, besides the new pharmaceutical and fuel businesses, and despite competitive pressures, higher growth in sales figures is expected compared to 2005. The year of 2006 should offer a window of opportunity for operators to consolidate their market share, through the large number of new stores predicted for the year, based on the licences obtained in 2005. The sales scenario for 2006, therefore, is extremely aggressive, both in terms of price and demand. With such moderate predictions for consumer growth, this increase in store numbers may lead to a decrease in sales per sqm. With the highly dynamic situation in Organized Food Retail, the decline in Traditional Retail is expected to continue and accelerate, and early signs in 2006 confirm this trend. Cash & Carrys, on the other hand, should show moderate growth rates or at least remain stable. Evidence for this can be seen in the growth trend observed in the last few months of 2005 by the HoReCa channel, despite this sector traditionally being highly susceptible to economic fluctuations. Still with Cash&Carrys, neither large-scale acquisition operations, nor new store openings, are expected. Operators should be making clear efforts to reposition themselves, and there will be a great deal of commercial aggression on show. 11.1.3. Poland

Estimates are for an increase in GDP for 2006 of 4.6%, meaning new growth acceleration for the Polish economy. With the election of the new government, economic uncertainty should decrease, and internal demand is expected to increase by 5.4%.

Private consumption should grow around 3.5% and Poland should see big increases in investment (+15.0%), encouraged by the following two factors, already highlighted above: (i) the favourable climate for transferring business units from other European Union countries, in order to benefit from the high skill levels of the Polish workforce, as well as competitive costs; and (ii) the impact of EU funds, directed towards the development of infrastructures and company competitiveness. The prediction for exports is for a decrease in their contribution to economic growth, and that they will grow below expectations.

Slowly but surely, the unemployment rate continues to fall, despite remaining high. These falls should consolidate consumer confidence. In 2006, the unemployment rate is expected to reach 16.5%.

The implementation of the convergence plan continues to go ahead smoothly, with predictions of 3.6% of GDP for Poland’s budget deficit for 2006.

The inflation rate should remain stable at around 2%, although the same risks to those identified in the description of the world macro-economy remain.


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In what concerns exchange rate, the Zloty should hold its vitality, with a consequent impact on exports, and there should be a continuing reduction in interest rates on the part of the Polish authorities.

In the Food Distribution sector in Poland, the highly aggressive competitive scenario is expected to continue, as are the expansion plans of the majority of operators, who are now starting to turn their investments to smaller cities.

The continued growth of Organized Retail to the detriment of Traditional Retail, which still represents around 58% of the total food market is thus expected. The discount store segment continues to offer the best growth dynamic in terms of number of stores.

Because many operators continue to make a loss, there is the possibility that store numbers will be consolidated in Organized Retail. As purchasing power increases, supply will diversify and quality levels will continue to close on those of Western Europe.

*** Information Sources: Autumn Predictions of the European Commission, Autumn and Winter 2005 Economic bulletins of the Bank of Portugal, OECD Economic Outlook nº 78, Thematic Report – NECEP/CEA FCEE nº 2; The National Bank of Poland, Central Statistical Office (GUS), Citibank Handlowy, BRE Bank, Business Monitor International Ltd.

11.2. Jerónimo Martins

Bearing in mind the macro-economic and sectorial scenarios described above, the Jerónimo Martins Group’s priority continues to be for the solid, profitable growth of its current portfolio of businesses in Food Distribution. Poland should continue to be the main growth engine for the Group, and there will be intensified investment in the expansion of the Retail chains in Portugal, as well as in the Food Service segment.

Both in Portugal and in Poland, consumers continue to be rational in their evaluation of the quality-price binomial, which places the competitiveness of the Chains at the top of the priority list. In their turn, the Chains are focussed on the increased circulation of its invested capital, with investment in attractive, innovative, differentiated projects, which will lead to increases in the average sales value to customers.

Pingo Doce will continue to strengthen its leadership position in the supermarket sector. The Chain’s priorities are for expanding its store network, consolidating its price repositioning strategy and continuing to develop in Perishables and Private Labels, as factors of differentiation.

Feira Nova will also consolidate its competitive price positioning, the growth of its ElectricCo and New Code businesses and will invest in Perishables and Private Labels, as factors of attraction and loyalty, respectively. In 2006, the main challenge for the Chain will be on expanding its medium-sized store network.


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Recheio will continue to consolidate its market leadership status in Traditional Retail, in order to sustain its business in a market, which should show shrinkage in the coming years due to pressure from openings in Organized Retail. The HoReCa channel promises Recheio significant growth opportunities, with the Chain testing more efficient formats to compete in the various market segments.

In the Polish market, Biedronka will continue to work towards the sedimentation of its successful strategy, guaranteeing the continuation of its advantage in the market and focussing the whole Organization on continued, rapid and sustained growth. The company continues to follow aggressive expansion plans (80 to 100 stores/year) and remodelling plans (40 to 60 stores/year) and proposes the creation of another logistic and operating area, so as to prepare its operating structure for the existing growth potential.

In the area of Manufacturing it is expected that sales growth will be interesting and that all Areas of Business will consolidate their market shares, through strong investment in price and a clear policy of innovation. The optimization of costs and refocusing on a portfolio of strong brands are the two priorities of the Organization.

JMD will continue to focus on the broadening of its portfolio of represented brands and on the development of its new projects in the Restaurant area.

Although another difficult year is expected, the Group’s objectives for 2006 are ambitious in terms of the market and highly demanding for the Organization, but are considered achievable.

Despite the ambitious nature of our growth objectives for the current portfolio, the Group continues to research and analyse new strands of growth, whether in store formats, new geographical areas or new businesses. Accordingly, in February 2006 the Group formalised its relation with the Portuguese Association of Pharmacies (ANF) with a view to looking into the possibility of setting up a pharmacy business in the Polish market. In a scenario of uncertainty such as that facing companies today, it is fundamental to evaluate objectively the risks involved in new investments and the capacity of the Organization to accommodate such risks.

Other clearly accepted priorities are internal development at the level of management policies, practices and processes, in the area of Corporate Governance, Social Responsibility, Food Safety, Logistics, Sourcing or Information Systems. Also prioritized are the investment in the training and professional development of staff and the optimization of capital costs, with the aim of empowering the Organization with the necessary resources and skills to ensure the competitive nature of its brands and to meet the needs thrown up by market trends and the demands of its customers, shareholders and stakeholders in general.


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By the closing of this report, there are no relevant events that should be mentioned.

12. EVENTS AFTER BALANCE SHEET DATE


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In the financial year 2005, Jerónimo Martins, SGPS, S.A. declared consolidated profits of Euro 110,379,181. In accordance with the policy of dividend distribution announced several years ago and described in the chapter of the Corporate Governance, the Board of Directors proposes a distribution to the Shareholders of Euro 52,788,474.48, an amount which corresponds to 47.8% of consolidated net profit. Therefore the application of the Jerónimo Martins, SGPS, S.A. individual net result that in 2005 was Euro 79,418,358.12 is proposed to be as follows:

• Legal Reserve ........................... Euro 3,970,917.91.

• Dividend Distribution ........ Euro 52,788,474.48.

• Free Reserves ....................... Euro 22,658,965.73.

13. RESULTS APPROPRIATION PROPOSAL


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INFORMATION CONCERNING THE STAKES HELD IN THE COMPANY BY MEMBERS OF THE BOARD OF DIRECTORS AND STATUTORY AUDITOR AS AT 31 DECEMBER 2005

(As provided in article 447 of the Portuguese Commercial Companies Code and under the terms of sub-paragraph b), paragraph 1 of article 7 of the Portuguese Securities Market Commission (CMVM) Regulation nº 24/2000)

BOARD OF DIRECTORS

Members of the Board of Directors Held on 31.12.04

Increases during the year Decreases during the year Held on 31.12.05

Shares Bonds Shares Bonds Shares Bonds Shares Bonds

Elísio Alexandre Soares dos Santos 20,071 - 20,071 -

José Manuel da Silveira e Castro Soares dos Santos 1 - - - -

Luís Maria Viana Palha da Silva - - - -

Pedro Manuel de Castro Soares dos Santos 23,661 - 23,661 -

António Mendo Castel-Branco Borges - - - -

Artur Eduardo Brochado dos Santos Silva 1 2 1,536 -. 1,536 -

Hans Eggerstedt 3,940 - 3,940 -

Manuel Fernando Macedo de Alves Monteiro 1 -. - - -

Rui Manuel de Medeiros d`Espiney Patrício - - - -

Álvaro Carlos Gonzalez Troncoso - - - -

STATUTORY AUDITOR

As at 31 December 2005, the Statutory Auditor PricewaterhouseCoopers & Associados, SROC, Lda., did not hold any shares and bonds of Jerónimo Martins, SGPS, S.A. and had not made any transactions with Jerónimo Martins, SGPS, S.A. securities.

14. CONSOLIDATED MANAGEMENT REPORT ANNEX


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LIST OF SHAREHOLDERS WITH QUALIFYING STAKES AS AT 31 DECEMBER 2005 (Under the terms of articles 447 and 448 of the Portuguese Commercial Companies Code and for the purposes of section e), paragraph 1 of article 6 of the Portuguese Securities Market Commission (CMVM) Regulation nº 11/2000 and in the terms of the Portuguese Securities Code)

Shareholder Nº of shares held

% Capital % of Voting Rights*

Sociedade Francisco Manuel dos Santos, SGPS, S.A.

Directly 70,353,985 55.899% 55.976%

Strand Ventures Inc.**

Directly 10,454,615 8.307% 8.318%

Through Fitron Management Ltd. (Held at 100% by Strand Ventures, Inc.)

4,234,159 3.364% 3.369%

Through Multiplus Investments Ltd. (Held at 100% by Strand Ventures, Inc.)

5,266,256 4.184% 4.190%

Total Attributable 19,955,030 15.855% 15.877%

Zenith, SGPS, S.A. ***

Directly 2,973,484 2.363% 2.366%

* (% Voting rights = Nº shares held / (Total Nº JM shares – Own shares))

** Under the terms and for the purposes of paragraph 3, article 16 of Portuguese Securities Code (CVM), the stakes held directly and indirectly by Strand Ventures Inc must be imputed, according to paragraph 1, article 20 of the CVM to the following companies:

- Banco Privado Português (Cayman) Ltd., under a portfolio management contract for the entire stake in Jerónimo Martins, SGPS, SA;

- Banco Privado Português, SA, under an agreement with several shareholders of Strand Ventures allowing it to elect the majority of the members of the board of directors. *** Under the terms and for the purposes of paragraph 3, article 16 of Portuguese Securities Code (CVM), the stakes held directly by Zenith, SGPS, S.A. must be imputed, according to paragraph 1, article 20 of the CVM to the following companies:

- Banco Privado Português, S.A., under a portfolio management contract for the entire stake in Jerónimo Martins, SGPS, SA;

- Banco Privado Português, SA, under an agreement with several shareholders of Zenith, SGPS, S.A. allowing it to elect the majority of the members of the board of directors.


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EBITDA Margin =

(+ Operating Results + Depreciation + Goodwill Amortisation - Non Recurrent Operating Results)

/ Net Sales & Services

EBITA Margin =

(+ Operating Results + Depreciation - Non Recurrent Operating Results)

/ Net Sales & Services

OIC (Operating Invested Capital) =

+ Gross Goodwill + Net Fixed Assets + Working Capital

NOIC (Non Operating Invested Capital) =

+ Goodwill Accumulated Amortisation + Net Financial Investments + Deferred Taxes Provision + Income Tax Provision PreTax ROIC (Return, before taxes, on Invested Capital) =

[Sales & Services / ((OIC + NOIC – Deferred Taxes provision + Goodwill Acc. Amortisation) average] x EBITA Margin

Cash Flow =

+ Net Results + Amortisation, Depreciation and Provisions - Deferred Taxes - Non Recurrent Items (operating, disposals and financial)

Net Debt =

+ Bonds + Bank Loans + Other loans - Marketable securities and bank deposits

+ Leasings + Accrued interest Gearing =

+ Net Debt / + Shareholders funds

15. FINANCIAL GLOSSARY *


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Interest Cover Ratio + EBITA / (+ Financial Results (excluding non recurrent items) - Partners loans interest)

Like For Like sales: Sales by stores that operated under the same conditions in two periods. Excludes stores opened, closed or which suffered major remodelling works in one of the periods.

* This financial glossary is based on the income statement by functions


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Aiming to facilitate the direct access to some of Jerónimo Martins Group entities the following e-mail address are disclosed: Elísio Alexandre Soares dos Santos (Chairman of the Group) [email protected] Luís Palha (Chief Executive Officer) [email protected] Pedro Soares dos Santos (Member of the Executive Committee - Responsible for Food Distribution Operations) [email protected] José Soares dos Santos (Member of the Executive Committee - Responsible for Industry and Representations and Marketing Services) [email protected] Henrique Soares dos Santos (Company Secretary) [email protected] Cláudia Falcão (Head of Investor Relations and Market Relations Representative) [email protected] Ethics Committee [email protected] Communication Department [email protected] Human Resources Department [email protected] Client’s Ombudsman [email protected]

16. CONTACTS

IV. Social Responsability

121 0. Relevant Facts of the Year

123 1. Jerónimo Martins and Social Responsibility 124 2. Corporate Ethics

125 3. Human Resources 125 3.1. Human Resources Policy 125 3.2. Description of Human Resources 125 3.3. Recruitment 127 3.4. Training and Personal Development 130 3.5. Career Management 131 3.6. Remuneration Policy 131 3.7. Working Conditions 133 3.8. Occupational Medicine 134 3.9. Partners in the Area of Human Resources 134 3.10. Company Agreements and Benefits 136 4. Quality and Food Safety

136 4.1. Quality, Food Safety and GMOs Policies 137 4.2. Main Projects of the Year

140 4.3. Monitoring of Food Quality and Safety 143 4.4. Partners in the Area of Quality and Food Safety 145 5. Environmental Management 145 5.1. Environmental Policy 146 5.2. Main Environmental Impacts 147 5.3. Environmental Management Programmes 156 5.4. Climate Change 157 5.5. Partners in the Area of the Environment 159 6. Patronage 159 6.1. Social Patronage 164 6.2. Cultural Patronage 166 7. Frequently Asked Questions

Annual Report’05 – Social Responsibility

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January

• Opening of Jerónimo Martins Training School in Portugal • Implementation of variable remuneration in the Recheio Food Service

Platforms • FimaVG-LeverElida-IgloOlá carry out internal fund-raising initiatives for

UNICEF and AMI, in the aftermath of the Asia tsunami February

• Biedronka takes part in the “Alcohol: minors forbidden” campaign March

• Launch of permanent section dedicated to Social Responsibility in the internal Jerónimo Martins magazine, “A Nossa Gente”

• Launch of the new freepost communication channel with the Ethical Committee

• Start of joint organic waste collection project at 25 Pingo Doce, Feira Nova and Recheio stores, for composting at the VALORSUL and LIPOR centres

• Start of selective collection of used consumables (toners, print cartridges, among others) at Gestiretalho, Pingo Doce, Feira Nova and Recheio

• Provision of free breast and cervical scans for female Biedronka employees in the largest project of its kind carried out in Poland

• Successful transition by LeverElida of its environmental certificate to the new NP EN ISO 14001:2004 standard

• Commemoration of Day of the Tree at the LeverElida factory, with children from the Sacavém Social Centre

May

• Opening of the new premises of Diferenças, a Child Development Centre, in the Feira Nova da Bela Vista shopping centre, part funded by Jerónimo Martins

June

• Celebration of 10 years of Jerónimo Martins in Poland. Events were held that involved more than 10 000 employees of Biedronka, as well as suppliers and other entities

• Certification of the Hazards Analysis Critical Control Point system (HACCP) in 19 Recheio stores, in accordance with the Codex Alimentarius

July

• Sixth edition of the Jerónimo Martins internal magazine geared towards the Senior Staff, dedicated to the theme of Social Responsibility

• First Biedronka holiday camp, held for 130 children of employees from low-income households

• Successful transition by Victor Guedes of its environmental certificate to the new NP EN ISO 14001:2004 standard

August

• School equipment given to Biedronka employees’ children who were starting school

0. RELEVANTS FACTS OF THE YEAR


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September • Start of workshops with suppliers of perishable Own-Brand food products,

aimed at improving Food Safety, Quality and Environmental Management • Pingo Doce enters the Top Ten companies with best environmental

performance in Portugal, in the area of climate change (Euronatura study) • Biedronka launches programme to help employees with serious illnesses or

handicaps

October • Jerónimo Martins takes part in the 1st Portuguese Forum of Social

Responsibility of Organisations • Jerónimo Martins signs the GRACE Commitment Charter, with Goals for the

Millennium November

• Certification of the HACCP system of the Food Service Platforms of Recheio Masterchef in Lisbon and Porto, in accordance with the Codex Alimentarius

• Launch of the “Learn to Enterprise” Association, a partner project of the Junior Achievement initiative, of which Jerónimo Martins is a founder member

December

• Pioneering launch in Food Distribution in Portugal of the Jerónimo Martins Client’s Ombudsman

• Completion of the internal trainers’ training course at the Jerónimo Martins Training School, involving 70 employees from the Group

• Food Safety and Environmental Certification from the Gestiretalho distribution centres, in line with the NP EN ISO 14001:2004 and DS 3027 E: 1999 standards

• Undertaking of awareness-raising action for Biedronka employees to save water, energy and waste management

• Christmas charity initiative by Biedronka together with the Polish Caritas charity, involving 1 000 underprivileged children

• Awareness initiative organised by the Portuguese Road Safety Authority for the employees of the LeverElida factory focusing on Defensive Driving and the Highway Code

• Air Quality and Thermal Comfort Analyses at the Central Offices of FimaVG-LeverElida-IgloOlá

• FimaVG obtains “level A” (maximum) in a Quality audit carried out by Unilever

• Victor Guedes attributed the “Award for Excellence in Consistence TPM Commitment 2005”, reaching Level II of the TPM


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Over 200 years of investing in Sustainable Development

«A socially responsible company assesses the impacts of its decisions not only in the short term, but also in the medium and long term. It knows that sooner or later it will be judged by the good or bad consequences of its actions, not only concerning profits, but also with regard to its social and environmental record. A socially responsible company bases its competitiveness on a philosophy of constant innovation, based on a culture of knowledge and meticulous execution. A socially responsible company has a transparent communication policy through which it justifies its activity to all those who contribute to its existence and its success: shareholders, employees, suppliers, customers, financial community, the public and government authorities...»1 In viewing Social Responsibility as a management philosophy aimed at bringing about sustainable development, Jerónimo Martins ensures that the pursuit of its business goals is FimaVGly focused on the creation of value, not only in the short term, but also in a sustainable manner in the medium and long term. The adoption of this socially responsible stance has implications on the way the Group and its Companies operate at all levels. It gives rise to management based on rigor, innovation, a permanent learning attitude, ongoing improvement and on obtaining ambitious results in three areas: Profit, People and Planet (Triple Bottom Line). «Socially responsible management implies a transversal vision of the reality and a culture of knowledge, innovation and high ethical standards.»1 In this chapter, information is given about the policies and business activity of the Group in the areas of Business Ethics, Human Resources, Quality and Food Safety, Environmental Management and Patronage in 2005.

1 Alexandre Soares dos Santos, Chairman of the Board of Directors of the Jerónimo Martins Group, in the internal magazine for the Senior Staff of the Group, Workout, No. 6.

1. JERÓNIMO MARTINS AND SOCIAL RESPONSIBILITY


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The Jerónimo Martins employees should adopt behavioural habits extolling the principles of integrity and loyalty that act as the cultural framework of the Group and which are outlined in the current Code of Conduct. All employees of the Group, in Portugal and in Poland, are compelled to comply with the Code of Conduct, which may be consulted on the Group’s website, at www.jeronimomartins.com. This Code clarifies guidelines on various fundamental questions related to the Jerónimo Martins mission such as obeying current legislation; respect for the principles of non-discrimination and equality of opportunity; environmental concern; business transparency; and integrity in relations with employees, suppliers, customers and official entities. Jerónimo Martins established an Ethical Committee since 2003, which freely and independently ensures disclosure of and compliance with the Code of Conduct. In 2005 the Ethical Committee implemented a new freepost communication channel, which enables any employee to clarify any doubts regarding the Code and to point out any irregularities that may occur in the Group. This new channel, which adds to the e-mail address already set up for the purpose - [email protected], was communicated to the employees through the internal Jerónimo Martins magazine in March 2005. Its disclosure was reinforced through the affixing of posters in all the stores, Food Service Platforms, distribution centres and central offices in January 2006. Another highlight of the Ethical Committee’s activity in 2005 was the proposal approved by the Board of Directors in November and disclosed to all Staff in January 2006 - “Company Share Transactions Regulations”-, establishing the procedures to adopt in certain circumstances, regarding the purchase of shares by the Senior Staff of the Jerónimo Martins Group and limiting the periods in which these transactions can take place. Owing to its pioneering nature in the Food Distribution sector in Portugal, the major landmark in 2005 was the creation of the Client’s Ombudsman. Up and running at the end of the year, this entity shall freely and independently defend the rights, guarantees and legitimate interests of Pingo Doce and Feira Nova customers. Independence from these two supermarket chains is ensured by the fact that the Client’s Ombudsman reports directly to the Executive Committee of the Group. As well as providing another facet of the Customer Care Service that has operated in the two Companies from several years, this new entity, in addition to providing the usual guarantees of food safety and quality of the products on sale in the stores of the Group, shall also provide nutritional advice to customers to aid them in their selection/purchases. All the above-mentioned measures reinforce the commitment by the Jerónimo Martins Group towards its ethical principles and its community, both internal and external, and will be further enhanced in 2006.

2. CORPORATE ETHICS


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3.1. Human Resources Policy

To guarantee the highest competence of Human Resources of Jerónimo Martins, it is a key requisite for pursuing the strategic objectives of excellence of service to customers and consumers. The strategies and mechanisms for the development of Human Resources, as well as their alignment to business targets remain increasingly important factors of differentiation. The aim is to have an Organisation where the working teams are motivated, focused and committed to the objectives of the organisation. To this end, it is essential to offer a motivating and healthy working environment, fair and adequate pay and good opportunities for development with a view to optimum performance but also the personal and professional fulfilment of each co-worker.

3.2. Description of Human Resources

Total Employees of Jerónimo Martins Group on 31 December 2005

Holding 71

Distribution Portugal 15,866

Distribution Poland 13,472

Manufacturing and Services 1,344

TOTAL 30,753

3.3. Recruitment

Recruitment continues to be fundamental for furthering growth and strengthening Jerónimo Martins’ position in the market. The main criteria are to ensure equal opportunities and to assess whether the profile of the applicant (internal and/or external) suits the requirements of the job. In order to accommodate the Expansion Plans of the various Companies of the Group, in 2005 several recruitment processes were carried out in the Operations areas, such as the annual recruitment of recent graduates and the internal/external recruitment of Store Managers. During this year, the Jerónimo Martins Group has been reinforcing its links to the academic world with a view to attracting and retaining talents.

3. HUMAN RESOURCES


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3.3.1 Distribution

Jerónimo Martins seeks to offer its employees different opportunities for growth and development, promoting mobility among the various functional and business areas. In Portugal there were nearly 600 internal moves as part of the internal recruitment policy (promotions, transfers and movements within and between Companies – Non-Senior Staff) in the areas of Operations, Category Management, Human Resources, Marketing, Finance, Information Systems and Logistics. As for middle management and senior staff, there were 102 internal moves (promotions, transfers and movements within and between Companies) and five expatriation processes. It is pointed out that as part of the Expansion Plan of the Operational Companies, and taking into account only the centrally managed processes, 327 employees were recruited for the new Feira Nova stores. In line with the policy implemented in recent years, the Pingo Doce and Lidosol chains continue to provide training for Store Manager Trainees, and recruited 58 and 10 trainees respectively. Also worthy of note was the opening of the Forum Madeira Pingo Doce, which led to the creation of 82 new jobs. The Recheio chain has focused on recruitment for its sales team, as well as the opening of positions for two managers in the Perishable Foods area. 2005 was also marked by the resumption of the Recent Graduate Recruitment Programme, which seeks to address the Group’s medium to long-term needs in terms of management staff. Under this programme, 13 new graduates were hired in September. In order to strengthen and bring about closer relations with the academic community, the Jerónimo Martins Group held 95 curricular training initiatives in the Marketing, Human Resources and Store Operations departments in 2005. At the same time Jerónimo Martins’ middle management and senior staff have been helping students with curricular essays, and also taking part in University seminars and curricular subjects in order to disseminate good business practices and case studies.

In Poland, the 2005 plan was again dominated by an aggressive expansion policy and by the reorganisation of the Human Resources Department, which translated into the decentralisation of the payroll processing area for each of the operational regions. As such, there were of 2,271 internal moves within the company, 12 of whom were middle management and senior staff. The Company promoted 1,342 employees most of whom non-managerial.

In 2005 Biedronka recruitment program was focused in stores’ structure and Distribution Centres. There was also a need to strengthen the middle management


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and senior staff, which led to the recruitment of new employees for the Operations area. Biedronka advertised these new posts in Employment Centres, the written press, the Internet, the corporate site and also by placing job advertisements in the stores themselves. As part of the Recent Management Trainees Programme Poland recruited 21 manager trainees in 2005, 15 of whom were allocated to the Operations area, 2 to the Supply Chain and the rest to the Marketing, Human Resources, Financial and Commercial areas. 3.3.2. Marketing, Representation and Restaurant Services As part of JMD’s expansion into new Business Areas, in 2005 182 employees were recruited for the Subway, Ben & Jerry’s, Olá, Jeronymo and Hussel chains. A further six new employees were recruited for the Head Office, namely for the Marketing, Sales and Finance areas. 3.3.3. Manufacturing

As part of the internal recruitment and development policy, among the internal movement of 103 non-managerial staff, 92 resulted in definitive integration of Bestfoods into the FimaVG. A total of 48 transfers took place within the Company. As for middle management and senior staff, there were 16 internal moves within the same Company, 43 between Companies (26 deriving from the integration of Bestfoods into the FimaVG), of which 23 were promotions. There were also three repatriation processes. In 2005 five new non-senior employees and two recent Management graduates were recruited. In the case of the latter, activities were carried out with some of Portugal’s top universities, namely the coordination and implementation of seminars and workshops for final-year undergraduates in Economics and Business Sciences. Furthermore, the corporate site of the Group of Companies - www.unilever-jm.com - was permanently online outlining all the information concerning the kind of graduates sought, as well as the respective Development Programme. Finally, during the year, the Group of Companies also provided 33 traineeships in Human Resources, Quality, Development, Becel Institute, Logistics, Marketing, Customer Management and Supply Chain.

3.4. Training and Personal Development Training has always been a strategic priority for the Jerónimo Martins Group, inasmuch as it aims to endow its workforce with the skills required to meet the current and future needs of the Organisation. Moreover, investing in training has a considerable impact on efficiency and productivity – two critical factors that give companies a leading edge in an increasingly competitive market.


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3.4.1. Distribution

Throughout 2005, 4,680 employees from the various Companies of the Group took part in training activities in Portugal. Of the 50,532 training hours, 48% were developed and administered internally in several areas such as: Customer Service, Project Management, IT, Labour Legislation, Safety in the Workplace, Food Safety, Leadership, Team Management, Perishables, Operational Control, Quality Control. In Portugal, the five and a half-month job integration programme was implemented to introduce 13 newly graduated employees to their job. This plan, which includes the transmission of knowledge about the Companies’ structures and business strategies, through classroom and on-site training at the store, aims to provide recent graduates with the skills, experience and knowledge needed to perform their future functions. Jerónimo Martins continued to implement the protocol signed with Novaforum – Executive Training, (Universidade Nova), for the Management Degree. The programme, which lasted two years, ended in 2005. A total of 10 middle management and senior staff took part, both Portuguese and Polish, from the areas of Operations, Commerce and Human Resources. Throughout the year 84 middle management and senior staff members took part in seminars about Labour Legislation, Marketing, Safety in the Workplace, Food Safety, Media Training and International Accounting Standards. It is also pointed out that 28 middle management and senior staff members took part in 13 activities, seminars and congresses abroad (HARVARD, BABSON COLLEGE, IMD, WHARTON, INSEAD, MCE, CIES, among others). At the same time the Group continued to grant time off for attendance of post-graduate and MBA courses in several areas. Jerónimo Martins Training School In January 2005, Jerónimo Martins opened its Training School in Portugal. This unique training facility, common to the Companies of the Group, has the goal of not only teaching employees the skills required to exercise their functions, but also to enrich and disseminate the bank of knowledge the Group contains in all the Business Areas. Throughout the year the Training School registered 1,209 employees from the various Companies in 97 initiatives, totalling 16 889 hours of training. Of the 97 training actions, 84 were developed and administered by internal trainers, translating into 15,065 training hours given to 1,118 trainees. To enable this, 70 employees of the Group attended the Trainer Training Course. It is also pointed out that 13 courses were held at the Jerónimo Martins Training School that were given by external entities to a total of 91 participants, totalling 1,824 training hours. These actions covered themes such as Customer Care, Project Management, Time Management, English and Computer Studies.

The 2005 Poland Training Plan involved an investment of 898,529 training hours given to 28,336 employees. It is pointed out that most of the courses were given by internal trainers, and focussed on imparting knowledge and skills related to


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Health and Safety in the Workplace, Operational Procedures, Information Systems and Languages Learning. Also worthy of note were the “Management Academy”, “Executive MBA” and “Biedronka Management Academy” programmes. In 2005 the “Management Academy” completed its first course, training 112 middle management and senior staff over two years in modules focusing on advanced management. In the “Executive MBA” Programme, which lasted one year, 24 managers were able to attend courses in the areas of Strategic Management, Finance, Marketing, Sales, Team Management and Project Management. Finally, “Biedronka Management Academy” consists of a six-month training programme for Store Managers, which in 2005 trained 780 employees in Management and Leadership. Sixty-seven middle management and senior staff members were given the opportunity to attend seminars/congresses on such themes as Finance, Human Resources, Environment, Quality Control and Information Systems, among others. A further nine middle management and senior staff members took part in training courses abroad.

Encouraging the sharing of information

Aware of the importance of sharing information and strengthening the pride felt by the workforce in belonging to the Group, Jerónimo Martins kept on publishing three internal magazines:

“A Nossa Gente”, a quarterly magazine aimed at the Distribution and Services staff in Portugal, which aims to inform around 20,000 employees about the current activities undertaken by the Group;

“Nasza Biedronka”, a quarterly magazine with a circulation of 13,000 copies, aimed at the employees of the Biedronka chain in Poland;

“WorkOut”, a six-monthly bilingual magazine aimed at the middle management and senior staff from all the Business Areas in Portugal and Poland.

Another important initiative involved the journey made by 100 Polish employees to Portugal in 2005 to get to know the Group’s business in this country and to share experiences with Portuguese colleagues.

3.4.2. Marketing, Representation and Restaurant Services

Throughout 2005, 17 employees took part in training courses lasting a total of 312 hours. Highlights included initiatives related to Product Management, Store Wars and Sales, as well as training courses provided by Ben & Jerry’s and Subway.


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3.4.3. Manufacturing

In 2005, as part of the National Training Plan, the employees of the Group were able to take part in internal actions (8), external actions (21) and actions abroad (32), aimed at improving their performance and consequently the performance of the Organisation. As such, a total of 446 employees took part in internal, external and foreign training actions, totalling 10,260 training hours. The training programme also included courses aimed at factories and international courses, registering 502 participations in 82 external actions and 562 participations in internal actions.

Integration Programme for New Graduates

The Companies in the Manufacturing area have put together several initiatives with a view to the effective integration of graduates recruited, including the development of the skills and competences required for a first job with management responsibilities. The programme involved the following cycle: initial training course; lengthy apprenticeship period in the Companies; ten months of on-the-job training; allocation of new graduates to their respective function. 3.5. Career Management

The career development of Jerónimo Martins employees of and the creation of competitive and highly motivated teams are critical factors for the sustained success of the Companies.

3.5.1. Distribution

During 2005, 76 employees were promoted to middle management and senior positions in Jerónimo Martins – 39 in Portugal and 37 in Poland. Once again the extremely dynamic organisational model was in evidence, reflected in the internal movement of staff between Companies and between Departments.

3.5.2. Manufacturing In 2005 there was a high managerial turnaround between the Companies and the functional areas in order to provide experience in different functions, multiplying the opportunities for learning and career development. The departments of Marketing, Customer Management and Finance were those that recorded the highest internal movement within each Company, while the National Finance Department, the Supply Chain and Fima registered the highest internal movement between the Companies.


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3.6. Remuneration Policy Aiming to assure a fair and adequate salary policy that encourages excellence of performance, the various Group Companies continued to optimise variable remuneration policies that reward the attainment of individual and/or team objectives. The variable remuneration policy aims to contribute to improving the results of the Companies.

3.6.1. Distribution

Pingo Doce, Feira Nova, Recheio, Biedronka and the distribution centres increased their minimum salary so as to become more competitive in the market. The variable remuneration policies in place in the different Companies of the Group are a continuation of the strategy adopted in 2004. The Jerónimo Martins Group also redefined the bonus schemes for middle management and senior staff in line with the new tools implemented during 2005. 3.6.2. Manufacturing In 2005 the remuneration policies for Non Management staff followed the variable component system based on the Valuation of Performance established in 2003. Unilever remuneration policies for Management were maintained through Reward for Growth system that is based on three main elements – business results at European level (growth and profitability), business results by Company (growth, profitability and long term value creation) and individual performance.

3.7. Working Conditions

It is a constant concern of the Group to make the premises, equipment and machines as suitable as possible in terms of health and safety in the workplace. The “zero tolerance” principle continues to act as a guideline for the whole Organisation, and it was especially satisfying to register a sharp fall in the number of accidents in 2005 compared to the figures of the previous year.

3.7.1. Distribution

In Portugal the team of Health and Safety in the Workplace Officers was reinforced with the recruitment of an Officer for Madeira, guaranteeing similar resources to those of the Companies Lidosol and J. G. Camacho.

In the year under analysis the following actions are especially worthy of mention:

Preparation of Model Emergency Plans for the stores;


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Extension to the Pingo Doce and Recheio stores of assessment of the physical, chemical and biological hazards, as had been carried out previously for Feira Nova and undertaken by the Ricardo Jorge Institute (North and South) and CATIM;

Undertaking of risk assessments and proposal and adoption of the corrective measures deemed necessary;

Preparation and implementation of safety instructions and information for machines, equipment and chemical products used in the stores/distribution centres;

Analysis of risk situations and selection of individual protection equipment considered most suitable for these situations;

Study and adoption of safety signs more adapted to the reality of the Group;

Bolstering and undertaking of training, information and awareness-raising actions in the area of Health and Safety in the Workplace (HSW), particularly focusing on managers and recent recruits;

HSW audits of the stores and preparation of reports (with particular emphasis on factors such as professional risk, prevention and protection measures, safety in the workplace and assessment of installations and equipment);

Inquiries into work accidents, determining the respective causes and taking corrective measures;

Reports on accident occurrence;

Feira Nova launched a campaign for the selection of the logo for the area of Safety at Workplace with high participation of the Company employees.

Accident Indices: frequency, seriousness and comparative evolution The Group’s initiatives in Health and Safety in the Workplace have begun to bear fruits. Furthermore, the efforts made by the different managers to raise awareness of their employees regarding this issue have proven extremely beneficial. As a consequence, the accident indices of Distribution in Portugal have fallen sharply in comparison to 2004; translated into a 16.6% drop in the frequency index and a 30.5% fall in the seriousness index. The number of accidents leading to temporary or definitive incapacity fell from 1,030 to 842 (-18.3%) in relation to 2004, while the number of days lost as a result of accidents fell from 21,144 to 14,444, which is a reduction in the order of 31%. All the companies contributed to this achievement, with the following figures particularly noteworthy:

• At Feira Nova the frequency index fell 23.0% and the seriousness index fell 42.0% over the year. As a result of the latter, the number of working days lost dropped from 4,912 in 2004 to 2,762 in 2005;


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• At Recheio the number of working days lost fell from 2,342 to 1,199 as a result of the 50% drop in the seriousness index; The frequency index underwent the same downward trend, reducing 22.8% in comparison to the previous year;

• At Lidosol the seriousness index fell 43.5%, which led to a reduction in the number of working days lost from 908 to 514.

During 2005 were registered in Biedronka 265 work accidents, three of which were considered as being serious accidents, with and index of frequency of 18.8%.

3.7.2. Manufacturing

At the LeverElida plant, 2005 saw the continuation of activities focusing on Safety linked to the Integrated Management System, as certified by the OHSAS 18001:1999 standard. Among the initiatives carried out, particular emphasis was put on projects to improve access facilities and the physical work conditions, machine safety and external and internal circulation at the premises. A big effort was made to eliminate safety hazards, with over 150 safety actions carried out. At the start of 2005, a health and safety in the workplace initiative was undertaken for all the workers at the FimaVG plant, focusing on the incidents and accidents that occurred the previous year, the implementation of safety measures and the dissemination of information about the risks at the factory. At the IgloOlá factory, management activities with regard to Safety were carried out in accordance with the OHSAS 18001:1999 standard, and increasingly as part of another management tool, the TPM, through the development of the so-called Safety and Environment Pillar. At Victor Guedes several training initiatives were held during 2005 in the areas of Health and Safety, Fork-lift truck driving, Safety in the laboratory, Evacuation Drills and Handling of Portable Extinguishers for the whole of the factory workforce.

The work carried out to reduce accidents in the Companies has been successful, as testified by a sharp fall in the seriousness and frequency indices. In comparison with 2004, the seriousness index fell 14.6% and the frequency index was 0.28% lower.

3.8. Occupational Medicine In order to comply with the legislation in force, reduce accidents and control/reduce absenteeism, measures continue to be implemented with a view to adopting good practices in terms of health and hygiene.


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Admission

Exams Periodic Exams Occasional

Exams

Distribution Portugal

2,590 5,601 7,417

Manufacturing and Services

469 479 4,618

TOTAL 3,059 6,080 12,035

3.9. Partners in the Area of Human Resources 3.9.1. Distribution In the area of Labour Relations, we maintained collaboration with the Portuguese Association of Distribution Companies (APED), namely through the Human Resources Committee, having achieved a more suitable Collective Employment Contract for the new conditions introduced by the new Employment Code. Moreover, a closer relation was nurtured with the Association of Trade and Services of the Autonomous Region of Madeira, so as to proceed with the modernisation of the Collective Work Contract in force in the island for the Food sector. Relations with the unions, based on permanent dialogue and a high sense of responsibility, contributed to the reinforcement of the peaceful working environment in a relation based on confidence and the introduction of new work organisation measures to the advantage of all parties involved. 3.9.2. Manufacturing The Companies continued to maintain close relations with the Workers’ Committees, which contributed greatly to the stability of the business. 3.10. Company Agreements and Benefits 3.10.1. Distribution

Portugal

In Portugal, Jerónimo Martins continued to renegotiate and disclose new agreements (and respective benefits) with companies from the most wide-ranging sectors of activity (Bank, Insurance, Leisure, Mobile Phones’ Operators, Cars), so as to provide the Group’s employees with access to certain goods and services and to contribute to improved standards of living.


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Poland

In Poland the year 2005 was replete with initiatives geared towards the well-being of the employees, encouraging a healthy team spirit and disseminating the good practices needed for socially responsible management. As such, several projects were carried out in the areas of health and prevention, aiding the underprivileged and integration of employees.

Breast and Cervical Scans – March 2005 In March more than 700 female employees at Jerónimo Martins Dystrybucja S.A. undertake free breast and cervical scans in a project carried out in collaboration with the Polish Association of Cancer Prevention, aimed at preventing breast and cervical cancer. Biedronka Children’s Day– June 2005 On 1 June, World Children’s Day, the children of Biedronka employees who were under 12 years of age received several gifts. An art contest was also organised and the children were invited to visit their parents’ workplace. Picnics – June 2005 As part of the commemoration of Biedronka’s 10th anniversary in Poland, several picnics were organised in Polish cities during the month of June. Children’s holiday camp – July 2005 In an initiative carried out by the Board of Directors of Jerónimo Martins Dystrybucja SA, 130 children of employees from low-income families were invited to spend two weeks in the Dziwnów holiday camp on the Polish coast. School bags for Primary School Pupils – August 2005 All the employees’ children who began primary school this year (around 500 children, aged seven) received a complete school bag with school material (pens, markers, rulers, pencils, among other items). Support to handicapped children (Employees’ children) – September 2005 In September a project was launched to support handicapped children of Biedronka employees. A special committee was set up, which included a doctor to carefully and individually assess the children case by case. Up to the deadline date for delivery of this report, 50 children had been registered on the scheme, which shall be assessed by the committee. Christmas presents for Employees and their children – December 2005 In December all the employees of Biedronka and their children received Christmas presents. Employees whose salary is less than 3 000 Zloty were given shopping vouchers to spend in Biedronka stores.

3.10.2. Manufacturing The Company benefits package for middle management and senior staff did not undergo significant changes.


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The Companies belonging to the Jerónimo Martins Group have the foremost priority of ensuring the highest possible standards of Food Quality and Safety, from the initial production to delivery to the consumer. All the employees of Jerónimo Martins are individually and collectively responsible for the Quality and Safety of the Food products produced and sold by the Group.

4.1. Quality, Food Safety and GMOs Policies

In the Jerónimo Martins Group, Food Quality and Safety are critical factors behind the success of its operations. Therefore, satisfying the present and future needs and expectations of the customers and the creation of value for the shareholder are clear corporate aims. These goals are achieved through encouraging a culture of ongoing improvement in performance, never losing sight of the evolution in technology, science, and the market and consumer expectations. The Group’s employees are personally and collectively called to make their contribution, given that it is considered that “Food Quality and Safety is everybody’s responsibility”. The policy at the Jerónimo Martins Group follows a formula that associates prevention, vigilance and training:

• Cooperation with suppliers and authorities; • Timely response to customer concerns; • Search for the best technical/scientific information; • Assessment and monitoring of all processes and flows influencing Food

Safety; • Strict control of the quality of products from the source to the final delivery

to the stores; • Continuous training of human resources as a way of raising motivation and

performance; • Identification of the needs of the customers, at all times; • Developing customer information programmes.

Jerónimo Martins nurtures a relationship of cooperation with its suppliers, so as to understand the processes upstream from Distribution, in order to guarantee the full respect for its principles, namely regardind GMO’s. Whenever possible, the use of non-transgenic ingredients and additives in its private labels is assured. For products where it is not possible to eliminate transgenic ingredients, the customers shall be informed of the fact on the label. In establishing Food Quality and Safety as strategic priorities, the Group makes sure it constantly keeps track of the evolution of scientific knowledge, and selects the most up-to-date scientific data to govern its action.

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4.2. Main Projects of the Year 4.2.1. Distribution Portugal In 2005 in Portugal projects were completed to implement review and certificate the Food Safety and Environmental Management Systems that were started in 2004. As such, the following certificates were obtained:

• Recheio Cash & Carry Stores – its HACCP system has been certified in accordance with the Codex Alimentarius CAC/RCP-1-1969, Rev.4 (2003), in 19 Stores. It is the first multiple-site certification in HACCP awarded to a wholesale Distribution chain in Portugal.

• Gestiretalho Warehouses – APCER certified compliance with its Integrated Management System (HACCP Food Safety Management in accordance with DS 3027E: 2002 and Environmental Management NP EN ISO 14001:2004), implemented in the warehouses in Guardeiras, Vila do Conde and Azambuja, which thus became the first Modern Distribution Warehouses in Portugal to receive this system certification.

• Recheio/Masterchef Food Service Platform of the Lisbon Region Supply Market – certification of the Food Safety System in accordance with the Codex Alimentarius CAC/RCP-1-1969, Rev.4 (2003).

• Recheio/Masterchef Food Service Platform of Oporto Supply Market – certification of the Food Safety System in accordance with the Codex Alimentarius CAC/RCP-1-1969, Rev.4 (2003)

Obtaining the certification rewarded the effort and commitment of the various teams involved (Departments of Quality Control and Environment, Operations, Logistics, Commercial, Maintenance, Human Resources, Internal Auditing, among others), throughout the 18 months in the different activities required to ensure the success of these projects, of which we highlight the following:

• Identification of opportunities to improve the Systems; • Identification of necessary renovation/adaptation works in store, platform

and warehouse infrastructures; • Revision of documentation:

• Food Safety Manuals and Integrated Management Manual; • Producing/redefining all of the support documentation to the systems

to be certified (working instructions, inspection plans, Code of Good Practices and System register models, among others);

• Training of human resources of the Companies involved in these processes (Recheio and Gestiretalho), whenever the review or reformulation of procedures led to this need;

• Undertaking of internal audits needed to assess the implementation status and maturity of the Systems.

While the year 2004 was dedicated to the design, development and implementation of the Systems, the focus in 2005 was on validating operability and completion of the certification process.


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The efforts made to obtain the certification are illustrated through the following figures:

• 376 training hours of various sectors of the workforce (Recheio and Gestiretalho, including employees of subcontractors, namely linked to transport, cleaning and maintenance, among others);

• More than 2,000 direct work hours of the project teams; • 32 internal audits to identify opportunities to improve the Systems and their

implementation.

Following on from previous projects, it became necessary to review and thighten the criteria concerning the selection of suppliers. Therefore, the Supplier Assessment and Selection Manual was revised, which in addition to describing the assessment and selection procedures, also outlines how the audit reports are to be presented and how the Food Safety rules are to be registered and complied with. The criteria to take into account during the supplier audits are outlined in three documents enclosed with the Manual: the Food Technical Standard, the Environmental Technical Standard and the Non-Food Technical Standard (the last is only applicable to the Private label suppliers). In line with a relationship based on transparency and partnership between the Group and its suppliers, and aimed at disclosing the content of this new Manual and the underlying criteria behind it, several workshops were organised to which the national suppliers of Perishable Goods and Private Label products were invited, and in which 267 company representatives took part. 4.2.2. Poland In 2005, in order to encourage continuous improvement, internal audits were carried out for the distribution centres with regard to Good Handling Practices, Good Hygiene Practices and the HACCP System, and the results constituted the basis to improve the construction of the new standards. Furthermore, in the distribution centres periodic control programmes were started for brand products from Manufacturing and for groups of paper products. As for control and monitoring of suppliers, Biedronka drew up a simplified checklist based on the Food Safety Standards of the British Retail Consortium (BRC), in order to help its smaller suppliers to improve their production conditions. Free audits are regularly carried out to measure and assess the degree of evolution. Both in Portugal and in Poland in 2005 the Jerónimo Martins Group continued to involve itself in the development and implementation of tracking systems for all the food products, in partnership with farmers, producers and EAN among others. 4.2.3. Manufacturing The plants of the Group carried out their activity complying with good practice principles, of which the following are highlighted:


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• Use of the most appropriate production equipment and technology, in accordance with stringent quality standards, thus avoiding the generation of non-conforming products and costs associated with non-quality;

• Investment in training and raising awareness of risks among the Workers, as part of the Food Quality and Safety drive, both through general and more specific initiatives;

• Analysis in a self-control regime whenever applicable and technically possible so as to directly involve the Workers;

• Use of the HACCP methodology, aimed at achieving the “zero incidents” target in the Food area.

Assessment of current practices and procedures is carried out by undertaking Quality audits, using the internal teams of each plant or inter-factory teams, taking advantage of and encouraging the sharing of practices and knowledge. With regard to training, 468 hours were given in the areas of Food Quality and Safety (FimaVG, Iglo and Victor Guedes) and Quality (Lever). In 2005 all the plants of the Group achieved certification in accordance with the NP EN ISO 9001:2000 (Quality) standard. The FimaVG plant was audited by Unilever in terms of Food Quality and Safety, obtaining score “A”, which is the highest possible level in this kind of audit. This classification rewards the efforts of all involved and acknowledges the sustainability of the System implemented. In order to ensure continuous improvement, Victor Guedes undertook a detailed analysis of all the production processes so as to optimise and apply the most recent technology, namely with regard to Food Safety. Throughout 2005 the IgloOlá plant fully implemented its Total Productive Maintenance (TPM) programme and expanded the TPM methodology to areas outside production, especially focussing on Quality, one of the pillars of the TPM broadly developed over the year. The Quality standards used in the IgloOlá plant were “reinvented”, in line with the directives of the Unilever Ice-Creams Category, giving rise to the Relevant Quality Standards for the Consumer. This new methodology, allied to the Quality Charts that began to be drawn up in 2005 in two factory pilot lines, is aimed at consumer satisfaction and its goal is to bring about zero defects at the ice-cream plant. Although originating at the IgloOlá factory, the Quality Charts, which shall be further developed as part of the TPM, also became the “common language” in the other plants. Victor Guedes reached Level II of the TPM, and was attributed the “Award for Excellence in Consistence TPM Commitment 2005” by the Japanese Institute of Plant Maintenance (JIPM). FimaVG and Victor Guedes implemented a project that enables information systems to keep track of ingredients and materials more quickly and effectively. The big project in the Food Area in 2005 however was the start of production of broth in Santa Iria, which became an integral part of the FimaVG factory unit.


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The big challenge faced in the last quarter of the year, which will continue throughout 2006, is the optimisation of resources and integration of systems. The final goals are to guarantee the quality of the products, the safety of the consumers and to safeguard the needs and expectations of the customers.

4.3. Monitoring of Food Quality and Safety 4.3.1. Distribution Stores - Portugal In order to promote Food Hygiene and Safety, in collaboration with the Feira Nova Human Resources Department, a Training Plan was drawn up and implemented for Workers in the Perishable Foods area, aimed at reaching an ever increasing number of trainees, as well as the newly recruited employees. Activities related to Management trainee and Pingo Doce Store Manager training were also carried out, together with several collaboration initiatives with the Technical Departments concerning licensing processes, assessment of new infrastructures/stores meanwhile acquired by the Companies or refurbishment of the current stores. A higher degree of monitoring was implemented for the Bakery Production area, doubling the number of Quality Officers working in this sector. In addition to the continuous training of the different professionals, internal audits were carried out aimed at increasing the Quality Index of the Stores, including assessment of the premises, the facilities and the operations of the stores themselves. During these audits, the various operators are always reminded of food safety procedures. The following initiatives were carried out in 2005:

• 933 audits of stores belonging to the different chains;

• 651 specific visits to support the stores, provide various clarifications, solve complaints and monitor the product throughout the logistics circuit;

• 600 training hours, with special focus on the area of Food Safety, as part of the Training programme for Jerónimo Martins Management Trainees, Pingo Doce Store Manager, Feira Nova and employees of Jerónimo Martins Distribuição de Produtos de Consumo.


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Laboratory Analyses 2005 2004

Working surfaces 20,331 2,226

Handlers 9,099 877

Food Products (excluding Private Label)

1,080 767

The sharp increase in the number of analyses carried out is crucially important for the HACCP study with a view to upgrading the Food Safety Systems of Pingo Doce and Feira Nova stores in 2006. As a result of the actions carried out, the performance indicator of the stores with regard to Hygiene, Good Practices and Quality increased on average 0.7% in Feira Nova, and remained about the same as the level achieved in 2004 in Recheio. In this Company, implementation of the HACCP system led to more stringent standards, meaning that the result achieved can be considered extremely positive in relation to last year’s mark. As for the performance of Pingo Doce, there was a decrease in the indicator (-1.16%) and measures are being implemented to improve this situation. Stores - Poland In Poland in 2005 several posters were produced and affixed in stores containing information for customers about the efforts made by Jerónimo Martins in selecting products and suppliers. These posters also include indication of the laboratories used for control analyses of the products sold. Suppliers In Portugal, as mentioned earlier, in 2005 the Supplier Assessment and Selection Manual was revised (including the Food, Environmental and Non-Food Technical Standards), which was disclosed through workshops held with the Quality Officers of Jerónimo Martins and the suppliers. This process made the selection system more transparent and clear for these partners, but also more demanding. In tandem with the certification processes, new general contract conditions were drawn up for Perishable Foods. Aimed at fine-tuning the supply chain of Perishable Foods, a group of Quality Officers monitored the entire chain (supplier – warehouse – store) during the year, per product group, identifying aspects that can be improved in order to increase quality and efficiency. In Poland, Biedronka works with some 400 suppliers, small and medium-sized Polish companies, which ensure a positive response to the Company criteria. The audits performed on these suppliers use, as previously mentioned, a checklist drawn from the Food Safety Standards of the British Retail Consortium. In this way small suppliers can grow and develop being permanently adapted to the growing market requirements and Biedronka’s standards. In Portugal and Poland, these audits are performed based on the main requisites established in the Codex Alimentarius, the “GFSI Guidance Document – 4th edition


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- Task Force da Global Food Safety Initiative – CIES”, or by any of the regulations recognised by this entity – BRC, SQF2000, EFIS, FTS, EUREPGAP.

Audits and monitoring visits 2005 2004

Full audits (products + systems) - Portugal 647 521

Full audits (products + systems) - Poland 105 97

Product monitoring visits or corrections requested - Portugal 292 345

Private Labels The Food Quality and Safety of the Private and Exclusive Labels are strategic priorities for the operational Companies in Portugal and in Poland. Therefore, adding a benchmark at a given standard requires careful reflection. The decision-making process complies with the following steps:

• Product assessment (sensorial and/or laboratorial), using the benchmark;

• Supplier assessment; • Definition of general contract conditions; • Establishment of routine control plan after launch (laboratory decisions

to be made, recognised laboratories for the taking of those decisions, frequency of producer audits);

• Information to be written on the labels.

Quality and Food Safety are a clear imperative in the development of all the products marketed under Jerónimo Martins brands. As well as the strict specifications, only suppliers outline present their Quality and Food Safety systems implemented shall be selected. The Group only accepts suppliers that comply with predefined environmental requisites. Currently 60% of the Private label suppliers of pet food and in the Non-Food area have the ISO 9001 certification. Preference is given to suppliers with this certificate. It is policy to encourage national suppliers, and as such preference is given to Portuguese and Polish articles. Whenever possible we choose Integrated Protection products such as the “Alcobaça” apple and the “Rocha” pear. Small regional suppliers of delicatessen products, cheese and fruits & vegetables are given full technical support to diagnose Food Safety systems and environmental conditions, for subsequent implementation of the appropriate systems.


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Portugal Poland Development of Private labels and Routine Control

2005 2004 2005 2004

Audits and monitoring visits 313 288 105 97

Launches and re-launches 701 657 647 245

Sensorial tests (for launch and routine)

1,776 1,251 926 869

Routine laboratory tests 1,557 1,310 2,758 2,184

Laboratory tests for selection - - 753 - All products are subject to a strict analytical control of the supplier and the origin of the raw materials, which is planned according to the level of risk. This routine control is carried out by internal teams (sensorial analysis) and recognised by independent laboratories (microbiological, chemical and physical analyses). 4.3.2. Manufacturing

The plants have implemented sampling and analysis plans for raw materials, packaging materials and finished products, in order to guarantee compliance with the specified requirements. These plans are reviewed regularly, based on analysis of the suppliers’ performance, and the materials and products in question, and include sensorial, microbiological and physicochemical analyses. In addition to the routine analyses, and with a view to ensuring continuous improvement, the Manufacturing has actively collaborated with its suppliers to improve and continuously guarantee the Safety and Quality of the products through an annual audit plan and by undertaking technical visits whenever necessary. In order to carry out these audits a specific checklist and a team of duly trained auditors is used. As well as the Food Quality and Safety components, other aspects are assessed concerning Environmental Management, Health and Safety in the Workplace, and the Business Principles Code. The Manufacturing carried out a total of 23 on-site audits of suppliers and sent six pre-audit/approval questionnaires to low-risk suppliers. Finally, and to verify compliance with all the established practices, the processes were subject to 38 internal audits, not only on issues related with Quality, but also with Food Safety, Environmental Management and/or Safety and Health in the Workplace

4.4. Partners in the Area of Quality and Food Safety 4.4.1. Distribution

APED – (Portuguese Association of Distribution Companies) – Quality and Food Products Committee;

Universidade Técnica de Lisboa (Lisbon Technical University) – participation in the Post Graduation in Quality and Food Safety, intervening on the theme of “Quality and Food Safety in Modern Distribution”;


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Instituto Superior de Ciências de Saúde Egas Moniz (Egas Moniz Teaching Cooperative) – participation in the Post Graduation in Quality Management and Food Safety, intervening on the theme of “Crisis Management and Food Safety in Modern Distribution”;

Higher Education Teaching Establishments – yielding of several training placements for students to obtain degrees related to the Agro-Manufacturing;

CIES – Global Food Safety Initiative – member of the Task Force; Royal Ahold – member of the Food Safety Steering Committee; AMS – member of the Quality Committee; Associação Portuguesa para a Qualidade (Portuguese Quality Association); Instituto Português da Qualidade (Portuguese Quality Institute).

4.4.2. Manufacturing FimaVG, Victor Guedes, LeverElida or IgloOlá have representatives, are members of and/or take part in working groups within the scope of the following organisations:

AISDPCL- Association of Manufacturers of Soaps, Detergents and Maintenance and Cleaning Products;

ANIGA - National Association of Ice Cream Manufacturers; ANIRSF – National Association of Manufacturers of Soft Drinks and Fruit

Juices; APA – Portuguese Association of Aerosols; APLOG – Portuguese Association of Logistics; APOGOM – Portuguese Association of Oils and Vegetable Oils, Margarines

and Derivatives; Casa do Azeite – Association of Portuguese Olive Oil; FIPA – Federation of the Agro-Food Portuguese Industries; Universidade Técnica de Lisboa (Technical University of Lisbon) –

Participation in the Post Graduation on Quality and Food Safety, intervening on the “Tracking” theme;

Instituto Português da Qualidade (Portuguese Quality Institute).


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The future is for those who promote the sustainable development of the community

The Jerónimo Martins Group strives to conserve the environment, considering this one of the major factors in running its business and allowing its Companies to enjoy economic growth. An example of this is the dedication shown to the issue of climate change, recognising the environmental, economic and social impact of the problem. Climate change is one the today’s greatest challenges facing the world, resulting from the excessive exploitation of natural resources, especially oil and coal, which contribute to the increased concentration of gases (above all carbon dioxide) leading to the greenhouse effect. The consequence of the higher concentration of these gases is the so-called global warming, giving rise to adverse climatic conditions, such as the increase in drought periods. The Jerónimo Martins Group considers it part of the Social Responsibility of businesses to fight against this phenomenon. The Group Companies adopt responsible and proactive behaviour in implementing actions that contribute to minimising the emission of greenhouse effect gases. This concern underpins the Group’s environmental policy. Below are listed the main activities carried out in 2005 in the area of Environmental Management and it is pointed out that this sub-section is part of the requirements defined in Accounting Directive no. 29 - Environmental Matters, so as to highlight the environmental performance of the Companies in several areas. 5.1. Environmental Policy The environmental policy of the Jerónimo Martins Group aims to achieve the following objectives:

continuous improvement of the environmental performance of the activities, products and services, and prevention of pollution;

compliance with applicable environmental legislation and other relevant requirements and preparation for compliance with future legislation;

adoption by its staff and suppliers of good environmental practices;

answer to and satisfaction of Consumers’ environmental concerns. The Environmental Management Systems of the Distribution and Manufacturing Companies are based on the NP EN – ISO 14001 standard. This ensures frequent updating of environmental legislation, the undertaking of environmental diagnoses/audits of the various units, annual definition of environmental programmes and monitoring of the environmental aspects (monitoring reports of the Environment programmes). In Poland, in order to respond to the growing operational and legal demands regarding environmental management, the Group created a special unit in

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Biedronka to deal with environmental management. This unit is made up of officers with ecological training and managers of operations data. 5.1.1. Environmental Certification The Environmental Management Systems of the Companies in the Manufacturing area are based on the NP EN - ISO 14001:2004 standard. The units of LeverElida and Victor Guedes successfully transposed their environmental certification to the new standard, in March and July 2005 respectively, while the FimaVG and IgloOlá units, certified by the ISO 14001:1999 standard, will make the adaptations required for the new standard in the first six months of 2006. At the Distribution level, in December 2005 environmental certification of Gestiretalho distribution centres (three units) was obtained, in accordance with the NP EN - ISO 14001:2004 standard. This environmental certification is viewed by Gestiretalho as an ideal management tool in seeking actions and solutions aimed at continuous improvement of environmental performance, prevention of pollution and legal compliance. 5.2. Main Environmental Impacts 5.2.1. Distribution These are the most important environmental issues at the Distribution level:

• energy consumption, being electrical energy the main source used in the preservation of food products, lighting, acclimatisation and operation of equipments in general;

• the production of solid waste, mainly organic solid waste, paper/cardboard and plastic;

• emissions to the atmosphere (mainly CO2) and the consumption of fossil fuels (diesel) in the transportation of goods.

During 2005 several environmental diagnoses were carried out for the stores and distribution centres, as well as the subcontracted transporters, so as to guarantee compliance with legal requirements and the internal procedures concerning the environment. 5.2.2. Manufacturing Under the Environmental Management System implemented according to the requirements of the NP EN - ISO 14001:2004 standard, environmental issues associated with activities in the Manufacturing sector are revised and evaluated on an annual basis. In 2005, the following main factors were identified:

• water consumption in heating and cooling systems, cleaning/sanitation and personal hygiene;

• energy consumption, mainly electricity and natural gas;

• solid waste arising from the manufacturing process, namely packaging;

• manufacturing and domestic wastewater;


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• emissions to the atmosphere due to the production processes. 5.3. Environmental Management Programmes 5.3.1. Distribution The Environmental Management Programme implemented in 2005 in the Distribution area (stores and distribution centres) was systematised into the various actions described below. Water Quality and Consumption Control The Water Quality Monitoring Plan prepared in 2005 was implemented in all the Distribution units in Portugal, with a view to the optimum control of the quality of water consumed, supplied in most of the units by the public network. As such, of the 301 analyses carried out, compliance with the legal threshold (Law 243/2001 in force since December 2003) reached 98%, which shows a 5% increase.

In 2005 a database was implemented to enable a more effective management of water consumption, as well as maintenance of the historical information. Therefore the indicators for water consumption include 78% of the units in Portugal and 74% of the polish units. Although the Group intends to highlight the evolution of these ratios it was not possible to do it due to significant differences in the number of units controlled and because there are some inconsistent numbers for the years of 2003 and 2004.

2005 Portugal Polónia

Stores

Water Consumption per Sales Area (m3/m2)

2.03 0.74

Distribution Centres

Water Consumption per thousand boxes of throughput (m3/UMC'000)

0.47 0.10

Energy Consumption Minimization

Several initiatives were undertaken with regard to the minimization of energy consumption, namely:

• Replacement at the Gestiretalho distribution centres of the current fork-lift truck battery chargers with high-frequency chargers, leading to an increase in output from 85% to 94%;

• Remodelling of a refrigerated distribution centre warehouse in Azambuja’s distribution centre, leading to a reduction in electricity consumption of around 5%;

• Completion of the implementation of the voluntary European Green Light project in seven units, using more efficient lighting;


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• Change in the timetable of refrigerated exhibitors and purchase/replacement of curtains or covers in the freezers of Pingo Doce stores;

• Start of the centralised energy consumption control project at Recheio for the cooling industrial systems;

• Undertaking of a viability study of use of renewable and alternative energies in the areas of Thermal Solar Energy, Photovoltaic Solar Energy, Wind Energy and Biodiesel for buildings and transports;

• Installation of heat exchangers in five Feira Nova stores, which allows to recover the wasted heat from the cooling industrial system to heat water;

• In order to minimise emissions into the atmosphere, in the Biedronka stores the coal boilers were replaced with equipment that uses natural gas or with community heating systems.

As with the water consumption monitoring, a database system was built to allow a more effective following of the evolution of the electricity consumption indicators that allowed obtaining the consumptions for 72% of total stores in Portugal and 76% of total polish stores. Nevertheless it was not possible to show the evolution of these indicators due to the significant increase in the number of units controlled and because there are some inconsistent numbers for the year of 2004. Energy Consumption Rationalisation – Environmental Indicators:

2005 Portugal Polónia

Stores

Electricity Consumption per Sales Area (kWh/m2)

653.9

361.4


Electricity Consumption per thousand boxes of throughput (kWh/UMC'000)

125.5

54.1

Waste Management The following waste management optimisation projects in 2005 are highlighted:

• Installation of 14 compactors and six presses with capacity for larger loads to optimise separation, conditioning and storage of cardboard and plastic waste at the Pingo Doce stores;

• Selective collection was followed in the Gestiretalho distribution centres of drinks packaging, wood, metal and paper). In 2005 424 tonnes of waste was forwarded for recycling;

• Disclosure to the employees of good practices with regard to waste management, through information systems, publication of articles in the internal magazine “A Nossa Gente” and training initiatives;

• Start of the selective collection of organic waste project (waste solid food products past their ‘consume by’ date, waste from the preparation


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and processing of meals) in 25 units. 340 tonnes of this waste were sent to the composting systems of Valorsul and Lipor.

• Eco-centres were installed in Poland’s distribution centres to collect metal, paper, wood waste and toners.

Waste Management – Environmental Indicators:

Total waste forwarded for recycling (tons):

2005 2004 Variation

05/04 2003

Portugal 14,200 13,677 +3.8% 12,129

Polónia 21,720 15,025 +44.6% 11,780

Total 35,920 28,702 +25.5% 23,909 The increase in the quantity of waste forwarded for recycling is due to strong commitment and awareness on the part of the Group’s employees and also to the increase of the number of stores in Poland. Management of Wastewater The wastewater coming from the Distribution sector is not highly polluting. For the most part they are discharged into municipal collectors. Nevertheless, in order to reduce the organic content of the effluents, namely oils and fats, the following actions were carried out:

• Installation of pre-treatment systems; • Use of highly biodegradable cleaning products (98%); • Selective collection of used food-frying oils by licensed recycling

operators. Furthermore, the Azambuja distribution centre includes a Wastewater Treatment Plant, as well as retainers for fats and hydrocarbons, given that the effluents are discharged into the natural environment. The legal discharge thresholds are therefore not exceeded. Despite carrying out sporadic analyses of the effluents, upon request from the Municipal Departments, in 2006 a plan to monitor the wastewater generated shall be implemented in many of the units, ensuring compliance with the thresholds defined by national legislation and municipal regulations. Environmental Criteria in Unit Construction and Refurbishing Works: In 2005 environmental criteria were considered in 29 building or refurbishment projects of units in Portugal. Several improvements were carried out, namely the purchase of more efficient equipment (taps and lighting systems), installation of monitoring mechanisms (water sub-meters), optimisation of waste management (card and plastic presses), improvement of the emission control systems (retainers


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for solids and fats in the sewage system) and pollution prevention (replacement of cooling gases with monopropylene glycol). Employees Adoption of Good Practices: Among the initiatives carried out with the employees of the Companies in order to raise awareness of good environmental practices, the following are highlighted:

• Training actions in the Gestiretalho distribution centres on the principles of the Environmental Management System, Environmental Policy and good practices;

• Training actions for the Pingo Doce store managers, aimed at disclosing the internal procedures and raising awareness about good environmental practices;

• Creation of the “Environment” feature in the permanent section dedicated to Social Responsibility of the internal magazine “A Nossa Gente”;

• Start of preparation of the Environment dossier, consisting of an information index with regard to the environmental measures applicable to the activity of the Distribution sector. The main purpose of the dossier is to help units’ managers to prepare for any inspections.

• In Poland a programme was carried out to raise the awareness of employees about segregation of waste and energy and water saving. Leaflets were distributed and signs put up in the Biedronka stores, in the distribution centres and in the central offices.

Environmental Criteria to Select Suppliers In 2005 the Environmental Technical Standard of the Manual for the Assessment and Selection of Suppliers was reviewed. Criteria were defined to classify suppliers in accordance with their environmental performance in relation to:

Environmental legislation applicable to their activity; Adoption of good practices; Clauses of an environmental management system.

As mentioned earlier in this Report, workshops were carried focusing on the Environmental Technical Standard, which involved 267 suppliers of Private labels, and Perishable Goods. All supplier audits include an Environmental component. Logistics and Environment The system of reusable plastic boxes continued to be used in the Fruit & Vegetables, Meat and Dairy Products areas, allowing minimisation of waste from non-reusable packaging, optimisation of space in transportation vehicles, reduction of fuel consumption and minimisation of emissions of polluting gases. This year an identical project was started with the fresh fish suppliers and the percentage of meat suppliers covered increased. The environmental performance of the companies that transport products, between the distribution centres and the stores, and the ones that deliver products to clients was also assessed.


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Environmental Campaigns Aware that companies should play an active role in raising community awareness about the critical nature of sustainable development, the Companies in the Distribution area of the Jerónimo Martins Group in Portugal undertook several activities in 2005 to raise environmental awareness among consumers and employees:

Backing of the “Save Rivers of Water” national campaign organised by the Ministry of the Environment and the company Águas de Portugal (Portugal’s national Water company);

Disclosure of good environmental practices in the promotional leaflets of Feira Nova and Recheio;

• Re-launch of the 2006 Environmental Calendar campaign in Pingo Doce, Feira Nova and Recheio stores.

• Through the “Biedronka – a partner of confidence for the Environment” programme, the company funded the celebration of the National Earth Day, an educational event organised by the Polish Ministry of the Environment.

Expressing its concern about environmental protection, the Jerónimo Martins Group took part in the following events:

• 15th Quercus Environment Seminar, under the subject “Environmental Distribution and Responsibility: Jerónimo Martins Group case study”;

• 1st Portuguese Forum on Social Responsibility of Organisations, under the subject of “The Jerónimo Martins Group and Climate Change”.

As in 2004, also in the year under analysis the Jerónimo Martins Group linked up with the Portuguese Youth Institute, the National Forestry Board, the Nature Conservation Institute and the Environment Institute in the youth volunteer programme “For the Forest - Against Fire”, launched for the first time in 2005 throughout the country. 5.3.2. Manufacturing Control of Water Consumption The Companies in the Manufacturing area have been taking several actions to rationalise water consumption and minimise waste. To attain these objectives, the following initiatives, among others, were taken in during this year:

At Victor Guedes, during the month of September, the cooling system was changed for the olive oil and oils warehouse, with the introduction of a valve regulating the water supply to the system condenser, which leads to a reduction in water consumption;

IgloOlá increased its ice bank capacity to enable use of ice-cold water in the cooling system of the Air Treatment Unit of Production, as an alternative to a local system (Chiller) which consumes water in the hottest periods of the year;

At LeverElida improvements were made to simplify the installation and optimise the process in the Liquid Detergent area, aimed at reducing water consumption and liquid waste.


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At FimaVG actions were taken to promote the detection of leakages in the underground pipes.

Control of Water Consumption - Environmental Indicators:

2005

2004

Variation 05/04

2003

Global water consumption (103m3) 434.0 445.6 -2.6% 485.1

Water consumption per unit of product produced (m3/t) 2.62 2.84 -7.7% 2.66

Note: the indicators for 2003 and 2004 were updated considering the Knorr Plant.

Energy Consumption Minimization

To minimise energy consumption and contribute to the preservation of energy resources, the Manufacturing area has carried out several initiatives within the scope of energy consumption minimization plans, namely:

• At IgloOlá, the information system that manages the water heating was optimised in order to save steam during production pauses. The change in the functioning of the air conditioning in Production also led to savings in electricity, as the new solution is more efficient than the previous one.

• The programme to install TL5 fluorescent lamps continued with a view to the gradual replacement of the TLD electronic ballast lamps, already common in the building.

Energy Consumption Rationalisation – Environmental Indicators:

2005

2004 Var.

05/04

2003

Global electricity consumption (MWh) 27,102 27,598 -1.8% 31,513

Global natural gas consumption (103 Nm3)

2,038 1,908 +6.8% 2,243

Consumption of energy per unit of product produced (GJ/t)

1.10 1.14 -2.9% 1.14

Note: The indicators for 2003 and 2004 were updated considering the Knorr Plant. In previous reports the indicators regarding natural gas were reported in kwh The increase in natural gas consumption was due to the water vaporisation operations organised to solve the lack of capacity of LeverElida’s water reprocessing system.


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Waste Management The Companies in the Manufacturing area carried out several staff awareness-raising campaigns so that they use only what they require; recognise and use the adequate places for waste separation; respect, whenever possible, the waste separation principle; and ensure that each waste is given an adequate destination. Whenever possible, waste is reutilised or forwarded for recycling. In order to minimise the quantity of waste for elimination, Victor Guedes continued to carry out initiatives in this area, namely increasing incorporation of filtration waste in ceramic products. At IgloOlá the segregation procedure for plastic waste continued to be improved, which led to a rise in recyclable waste. More environmentally friendly solvents were also adopted for cleaning parts in the maintenance workshops. In the second quarter of 2005 in FimaVG plant, waste coming from the filtration processes began to be forwarded to the ceramics manufacturing companies. At the LeverElida factory improvements were carried out to the waste collection equipment and respective signposting, aimed at perfecting segregation.

Waste Management – Environmental Indicators:

2005

2004

Var. 05/04

2003

Quantity of waste per unit of product produced (t/t) 0.0272 0.0274 -0.4% 0.0270 Total residues forwarded for recycling (t) 3.214 3.184 +1.0% 3.119

Waste recycling rate 71.3% 74.2% -2.9pp 63.3%

Note: The indicators for 2003 and 2004 were updated considering the Knorr Plant.

The reduction of the waste recycling rate in 2005 was due to the increasing of waste sent to embankment as a result of a warehouse closing and the change in the recycling process regarding the destiny of the waste send to recycling. Management of Wastewater Wastewater from the Manufacturing sector represents one of the areas with the heaviest environmental impact. To reduce such impact and ensure compliance with legal limits, FimaVG and IgloOlá have a System for the Pre-Treatment of effluents generated, which are subsequently drained into the municipal collector. The main objective is to optimise operating conditions a wastewater pre-treatment plant, using a specialised company, in order to lower the pollution burden of wastewater. At the LeverElida plant, the measures to reduce the production of wastewater were taken in an integrated way, covering water consumption, the generation of


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wastewater and the manufacturing processes. The industrial wastewater is reintegrated in the production process. At IgloOlá the topic of contamination of industrial effluent with organic matter resulting from the process was reinforced in the training actions organised for the contractors in order to encourage the implementation of good practices. Management of Wastewater – Environmental Indicators:

2005

2004 Var.

05/04

2003

Total quantity of industrial wastewater per unit of product produced (103 m3) 138.5 147.6 -6.1% 176.2

Note: The indicators for 2003 and 2004 were updated considering the Knorr Plant.

Management of Emissions to Air The Manufacturing Companies with emissions to atmosphere monitor relevant parameters with the objective of ensuring compliance with the legislation. Noise Control The Companies in the Manufacturing area strictly complied with Environmental Noise thresholds, with no special initiative to report in 2005. Environmental Criteria in the Construction and Remodelling of Units The projects and/or changes in production processes entail previous evaluation of environmental issues to ensure that aspects such as the segregation of waste or the management of wastewater are taken care of, both during the execution of work and in the start-up and operation of the new facilities. The type and quantity of gases are defined and measured for all facilities requiring refrigerating gases, and taken into account when planning the construction or refurbishing of units. Employee Adoption of Good Practices The initial training given to new employees includes a section on environmental issues, to ensure overall adoption of Good Practices in this area. Environmental training/awareness-raising sessions addressed to the entire staff also take place on a regular basis. In 2005, these included the following:

Consolidation of the environmental training policy at LeverElida, giving greater instruction in Safety and the Environment to temporary workers;

The widening of general initiatives to raise awareness for service providers, namely with regard to contention of spillages, handling of chemical substances and segregation of waste;

IgloOlá organised awareness raising sessions to improve segregation of waste.


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Total Productive Maintenance Methodology (TPM) The Companies in the manufacturing area are currently implementing TPM methodology, which has as its core concerns the Environment and Safety: TPM aims at process optimisation and its main objectives are:

zero losses (aimed at the increasingly disciplined use of natural resources and the reduction in/reuse of waste generated);

zero defects; zero accidents.

After FimaVG and IgloOlá had obtained level II of the TPM - Award for Excellence in Consistence TPM Commitment First Category - in 2004, Victor Guedes also obtained the same level in December 2005. At IgloOlá the creation of a specific new TPM pillar for Energy reflects the importance given to the reduction of Energy consumption. Environmental Criteria in the Selection of Suppliers and Service Providers The selection criteria of the Manufacturing Companies’ suppliers include an environmental component materialised through the sharing of concerns and policies in this area, the offer of support in the implementation of measures, and the audit tool. The suppliers to be selected are evaluated according to the same criteria as are applied in the Group’s plants, and invited to adopt environmental management programmes. LeverElida applies in Portugal the same procedures for regional suppliers used in all other European countries, which include planning evaluation criteria, implementation and control of environmental management activities. The Companies in the manufacturing area use selection criteria and perform audits on suppliers and other service providers in order to guarantee that they act in an environmentally correct way. In 2005, there were made 27 environmental audits to suppliers. At IgloOlá issues related to the Environment began to be taken into consideration, which hitherto had been dealt with in audits usually carried out on suppliers and co-packers. To hold the suppliers co-accountable for Quality and the Safety of consumers, Environmental Management and Safety and Health in the Workplace and increase their level of commitment, the LeverElida plant develops a management programme based on a service agreement that includes its eight most important local suppliers. Logistics and Environment To achieve optimum transportation costs of final products, optimising both the weight and size of packages, the Companies in the manufacturing area have developed a number of studies and actions, namely:


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whenever possible, FimaVG continuation of the cooperation with the suppliers of packaged goods so that they take back the primary packages, thus reducing the quantity of waste produced;

Reduction at LeverElida, by approximately 10%, of the detergent mass per dose, consequently leading to a drop of over 20% in the packaging material used per dose.

Environmental Campaigns LeverElida continued to develop close and solid links with the community living in the neighbourhood of its factories. Following the voluntary action in the Sacavém Social Centre carried out in 2004, the Day of the Tree and the World Environment Day were commemorated, with the participation of children from the respective free-time activities centre. Different activities on the environment were organised, tailored to the age group of children involved. FimaVG, LeverElida and IgloOlá continued to sponsor, for the third consecutive year, the Eco-Schools Programme, a Europe-wide initiative launched by the European Blue Flag Association (ABAE)/Foundation for Environmental Education (FEE). This initiative is designed to encourage young people to participate in decision-making processes and to make them aware of the importance of the environment. In the 2004/05 academic years 461 schools took part in this Programme, with 400 action plans. The Companies also continued the National Green Brigade Contest, organised in collaboration with ABAE. In 2005 students were again challenged to present projects involving the school in the community through environmental initiatives. Each Green Brigade had to assess the needs and deficiencies of the respective school or the surrounding area in order to submit a specific project with solutions to improve or minimise the existing problem. 58 schools grouped under two categories – nursery and infant schools and junior cycle and secondary schools – participated in the national competition. 5.4. Climate Change The main factor generating gas emissions that leads to the greenhouse effect is consumption of electricity and fuels as well as fuel used to transport goods. In order to contribute to the minimisation of the emission of these gases, the various Companies of the Group have implemented several actions, namely:

• Installation of more efficient equipment in terms of energy consumption;

• Use of reusable boxes in the transport of goods, optimising the transport and consequently reducing the emission of polluting gases;

• Employee training in rationalisation of energy consumption through the adoption of suitable routines and procedures;

• Communication to the employees about the concerns and actions carried out with regard to climate change in the internal magazine “A Nossa Gente”;

• Undertaking of environmental campaigns for employees and customers aimed at the rationalisation of energy consumption and protection of the Environment.


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During 2005 Pingo Doce took part in the Climate Change Index and Management of Companies project implemented by Euronatura, an external and independent organization. In this project the environmental performance of 30 companies from different sectors of activity in Portugal was assessed with regard to their strategy for climate change. Pingo Doce was classified among the ten best performing companies (further information available at www.responsabilidadeclimatica.org).

Environmental Indicators:

2005 Portugal

Stores

Emissions of CO2 equivalent per volume of sales (t CO2 eq. / thous. €) – stores

0.052


CO2 emissions equivalent per thousand boxes of throughput (t CO2 eq/UMC'000) – distribution centres

0,062

Manufacturing

CO2 emissions equivalent per unit of product produced (t/t)

0,107

Note: The figures presented took into account emission factors, defined by IPCC (natural gas) and calculated by GASA/FCT (report “Emissions and control of gases with greenhouse effect in Portugal”, 2000). 5.5. Partners in the Area of the Environment 5.5.1. Distribution The Distribution area has representatives in the following organisations:

• Portuguese Chapter of the World Business Council for Sustainable Development (WBCSD);

• Committee for the Environment of the APED (the Portuguese Association of Distribution Companies);

• DISPAR – an institution of national producers with 20% of the share capital of Sociedade Ponto Verde.

5.5.2 Manufacturing

The Companies in the manufacturing area have representatives, are members of or take part in working groups within the scope of the following organisations:

• AISDPCL- Association of Manufacturers of Soaps, Detergents and Maintenance Cleaning Products

• ANIGA - National Association of Ice Cream Manufacturers; • ANIRSF – National Association of Manufacturers of Soft Drinks and

Fruit Juices;


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• APA – Portuguese Association of Aerosols; • APLOG – Portuguese Association of Logistics; • APOGOM – Portuguese Association of Oils and Vegetable Fats,

Margarines and Derivatives; • Casa do Azeite – Association of Portuguese Olive Oil; • FIPA – Federation of the Agro-Food Portuguese Industries; • Instituto Português da Qualidade (Portuguese Quality Institute); • Sociedade Ponto Verde (Green Dot Association).


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Commitment to the Community

The Jerónimo Martins Group has for long supported projects and institutions that help the community and underprivileged groups, either at the institutional and corporate level, or through its employees’ voluntary contributions in internally organised campaigns. All these activities are part of a clear and structured Patronage policy following three guidelines that characterise the positioning of the Jerónimo Martins Group: the Food World, the Portuguese Character and Innovation as a business stance. As part of this policy two strategic areas of social and cultural support were defined, annually undertaking activities as part of the two major programmes currently in effect:

“Jerónimo Martins Feeds Smiling Futures”: a programme of a social nature essentially addressed at providing support to children and young people;

“Jerónimo Martins Supports National Culture”: a programme specifically addressing cultural issues, in particular the preservation and dissemination of Portuguese historical and cultural heritage.

6.1. Social Patronage

The Jerónimo Martins Group actively co-operates with institutions and projects supporting the underprivileged, having chosen as target priority groups children and young people. To this end, every year the Group offers funds, time and food to several social solidarity causes and entities that work in favour of these groups.

6. PATRONAGE


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6.1.1. Jerónimo Martins Group’s Institutional Support

Name of the Institution

Area of Activity

Start of Jerónimo Martins Support

Kind of Support

Aldeia SOS de Bicesse

Charity to shelter and protect children without normal family environment.

2002 Food support for children and youths.

Obra do Ardina100-year old charity supporting

underprivileged children.2003

Support to feed 55 children and youths that board at the institution.

Casa da AcreditarSupport for children with cancer and their

families2003

Sponsorship of 2 bedrooms. Offer of 2 welcome packages (with quality brand personal hygiene products and food).

Crescer SER: apoio ao centro de

acolhimento da APDMF

Shelters for children and youths without a family environment, victims of violence or

coming from families whose situation requires temporary support.

2004Support through monthly shopping

vouchers.

Centro Social da Paróquia de Torredeita

Centre geared towards underprivileged children and youths from the Torredeita

region (Viseu).2004 Funding of most of the food.

CONTINUOUS SUPPORT

New institutions supported in 2005


Area of Activity Kind of Support

Associação Protectora das

Florinhas de Rua

Private Charity that shelters and protects children at risk in a boarding regime.

Contribution providing most of the food of the 25 children of the home.

Diferenças - Centro de

Desenvolvimento Infantil

Child development centre, assessing, diagnosing and intervening in children's illnesses.

Yielding of space in the Feira Nova Bela Vista Shopping Centre for a symbolic rent. Financial

support for its construction.

NEW INSTITUTIONS SUPPORTED IN 2005

Special Actions carried out in 2005

Together with the continuous support given to the different institutions, Jerónimo Martins also carries out special campaigns encouraging the involvement of its employees in helping the needy.


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Name of the

InstitutionProject and Aim

Start of Jerónimo Martins Support

Kind of Support

Florinhas de Rua

Summer Camp - Create the first holiday camp.

June 2005Internal collection campaign of toys, sun protectors,

slippers, swimsuits, etc.

Obra do Ardina

Return to School - Provide a perfect return to school

September 2005Internal collection campaign of school bags, folders,

pencils, pens, etc.

Instituto Português do Sangue

Blood Donation - blood collection campaign

November 2005Blood collection campaign undertaken at the central

offices of the Jerónimo Martins Group

CrescerSERChristmas Initiative -

Collection of Christmas presents for the children

December 2005Internal campaign. Collection of Christmas presents for49 children from 4 temporary shelters of the Charity.

SPECIAL ACTIONS

6.1.2. Pingo Doce With over 190 stores in mainland Portugal and Madeira, Pingo Doce is especially focused on cooperating with the communities where it is located, channelling its aid to underprivileged children and youths. In 2005, support was afforded through Shopping Vouchers or equivalent to several charities, such as the Ajuda de Berço, Casa dos Rapazes, Novo Futuro and Cadim. Pingo Doce also carried out a fund-raising event for victims of the Asia tsunami (through AMI, Doctors of the World and Unicef), together with Feira Nova and Centralcer. Finally we highlight the contribution of actions undertaken by the Food Bank at Pingo Doce, which maintained its standing as the Portuguese Retail Food Chain that has the highest quantity of food sales. In 2005, and due to the reinforcement of the relationship established between the Company and that Non Governmental Organization, the participation increased about 19%. About 600 tons of food products were collected. 6.1.3. Feira Nova Feira Nova believes it has a natural duty to help underprivileged communities, aiding many charities by donating goods. Furthermore, and given that it is present in the day-to-day life of thousands of people, Feira Nova is able to organise and congregate efforts with its customers for charitable causes. As such, it has carried out projects giving support to institutions that have few resources, which help underprivileged children. These projects are: “Solidarity Recipe” and a second running of “A Tonne of Smiles”. The first encouraged the most well-off to contribute to the most needy, by offering “products”, the value of which is donated to the associations in their entirety. This action was held in the final third of 2005, and raised 34,000 euros. As in 2004, over Christmas the “A Tonne of Smiles” action was carried out, which was a campaign to collect new and used toys of the Feira Nova customers, to help local charities for underprivileged children and youths. The result totally surpassed initial expectations (one tonne), with 4.5 tonnes of toys collected.


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Feira Nova also launched a charity project together with its customers to help with the scourge of fires experienced in Portugal during the summer of 2005. Feira Nova’s contribution to the Food Bank is also pointed out. 6.1.4. Recheio An integral part of the mission of Recheio Cash & Carry is economic development, and consequently the social and cultural advancement of the communities it is part of. This fact, together with the characteristics of the Company as a Portuguese chain with strong regional ties, allows Recheio to play an essential role in the development of the communities. In accordance with the directives of the Group’s Policy in this area, Recheio allocates 73.2% of the patronage funds to activities and charities geared towards underprivileged children and youths, most of which have been consistently supported over the last three years. The main beneficiary charities supported are the following: Associação Remar Portuguesa; Associação S. Vicente de Paulo; Escola Básica Integrada do Eixo; Lar Santa Teresinha; Banco Alimentar contra a Fome (Food Bank) and Verbum Dei. Also worthy of note is the support given to the holding of the Catholic Church meeting entitled “New Evangelisation”. When selecting the cultural and charitable activities to be funded, the criteria always focus on education. 6.1.5. Poland With regard to Patronage, Biedronka has been carrying out campaigns and increasing support that expresses the concerns of the chain and its positioning as a socially responsible entity. As such, in 2005 the following actions and projects were undertaken in the areas of health and prevention and aid to the underprivileged:

Alcohol: Minors entrance forbidden In February Biedronka joined the national campaign against the sale of alcohol to minors, called “Alcohol: Minors entrance forbidden”, which is an initiative shared with the Government Body responsible for dealing with Alcohol Problems and the Beer Producer Association. Assistance to Orphanages and Charities Throughout the year the Company gave wide-ranging support to several orphanages and charities, through donations of food and clothing. Cooperation with Caritas The year 2005 saw Biedronka begin collaboration with Caritas Poland, a catholic charity. The two entities organised various fund-raising and food donation campaigns to help the needy.


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6.1.6. Manufacturing In the area of Social Patronage, FimaVG, LeverElida and IgloOlá have carried out initiatives aimed at the most vulnerable segments of the population: children, the handicapped and the elderly. In 2005 many charities received direct support through donations of funds or products. Particularly noteworthy owing to the scale of the initiative was the support given to the Food Bank action, with the donation of over 300 tonnes of products. Asian Tsunami: UNICEF and AMI In the aftermath of the natural disaster in Asia, the Companies FimaVG, LeverElida and IgloOlá organised a fund-raising effort among its employees in January. The Companies matched the amount raised and the total was divided between UNICEF and AMI. Raríssimas The 2005 Christmas Cards of the Companies FimaVG, LeverElida and IgloOlá were designed using drawings by children and youths from the charity Raríssimas – National Association of Rare Mental Handicaps, with the collaboration of two suppliers in the adaptation and printing of the cards. Raríssimas is a Private Charity that lends support to patients, family and friends of people suffering from rare mental handicaps. Its next goal is to build the “Casa dos Marcos”, a live-in school.

Skip Mão Amiga/Obra do Frei Gil In October the Skip Golf Club organised a Skip Golf Masters Mão Amiga Tournament to raise funds for the Obra do Frei Gil. His Excellency the President of the Republic, Jorge Sampaio, and the First Lady Maria José Ritta sponsored the event. The Obra do Frei Gil, founded in 1942, is an institution dedicated to sheltering and protecting children and youths at risk that do not have any family support or from the psychosocial environment. With six homes, this institution has helped more than 200 children and youths. Comfort/Ajuda de Berço In the months of June and July 2005 the Comfort brand carried out an initiative in the Sonae Sierra Shopping Centres through a “Comfort family” charity campaign. The brand brought out and sold “Luis”, “João” and “Inês” dolls for the symbolic value of five euros, with the proceeds forwarded to the charity Ajuda de Berço. Sun/Acreditar no Futuro 2 In May and June 2005 Sun carried out a fund-raising event under the theme “1 Sun = 1 meal”, through the sale of special packages that included a bowl. The amount raised was donated to the Food Bank to purchase food products. Skip/Talent Academy The Skip Mão Amiga Project launched a project involving schools throughout Portugal, called “The Talent Academy”. This initiative, which began in 2004, culminated in January 2005 when the Skip Talent Academy journeyed from the North to the South of Portugal involving over 100 schools and more than 18,800 children between five and ten years of age.


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These children were given the opportunity to undertake wide-ranging didactic activities in a relaxing and creative environment. Olá/Terry Fox In 2005, Olá continued to support the fund-raising Terry Fox Race in favour of the Portuguese League against Cancer. Visits to factories The Companies kept the doors to their factories open to study visits from school and universities in 2005. Over 15,400 people coming from over 300 schools and institutions visited the factories of FimaVG, LeverElida and IgloOlá.

6.2. Cultural Patronage 6.2.1. Jerónimo Martins Group’s Institutional Support As part of its “Jerónimo Martins National Culture Support” programme, the Group has funded projects of social, cultural and educational interest, focusing on initiatives aimed at preservation of Portugal’s historical and cultural heritage.

Continued Support


Type of ActivityStart of Jerónimo Martins Support

Kind of Support

Apoio à Orquestra Sinfónica Juvenil

Training of young musicians

2002 Sponsorship of the End of Year Concert

Museu da Presidência daRepública

Museum 2004Sponsorship of the publishing of a technical book about the Museum, as an architectural

work.

CONTINUOUS SUPPORT

New Support

Name of the Institution Kind of Activity Kind of Support

Biblioteca da Faculdade de Direito da Universidade de

CoimbraLibrary

Support to the new Library architectural project commissioned to Siza Vieira.

CIVITAS - Centro de Estudos e Recursos de Literatura & Literacia

Promotion of contact between child educators, teachers and guardians with children's books.

Training to teaching staff.

Funding that allows the Centre to function regularly.

Aprender a Empreender (To Learn to Undertake)

Young Entrepeneur Association in Portugal, which is a non profitable association, related with the YA-YE

Europe initiative.

As Senior Associate, supports with annual amount.


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6.2.2. Pingo Doce Since March 2003, Pingo Doce has been the official sponsor of Lisbon Oceanarium, a magnificent Portuguese facility of great scientific, pedagogic and cultural value, which aims to deepen knowledge about the oceans, this crucial worldwide asset. Under the slogan “Pingo Doce for the Conservation of the Oceans”, this support enables the Oceanarium to continue disseminating knowledge about the seas and the importance of protecting ocean life, and to raise general awareness regarding the future of the oceans and the Environment. As part of this sponsorship several initiatives were carried out to publicise the Oceanarium aimed at children, such as on World Child Day when entrance tickets were offered to the Oceanarium to all children who visited Pingo Doce stores. 6.2.3. Manufacturing The Staff Club, which is an autonomous entity funded by the Companies through membership payments and fund-raising initiatives, organises free-time activities in the area of culture, sport and leisure. In 2005, the Staff Club arranged discounts for 16 theatre plays and nine cultural visits. At Christmas time the usual trip to the Circus for employees’ children was organised, involving more than 3,100 people. The sports activities organised (tennis, walks, five-a-side football, rallies, mountain biking) involved around 300 people in 2005.


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Frequently Asked Questions

To provide quick answers about the practices of Jerónimo Martins in the area of Social Responsibility, this section lists the most frequently asked questions put to the Group and the respective answers. For further details, the chapter of this report on Social Responsibility may also be consulted, as well as the Group’s institutional site on the internet, at www.jeronimomartins.com.

Corporate Ethics

1. Does the Jerónimo Martins Group have a Code of Conduct?

Yes No

1. 1. If yes, what areas does it cover and what has been done to divulge them?

Areas covered

Social Responsibility Respect for the Law Cooperation with Official Entities Independence vis-à-vis Political Parties

Integrity Measures against Corruption Patronage Environmental Protection Thorough and Transparent Information Quality Fair Trade Practices Selection of Partners/Suppliers Workers and Employees Equal Opportunities Health, Hygiene and Safety in the Workplace

The Code of Conduct was divulged internally to all the Group employees in Portugal and Poland, and externally on the Group’s site on the internet.

7. FREQUENTLY ASKED QUESTIONS


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2. Is there a specific body that coordinates the application of the Code of Conduct and to which the employees can resort?

Yes, the Ethics Committee is the body responsible for divulging, clarifying doubts about and ensuring compliance with the Code. Any employee can address this Committee. In addition, the Group’s management is prepared to clarify doubts and steer procedures in order to guarantee full compliance with the established principles. All employees are responsible for strict compliance with the Code of Conduct.

Social Performance

3. Does the Jerónimo Martins Group report externally on its Social Responsibility policy and performance?

Yes, every year the Jerónimo Martins Group’s Annual Report includes a chapter on Social Responsibility. The institutional site on the internet has also a section dedicated to this issue.

4. Does the Group have a written policy that contains measures for upholding and promoting human rights?

Yes, the Jerónimo Martins Group respects Human Rights within the framework of the Universal Declaration of Human Rights, assuming its responsibility in this area, and seeking to promote the improvement of the quality of life of all those with whom it has relations, as it believes that this is a mission that falls to every one and in particular to economic entities. These principles are enshrined in the Group’s Code of Conduct and Human Resources policy.

5. Does the Jerónimo Martins have policies or take measures intended to ensure...

...freedom from discrimination? Yes No

...freedom from slavery practices? Yes No

...freedom of association and the right to collective bargaining? Yes No

... the prohibition of child labour? Yes No

... assure the health and safety of employees? Yes No

6. Does Jerónimo Martins Group have a written Human Resources Policy?

Yes No

(see reference under Human Resources’ chapter of this report on Social Responsibility).


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7. Does the Group have professional development programmes/instruments? (internal promotion schemes, assessment talks, job rotation, individual career plans and training)?

Yes, the Group has in place instruments of professional and personal development. For more information see on the section of Human Resources in the chapter of this report on Social Responsibility, and the Group’s institutional site, under Human Resources.

8. Is there any form of employee representation in the company?

The employees of the Group are represented by trade unions with which the Group maintains an open relationship and dialogue that seeks to maintain a climate of understanding and social peace.

9. In the area of Health, Hygiene & Safety in the Workplace, does Jerónimo Martins...

...have a formal policy? Yes No

If yes, specify principles. This policy is based on the principle of “Zero Tolerance”.

...do you have specific technicians in this area? Yes No

...do you have manuals? Yes No

...do you organise training sessions? Yes No

...are audits and reporting made? Yes No

10. Is the company involved in local community development programmes?

The Jerónimo Martins Group has long supported and developed projects with a strong community component where the community plays an important role, either at the institutional and corporate level, or through Employees’ voluntary contributions.

All these activities are part of a clear and structured Patronage policy. The policy defines two strategic areas of support – social and cultural – every year implementing activities within the scope of the two major programmes:

- “Jerónimo Martins Feeds Smiling Futures”: a programme of a social nature essentially addressed at providing support to children and young people;

- “Jerónimo Martins Supports National Culture”: a programme specifically addressing cultural issues, in particular the preservation and dissemination of Portuguese historical and cultural heritage.

11. Is the Jerónimo Martins Group a member of any organisation in this ambit?

The Group is a member of the Portuguese chapter of the World Business Council for Sustainable Development (WBCSD). Recently, it has signed the Company’s Commitment Letter with the Millenium Objectives, which is an initiative from Grace.


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Food Quality and Safety

12. Does the Jerónimo Martins Group have a written Safety and Food Quality Policy?

Yes No

(See Food Quality and Safety in the chapter of this report on Social Responsibility).

13. Has the Jerónimo Martins Group implemented food safety prevention schemes?

Yes No

(All food manufacturing and distribution units are equipped with Hazard Analysis and Critical Control Points (HACCP) and auto-control systems)

14. How do you guarantee the suitability of systems?

Permanent assessment of risks Maintaining hazard analysis and critical control points

systems Adequate equipment and installations Staff training

Suppliers’ qualifications Management of customer complaints

Use of suitable, scientifically proven models Consumer/customer information

15. How do you guarantee the Quality and Safety of the products throughout the supply chain?

Rigorous technical conditions and specifications Audits to suppliers

Inspection of products at source (in the suppliers) Inspection of products in the warehouses (*)

The existence of HACCP/auto-control systems implemented in the warehouses

Product inspections in the stores (*) The existence of HACCP/auto-control systems

implemented in the stores (*) (*) These phases/processes also involve laboratory control.

16. How do you measure the implementation and performance of Food Quality and Safety Systems?

Undertaking internal audits for the systems Undertaking audits for the stores with regard to good

practices, conservation, infrastructures, hygiene, etc.


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17. Has the Jerónimo Martins Group signed any national/international protocol/agreement on Food Safety?

Yes, the Jerónimo Martins Group actively participates in the Global Food Safety Initiative (GFSI) facilitated by CIES, which established a benchmark model to assess Supplier Standards and Certification under the principle “certified by one, accepted by all”.

18. Do you have a policy regarding the sale of products containing genetically modified organisms (GMOs)?

Yes, we have an established policy in this area. In principle, the Jerónimo Martins Group does not use GMOs in its Private Labels, in the Distribution Area and in the products of the Manufacturing area. When there is no other alternative, the Group alerts consumers to the fact, by providing information on the package in accordance with European Community regulations.

19. Do you conduct tests on animals at any stage of the development of Group products?

The Jerónimo Martins Group understands and shares the concerns of consumers with respect to this important and complex issue. Consumers are the first priority of the Group. When health or safety reasons so demand, the Companies in the Manufacturing area may carry out tests on animals. However we only admit that such testing be carried out when there is no other solution, either through alternative tests or by resorting to available safety information. Today, the vast majority of our products reach the consumers without having undergone any animal testing and this will continue to be so.

Environment

20. Does the Jerónimo Martins Group have a written environmental policy?

Yes No

(see Environmental Management’s chapter of this report on Social Responsibility).

21. Does the Group have programs to implement its environmental policy?

Yes, the Group has environmental management programs which are revised on an annual basis. These programs aim for the materialisation of the corporate environmental policy principles, ensuring the adoption of good environmental practices by suppliers, employees and even consumers, as well as the improvement of the environmental performance of its activities.

(see Environmental Management’s chapter of this report on Social Responsibility).


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22. Has the Jerónimo Martins Group signed an environmental charter or is it a member of an environmental protocol/council, and/or does it use a specific environmental management system? The Group is a member of the Portuguese chapter of the World Business Council for Sustainable Development (WBCSD). With regard to its management system, the manufacturing area’s plants are certified under ISO 14001 standard, and the Distribution area received the certification under the same standard. This last area began the project to prepare Environmental and Food Safety certification for Gestiretalho (distribution centres) in 2004.

23. With regard to Environmental Management, does the Group...

...have environmental standards concerning the choice of suppliers? Yes No

assess specific environmental aspects and include environmental criteria in the construction or refurbishing plans of its facilities? Yes No

24. Does your company try to raise awareness about the Environment among consumers?

Yes, the Group has launched campaigns addressed at the consumer, namely on issues related to: Energy, Water and Waste. The launch of the “Environmental Calendar” campaign was repeated in 2005.

V. Consolidated Financial Statements

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JERÓNIMO MARTINS, SGPS, S.A.

CONSOLIDATED INCOME STATEMENT BY FUNCTIONS

FOR THE YEARS ENDED 31 DECEMBER 2005 AND 2004

Euro thousand

Notes 2005 2004

Sales and services rendered 3 3,828,166 3,494,600Cost of sales (3,041,840) (2,746,461)Supplementary income and costs 5 156,318 127,881

Gross profit 942,644 876,020

Distribution costs 6 (610,273) (552,110)Administrative costs 6 (123,767) (116,191)Exceptional operating profits/losses 11 7,899 (266)

Operating profit 216,503 207,453

Net financial costs 8 (45,485) (57,814)Profit in associated companies 16 189 123 Profit before taxes 171,207 149,762

Income taxes 10 (25,446) (18,835)

Profit before minority interests 145,761 130,927

Attributable to: Minority interests 35,382 38,412 Jerónimo Martins Shareholders 110,379 92,515 Basic earnings per share- Euros 24 0.8782 0.8346 Diluted earnings per share- Euros 24 0.8782 0.8346 To be read with the attached notes to the consolidated financial statements.

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CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2005 AND 2004

Euro thousand

Notes 2005 2004

Assets Tangible assets 12 1,101,695 1,034,756Investment properties 14 40,845 55,584Intangible assets 13 424,012 332,428Investments in associated Companies 16 665 387Advanced for financial investments - 101,144Available-for-sale financial investments 17 40,908 60,520Non-current debtors 20 65,199 60,081Derivative financial instruments 15 3,632 1,826Deferred tax assets 19.1 89,676 92,357

Total non-current assets 1,766,632 1,739,083

Inventories 18 240,570 208,207Taxes receivable 19.3 19,576 11,947Trade debtors, accrued income and deferred costs 20 132,278 113,398Available-for-sale financial investments 17 22,218 -Cash and cash equivalents 21 191,392 161,013

Total current assets 606,034 494,565

Total assets 2,372,666 2,233,648

Shareholders’ equity and liabilities

Share capital 23.2 629,293 629,293Share premium 22,452 22,452Own shares (6,060) (6,060)Fair value and other reserves 23.1 76,078 65,905Retained earnings (301,963) (369,961)

419,800 341,629

Minority interests 250,765 227,581

Total Shareholders’ equity 670,565 569,210

Borrowings 25 601,382 448,507Derivative financial instruments 15 8,190 16,673Employee benefits 26 18,690 19,856Deferred profits- state grants 1,458 1,694Provisions for risks and contingencies 27 14,663 16,175Deferred tax liabilities 19.1 46,510 44,031

Total non-current liabilities 690,893 546,936

Trade creditors, accrued costs and deferred income 28 878,497 782,130Derivative financial instruments 15 848 126Borrowings 25 101,788 306,813Taxes payable 19.3 30,075 28,433

Total current liabilities 1,011,208 1,117,502

Total Shareholders’ equity and liabilities 2,372,666 2,233,648To be read with the attached notes to the consolidated financial statements.

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CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

Euro thousand

Shareholders’ equity attributable to Shareholders of Jerónimo Martins, SGPS, S.A.

Notes Share Capital

Share Premium

Own Shares

Consolidation Differences

Fair value and other reserves

Retained Earnings

Total Minority Interests

Shareholders’ Equity

Balance Sheet at 1 January 2004 479,293 22,452 (6,060) (261.456) 43,027 (200,564) 76,692 205,073 281,765

Equity changes in 2004

Currency translation differences in 2004 23.1 22,060 22,060 22,060

Revaluation of fixed assets: 23.1

- from 2004 420 420 285 705

- land transfer to investment property (413) 413 -

Consolidation differences derecognised (IFRS 3) 261,456 (261,456) -

Fair value gains/losses of available-for-sale financial investments 23.1 735 735 735

JM stock options plan trust residual value (SIC 12) 1,403 1,403 1,403

Gains/losses directly recognised in equity - - - 261,456 22,802 (259,640) 24,617 285 24,903

Net profit in 2004 92,515 92,515 38,412 130,927Total gains/losses recognised during the year - - - 261,456 22,802 (167,125) 117,132 38,697 155,830

Capital increase 150,000 150,000 150,000

Costs with capital increase (2,272) (2,272) (2,272)

Fair value of services rendered - stock options plan 23.1 76 76 76

Dividends (16,189) (16,189)

Balance Sheet at 1 January 2005 629,293 22,452 (6,060) - 65,905 (369,961) 341,629 227,581 569,210

Equity changes in 2005

Currency translation differences in 2005 23.1 5,003 5,003 5,003

Revaluation of fixed assets in 2005 23.1 1,278 1,278 857 2,135

Fair value of cash flow hedgings (IAS 39) 73 73 73

Fair value gains/losses of available-for-sale financial investments 23.1 3,895 2,729 6,624 6,624

Gains/losses directly recognised in equity - - - - 10,249 2,729 12,978 857 13,835

Net profit in 2005 110,379 110,379 35,382 145,761

Total gains/losses recognised during the year - - - 10,249 113,108 123,357 36,239 159,596

Fair value of services rendered - stock options plan 23.1 61 61 61

Options cancelation of the stock options plan 23.1 (137) 137 -

Dividends 23.4 (45,247) (45,247) (13,055) (58,302)

Balance Sheet at 31 December 2005 629,293 22,452 (6,060) - 76,078 (301,963) 419,800 250,765 670,565

To be read with the attached notes to the consolidated financial statements.

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CONSOLIDATED CASH FLOW STATEMENT


Euro thousand

Notes 2005 2004

Operating Activities

Cash received from Customers 4,285,947 3,908,224Cash paid to Suppliers and Employees (3,953,816) (3,633,036)Cash generated from operations 22 332,131 275,188Interest paid (41,329) (39,342)Income taxes paid (17,758) (16,832)

Cash Flow from operating activities 273,044 219,014

Investment activities Disposals of tangible assets 2,381 1,399Disposals of available-for-sale financial investments and investment property 17,253 35,725Interest received 3,297 4,301Dividends received 8 1,052 1,174Acquisition of group and associated Companies - (101,394)Acquisition of tangible assets (147,029) (90,738)Acquisition of available-for-sale financial investments and investment property (378) (49,967)Acquisition of intangible assets (5,381) (8,552) Cash flow from investment activities (128,805) (208,052)

Financing activities Received from issuance of ordinary shares - 147,728Received from other non-current loans 160,000 402,965Reimbursement of loans (220,453) (525,569)Dividends paid 23.4 (58,302) (16,189) Cash Flow from financing activities (118,755) 8,935

Net increase in cash and cash equivalents 25,483 19,897 Cash and cash equivalents changes Cash and cash equivalents at the beginning of the year 161,013 132,758Net increase in cash and cash equivalents 25,483 19,897Disposal of subsidiaries 967 -Effect of currency translation differences 3,929 8,358 Cash and cash equivalents at the end of the year 21 191,392 161,013

To be read with the attached notes to the consolidated financial statements

Notes to the Consolidated Financial Statements

31 December 2005 and 2004

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Index to the Notes to the Consolidated Financial Statements Page

1 Activity ................................................................................................................................................178 2 Accounting policies ................................................................................................................................178 3 Segments reporting ...............................................................................................................................186 4 Businesses Acquisitions..........................................................................................................................187 5 Supplementary income and costs ............................................................................................................188 6 Distribution and administrative costs .......................................................................................................188 7 Staff costs ............................................................................................................................................188 8 Net financial costs .................................................................................................................................189 9 Financial instruments.............................................................................................................................189 10 Income tax recognised in the income statement........................................................................................190 11 Exceptional operating losses ...................................................................................................................190 12 Tangible Assets.....................................................................................................................................191 13 Intangible Assets...................................................................................................................................192 14 Investment Property..............................................................................................................................193 15 Derivative financial instruments ..............................................................................................................194 16 Investments in associated companies ......................................................................................................194 17 Available-for-sale financial investments....................................................................................................194 18 Inventories...........................................................................................................................................195 19 Taxes ..................................................................................................................................................195 20 Trade debtors, accrued income and deferred costs ....................................................................................196 21 Cash and cash equivalents .....................................................................................................................197 22 Cash generated from operations .............................................................................................................197 23 Capital and reserves ..............................................................................................................................198 24 Earnings per share ................................................................................................................................199 25 Borrowings ...........................................................................................................................................199 26 Employee benefits .................................................................................................................................201 27 Provisions and adjustments to the net realisable value...............................................................................203 28 Trade creditors, accrued costs and deferred income...................................................................................204 29 Guarantees...........................................................................................................................................204 30 Operational lease ..................................................................................................................................204 31 Capital commitments .............................................................................................................................205 32 Contingencies .......................................................................................................................................205 33 Related parties......................................................................................................................................206 34 Group companies ..................................................................................................................................206 35 Interest in joint ventures........................................................................................................................208 36 Events after the balance sheet date.........................................................................................................208



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1 Activity

Jerónimo Martins, SGPS, S.A. (JMH), is the parent Company of Jerónimo Martins Group (Group) and has its head office in Lisbon.

Jerónimo Martins Group is essentially devoted to the production, distribution and sale of food and other fast moving consumer goods products. The Group operates in Portugal and Poland, and employs 30,753 people (28,914 in 2004).

Head Office: Rua Tierno Galvan, Torre 3, 9º, J- 1099-008 Lisbon

Share Capital: 629,293,220 euros

Corporate Tax Number: 500100144

Registered with the Lisbon registrar of Companies under 8,122.

JMH has been listed on Euronext Lisbon (ex-Lisbon and Porto Stock Exchange) since 1989.

The share capital is composed of 125,858,644 ordinary shares (2004: 125,858,644), with all shares having a nominal value of 5 Euros.

The Board of Directors approved these consolidated financial statements on 20th February 2006.

2 Accounting policies

The principal accounting policies adopted in the preparation of these consolidated financial statements are as follows:

2.1. Basis for preparation

All amounts are shown in thousand euros (EUR) unless otherwise stated.

The consolidated financial statements of JMH were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU).

The JMH consolidated financial statements were prepared in accordance with the historical cost principle, except for land recorded in tangible assets, investment property, derivative financial instruments and available-for-sale financial investments, that includes equity holdings referred in note 2.8, which were stated at their fair value (market value).

The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current event and actions, actual results ultimately may differ from those estimates.

It is, however, firmly believed by the management that the estimates and assumptions adopted do not involve significant risks that may, over the course of the coming financial year, cause material adjustments in the value of the assets and liabilities.

Change in Accounting Policy and Bases for Presentation

As referred in the last year annual report, the Group decided to adopt, effective from 1st January 2004, all the recent changes introduced by the International Accounting Standards Board (IASB), until 31st December 2004, that constitute the stable platform of standards applicable by all companies listed on European stock markets in 2005.

In this way, the financial information presented in this annual report is perfectly comparable with the previous year.

During 2005, IASB issued a new accounting standard IFRS 7 – Financial Instruments: Disclosures and have made improvements/changes on IAS 1 – Presentation of Financial Statements, IAS 19 – Employee Benefits, IAS 21 – The Effects of Changes in Foreign Exchange Rates, IAS 39 – Financial Instruments: Recognition and Measurement, IFRS 1 – First-time Adoption of International Financial Reporting, IFRS 4 – Insurance Contracts and IFRS 6 – Exploration for and Evaluation of Mineral Resources.

The new IFRS 7 and also the changes made to the above-mentioned standards, should be applied on 1st January 2006, or after this date, none of which have material effects on the financial statements of the Jerónimo Martins Group, and in most cases are not applicable to any of the Group Companies.

The International Financial Reporting Interpretations Committee (IFRIC), issued in 2005 the interpretations IFRIC 6- Liabilities arising from Participating in a Specific Market and IFRIC 7- Applying the Restatement Approach under IAS 29, which are not applicable to the Group activities.



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2.2. Basis of consolidation

Reference dates

The consolidated financial statements include, as of 31 December 2005, assets, liabilities and results of Group companies, i.e., the ensemble consisting of JMH and its subsidiaries and associated companies, which are presented in notes 34 and 16, respectively.

Investments in Group companies

Group companies (subsidiaries) are those controlled by JMH. There is control when JMH, directly or indirectly, holds more than half of the voting rights, or has the power to conduct the company’s financial and operating policy with the purpose of deriving benefits from its activity. It is assumed that there is control when the percentage of the holding exceeds 50%.

Group companies are included in the consolidation by the full consolidation method, from the date when control was acquired to the date when it effectively ends. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of the acquisition is measured as the fair value of the assets given up, shares issued and liabilities undertaken at the date of the acquisition plus costs attributable to the acquisition.

In cases where the share capital of subsidiaries is not held at 100%, a minority interest is recognised relative to the portion of results and net value of assets attributable to third parties.

Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group.

Investments in associated companies

Associated companies are those over whose financial and operating policy JMH exercises significant influence. Such influence is presumed to exist when the percentage of participation exceeds 20%.

These investments are consolidated by the equity method, i.e., the consolidated financial statements include the Group’s interest in the associated company’s total recognised gains and losses from the date when significant influence starts to the date when it effectively ends.

When the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognise further losses, unless the Group has incurred obligations or made payments on behalf of the associates.

Investments in companies subject to joint control

Companies subject to joint control are those over which the Group exercises joint control as established in shareholder agreements.

These companies are consolidated by proportional method, i.e., the consolidated financial statements include the share attributable to the Group in these company’s assets, liabilities and accumulated earnings and losses from the date when joint control starts to the date when it effectively ends.

Goodwill

Goodwill represents the surplus of acquisition cost over the fair value of identifiable assets and liabilities at the date of acquisition or first consolidation. If the cost of acquisition is lower than the fair value of the net assets of the acquired subsidiary, the difference is recognised directly in the income statement.

At the balance sheet date the Group makes an assessment for goodwill impairment indicators. If those indicators exist, an evaluation of the recoverable amount is made, and the respective impairment losses recognised whenever goodwill exceeds its recoverable amount (note 2.13).

The gain or loss on disposal of an entity includes the carrying amount of goodwill related to the entity sold, unless the business to which that goodwill is related is maintained generating benefits to the Group.

Foreign currency translation

The financial statements of foreign entities are translated into Euros based on the closing exchange rate for assets and liabilities and historical exchange rates for equity. Costs and income are translated at the average monthly exchange rate, which basically corresponds to the exchange rate on the date of the respective transaction. Exchange differences arising are entered directly in equity net of the effect generated by the respective hedging instrument (see accounting policy described in note 2.5).

When a foreign entity is sold, accumulated exchange differences are recognised in the income statement as part of the gain or loss on sale.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.



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Balances and transactions between Group companies

Balances and transactions as well as unrealised gains between Group companies and between these and the parent company are eliminated in the consolidation. Unrealised losses are also eliminated unless the cost cannot be recovered.

Unrealised gains arising from transactions with associated companies or companies subject to joint control are eliminated in the consolidation proportionally to the share attributable to the Group. Unrealised losses are also eliminated except when providing proof of impairment of the asset transferred.

2.3 Transactions in foreign currencies

Transactions in foreign currencies are translated into Euros at the exchange rate prevailing on the transaction date.

On the balance sheet date, assets and liabilities expressed in foreign currencies are translated at the exchange rate prevailing on that date and exchange differences arising from this conversion are recognised in the income statement. When qualifying as hedges on investments in foreign subsidiaries the exchange differences are deferred in equity.

The main exchange rates applied on the balance sheet date are those listed below:

Rate on 31 December 2005

Average rate for the year

Polish Zloty € 0.2591 € 0.2490 Sterling Pound € 1.4592 - US Dollar € 0.8477 -

2.4 Derivatives

The Group uses derivatives with the sole intention of managing any financial risks to which it is subject. In accordance with its financial policies, the Group does not enter into speculative positions.

Although derivatives carried currently in its books correspond to effective economic hedges against risks to be hedged, not all of them qualify as hedge instruments for accounting purposes, according to IAS 39 rules. Those that do not qualify as hedge instruments are booked on the Balance sheet at fair value and changes to that amount are recognized in the financial results.

Whenever available, fair values are estimated based on quoted instruments. In absence of quotes, fair values are estimated through discounted cash flow methods and option valuation models, in accordance with generally accepted assumptions.

2.5 Hedging operations

Interest rate risk (cash flow hedge)

Whenever expectations surrounding movements in interest rates so justify, the Group tries to anticipate any adverse impact through the use of derivatives, such as, interest rates swaps, caps and floors, forward rates agreements, etc. The selection process that each instrument is subject to, praises economic contribution more than anything else. The implications of adding any new instrument to a portfolio of derivatives are also taken into account, namely, in terms of volatility reduction it brings to the earnings.

The instruments that qualify as cash flow hedging instruments are booked at fair value on the Balance sheet, and to the degree that they are considered effective, changes to their fair value are initially booked against equity and afterwards reclassified as financial expenses.

The ineffective part of any hedging instrument is recognised directly in the profit and loss. This way, in net terms, all costs associated to the underlying exposure are carried at the interest rate fixed by the derivative instruments.

The profits or losses incurred with the unwinding of any of these interest rate swaps are recognised, through the income statement, on the unwinding date.

Interest rate risk (fair value hedge)

Financing operations in foreign currency or fixed interest rate that are not natural hedgings of investments in foreign operations, whenever justifies, the Group uses fair value hedging operations, as instruments to neutralise the volatility of those financing operations in the Group financial statements.

That way, hedging instruments that are designated so and that qualifies as fair value hedging, are recognised in the balance sheet at its fair value, with changes recognised in the profit and loss. At the same time, changes to the fair value of the hedged instrument, in the component that is being hedged, are recognised in profit and loss. Consequently, any ineffectiveness of the hedging operations are immediately recognised in results.



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Foreign exchange risk

With respect to foreign exchange risks, the Group follows a natural hedge policy, raising debt in local currency whenever market conditions are judged to be convenient (namely, taking into consideration the level of interest rates).

Investments in foreign operations

Exchange rate fluctuations in loans contracted in foreign currencies for the purpose of funding investments in foreign operations are taken directly to currency translation reserve (note 2.2).

Any cross currency swaps that are entered into with the purpose of hedging investments in foreign holdings that qualify as hedging instruments are booked at fair value on the Balance sheet. To the degree that they are considered effective, changes to their fair value are recognized directly in currency translation reserve (note 2.2).

2.6 Tangible assets

Assets other than land are recorded at acquisition cost net of accumulated depreciation and impairment losses (note 2.13).

Assets classified as land are stated as per the respective revaluation carried out by independent agents.

Increases in the carrying amount arising from revaluation of land are credited to fair value reserves in shareholders’ equity. Decreases that offset previous increases of the same asset are charged against fair value reserves. All other decreases are charged to the income statement.

Gains and losses on disposals are determined by comparing proceeds with the carrying amount and are included in the operating profit. When revalue assets are sold, the amounts included in fair value and other reserves are transferred to retained earnings.

Repairs and maintenance costs that do not extend the useful life of these assets are charged directly to the income statement during the financial period in which they are incurred. The cost of major store renovation is included in the carrying amount of the asset when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the Group.

Financial lease agreements

Assets used under financial lease contracts relative to which the Group substantially assumes all the risks and rewards of ownership of the leased asset are classified as tangible assets.

Financial lease contracts are recorded at the time they are entered into as assets and liabilities for the lower of fair value of leased assets or present value of outstanding lease payments.

The depreciation of leased assets is based on the policy established by the Group for tangible assets.

Rental payments are split into a financial charge and a reduction of liability. Financial charges are recognised as costs over the lease period, so as to produce a constant periodic rate of return on the lessor’s remaining net investment.

Depreciation

Depreciation is calculated by the straight-line method, on a duodecimal basis on acquisition cost according to the useful life estimated for each class of asset. The most important annual depreciation rates are as follows (in %):

%

Land Not depreciated

Buildings and other constructions 2-4 Plants and machinery 10-20 Transport equipment 12.5-25 Office equipment 10-25

2.7 Intangible assets

Intangible assets are stated at acquisition cost net of accumulated amortisation and impairment losses (note 2.13).

Costs with internally generated goodwill and own brands are taken to the income statement as they are incurred.

Research and development expenditure

Research expenditure incurred in the search for new technical or scientific knowledge or alternative solutions are recognised in the income statement as incurred.



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Development expenditure is recognised as intangible assets when the technical feasibility of the product or process being developed can be demonstrated and the Group has the intention and capacity to complete their development and start trading or using them.

Capitalised development expenditure includes the cost of materials used, direct labour costs and a share of general expenditure.

Computer software

Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred. If those costs are directly associated with development projects that will probably generate future economic benefits (reliably measured), they are recognised as research and development in intangible assets.

Other intangible assets

Expenses to acquire key money, trademarks, patents and licences are capitalised when expect to be used by the Group.

Intangible assets with indefinite useful life

The trademarks Pingo Doce and Feira Nova are, besides Goodwill, the only intangible assets with indefinite useful life, where there is no foreseeable limit to the period over which these assets are expected to generate economic benefits for the Group.

Depreciation

Depreciations are recognized in the income statement on a linear basis over the estimated useful life of the intangible assets, except if that life is considered indefinite. Goodwill and the intangible assets with indefinite useful life are tested for impairment at balance sheet date, and whenever there is an indication that the book value will not be recoverable.

Depreciation of the other intangible assets is calculated by the straight-line method, on a duodecimal basis on acquisition cost. The most important annual depreciation rates are as follows (in %):

%

Development expenditure 20-33.33 Key money and trademarks 5-6.66

2.8 Investments

The Group classifies its investments into the following categories: financial investments held for trading, loans and receivables, held-to-maturity investments and available-for-sale financial investments. The classification depends on the purpose for which the investments were acquired.

Financial investments held for trading

An asset is classified in this category if it was acquired with the principal intention of being sold in the short term. This category also includes those Derivatives that do not qualify for hedge accounting. Changes to their fair value are recognised directly in the income statement.

Loans and receivables

These correspond to non-derivative financial assets, with fixed or determined payments, that are not quoted in an active market. The assets are those that result from the normal operational activities of the Group, such as the supply of goods or services, and that the group has no intention of selling.

Held-to-maturity investments

These correspond to non-derivative financial assets, with fixed or determined payments and with fixed maturity, for which there is, the intention and the capacity to hold them until maturity. The Group does not own any asset that falls into this category.

Available-for-sale financial investments

In this category are included all the remaining financial assets not included in the above categories. They are recognised as non-current assets, except if there is the intention to sell them within 12 months of the balance sheet date.

Equity holdings

Equity holdings other than Group’s companies, joint ventures or associates, are classified as available-for-sale financial investments and recognised in the accounts as non-current assets.



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These financial investments are marked to market, i.e., they are stated at the respective listed value as at balance sheet date. When there is medium term expectation of significant decrease of the value below the listed value, provisions for impairment losses are set up to reflect permanent losses.

If the investments are unlisted, the Group uses, whenever possible, valuation techniques to obtain the fair value of those investments. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same or estimation of discounted cash flow to be received in the future. Not being possible the use of any of these valuation techniques, they are stated at cost. When so justified, provisions for impairment losses are recognised.

Unrealised capital gains and losses are recognised directly in equity, until the financial asset is de-recognised, at which time the accumulated gain or loss previously recognised in equity is included in net gains or losses for the period.

2.9 Investment Property

Investment property is registered at fair value, determined by specialised independent entities, with appropriate recognised professional qualification and experience in valuations of these kinds of assets.

The fair value is based on market values, being this the amount that two independent willing parties would be interested in making a transaction of the asset.

Changes to fair value of investment property are recognised in the income statement, in net financial costs, in accordance with IAS 40, since it is related with the expected return of a financial investment in assets owned for appreciation.

Whenever, as a result of changes in their expected use, tangible assets are transferred to investment property, the transfer value corresponds to their carrying amount, which should correspond to the respective market value on the date of transfer.

If an investment property starts to be used by the business operations of the Group, it is transferred to tangible assets and its fair value at the date of transfer becomes its acquisition cost for accounting purposes.

2.10 Customers and debtors

Customers and debtor balances are recorded at fair value of the originated transaction, net of any provision for impairment losses required to restate their expected recoverable amount.

2.11 Inventories

Inventories are valued at the lower of cost or net realisable value. The net realisable value corresponds to the selling price in the ordinary course of business, less the estimated selling expenses.

Inventories are usually valued at the last acquisition cost, which, considering the high rotation of Inventories corresponds approximately to the actual cost that would be determined based on the FIFO method.

The cost of finished goods and work in progress comprises raw materials, direct labour, and other direct costs.

2.12 Cash and cash equivalents

The cash and cash equivalents heading includes cash, deposits on hand and short-term investments with high liquidity. Bank overdrafts are presented as current Borrowings.

2.13 Impairment

Except for investment property (note 2.9), inventories (note 2.11) and deferred tax assets (note 2.22), all other Group assets are considered at each balance sheet date in order to assess for indicators of possible impairment losses. If such indication exists, the assets recoverable amount is estimated.

For Goodwill and other assets with indefinite useful life, the recoverable amount is estimated annually at balance sheet date.

Regarding cash-generating units in operation for less than a certain time period (2 to 3 years, depending on the business segment), the Group decided not to make impairment tests as the respective businesses have not yet reached sufficient maturity, for revaluation to be proved credible.

It is determined the recoverable amount of assets with indication of potential impairment loss. Whenever the carrying value of an asset, or the cash-generating unit to which the same belongs, exceeds its recoverable amount, its value is reduced to the recoverable amount and the impairment loss recognised in the income statement.



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Determining the recoverable amount of assets

The recoverable amount of medium and long-term receivables corresponds to the present value of estimated future receipts, using as discount rate the actual interest rate implicit in the original operation. For all other assets, the recoverable amount is the higher of net selling price and value in use.

The value in use of an asset is calculated as the present value of estimated future cash flows. The discount rate used is a pre-tax rate that reflects current market assessments of the time value of money and the specific risks of the asset in question.

The recoverable amount of assets that by them do not generate independent cash flow is determined together with the cash-generating unit to which these assets belong.

Reversal of impairment losses

An impairment loss recognised in a medium and long-term receivable is only reversed if justification for the increase in the respective recoverable amount is based on an event taking place after the date the impairment loss was recognised.

An impairment loss recognised as related to goodwill is not reversed.

Impairment losses for other assets are reversed whenever there are changes in the estimates used to determine the respective recoverable amount. Impairment losses are reversed to the extent of the amount (net of amortisation or depreciation) that would have been determined for the asset if no impairment loss was recognised.

2.14 Capital

Costs incurred with the issuance of new shares are recognised directly in reserves, net of respective taxes.

Own shares purchased are shown at cost as a deduction in equity. When they are disposed, the amount received, net of costs related with the transaction and taxes, are recognised directly in equity.

2.15 Dividends

Dividends are recognised as liabilities when they are declared.

2.16 Loans

Loans are registered as liabilities at their nominal value. Issuance costs are recognised in the income statement during the loan’s life. This procedure, without material differences, corresponds to the application of amortised cost method, i.e., the costs recorded reflect the application of the effective interest rate on the loans.

2.17 Employees benefit

Post-employment benefits (Retirement)

Defined contribution plans

Defined contribution plans are pension plans for which the Group makes defined contributions to independent entities (funds), and for which it has no legal or constructive obligation to pay any additional contribution at the time when the employees come into use of that benefits.

Group contributions to defined contribution plans are recognised as expenses at the time they are incurred.

Defined benefit plans

Defined benefit plans are pension plans where the Group guarantees the attribution of a certain benefit to the employees included in the plan at the time such employees retire.

The Group’s obligation for defined benefit plans is estimated, for each plan separately, every semester at the accounts closing date by a specialised independent agent.

Actuarial valuation is made using the immediate rents method, having present that the plans includes only retired ex-workers. The discount rate is the interest rate on medium and long-term risk-free bonds. The obligation thus determined is shown in the balance sheet net of plan assets.

The year’s current service costs, interest, return on plan assets and actuarial gains or losses are recognised as costs or income for the year.

Stock Options

In 2005 the Group extinguished the compensation plan based on shares, which assumed the characteristics of an equity-settled, i.e., equity instruments that were attributed to its senior staff.



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The fair value of services provided by employees in compensation for the granting of options are recognised as cost against a Stock Options reserve within equity, during the vesting period.

The value recognised as a cost corresponds to the fair value of the options at grant date.

With the extinguish of the plan, the Group recognised in 2005, all of the remaining fair value, that would be otherwise recognised in the future years.

2.18 Provisions

Provisions are booked in the balance sheet whenever the Group has a present obligation (legal or implicit) as a result of a past event and it is probable that a rationally estimated outflow of resources embodying economic benefits will be required to settle the obligation.

Restructuring provision

Provisions for restructuring costs are set up whenever a formal restructuring plan has been approved by the Group and the restructuring has started to be implemented or has been publicly announced.

2.19 Suppliers and other creditors

Suppliers and other creditors’ balances are stated at their nominal value, due to the fact that are short term payables, and the impact of applying the amortised costs would not be material. The benefits from the application of this procedure in the financial statements, would not compensate the costs incurred with that.

2.20 Recognition of revenue

Sales and services rendered

Revenues from sales are recognised in the income statement when significant risks and rewards of ownership are transferred to the buyer. Revenues from the services rendered are recognised as income in accordance with their stage of completion as of the balance sheet date. Revenues relating to the purchase of goods for resale are recognised when these are sold.

Government grants

Government grants are only recognised after it has been safely established that the Group will comply with the inherent conditions and that the grants will be received.

Government grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs they are intended to compensate.

Government grants related to the purchase of fixed assets are included in non-current liabilities and are recognised in the income statement during the estimated useful life of the respective subsidised asset, for a maximum of 10 years.

Rents

Rents received for the lease of investment property are recognised as financial revenues in the income statement in the period to which they relate.

Dividends

Dividends are recognised as revenues at the time they are declared.

2.21 Costs

Operational Leasing

Payments made for operational leasing contracts are recognised in the income statement on a linear basis for the duration of same contracts.

Net financial costs

Net financial costs represent the interest on borrowings, the interest on investment made, dividends, foreign exchange gains and losses, potential gains and losses in financial instruments that do not qualify for hedging accounting, gains and losses in the valuation of investment property and costs and income with financing operations.

Net financial costs are accrued in the income statement in the period in which they are incurred.

2.22 Income tax

Income tax includes current and deferred taxes. Income tax is recognised in the income statement except when relating to gains or losses directly recognised in equity, in which case it is also stated directly in equity.



186

Tax on current income is calculated in accordance with tax criteria prevailing as of the balance sheet date.

Deferred tax is calculated in accordance with the balance sheet liability method on temporary differences between the book value of assets and liabilities and the respective tax base. No deferred tax is calculated on goodwill and initial recognition differences of an asset and liability if the same does not affect book or tax results.

The measurement of deferred tax assets and liabilities should reflect the tax consequences that would follow from the manner in which the Group expects, at the balance sheet date, to recover or settle the carrying amount of its assets and liabilities.

The rate used to determine deferred tax is that in force during the period when temporary differences are reversed.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which temporary differences can be utilised. Deferred tax assets are revised on an annual basis and reduced when it is no longer probable that they may be used.

2.23 Segment information

Business segment

Business segment is a distinguishable component of the Group committed to supplying an individual product or service and subject to different risks and returns from those of other business segments. Two business segments were identified:

• Distribution of consumption products in self-service stores; and

• Manufacturing industry of food products, personal and home care products, and product distribution services through representations.

Geographical segment

Geographical segment is an individual unit of the Group committed to provide products or services within a specific economic environment and subject to different risks and returns from those of other units operating in other economic environments. The following geographical segments were identified: Portugal and Poland.

2.24 Business combinations

A Business combination involving entities under common control, before and after the combination takes effect, it is applied the book value measurement method to the transactions of the business combination.

3 Segments reporting

Information by segments is reported relative to the Group’s geographical and business segments.

The results, assets and liabilities of each segment correspond to those directly attributable to them as well as those that may reasonably be attributed to them. The results, assets and liabilities not directly attributable to segments and included in the “not allocated” column refer essentially to financial operations, also including consolidation adjustments.



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Detailed Information by Segment

DISTRIBUTION MANUFACTURING AND SERVICES NOT

Portugal Poland Portugal ALLOCATED TOTAL

2005 2004 2005 2004 2005 2004 2005 2004 2005 2004

Revenues from external customers

Sales 2,220,902 2,165,622 1,336,402 1,055,744 255,029 255,617 438 4,406 3,812,771 3,481,389

Services rendered 3,902 3,422 11,465 9,713 - 1 28 75 15,395 13,211

2,224,804 2,169,044 1,347,867 1,065,457 255,029 255,618 466 4,481 3,828,166 3,494,600

Inter-segments revenues 574 1,052 - - 53,534 59,514 (54,108) (60,566)

TOTAL REVENUES 2,225,378 2,170,096 1,347,867 1,065,457 308,563 315,132 (53.642) (56,085) 3,828,166 3,494,600

SEGMENT RESULTS 131,747 142,440 34,905 21,298 39,998 40,567 9,853 3,147 216,503 207,453

Net financial costs (45,485) (57,814)

Profit in associated Companies 189 123

PROFIT BEFORE TAXES 171,207 149,762

Income taxes (25,446) (18,835)

Minority interest (35,382) (38,412)

NET PROFIT 110,379 92,515

TOTAL ASSETS 1,571,067 1,518,065 542,118 446,339 319,073 223,980 (59,592) 45,264 2,372,666 2,233,648

TOTAL LIABILITIES 1,060,852 1,072,890 338,980 280,855 251,239 225,245 51,030 85,448 1,702,101 1,664,438

Cash flow from operating activities 272,969 219,014

Cash flow from investment activities (128,731) (208,052)

Cash flow from financing activities (118,755) 8,935

Investment in tangible and intangible assets 92,515 61,461 74,110 36,886 4,920 3,652 28 67 171,573 102,066

Amortisation and depreciation 61,917 63,346 33,432 29,424 4,237 4,112 133 248 99,719 97,130

4 Businesses Acquisitions

As mentioned in the 2004 Annual Report, on 14th December 2004 a deal was reached with the Unilever Group for the integration of the company Unilever Bestfoods Portugal - Produtos Alimentares, S.A. (Bestfoods Portugal) into the company FimaVG - Distribuição de Produtos Alimentares, Lda (FimaVG), owned in partnership by the two Groups.

As no opposition was raised by the Portugal’s Competition Authority to the incorporation of Bestfoods Portugal into FimaVG, the Jerónimo Martins Group, from 1 January 2005, included in its consolidated accounts 51% of the financial statements of the FimaVG and Bestfoods Portugal businesses.

On the acquisition date the Bestfoods Portugal assets and liabilities were recognized at their fair value.

The integration of 51% of the assets and liabilities of Bestfoods Portugal at a fair price, together with the 9% reduction in the assets and liabilities of FimaVG, had the following impacts on the consolidated result:

Tangible assets 3.175 Inventories 1.528 Receivable 9.772 Cash and cash equivalents 967 Borrowings 19.641 Payables (9.785) Total assets 25.298 Goodwill 75.846 Consideration paid 101.144 Debt reduction (19.641) Cash (acquired) (967) Net cash outflow on acquisition 80.536



188

5 Supplementary income and costs

2005 2004

Supplementary gains 144,066 113,958

Cash discount received 30,134 30,886

Cash discount paid (3,431) (3,505)

Credit card commissions (10,976) (11,078)

Other supplementary costs (5,521) (4,341)

Provisions for debtors suppliers 2,046 1,961

156,318 127,881

The supplementary gains concern profits obtained by the Group through the distribution of goods, namely, rental of spaces, participation in birthday events, rental of shelf’s, etc. Supplementary costs concern to the same nature of supplementary gains mentioned, paid by subsidiaries operating in the manufacturing and services segments.

6 Distribution and administrative costs

2005 2004

Supplies and services 169,720 152,135

Advertising costs 45,960 48,637

Rents 74,598 61,187

Staff costs 311,646 275,044

Depreciations, amortisations and assets profit/loss 97,821 94,392

Transportation 46,509 40,033

Other operational profit/loss (12,214) (3,127) 734,040 668,301

7 Staff costs

2005 2004

Wages and salaries 244,982 221,332

Social security 48,360 44,740

Employee benefits (note 26) 540 294

Other staff costs 26,957 20,956

320,839 287,322

Other staff costs include, namely, labour accident insurance, social action costs, training costs and indemnities.

Of total staff costs EUR 24,189 thousand corresponds to staff costs of subsidiaries and associated companies consolidated by the proportional method, the total amount of which was EUR 58,613 thousand.

In 2005 staff costs related to the productive activity of EUR 9,193 thousands (EUR 10,454 thousand in 2004) were attributable to the cost of the goods sold.

The average number of Group employees during the year was 29,227, distributed as follows:

2005 2004

Portugal 16,993 17,210

Poland 12,234 10,638

Total number of employees 29.227 27,848

Of the total number of employees 1,165 are employed by subsidiaries and associated companies consolidated by the proportional method.



189

The number of employees at the end of 2005 was 30,753, in 2004 it was 28,914, distributed as follows:

2005 2004

Portugal 17,281 17,031

Poland 13,472 11,883

Total number of employees 30,753 28,914

Of the total number of employees 1,048 are employed by subsidiaries and associated companies consolidated by the proportional method.

8 Net financial costs

2005 2004

Interest expense (42,199) (45,875)

Interest received 2,875 3,794

Dividends 1,052 1,174

Net foreign exchange (716) 660

Investment property:

Profit/loss on disposal 23 (391)

Changes to fair value (note 14) (18) (168)

Available-for-sale financial investments:

Profit/loss on disposal - (1,822)

Changes to fair value - (6,689)

Other financial costs and gains (2,950) (6,522)

Changes to fair value in financial instruments that do not qualify for hedge accounting (note 9.3)

(3,552)

(1,975)

(45,485) (57,814)

Other financial costs and gains include costs with debt issued by the Group.

9 Financial instruments

9.1 Interest rate risk

The Group uses derivatives, such as swaps and options, to manage its exposures to interest rate risks. Derivatives are efficient tools to hedge against adverse effects on cash flows associated with debt service payments.

Changes to fair values on derivatives that qualify for hedge accounting, are recognised in reserves (note 23.1), all other derivatives are recognised in results (note 8).

9.2 Foreign Exchange Risks

On 31st December 2005 the Group had contracted six operations totalling EUR 252,984 thousand to hedge its exchange rate risk exposures.

In comparison to the previous year, the only change to register is the maturity on 30 December of one of the three non-deliverable forwards contracted in July 2004 at the value of EUR 1,053 thousand, which was used to cover part of the Group’s investment in Poland.

With regard to the other coverage, namely the two EUR/USD cross currency swaps at the total value of EUR 151,007 thousand, and the two EUR/PLN cross currency swaps at the total value of EUR 100,000 thousand, there were no changes throughout the year of 2005. These operations were outlined in detail in point 12.2 of the accounts appendix of the 2004 Annual Report.

9.3 Fair value of financial instruments

The impact in reserves (net of taxes and minority interests), is as follows:



190

2005 2004

Currency swaps (1,477) (383)

Interest rates swaps (2,075) (1,592)

(3,552) (1,975)

Deferred taxes 977 442

Minority interests 510 232

Value recognised in profit/loss (2,065) (1,301)

The value recognised in currency translation reserve referred to hedging of investment in Poland is EUR (3,401) thousand (net of tax).

10 Income tax recognised in the income statement

10.1 Income taxes

2005 2004

Current income tax

Current tax of the year (16,151) (15,580)

Adjustment to prior year estimation (44) 16

(16,195) (15,564)

Deferred tax

Temporary differences created and reversed (15,457) (14,671) Change to the recoverable amount of tax losses and temporary differences from previous years 6,206 11,400 (9,251) (3,271)

Total income taxes (25,446) (18,835)

10.2 Reconciliation of effective tax rate

2005 2004

Profit before tax 171,207 149,762

Income tax using the Portuguese corporation tax rate 27.5% (47,082) 27.5% (41,185) Fiscal effect due to:

Different tax rates in foreign jurisdictions 3.8% 6,491 1.2% 1,872

Non taxable or non recoverable results 6.0% 10,232 8.2% 12,352

Non-deductible expenses (0.6%) (959) (1.6%) (2,413)

Adjustment to prior year estimation 0.0% (44) 0.0% 16

Change to the recoverable amount of tax losses and temporary differences of prior years

3.6% 6,206 7.6% 11,400

Results subject to special taxation (0.2%) (290) (0.6%) (877)

Income tax 14.9% (25,446) 12.6% (18,835)

11 Exceptional operating profits/losses

2005 2004

Restructuring provisions (5,443) Commercial brands disposals 2,462

Received indemnities 2,720

Extinguish of the Jerónimo Martins Stock Options Plan 7,708 -

Reduction of provisions 1,224 - Assets impairment (523) - Others (510) (5)

7,899 (266)



191

12 Tangible Assets

12.1 Changes occurred during the year

Land and natural

resources

Buildings and other

constructions

Plants, machinery and tools

Transport equipment and

others

Work in progress and

advances

Total

Cost

Opening balance 271,005 740,582 531,359 119,200 13,830 1,675,976 Foreign exchange differences 96 10,252 4,354 2,497 955 18,154 Increases 8,743 30,904 41,822 9,749 74,974 166,192 Acquisition/disposal of businesses 198 2,606 2,454 (310) 118 5,066 Revaluation 1,977 - - - - 1,977 Disposals - (1,226) (4,871) (3,835) (1,231) (11,163) Transfers and write off’s 1,670 14,709 (10,930) (4,570) (36,920) (36,041) Reclassifications - 38 55 359 (8,292) (7,840) Impairment losses (113) (410) - - - (523)

Closing balance 283,576 797,455 564,243 123,090 43,434 1,811,798

Depreciation and impairment losses

Opening balance - 185,124 362,854 93,242 - 641,220 Foreign exchange differences - 3,907 2,543 1,920 - 8,370 Increases - 34,018 47,173 13,492 - 94,683 Acquisition/disposal of businesses - 879 1,228 (216) - 1,891 Disposals - (25) (4,472) (3,716) - (8,213) Transfers and write off’s - (6,918) (14,357) (6,571) - (27,846) Reclassifications - (2) - - - (2)

Closing balance - 216,983 394,969 98,151 - 710,103

Net value

As at 1 January 2005 271,005 555,458 168,505 25,958 13,830 1,034,756

As at 31 December 2005 283,576 580,472 169,274 24,939 43,434 1,101,695

An impairment loss of EUR 113 thousand was recorded in 2005, related to a land in Madeira and of EUR 410 thousand that refers to a closing store.

12.2 Equipment under financial lease

The Group has a variety of equipment under financial lease or other equivalent contract conditions. Although the Group will not exercise the lease-purchase option on transport equipment, the terms of the contracts require that they be registered as fixed assets. Financial lease payments do not include values relative to contingent rentals. Unsettled liabilities on financial lease contracts are referred in note 25.4.

The value of assets under financial lease are shown below:

2005 2004

Land and natural resources Tangible assets 903 903

903 903 Buildings and other constructions Tangible assets 5,950 2,780 Accumulated depreciation (418) (244)

5,532 2,536

Plants and machinery Tangible assets 22,422 14,509 Accumulated depreciation (4,093) (1,793)

18,329 12,715

IT and office equipment and tools and utensils Tangible assets 27,533 22,936 Accumulated depreciation (17,962) (13,025)

9,571 9,911 Transport equipment Tangible assets 10,241 6,377 Accumulated depreciation (4,957) (3,043)

5,284 3,334

Work in progress 662 119



192

12.3 Guarantees

No assets have been pledged as security for the fulfilment of bank or other obligations.

12.4 Tangible assets in progress

Tangible assets in progress as at 31 December 2005 refer to the building and refurbishment of stores.

12.5 Revaluation

The Group records land allocated to its operating activity at market value, determined by specialist and independent entities. In 2005 new revaluations were carried out, creating an increase of EUR 1,977 thousand (note 23.1).

Revaluation values under fixed assets amount to EUR 141,310 thousand (EUR 139,333 thousand in 2004), with the following impact on shareholders’ equity:

2005 2004

Revaluation of land 141,310 139,333

Deferred taxes (31,749) (31,907)

Minority interests (42,113) (41,256)

Net revaluation (Note 23.1) 67,448 66,170

13 Intangible Assets

13.1 Changes occurring during the year

Goodwill

R&D expenses

Software, ind property and other rights

Key money

Work in progress

Total

Cost:

Opening balance 301,349 29,824 21,920 27,118 2,647 382,858

Foreign exchange differences 7,160 1,143 80 127 151 8,661

Increases - 431 227 758 3,966 5,381

Acquisition/disposal of businesses 75,846 - - - - 75,846

Transfers and write off's - (4,770) (3,032) (1,522) (1,989) (11,313)

Reclassifications - 386 1,434 3,139 2,881 7,840

Closing balance 384,355 27,015 20,629 29,620 7,656 469,274

Amortisation and impairment losses:

Opening balance - 27,277 6,607 16,546 - 50,430

Foreign exchange differences - 1,092 1 3 - 1,096

Increases - 2,463 655 1,919 - 5,037

Transfers and write off's - (6,699) (3,082) (1,522) - (11,303)

Reclassifications - 2 - - - 2

Closing balance - 24,135 4,181 16,946 - 45,262

Net value:

As at 1 January 2005 301,349 2,547 15,313 10,572 2,647 332,428

A at 31 December 2005 384,355 2,879 16,448 12,674 7,656 424,012

The Group identified as intangible assets of indefinite useful life, besides goodwill, the trademarks Pingo Doce and Feira Nova, for which there is no time limit for how long they will continue to create economic benefits to the Group. Their net value is EUR 13,717 thousand, which are not being amortized and are subject to impairment tests annually.

13.2 Guarantees

No assets have been pledged as security for the fulfilment of bank or other obligations.



193

13.3 Intangible assets in progress

The implementation of projects for processes simplification and key money from the Retail Portugal and Poland Business Areas are considered in intangible assets- work in progress.

13.4 Impairment tests for Goodwill

Goodwill is allocated to the Groups’ business areas as presented bellow:

Business Areas 2005 2004

Retail Portugal 97,298 97,298 Cash & Carry Portugal 72,433 72,433

Madeira 8,509 8,509

Manufacturing 75,846 -

Poland 130,269 123,109

384,355 301,349

The increases registered refer to the acquisition of the company Bestfoods Portugal, as mentioned in note 4, that generated Goodwill of EUR 75,846 thousand.

In addition, and as a consequence of the currency translation of assets in the Group’s business in Poland, the Goodwill value related to this business, totalling 502,818 million PLN, increased by EUR 7,160 thousand.

In 2005 evaluations were made according to the Discounted Cash Flows (DCF) evaluation models, thereby sustaining the recoverability of Goodwill value.

The values of these evaluations are reached through past performances and through expectations for market development, with future cash-flow projections being drawn up for each of the businesses, based on medium/long term plans approved by the Board of Directors.

These estimates were made considering a discount rate of between 7,5% and 7,9% for Portugal and 10.1% for Poland, and a perpetual growth rate between 0% and 1% for the various businesses.

14 Investment Property

2005 2004

Opening balance 55,584 88,585

Increases due to acquisitions 207 68

Transfers from tangible assets - 11,696

Other transfers (taxes) - (9)

Foreign exchange differences 338 840

Changes to fair value (note 8) (18) (168)

Disposals (15,266) (45,428)

Closing balance 40,845 55,584

The investment property relates to plots of land initially acquired for use in Group operations, and others actually used for that purpose for a period of time but which became redundant, either because they could not be used to build cash-generating units or because they became superfluous as a result of the restructuring of operations carried out in them.

This category also includes recently acquired land, whose use has still not been determined, being, therefore, considered has investment expecting for a market value increase.

As it is not likely that these assets will be sold within a period below 12 months, they are presented in the accounts as non-current assets.



194

15 Derivative financial instruments

2005 2004

Assets Liabilities Assets Liabilities

Non-current Interest rates Swap 164 2,937 204 1,642

Currency Swap - 5,253 1,622 828

USD loan hedging 3,468 - - 14,203

3,632 8,190 1,826 16,673

Current

Interest rates Swap - 219 - -

Currency Swap - 629 - 126

- 848 - 126

16 Investments in associated companies

In 2005 and 2004 the movement under this heading was as follows: 2005 2004

Investments Opening balance 387 14 Acquisitions 4 250 Equity method 189 123 Transfers 110 - Closing balance 690 387 Fair value adjustments Opening balance - - Transfers (note 27) (25) - Closing balance (25) -

Net value as at 1 January 387 14

Net value as at 31 December 665 387

The payable and receivable interests related to these financial instruments were detached to Trade creditors, accrued costs and deferred income (clean price).

17 Available-for-sale financial investments

Non-Currents 2005 2004

BCP shares 35,080 30,451 Advances on account of financial investments 4,988 4,988 Treasury Bonds - 22,514 JM stock options trust plan - 1,403 Others 840 3,184

40,908 62,540 Fair value adjustment (note 27) - (2,020)

40,908 60,520

Currents 2005 2004

Treasury Bonds 22,218 -



195

The short-term available for sale financial investments, at 31 December 2005, in the amount of EUR 22,218 thousand, respected to treasury bonds that had their maturity in January 2006.

18 Inventories

2005 2004

Raw and subsidiary materials and consumables 5,538 3,670

Goods and work in progress 997 571

Finished and semi-finished goods 84 105

Goods 241,611 212,228

248,230 216,574

Fair value adjustment (note 27) (7,660) (8,367)

Net inventories 240,570 208,207

No inventories have been pledged as guarantee for the fulfilment of contractual obligations.

19 Taxes

19.1 Deferred tax assets and liabilities

Change in deferred tax accounts

2005 2004

Opening balance 48,326 44,643 Currency translation difference 3,906 6,248

Revaluation and reserves 130 705

Acquisition/disposal of businesses 55

Results of the year (9,251) (3,270)


Deferred taxes are presented in balance sheet as follows:

2005 2004

Deferred tax assets 89,676 92,357

Deferred tax liabilities (46,510) (44,031)

43,166 48,326

Movement in deferred taxes during the year

Opening balance

Impact on results

Impact on

equity

Acquisition/disposal of businesses

Currency translation differences

Closing balance

Deferred tax liabilities

Revaluation of assets 33,453 (701) (149) 278 - 32,881Deferred income for fiscal purposes 643 797 - - 69 1,509Differences on accounting policies in other countries 7,157 1,524 - - 478 9,159Other temporary differences (including IAS impact) 2,778 152 - 31 - 2,961

44,031 1,772 (149) 309 547 46,510

Deferred tax assets

Excess over legal provisions 7,468 (1,053) - 370 175 6,960Revaluation of assets 789 108 9 - - 906Pension costs 652 3,961 - (8) - 4,605Costs with foreign exchange risk hedging operations 197 922 (28) - 1,291 2,382Recoverable losses 50,087 (8,789) - - 1,515 42,813Profit in inventories 481 18 - - - 499Provisions for inventories 1,737 (224) - - 43 1,556Other deferred costs for fiscal purposes 24,910 (1,664) - - 1,384 24,630Differences on accounting policies in other countries 1,133 (524) - - 45 654Other temporary differences 4,903 (234) - 2 - 4,671

92,357 (7,479) (19) 364 4,453 89,676

Net change in deferred tax 48,326 (9,251) 130 55 3,906 43,166



196

Deferred tax assets arising from recoverable losses are as follows:

2005 2004

Consolidated tax Group Recheio, SGPS, S.A. 18,891 32,247 Consolidated tax Group JMR, SGPS, S.A. 6,393 12,440 Jerónimo Martins Dystrybucja, S.A. 12,516 5,357 Others 5,013 43 42,813 50,087

The Group recognised these deferred tax assets on tax losses based on projections for the respective businesses that show that tax profits will be realised in the future ensuring their recoverability.

19.2 Unrecognised deferred taxes on tax losses

The Group did not recognise deferred tax assets relative to tax losses in respect of which, with reasonable accuracy, no sufficient tax profits are expected to guarantee the recovery of deferred tax assets. Total unrecognised tax assets amount to EUR 28,474 thousand (2004: EUR 37,215 thousand) relative to part of the losses generated in Jerónimo Martins Dystrybucja S.A., Recheio SGPS, S.A., JMH and the total amount of the losses form Jerónimo Martins Finance Company (1) Limited and Servicompra- Consultores de Aprovisionamento. Lda..

19.3 Receivable and payable taxes

Taxes receivable 2005 2004

Income tax receivable 4,185 712 VAT receivable 15,146 11,114 Others 245 121 19,576 11,947

Taxes payable Income tax payable 2.482 - VAT payable 13,176 13,601 Income tax withheld 1,735 3,242 Social security 5,848 5,287 Other taxes 6,834 6,303 30,075 28,433

20 Trade debtors, accrued income and deferred costs

Non-current debtors balance of EUR 60,091 thousand is related to tax liquidation. The Group has already contested the amount paid and made a legal claim for reimbursement (note 32).

Accrued income essentially respects to the recognition of supplementary gains contracted with suppliers, in the amount of EUR 11,285 thousand.

Non-current 2005 2004

Other debtors 60,091 60,081 Deferred costs 5,108 -

65,199 60,081

Current 2005 2004

Commercial customers 70,246 65,566 Subsidiaries companies 37 43 Suppliers 7,401 7.329 Staff 800 577 Other debtors 31,746 20.853 Accrued income 14,753 7,276 Deferred costs 7,295 11,754

132,278 113,398



197

The deferred costs heading includes EUR 5,230 thousand of pre-paid rents, EUR 2,541 thousand of bond issue and credit opening costs, EUR 4,632 thousand relative to other costs attributable to future years and paid in 2005, or, when not paid, were already charged by the competent entities.

The debtor’s amount is registered by the recoverable value, i.e., the Group constitutes provisions for impairment losses whenever there are signs of uncollectible amounts (note 27).

21 Cash and cash equivalents

2005 2004

Bank deposits 115,733 108,545 Short-term investments 72,603 50,441 Cash and cash equivalents 3,056 2,027

191,392 161,013

The short-term investments include short-term bank deposits and other negotiable funds for which provisions were booked to reduce it to the realizable value (note 27).

22 Cash generated from operations

2005 2004

Net results 110,379 92,515

Adjustments for: Minority interests 35,382 38,412 Taxes 25,446 18,835 Amortisations and depreciations 99,719 97,130 Provisions 1,184 8,718 Profit/loss from stock options plan 61 76 Net financial costs 45,485 57,814 Profit/loss in associated companies (189) (123) Impairment of assets 523 435 Profit/ Losses on financial investment disposals - 1 Profit/ Losses on tangible assets disposals 519 (227) Non operating results - 279

318,509 313,865 Changes in working capital: Inventories (27,525) (4,278) Trade debtors, accrued income and deferred costs (14,373) 10,098 Trade creditors, accrued costs and deferred income 55,520 (44,497)

332,131 275,188



198

23 Capital and reserves

23.1 Fair value and other reserves

Land and buildings

Cash-flow Hedging reserve


Stock options

Currency translation

reserve Total

Balance as at 1 January 2004 66,163 - - - (23,136) 43,027

Land transferred to investment property: - Gross value (617) (617) - Deferred tax (194) (194) - Minority interests 398 398 Revaluation: - Deferred tax 705 705 - Minority interests (285) (285) Fair value adjustment of available-for-sale financial investments:

735 735

Fair value services rendered- stock options 76 76

Currency translation differences: - In the year 15,812 15,812 - Deferred tax 6,248 6,248

Balance as at 1 January 2005 66,170 - 735 76 (1,076) 65,905

Revaluation: - Gross value 1,977 1,977 - Deferred tax 158 158 - Minority interests (857) (857)

Fair value of cash flow hedgings (IAS 39) - Gross value 101 101 - Deferred tax (28) (28) Fair value adjustment of available-for-sale financial investments:

3,895 3,895

Fair value services rendered- stock options 61 61 Options cancelation of the stock options plan

(137)

(137) Currency translation differences: - In the year 1,097 1,097 - Deferred tax 3,906 3,906

Balance as at 31 December 2005 67,448 73 4,630 - 3,927 76,078

23.2 Share capital and share premium

Authorised share capital is represented by 125,858,644 ordinary shares (2004: 125,858,644), at a nominal value of EUR 5 (five Euros) each.

The holders of ordinary shares have the right to received dividends as established in the General Meeting and have one vote for each 100 held shares. There are no preferential shares and the own shares’ rights are suspended until these shares are back in the market.



199

23.3 Own shares

The reserve for own shares reflects the cost of shares held by the Group in portfolio. As of 31 December 2005, the Group held 171,800 own shares (2004: 171,800). As defined by law the own shares are not entitled to dividends.

23.4 Dividends

Taking into consideration Group results in 2005, the Board of Directors of Jerónimo Martins SGPS, S.A. will propose in the General Meeting the distribution of EUR 52,788,474.48, which corresponds to a dividend per share of EUR 0.42.

The dividends distributed in 2005 of EUR 58,302 thousand were paid to Jerónimo Martins, SGPS, S.A. shareholders (EUR 45,247 thousand) and to minority interest in the Group companies (EUR 13,055 thousand).

24 Earnings per share

24.1 Basic and diluted earnings per share

Basic net results per share are calculated based on the net profit of EUR 110,379 thousand (2004: profit of EUR 92,515 thousand) attributable to ordinary shareholders and on weighted average outstanding ordinary shares, numbering 125,686,844 (2004: 110,850,778). The diluted earnings per share are equal to basic earnings per share as there are no dilution events.

24.2 Weighted average ordinary shares

2005 2004

Ordinary shares issued at the beginning of the year 125,858,644 95,858,644 Own shares at the beginning of the year 171,800 171,800 Shares issued during the year - 30,000,000

Weighted average number of ordinary shares 125,686,844 110,850,778

24.3 Diluted net results attributable to ordinary shareholders

2005 2004

Diluted net profit of the year attributable to ordinary shareholders 110,379 92,515

24.4 Diluted weighted average ordinary shares

2005 2004

Diluted weighted average ordinary shares 125,686,844 110,850,778

Basic earnings per share – Euros 0.8782 0.8346 Diluted earnings per share – Euros 0.8782 0.8346

25 Borrowings

In 2005 several short, medium and long-term Commercial Bills were contracted in the Jerónimo Martins Group. In line with these programmes, several issues were carried out in the course of the year.

JMH contracted, in line with these programmes, EUR 160,000 thousand in long-term commercial bills and EUR 35,000 thousand in short-term programmes, with the maturity dates of the latest in February and March 2006, and were issued in long term EUR 110,000 thousand at 31st December 2005.

Throughout the year the conditions of two bond loans were also renegotiated, reducing the spread applicable to the interest rate of the coupon. The loans on which this reduction took place were those issued in 2003 by JMH, SA and by JMR - Gestão de Empresas de Retalho, SGPS, S.A.(JMR).

The price conditions of a 5-year JMR loan, which has maturity date in January 2008, were also reviewed.

JMH issued 10 million bonds at a nominal value of 5 euros, divided into two bond loans amounting to EUR 25,000 thousand each, which mature in 4 and 5 years.



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25.1 Current and non-current loans

2005 2004

Non-current loans Bank loans 172,777 92, 986 Bond loans 409,380 341,804 Other loans 112 -

Financial lease liabilities 19,113 13,717

601,382 448,507

Current loans Bond loans - 99,760 Bank overdrafts 8,041 112,165 Bank loans 82,289 68,065 Other loans 113 - Loans from subsidiaries and parent companies - 15,409 Financial lease liabilities 11,345 11,414

101,788 306,813

25.2 Loan terms and maturities

Average rate

Total Less than 1

year More than 1

year

Bank loans

Commercial paper 2.68% 110,000 - 110,000

Loans in EUR 2.95% 65,337 53,225 12,112

Loans in PLN 6.03% 79,954 29,177 50,777

Bond Loans

Loans 3.42% 406,007 - 406,007

Fair value adjustment 3,373 - 3,373

Bank overdrafts 3.32% 8,041 8,041 -

Financial lease liabilities 5.28% 30,458 11,345 19,113

703,170 101,788 601,382

The amount of EUR 3,373 thousand, adjusted to the total of bond loans, refers to the updating of the bond loan for 180 million USD, for which the Group contracted a hedging instrument, presented in note 15, with a symmetrical value.

25.3 Bond loans

2005 2004

Non-convertible bonds 406,007 455,767

The bond loans in course at the end of 2005 were as follows:

In June 2003, 23 million JMR bonds were issued at the nominal value of 5 Euros. They were issued with a deadline of 5 years. The maturity date of these bonds was fixed for June 2008. The interest rate is variable. In 2005 the conditions of this loan were renegotiated. On the one hand their maturity was prolonged for another two years, now maturing in June 2010, and on the other hand the spread to add to the base rate for calculating the interest to be paid on each coupon was reduced. In October 2003, 8 million JMH bonds were issued, at a nominal value of 5 Euros. They were issued with a deadline of 5 years. The maturity date of these bonds was fixed for October 2008. The interest rate is variable. In 2005 the conditions of this loan were renegotiated. On the one hand their maturity was prolonged for another two years, now maturing in October 2010, and on the other hand the spread to add to the base rate for calculating the interest to be paid on each coupon was reduced. In February 2004 Recheio, SGPS, S.A. issued 1 million bonds at a nominal value of 50 Euros, totalling EUR 50,000 thousand Euros. This is a 5-year issue, which matures in February 2009 and the interest rate is variable and indexed to Euribor 6M.

In June 2004 a Private Placement was carried out by JMR on the US market, in the amount of USD 180,000 thousand, at a fixed rate. These “Notes” issued by JMR are equivalent to Bond Loans in Portuguese law. The total amount was divided between a 7-year issue of USD 84 thousand and a 10-year one of USD 96 thousand.



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Immediately after the contracting of this amount a EUR/USD Cross Currency Swap was carried out. In August 2005 a bond loan of 5 million bonds was issued by JMH, at the nominal value of 5 euros. These bonds mature in August 2009 and the interest rate is variable.

Also in August 2005, 5 million bonds were emitted by JMH, at the nominal value of 5 Euros. This bonds mature in August 2010 and the interest rate is variable.

The redemption dates of the bond loans are as follows:

2009 75,00 2010 180,000 2011 70,470 2014 80,537

Total 406,007

25.4 Financial lease liabilities

2005 2004

Payments in less than 1 year 12,229 12,413 Payments between 1 and 5 years 19,917 14,076 Payments in more than 5 years 163 -

32,309 26,489 Payment of future interest (1,851) (1,358)

Present value of liabilities 30,458 25,131

25.5 Financial debt

As the Group contracted several foreign exchange risk and interest risk hedging operations, as well as short-term investments, the net consolidated financial debt as at 31 December is:

2005 2004

Non-current loans (note 25) 601,382 448,507 Current loans (note 25) 101,788 306,813 Derivative financial instruments (note 15) 5,406 14,973 Interest on accruals and deferrals (693) 859 Bank deposits (note 21) (115,733) (108,545) Short-term investments (note 21) (72,603) (50,441) Short-term available for sale financial investments (note 17) (22,218) -

497,329 612,166

26 Employee benefits

Amounts of Employee benefits in the balance sheet: 2005 2004

Retirement benefits – defined contribution plan - - Retirement benefits - defined benefit plan paid for by the group 18,264 19,402 Retirement benefits - defined benefit plan with a fund managed by a third party 37 132 Seniority premium 389 322 Total 18,690 19,856

Amounts reflected in the income statement – staff costs (note 7): 2005 2004

Retirement benefits – defined contribution plan 612 654 Retirement benefits - defined benefit plan paid for by the group (141) (586) Retirement benefits - defined benefit plan with a fund managed by a third party (38) 132 Seniority premium 46 18 Stock options 61 76 Total 540 294



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A brief description of the plans and each one’s impacts follows:

26.1 Defined contribution plans for employees, with funds managed by a third party

The Group has defined contribution pension plans in the companies Jerónimo Martins, SGPS, S.A., Jerónimo Martins Serviços, S.A., Jerónimo Martins Distribuição de Produtos de Consumo, Lda. and in the companies of Fima, Lever, and Iglo.

These plans cover all of the employees in these companies who have permanent contract status, and they allow cost control related to the attribution of benefits, while simultaneously creating an incentive for the employees to participate in their own pension scheme.

Movements in the year:

2005 2004

Liabilities (not covered) as at 1 January - 441

Staff costs 612 654

Contributions of the year (612) (1,095)

Liabilities (not covered) as at 31 December - -

26.2 Defined contribution plans for former employees

Defined benefit plans paid for by the group

The Group has direct responsibility for these plans. Independent actuaries evaluate them twice a year. According to the actuarial calculation reported on 31st December 2005, the responsibility totals EUR 18,264 thousand, and is totally included in the heading employee benefits.

Movement in the year:

2005

Balance on 1 January 19,402 Acquisition/disposal of businesses (56) Interest costs 979 Actuarial (gains)/losses (1,120) Retirement pensions paid in (941)

Balance on 31 December 18,264

Actuarial assumptions used:

Mortality table TV – 73/77

Discount rate 4.5%

Pension growth rate 3.0%

Defined Benefit plans with a fund managed by a third party

The companies of Fima, Lever and Iglo group have a defined benefit plan limited to a range of pensioners. The responsibilities entailed by this plan are met by an autonomous pension fund managed by an independent entity.

Amounts in the balance sheet:

2005 2004

Present value of funded obligations 1,837 2,061

Fair value of plan assets 1,800 1,929

Liability in balance sheet - employee benefits 37 132


2005

Balance on 1 January 132 Acquisition/disposal of businesses (31) Costs recognised in income statement (38) Retirement pensions paid in (26)

Balance on 31 December 37



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The amounts recognised in income statement, are as follows:

2005

Interest costs 98 Expected return on plan assets (90) Actuarial losses recognised (46)

Total costs recognised (38)



Discount rate 5.40%

Fund income rate 5.20%

Pension growth rate 2.25%

26.3 Other long-term benefits granted to employees

The companies of Fima, Lever and Iglo group have an incentive plan which involves the attribution of a payment when employees complete 15, 25 and 40 years of service. The companies pay for this plan and an independent actuary evaluates the implied responsibilities each year. According to the actuarial study carried out, on 31st December the responsibility was for EUR 389 thousand, which is accounted for in the liabilities, in employee benefits.


2005

Balance on 1 January 322 Acquisition/disposal of businesses 65 Current service cost 29 Interest cost 17 Benefits paid in the year (44)

Balance on 31 December 389

Liability calculation assumptions:


Discount rate 5.40%

Salaries growth rate 3.25%

26.4 Compensation based on JM shares

In 2005 the compensation plan based on Jerónimo Martins shares, which consists of purchase options in Jerónimo Martins stock - Stock Options Plan Trust, was extinguished.

According to last years adopted principles there were no options to exercise on 31 December 2005, and the amount of EUR 61 thousand was recognised as cost of the year.

27 Provisions and adjustments to the net realisable value

Opening balance

Provisions set up

Provisions used

Foreign exchange difference

Acquisition/disposal of businesses

Transfers Closing balance

Doubtful debtors (note 20) 47,919 104 (6,883) 519 1,371 - 43,030

Investment in associated companies (note 16) - - - - - 25 25

Inventories (note 18) 8,367 151 (1,119) 227 34 - 7,660

Financial investments (note 17) 2,020 - (1,995) - - (25) -

Other securities (note 21) 57 - - - - - 57

Total fair value adjustments 58,363 255 (9,997) 746 1,405 - 50,772

Employee benefits (note 26) 19,856 1,032 (2,176) - (22) - 18,690

Other risks and contingencies 16,175 771 (8,259) 42 3,658 2,276 14,663

Total of provisions 36,031 1,803 (10,435) 42 3,636 2,276 33,353



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Provision for risks and contingencies includes:

An amount of EUR 1,763 thousand relating to possible future compensation to be paid by the Group in respect of guarantees on sales deals carried out in recent years.

An amount of EUR 12,900 thousand relating to litigious cases, which are not expected to be resolved within the year.

28 Trade creditors, accrued costs and deferred income

2005 2004

Associated companies and subsidiaries 2,212 7

Other commercial creditors 734,047 672,907

Other non-commercial creditors 36,601 10,436

Accrued costs 103,478 96,797

Deferred income 2,159 1,983

878,497 782,130

The heading “accrued costs” is composed essentially of salaries and wages to be paid to the employees, in the amount of EUR 40,544 thousand, interest payable in the amount of EUR 10,731 thousand and supplementary costs with the distribution and promotion of goods in the amount of EUR 25,829 thousand. The remaining EUR 26,374 thousand respects to sundry costs (utilities, insurance, consultants, rents, etc), for 2005, which had not been invoiced by the respective entities prior to the end of the year.

The heading “deferred income” comprises essentially supplementary revenues in the amount of EUR 845 thousand, which are deferred until the respective goods are sold.

29 Guarantees

The bank guarantees are as follows:

Guarantees provided to EDP (Electricity company) 177 Guarantees provided to suppliers 209 Guarantees for D.G.C.I. (Portuguese tax authorities) 1,793 Other guarantees provided 14,341

30 Operational lease

The amounts of liabilities related to medium and long-term contracts which have penalty clauses if broken, are the following:

2005 2004

Payments in less than 1 year 61,938 48,779 Payments between 1 and 5 years 158,144 130,559 Payments in more than 5 years 94,797 62,695

314,879 242,033

These amounts respect to stores and warehouses rent contracts, with initial term between 5 and 20 years, with an option to renegotiate after that period. The payments are annually updated, reflecting inflation and/or market valuation.

As mentioned all these contracts are breakable through the payment of penalty clauses. The liabilities inherent to these penalties were, in the end of 2005, of EUR 26,041 thousand.

Operational lease contracts were recognised as costs during the year in the amount of EUR 74,989 thousand. The amounts in 2004 were EUR 61,389 thousand.

The distribution is as follows: 2005 2004

Buildings and other const. 64,422 53,518 Plants & machinery 732 966 Transport equipment 5,471 4,061 IT equipment 426 350 Others 3,938 2,494

74,989 61,389



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The difference from the “rents” sated in note 6 are costs with occasional renting in the amount of EUR 121 thousand (2004: EUR 159 thousand) and rents costs that were attributable to the cost of goods sold in the amount of EUR 512 thousand (2004: EUR 361 thousand).

31 Capital commitments

Capital expenditure contracted for at the balance sheet date amount EUR 3,148 thousand, and referred essentially to work in progress.

32 Contingencies

• An amount of EUR 60,091 thousand is recognised in the financial statements under non-current debtors (note 20) relative to tax liquidations claimed by the Tax Administration. In 2005 EUR 10 thousand was liquidated and the rest in previous years in line with the exceptional regularisation process of tax debts (as outlined in note 38 of the 2004 Notes to the Consolidate Financial Statements).

The Group’s Board of Directors, supported by its tax and legal advisers, believes it has acted entirely within the law and maintains the claims filed against such settlements, without waiving its legitimate right to appeal against them and expecting their full recovery.

In this context the Group, immediately, demanded total reimbursement of the amounts paid, as well as indemnity interest at the legal rate for the period between the payment date and its effective restitution date.

According to the principle of prudence, the Group has not recognised the amount of indemnity interest over this credit.

• Besides several claims related to normal Group activities, the following materially relevant situations are pending:

a) In 1999, as a result of the acquisition of two companies that held establishments previously owned by exfranchised of ITMI – Norte-Sul Portugal – Sociedade de Desenvolvimento e Investimento, SA, this company, together with Regional de Mercadorias – Sociedade Central de Aprovisionamento, SA, has brought an action against several subsidiaries of the Group, holding them responsible for the alleged non fulfilment, by those exfranchised, of the contract they had set up with ITMI, already solved at the date of the acquisitions, demanding an indemnity of EUR 14,600 thousand. This procedure is still pending a court date. Considering both the complexity of the process and the fact that no prove has yet been produced, it is not possible, with assurance, to determine its outcome. Nevertheless, it is the belief of the Board of Directors that the amount requested will probably not be granted, thus, as referred to in the Groups’ affiliates annual reports of previous years, no provision has been set up.

b) The Company Leirimundo - Construção Civil, Lda claims an indemnity of EUR 8,196 thousand from Gestiretalho, as a result of the termination of the rental contract entered into by the parties. Gestiretalho refutes the claim filed by Leirimundo, having filed its own claim for an indemnity of EUR 31,441 thousand for losses and lost revenues. Gestiretalho claims non-fulfilment by Leirimundo as basis for terminating the contract. At the moment the process is in the arbitral court.

c) The company Águas do Marão, Lda. claims payment of EUR 502 thousand from Gestiretalho concerning bills due under a supply contract terminated by the latter with good cause. Gestiretalho contests part of the bills and claims an indemnity for the facts that led to the terminating of the contract.

d) The company Proherre Internacional, Lda claimed an indemnity payment of EUR 2,500 thousand from Pingo Doce – Distribuição Alimentar, S.A., alleging rescission of the lease contract by Pingo Doce, without having elapsed the minimum period agreed between the parties. Pingo Doce contests this claim based on the fact that the contact was terminated through mutual agreement. The case is in a preliminary phase.

e) The Tax Authorities claim from Recheio, SGPS, SA the amount of EUR 2,244 thousand concerning VAT officious liquidations, the reasons for which are the application of the method of VAT deduction from the actual affectation. The Management of Recheio, backed up by their tax consultants, believe they are entirely right concerning this matter, reinforced by the recent judgement ruled by the Lisbon Fiscal and Administrative Court on this matter.

f) The Tax Authorities informed Recheio, SGPS, SA, that it should carry out tax requalification on received dividends, to a total of EUR 65,825 thousand, relating to an undertaking in the Free Trade Zone of Madeira during the years 2000 to 2002. In the opinion of the Tax Authorities, this should have been subject to corporate tax deducted at headquarters, as opposed to dividends, which are exempt. The Administration of Recheio, with the support of its tax and legal advisors, does not consider the report of the Tax Authorities to have any foundation or validity, and will use all the resources at its disposal to fight the moves. Bearing in mind the accumulated losses incurred in the Tax Group to which Recheio belongs (approx. EUR 69,000 thousand), any correction which may be made by the DGCI will not result in payment on the part of Recheio, SGPS, SA. Because of its certainty that it is entirely in the right on this issue, the company will not make any change to its financial statements.



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g) The Tax Authorities claim from Feira Nova- Hipermercados, S.A. the amount of M EUR 743 concerning to Special Contribution officious liquidations, the reasons for which are the Bela Vista complex land plots valuation. The Management of Feira Nova, backed up by their lawyers and tax consultants, contest those liquidations considering that they are entirely right concerning this matter.

33 Related parties

55.899% of the Group is owned by the Sociedade Francisco Manuel dos Santos, and no transactions occurred between this Company and any other company of the Group in 2005. Neither were there any amounts payable or receivable between them on December 31st, 2005.

33.1 Benefits attributed to directors

Directors of Jerónimo Martins, SGPS, S.A. board are entitled to complementary retirement benefits, providing they have been executive board members for at least 10 years, and retire from the post at 65 years old of age.

This benefit corresponds to a complementary pension so as to receive an amount equivalent to the net salary earned as of retirement date.

At the Annual General Meeting in 2005, an alternative retirement pension plan was approved. It is a fixed-contribution Pension Plan, with a pre-determined contribution value, with the value of benefits depending on earnings received. The Remuneration Committee defines the contribution rate of the company and of the initial contribution.

Participants in the Plan are the Executive Directors of the Company, and those Directors who opted for the current Pension Plan forewent eligibility for the Retirement Complement Plan, which had to be expressly and irretrievably renounced.

33.2 Remuneration paid to directors

The members of the board of directors received the following remuneration (fixed, variable and contributions to the pension plans):

2005 2004

Executive directors 1,968 1,683

Non-executive directors 1,292 598

3,260 2,281

The Board of Directors of the company is composed of 9 Members, of which 3 are Executive and 6 Non executive as stated in this Annual Report- Corporate Governance.

The remuneration paid to Non executive Board Members in 2005, of EUR 10 thousand is relative to their participation in the Audit Committee (2004: EUR 3 thousand).

34 Group companies

Group control is ensured by the parent company, Jerónimo Martins, SGPS, S.A..

The tables below list the companies that form part of Jerónimo Martins Group. These tables were organised according to the consolidation method used, and where there are exclusions, the relevant reasons are given.

a) Full consolidation method

Company

Business area

Head office

% Owned

Jerónimo Martins, SGPS, S.A. Business portfolio management Lisbon

Jerónimo Martins – Serviços, S.A. Human resources top management Lisbon 100.00

JMR – Gestão de Empresas de Retalho, SGPS, S.A. Business portfolio management in the area of retail distribution

Lisbon 51.00

Pingo Doce – Distribuição Alimentar, S.A. Retail sales in supermarkets Lisbon 51.00

Supertur – Imobiliária, Comércio e Turismo, S.A. Real estate purchase and sale Lisbon 51.00

Feira Nova – Hipermercados, S.A. Retail sales in hypermarkets Lisbon 51.00

Bazar Novo – Distribuição de Produtos Não Alimentares, Lda Retail sales of durable consumer goods Lisbon 51.00

Gestiretalho – Gestão e Consultoria para a Distribuição a Retalho, S.A.

Retail management, consultancy and logistics Lisbon 51.00

Imoretalho – Gestão de Imóveis, S.A. Real estate management and administration Lisbon 51.00

Casal de São Pedro – Administração de Bens, S.A. Real estate management and administration Lisbon 51.00

Jerónimo Martins Finance Company (2), Limited Financial services Dublin

(Ireland) 51.00

EVA – Sociedade de Investimentos Mobiliários e Imobiliários, Lda Provision of services in the economic and financial areas and investment management

Funchal 51.00

Moser & Branco – Distribuição Alimentar, S.A. Retail sales in supermarkets Carregal do 51.00



207

Company

Business area

Head office

% Owned

Sal

Cunha & Branco – Distribuição Alimentar, S.A. Retail sales in supermarkets Lisbon 51.00

Electric Co – Distribuição de Produtos não Alimentares, Lda. Distribution of non-food and consumer goods Lisbon 51.00

Dantas & Vale, S.A. Distribution of food products Lisbon 51.00

Recheio, SGPS, S.A. Business portfolio management in wholesale and retail distribution

Lisbon 100.00

Recheio-Cash & Carry, S.A. Wholesale of food and consumer goods Lisbon 100.00

Imocash – Imobiliário de Distribuição, S.A. Real estate management and administration Lisbon 100.00

Larantigo – Sociedade de Construções, S.A. Real estate purchase and sale Lisbon 100.00

PSQ – Sociedade de Investimentos Mobiliários e Imobiliários, Lda Provision of services in the economic and financial areas and investment management

Funchal 100.00

Funchalgest– Sociedade Gestora de Participações Sociais, S.A. Business portfolio management Funchal 75.50

João Gomes Camacho, S.A. Wholesale of food and consumer goods Funchal 75.50

Lidosol II – Distribuição de Produtos Alimentares, S.A. Retail sales in supermarkets Funchal 75.50

Idole–Utilidades, Equipamentos e Investimentos Imobiliários, Lda Real estate purchase and sale Lisbon 75.50

Lidinvest – Gestão de Imóveis, S.A. Real estate management and administration Funchal 75.50

Belegginsmaatschappij Tand B.V. Financial services Rotterdam

(Holland) 100.00

Jerónimo Martins Dystrybucja, S.A. Retail and wholesale of food and consumer goods Poznan (Poland)

100.00

Tip Marken – Discount Handelsgesellschaft mbh Business portfolio management Sarstedt

(Germany) 100.00

Optimum Mark Sp. Z.o.o. Exploration of trade marks Warsaw (Poland)

100.00

JM Holdings UK, Ltd Business portfolio management London (U,K,)

100.00

Jerónimo Martins – Distribuição de Produtos de Consumo, Lda Wholesale of food products Lisbon 100.00

Caterplus – Comercialização e Distribuição de Produtos de Consumo, Lda

Wholesale of other food products Lisbon 49.00

Jerónimo Martins – Restauração e Serviços, S.A. Food retail stores Lisbon 100.00

Hermes–Sociedade Investimentos Mobiliários e Imobiliários, Lda Provision of services in the economic and financial areas and investment management

Funchal 100.00

Friedman - Sociedade Investimentos Mobiliários e Imobiliários ,Lda Provision of services in the economic and accounting area Funchal 100.00

Jerónimo Martins Finance Company (1), Limited Financial services Dublin (Ireland)

100.00

Servicompra – Consultores de Aprovisionamento, Lda Provision of services in the areas of market research, procurement and marketing and bargaining techniques

Lisbon 100.00

Jerónimo Martins Retail Services, S.A. Exploration of trade marks Klosters Switzerland

51.00

Desimo – Desenvolvimento e Gestão Imobiliária, Lda Real estate management and administration and trade marks

Lisbon 100.00

Comespa - Gestão de Espaços Comerciais, S.A. Management and administration of retail outlets Lisbon 51.00

Hussel Ibéria – Chocolates e Confeitaria, S.A. Retail sale of chocolates, confectionery and similar products Lisbon 51.00

b) Proportional consolidation method

Company

Business area

Head Office

% Owned

Fima/VG Distribuição de Produtos Alimentares, Lda Distribution of food products Lisbon 51.00

Fima - Produtos Alimentares, S.A. Production of margarines and similar products Lisbon 51.00

Victor Guedes – Indústria e Comércio, S.A. Production of olive oil Lisbon 51.00

Unilever Bestfoods Portugal – Produtos Alimentares, S.A. Production of savoury and desserts Lisbon 51.00

LeverElida – Distribuição de Produtos de Limpeza e Higiene Pessoal, Lda

Distribution of beauty and personal hygiene products Lisbon 40.00

Indústrias Lever Portuguesa, S.A. Detergent manufacturing Lisbon 40.00

IgloOlá – Distribuição de Gelados e Ultracongelados, Lda Distribution of ice-cream and deep-frozen products Lisbon 26.00

Iglo – Indústria de Gelados, S.A. Manufacturing of ice-cream and sorbet Lisbon 26.00

Gelcasa – Comercialização de Gelados e Ultracongelados, S.A. Retail sale of ice-cream and deep-frozen products Lisbon 26.00

c) Equity method

Company

Business area Head Office

% Owned

PGJM – Importação e Distribuição de Perfumes e Cosméticos, S.A. Wholesale of perfumes and cosmetics Lisbon 50.00

d) In 2005, the companies PITT Sp. Zo.o, Sklepy Spozywece Sp. Zo.o. and Twoje Sklepy Spozywece Sp. Zo.o. were merged in the company Jerónimo Martins Dystrybucja, S.A..



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35 Interest in joint ventures

The Group has interests in the following joint ventures:

● Fima Group – this group of companies manufactures and sells food products, specifically edible fats and drinks, and private labels as well as Unilever Group brands. The group Jerónimo Martins has a 51% capital share.

● Lever Group - this group of companies manufactures and sells personal and home care products. The brands marketed are the property of the Unilever Group. The Group Jerónimo Martins has a 40% capital share.

● Iglo Group – this group of companies manufactures ice cream and markets ice cream and frozen and deep frozen food products under private and Unilever Group brands. The Group Jerónimo Martins has a 26% capital share.

The consolidated financial statements include the following amounts relative to assets and liabilities appropriated as a result of participation in the above-mentioned joint ventures, consolidated by the proportional method:

2005 2004

Non-current assets 122,923 123,368 Current assets 80,795 65,714 Non-current liabilities (170,556) (180,956) Current liabilities (107,269) (93,892)

Net assets (74,107) (85,766)

Income and gains 317,333 274,539 Costs and losses (293,604) (254,165)

Net result 23,729 20,374

The Group holds 50% capital share in the company PGJM- Importação e Distribuição de Perfumes e Cosméticos, S.A. that distributes perfume and cosmetic products.

The assets and liabilities as well and the generated results by this company are not materially relevant.

36 Events after the balance sheet date

By the closing of this report, there are no relevant events that should be mentioned.

Lisbon, 20 February 2005

The Certified Accountant The Board of directors

PricewaterhouseCoopers & Associados - Sociedade de Revisores Oficiais de Contas, Lda. Matriculada na Conservatória do Registo Comercial sob o nº 11912 Sede: Palácio Sottomayor, Rua Sousa Martins, 1 - 3º, 1050 - 217 Lisboa Inscrita na lista dos Revisores Oficiais de Contas sob o nº 183 NIPC 506628752 Capital Social Euros 217.500 Inscrita na Comissão de Valores Mobiliários sob o nº 9077

PricewaterhouseCoopers & Associados - Sociedade de Revisores Oficiais de Contas, Lda. Palácio Sottomayor Rua Sousa Martins, 1 - 3º 1050-217 Lisboa Portugal Tel +351 213 599 000 Fax +351 213 599 999

Report of the Auditors for Statutory and Stock Exchange Regulatory Purposes in respect of the Consolidated Financial Information

(Free translation from the original version in Portuguese)

Introduction

1 As required by law, we present the Report of the Statutory Auditors for Stock Exchange Regulatory Purposes in respect of the Consolidated Financial Information included in the consolidated Directors’ Report and the consolidated financial statements of Jerónimo Martins, SGPS, SA., comprising the consolidated balance sheet as at 31 December 2005, (which shows total assets of Euros 2.372.666 thousand and a total of shareholder's equity of Euros 670.565 thousand, including a total of minority interests of Euros 250.765 thousand and a net profit of Euros 110.379 thousand), the consolidated statements of income by functions, the consolidated statement of changes in equity and the consolidated cash flow statement for the year then ended and the corresponding notes to the accounts.

Responsibilities

2 It is the responsibility of the Company’s Board of Directors (i) to prepare consolidated financial statements which present fairly, in all material respects, the financial position of the company and its subsidiaries, the consolidated results of their operations and their cash flows; (ii) to prepare the historic financial information in accordance with International Financial Reporting Standards as adopted by the EU while also meeting the principles of completeness, truthfulness, accuracy, clarity, objectivity and lawfulness, as required by the Portuguese Securities Market Code; (iii) to adopt appropriate accounting policies and criteria; (iv) to maintain adequate systems of internal accounting controls; and (v) the disclosure of any relevant matters which have influenced the activity, the financial position or results of the company and its subsidiaries.

3 Our responsibility is to verify the consolidated financial information included in the consolidated financial statements referred to above, particularly as to whether it is complete, truthful, accurate, clear, objective and lawful, as required by the Portuguese Securities Market Code, for the purpose of expressing an independent and professional opinion on that financial information, based on our audit.

Jerónimo Martins, SGPS, SA. 21 February 2006

(2)

Scope 4 We conducted our audit in accordance with the Standards and Technical Recommendations approved by the Institute of Statutory Auditors which require that we plan and perform the examination to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. Accordingly, our examination included: (i) verification that the subsidiary’s financial statements have been examined and for the cases where such an examination was not carried out, verification, on a test basis, of the evidence supporting the amounts and disclosures in the consolidated financial statements, and assessing the reasonableness of the estimates, based on the judgements and criteria of Management used in the preparation of the consolidated financial statements; (ii) verification of the consolidation operations; (iii) assessing the appropriateness and consistency of the accounting principles used and their disclosure, as applicable; (iv) assessing the applicability of the going concern basis of accounting; (v) assessing the overall presentation of the consolidated financial statements; and (vi) assessing the completeness, truthfulness, accuracy, clarity, objectivity and lawfulness of the financial information.

5 Our audit also covered the Consolidated Directors’ Report, having included the verification of its conformity with the financial information disclosed.

6 We believe that our examination provides a reasonable basis for our opinion.

Opinion

7 In our opinion, the consolidated financial statements referred to above, present fairly in all material respects, the consolidated financial position of Jerónimo Martins, SGPS, SA. as at 31 December 2005, the consolidated results of their operations and their cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU and duly comply with principles of completeness, truthfulness, accuracy, clarity, objectivity and lawfulness.

Lisbon, 21 February 2006 PricewaterhouseCoopers & Associados, S.R.O.C., Lda. represented by: Jorge Manuel Santos Costa, R.OC.



Report and Opinion

of the Statutory Auditors

(Free Translation from the original in Portuguese)

To the Shareholders 1 In accordance with the law and our mandate, we herewith present the report on our supervisory activity and our opinion on the Consolidated Directors’ Report and the corresponding Consolidate Financial Statements presented by the Board of Directors of Jerónimo Martins, SGPS, SA. with respect to the year ended 31 December 2005. 2 During the course of the year, we have accompanied the evolution of the company’s activities and of its most significant subsidiaries, as and when deemed necessary, and have verified the timeliness and adequacy of the accounting records and supporting documentation. We have also ensured that the law and the company’s statutes have been complied with. 3 As a consequence of our work, we have issued the attached Report of the Auditors for Statutory and Stock Exchange Regulatory Purposes in respect of the Consolidated Financial Information. Furthermore we have considered the Statutory Auditors’ Report sent to the Board of Directors in which the audit procedures undertaken are described, as required by Article 451º of the Commercial Companies Code. 4 Within the scope of our mandate, we have verified that: i) the Consolidated Balance Sheet, the Consolidated Statements of Income by functions,

the Consolidated Statement of changes in equity, the Consolidated Cash Flow Statement and corresponding Notes, present adequately the financial position, the results and the cash flows of the company;

ii) the accounting policies and valuation methods applied are appropriate; iii) the Consolidated Directors’ Report is sufficiently clear as to the evolution of the

business and the position of the company and its subsidiaries and highlights the most significant aspects.


(2)

5 On this basis, and taking into account the information obtained from the Board of Directors and the company’s employees, together with the conclusions in the Report of the Auditors for Statutory and Stock Exchange Regulatory Purposes in respect of the Consolidated Financial Information, we are of the opinion that: i) the Consolidated Director’ Report be approved; ii) the Consolidated Financial Statements be approved. Lisbon, 21 February 2006 The Statutory Auditor PricewaterhouseCoopers & Associados, S.R.O.C., Lda. represented by: Jorge Manuel Santos Costa, R.O.C.

VI. Individual Financial Statements

Jerónimo Martins, SGPS, S.A. Public Trade Company

Registered with the Lisbon registrar of Companies under 8.122 Share Capital: EUR 629.293.220 Corporate Tax No. 500 100 144

Rua Tierno Galvan, Torre 3, 9º, Letra J 1099 - 008 LISBOA

R&C’05 – Management Report

214


PUBLIC COMPANY

MANAGEMENT REPORT

Financial year 2005

As a manager of equity holdings, Jerónimo Martins has a portfolio of investments characterized by a strong presence in food retail in Portugal (Pingo Doce, Feira Nova and Recheio) and in Poland (Biedronka), in the industrial sector, where it maintains a long-standing partnership with Unilever (Fima, Bestfoods, Lever and Iglo), and also in specialized retail (Hussel and Jeronymo) and in marketing and distribution services (JMD). As the Group’s holding company, Jerónimo Martins co-ordinates and provides consultancy services to its subsidiaries. The functional areas of support to the Group, range from administration to institutional relations, development and strategy, planning and control, legal and fiscal affairs, risk control, internal audit, human resources, financial operations, consolidation and accounting, security and communication. Services provided reached 13.2 million euros.

Portugal In 2005, imbalances in the Portuguese economy continued to worsen and, according to the Winter Economic Bulletin of the Bank of Portugal, the country should register economic growth in the region of 0.3%, down on the 1.3% registered in 2004. This is among the lowest rates of the European Union, and is due mainly to poor performance in Gross Fixed Capital Formation, which saw an estimated 3.2% fall, and exports, which after growth of 5.4% in 2004, are now showing around the 1.8% mark. There is, then, a real divergence of the Portuguese economy from that of the European Union, which has been seen since 2000 and is a consequence of poor productivity levels in the Country. Despite the worsening of the situation in the labour market, and the marked reduction in consumer confidence seen over the second half of the year, it was the area of private and public consumption which saw most dynamism in terms of global demand, with annual growth rates above those of general economic activity. Although the second half of the year saw a clear slowdown, mostly reflected in a fall in consumer durable goods, private consumption is forecast to be at 1.8%, down from 2.3% last year, while public consumption rose 1.1% compared to 2.6% in 2004. Forecasts for 2005 are for a high level of debt on the part of private consumers as a percentage of available income, and that the public budget deficit will grow to 6.0% of GDP, despite corrective measures taken mid-year. According to the Bank of Portugal, the average annual inflation rate is around 2.1%, a reduction of 0.4 p.p. on the previous year. The impacts of the increase in the VAT rate and the price of oil were mitigated by favourable results in the price of imports, fuel excepted, and the prices of non-transformed food goods. The unemployment rate increased, especially in the first half of the year, with the rate at around 7.4% at mid-year. Forecasts are for private sector salary increases of 2.8%, which is only 0.7% in real terms.

The Group’s operating performance in Portugal

Pingo Doce

In 2005, Pingo Doce continued to follow the strategy defined in 2002: to be the best supermarket chain operating in Perishables in Portugal, increasing its market share in non-fresh products by the conversion of peripheral customers into nuclear customers, by reducing barriers to an increase in shopping items purchased.


215

In 2005, the positioning success of the chain was seen in like-for-like sales growth of 4.6%. The total volume of business was 853.4 million Euros, up 5.3% on 2004, largely due to an increase of 5.5% in the number of customer transactions. These results were achieved in a difficult competitive and macro-economic environment, with strong pressure on prices, especially on the part of the discount operators.

The prices practised by Pingo Doce in 2005 showed deflation of 3.6% on 2004, compared with an average variation over the last twelve months in the Consumer Retail Price Index of +2.3%.

The investment in marketing over the year consolidated the perception of the price decrease at Pingo Doce and reinforced the brand image in its areas of market differentiation: Perishables and Private Labels.

Feira Nova

For 2005, Feira Nova defined as its main strategic guidelines for action now, and to be sustained in the future; (i) heavy investment in winning market leadership in perceptions of low price by consumers; (ii) increased perceptions of quality in perishables; and (iii) investment in remodelling and modernization of the store network, namely the medium-sized stores and respective satellite stores, for Textiles, with the New Code brand, and for Electrical Goods and New Technology, with the Electric Co brand. At the same time, we continued to focus on operational efficiency with the aim of freeing up resources and allowing customers to benefit from the resulting savings.

The year also saw the beginning of a new phase in the big expansion programme for Feira Nova, which will go into action in the next few years, mainly through the medium-sized store format, accepted as the format which is currently best suited to the market and in which the brand has the skills to enable it to be market leader in the geographical areas in which it operates. Price repositioning entailed a reformulation of the commercial policy of the Company, with a decrease in prices in the product categories that are most sensitive to this factor and in which other formats have been gaining an important foothold. This strategic orientation resulted in accumulated deflation of around 3.4%, which did not prevent, however, Feira Nova’s increasing like-for-like sales (+0.5% compared with 2004) and achieving total growth of 3.5%, despite periods in which stores undergoing remodelling were closed.

Recheio

In 2005, marked by the intensification of competitive aggression in all the modern Food Distribution formats, and by the slowdown in private consumption, Recheio has managed once again to consolidate its leadership in the food wholesale market, and is the byword for supplying food to professionals in the catering industry – Hotel Industry and Traditional Retail. Despite net sales having fallen 2.4% on the previous year, Recheio increased its market share considering that the wholesale market as a whole was down in 2005 by around 4% on 20041.

1 Internal estimation


216

EBITDA grew in 2005, to 38.6 million Euros, which corresponds to 6.7% of sales, with the Company showing profit figures well above the sector average.

Madeira

Throughout 2005, Pingo Doce in Madeira followed a sustained policy of low, stable prices, guaranteeing its competitiveness through the monthly checking of prices of around 1500 reference products against our competitors. Pingo Doce kept its promise of not increasing its prices after the increase in VAT and for the second year running, the chain showed price deflation (monthly average deflation 1.8%), against average variation in the Consumer Retail Price Index of 2.3% in 2005. In 2005, another of the Group’s major projects was the opening of the new Pingo Doce store, in April, at the Forum Madeira shopping centre. In an ever more competitive environment, the current network of 13 stores achieved sales of 76.5 million Euros, which represents growth of 3.8% on the previous year. Despite the generalized fall in the Traditional Retail business, Recheio in Madeira consolidated its market leadership in 2005, achieving sales of 28.6 million Euros, a value comparable to the year before. The increase in operating and structural efficiency helped us to manage a positive performance in terms of annual profit. Among the factors to consider is the consolidation and signing of new supplier contracts to the main hotel and restaurant groups in Madeira.

JMD

2005 was a year of transition for JMD. After the shedding from its portfolio at the end of 2004 of a leading brand, the Company showed its capacity for renewal, through the entrance of other partners, of relevant size, to its representation business. The results achieved reflect the difficulties felt as a result of the above-mentioned alterations in the portfolio, with at least the basis for future growth, in line with recent years, starting in 2006.

Industry

2005 was a year in which FimaVG faced up to great challenges and emerged with an overall positive level of performance. Net sales were 285.0 million Euros, reflecting the integration of Bestfoods. The change in profits was, however, different in that the improvement in cost structures and the profitability of the majority of categories were offset by the losses in Olive and Cooking Oils. During 2005, due to an extremely competitive market, explicable by the unfavourable economic climate, LeverElida’s total sales (excluding the effect of the disposal of Denim and Vim) were kept at the previous year level, but posting an increase of 2.0% in the domestic market. However, our market share increased and consumption of our brands also grew by 7% in volume. IgloOlá’s total sales were 128.3 million Euros, representing growth of 0.2% on the year before (excluding the effect of selling the Pizza business). The Company’s activities were limited somewhat by the difficult socio-economic situation, which had adverse effects,


217

particularly with regard to consumption, the strong business pressures in organized retail and the aggressive competitive activities within the markets, despite the good weather seen, mainly in the Summer. Poland

Organized retail in Poland continued to reveal significant dynamism, marked by the continued opening of new shopping spaces, despite a slowdown in economic growth and private consumption. In 2005, it is estimated that around 250 new stores came into being, with the discount format remaining the strongest performer, with over 180 new stores. Growth rates registered in the hypermarket format are identical to those of previous years, with 44 new stores opening. Despite the dynamism of the Organized Retail business, Traditional Retail continues to represent 58% of the Polish market. In terms of licensing, the delay in answering requests for new stores on the part of the authorities increased substantially, from two to six months, while bureaucracy seems to have increased with regard to such processes. Despite many operators not yet having demonstrated positive results, prices continued to come under great pressure, with the last quarter showing a pressure peak on prices, due to the hypermarkets.

The Group’s operating performance in Poland

2005, being a year of macro-economic adversity, was an interesting test for the operational excellence of Biedronka, developed over recent years. As a result, the predicted economic growth figures for Poland in the year after it’s joining the European Union were not fully achieved. Indicators such as the GNP and Investment figures were significantly down on initially budgeted figures for 2005, with a consequent impact on private consumption. Despite all this, the macro-economic environment did not in any way inhibit the value generation aims that Biedronka programmed for the year 2005. In truth, the situation reinforced our leadership position in the Polish Food Retail market, with the reinforcement and acceleration of our organic expansion programme, as well as our leadership in price and range innovation, fitting in with the principle “Quality at low prices, every day”. In the course of 2005, 84 new stores were opened, which enabled the brand to end the year with a network of 805 units.

Our consumers recognised and valued our operational dynamics and the consistency of the measures implemented, which led to sales growth of 13.4% for Biedronka on 2004, with like-for-like growth of 5.4%.


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The Group’s business activities are analysed in more detail in the Consolidated Management Report that accompanies the 2005 Consolidated Financial Statements.

Company’s performance as a Holding of investments

The company as the Holding and manager of company holdings presented an operating profit of 10.9 million euros in 2005, which is 7.0 million euros higher compared to 2004.

As a result of restructuring the debt, with consequent reduction in issue costs and interest rates, the net financing costs reduced 60% in relation to 2004, totalling 6.0 million euros in 2005.

The Loans to companies of the Group and Joint-Ventures increased in net terms 96.2 million euros. This led to an increase in the debt of 77.7 million euros, to 221.5 million euros (143.8 Million Euros in 2004).

Several Commercial Paper Programmes were contracted in the total amount of 195 million euros. At the end of the year 110 million euros were being used. A new bond loan was also contracted for 50 million euros, with maturity divided between 2009 and 2010.

Exceptional operating profits/losses in 2005 were 7.7 million Euros, corresponding to a gain attributed to the company with the liquidation and termination of Jerónimo Martins Stock Options Plan.

Events after the balance sheet date

At the date this report was issued, no significant events occurred that should be disclosed.

2006 Perspectives

Bearing in mind the macro-economic and sectorial scenarios described above, the Jerónimo Martins Group’s priority continues to be for the solid, profitable growth of its current portfolio of businesses in Food Distribution. Poland should continue to be the main growth engine for the Group, and there will be intensified investment in the expansion of the Retail chains in Portugal, as well as in the Food Service segment. Both in Portugal and in Poland, consumers continue to be rational in their evaluation of the quality-price binomial, which places the competitiveness of the Chains at the top of the priority list. In their turn, the Chains are focussed on the increased circulation of its invested capital, with investment in attractive, innovative, differentiated projects, which will lead to increases in the average sales value to customers. Pingo Doce will continue to strengthen its leadership position in the supermarket sector. The Chain’s priorities are for expanding its store network, consolidating its price repositioning strategy and continuing to develop in Perishables and Private Labels, as factors of differentiation. Feira Nova will also consolidate its competitive price positioning, the growth of its ElectricCo and New Code businesses and will invest in Perishables and Private Labels, as factors of attraction and loyalty, respectively. In 2006, the main challenge for the Chain will be on expanding its medium-sized store network. Recheio will continue to consolidate its market leadership status in Traditional Retail, in order to sustain its business in a market, which should show shrinkage in the coming years sue to pressure from openings in Organized Retail. The HoReCa channel promises Recheio significant growth opportunities,


219

with the Chain testing more efficient formats to compete in the various market segments. In the Polish market, Biedronka will continue to work towards the sedimentation of its successful strategy, guaranteeing the continuation of its advantage in the market and focussing the whole Organization on continued, rapid and sustained growth. The company continues to follow aggressive expansion plans (80 to 100 stores/year) and remodelling plans (40 to 60 stores/year) and proposes the creation of another logistic and operating area, so as to prepare its operating structure for the existing growth potential. In the area of Manufacturing it is expected that sales growth will be interesting and that all Areas of Business will consolidate their market shares, through strong investment in price and a clear policy of innovation. The optimization of costs and refocusing on a portfolio of strong brands are the two priorities of the Organization. JMD will continue to focus on the broadening of its portfolio of represented brands and on the development of its new projects in the Restaurant area. Although another difficult year is forecast, the Group’s objectives for 2006 are ambitious in terms of the market and highly demanding for the Organization, but are considered achievable. Notwithstanding the ambitious objectives proposed for the current business portfolio, the Group continues to search for and to analyse new growth paths, either through new store formats, or through new geographies or businesses. Accordingly, in February 2006 the Group formalised its relation with the National Association of Pharmacies (ANF) with a view to looking into the possibility of setting up a pharmacy business in the Polish market. In a scenario of uncertainty such as that facing company today, it is fundamental to evaluate objectively the risks involved in new investments and the capacity of the Organization to accommodate such risks.

Information on environmental matters

There are no environmental matters likely to affect the company’s financial performance and situation.

Proposed application of results

In the financial year 2005, Jerónimo Martins, SGPS, S.A. declared consolidated profits of EUR 110,379,181.00.

In accordance with the policy of dividend distribution announced several years ago, and described in chapter of the Corporate Governance, included in the Consolidated Management Report, the Board of Directors proposes a distribution to the Shareholders of EUR 52,788,474.48, an amount which corresponds to 47.8% of consolidated net profit.

Therefore the application of the Jerónimo Martins, SGPS, S.A. individual net result, that in 2005 was 79,418,358.12, is proposed to be as follows:

• Legal Reserve = EUR 3,970,917.91 • Dividend Distribution= EUR 52,788,474.48 • Free Reserves = EUR 22,658,965.73


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Statements for legal purposes

Under the Law, the Board of Directors is required to provide the following information:

a) In addition to the facts referred above, and those that, in greater detail, are given in the Report that accompanies the Group’s Consolidated Financial Statements for 2005, no other situation has come to the Board of Director’s knowledge after the end of the year whose relevance warrants a special mention;

b) Under the terms of Article 21 of Decree-Law nº 411/91, from 17 October, there are no debts for arrears of payments to the Social Security;

c) Under the terms of the paragraph 2, article 324 of the Portuguese Commercial Companies Code, there were no purchases or sales of Own Shares, and therefore the number of Own Shares held at the end of 2005 was the same as on 31 December 2004: 171,800 Own Shares.

Lisbon, 20 February 2006 The board of Directors

2005 Management Report Annex

221

INFORMATION CONCERNING THE STAKES HELD IN THE COMPANY BY MEMBERS OF THE BOARD OF DIRECTORS AND STATUTORY AUDITOR AS AT 31 DECEMBER 2005

(As provided in article 447 of the Portuguese Commercial Companies Code and under the terms of sub-paragraph b), paragraph 1 of article 7 of the Portuguese Securities Market Commission (CMVM) Regulation nº 24/2000)

BOARD OF DIRECTORS

Members of the Board of Directors Held on 31.12.04

Increases during the year Decreases during the year Held on 31.12.05

Shares Bonds Shares Bonds Shares Bonds Shares Bonds

Elísio Alexandre Soares dos Santos 20,071 - 20,071 -

José Manuel da Silveira e Castro Soares dos Santos - - - -

Luís Maria Viana Palha da Silva - - - -

Pedro Manuel de Castro Soares dos Santos 23,661 - 23,661 -

António Mendo Castel-Branco Borges - - - -

Artur Eduardo Brochado dos Santos Silva 1,536 -. 1,536 -

Hans Eggerstedt 3,940 - 3,940 -

Manuel Fernando Macedo de Alves Monteiro -. - - -

Rui Manuel de Medeiros d`Espiney Patrício - - - -

Álvaro Carlos Gonzalez Troncoso - - - -

STATUTORY AUDITOR

As at 31 December 2005, the Statutory Auditor PricewaterhouseCoopers & Associados, SROC, Lda., did not hold any shares and bonds of Jerónimo Martins, SGPS, S.A. and had not made any transactions with Jerónimo Martins, SGPS, S.A. securities.

2005 Management Report Annex

222

LIST OF SHAREHOLDERS WITH QUALIFYING STAKES AS AT 31 DECEMBER 2005

(Under the terms of articles 447 and 448 of the Portuguese Commercial Companies Code and for the purposes of section e), paragraph 1 of article 6 of the Portuguese Securities Market Commission (CMVM) Regulation nº 11/2000 and in the terms of the Portuguese Securities Code)

Shareholder Nº of shares held

% Capital % of Voting Rights*

Sociedade Francisco Manuel dos Santos, SGPS, S.A.

Directly 70,353,985 55.899% 55.976%

Strand Ventures Inc.**

Directly 10,454,615 8.307% 8.318%

Through Fitron Management Ltd. (Held at 100% by Strand Ventures, Inc.)

4,234,159 3.364% 3.369%

Through Multiplus Investments Ltd. (Held at 100% by Strand Ventures, Inc.)

5,266,256 4.184% 4.190%

Total Attributable 19,955,030 15.855% 15.877%

Zenith, SGPS, S.A. ***

Directly 2,973,484 2.363% 2.366%

* (% Voting rights = Nº shares held / (Total Nº JM shares – Own shares))

** Under the terms and for the purposes of paragraph 3, article 16 of Portuguese Securities Code (CVM), the stakes held directly and indirectly by Strand Ventures Inc must be imputed, according to paragraph 1, article 20 of the CVM to the following companies:

- Banco Privado Português (Cayman) Ltd., under a portfolio management contract for the entire stake in Jerónimo Martins, SGPS, SA;

- Banco Privado Português, SA, under an agreement with several shareholders of Strand Ventures allowing it to elect the majority of the members of the board of directors.

*** Under the terms and for the purposes of paragraph 3, article 16 of Portuguese Securities Code (CVM), the stakes held directly by Zenith, SGPS, S.A. must be imputed, according to paragraph 1, article 20 of the CVM to the following companies:

- Banco Privado Português, S.A., under a portfolio management contract for the entire stake in Jerónimo Martins, SGPS, SA;

- Banco Privado Português, SA, under an agreement with several shareholders of Zenith, SGPS, S.A. allowing it to elect the majority of the members of the board of directors.

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INCOME STATEMENT BY FUNCTIONS


Euro thousand

Notes 2005 2004

Services rendered 13,253 11,907

Cost of the services rendered (7,612) (6,048)

Gross profit 5,641 5,859

Other operating revenues 127 271

Administrative costs (1,527) (1,267)

Other operating costs (1,051) (1,011)

Exceptional operating profits/losses 8 7,708 -

Operating profit 10,898 3,852

Net financial costs 4 (5,966) (15,075)

Profit/loss in subsidiaries and associated companies 7 66,714 42,530

Profit/loss in other investments 1,035 1,134

Profit/loss before taxes 72,681 32,441

Income taxes 6 6,737 (54)

Net profit/loss 79,418 32,387

Basic earnings per share - Euros 20 0.632 0.292

Diluted earnings per share - Euros 20 0.632 0.292

To be read with the attached notes to the Individual Financial Statements The Certified Accountant Board of Directors

____________________________ ______________________________

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BALANCE SHEET AT 31 DECEMBER 2005 AND 2004

Euro thousand

Notes 2005 2004

Activo

Tangible assets 9 319 419

Intangible assets 10 - -

Investment properties 11 2,470 2,459

Investments in subsidiaries 12 234,074 228,656

Investments in joint-ventures 12 6,285 6,285

Loans to subsidiaires 13 690,601 600,948

Loans to joint-ventures 13 164,199 157,699

Available-for-sale financial investments 14 35,080 29,858

Deferred tax assets 15 7,221 -

Total non-current assets 1,140,249 1,026,324

Taxes receivable 15 93 73

Loans to subsidiaires 13 100,000 100,000

Trade debtors, accrued income and deferred costs 16 9,216 4,109

Cash and cash equivalents 17 1,482 28

Total current assets 110,791 104,210

Total assets 1,251,040 1,130,534

Shareholders' equity and liabilities

Share capital 19.1 629,293 629,293

Share premium 19.1 22,452 22,452

Own shares 19.2 (6,006) (6,060)

Reserves 19.4 4,646 810

Retained earnings 19.5 359,047 322,010

Total shareholders' equity 1,009,378 968,505

Borrowings 21 200,009 40,034

Employee beneficts 25 14,527 15,560

Provisions 22 12 20

Deferred tax liabilities 15 450 -

Total non-current liabilities 214,998 55,614

Trade creditors and accrued costs 23 3,010 2,116

Derivative financial instruments 24 1,240 548

Borrowings 21 22,054 103,389

Taxes payable 15 360 362

Total current liabilities 26,664 106,415

Total Shareholders’ equity and liabilities 1,251,040 1,130,534

To be read with the attached notes to the Individual Financial Statements

225

Euro thousand

Notes

Share Capital Share Premium

Own shares Reserves Retained earnings

Shareholders' equity

Balance sheet at 1st January 2004 479,293 22,452 (6,060) 394,543 (104,050) 788,178

Reclassification (394,543) 394,543 -

Total reclassifications - - - (394,543) 394,543 -Fair value gains/losses of available-for-sale financial investments 734 734

Fair value of services rendered - stock options plan 76 76

Costs with capital increase (2,272) (2,272)

JM stock options plan trust residual value (SIC 12) 1,402 1,402

Gains/losses directly recognised in equity - - - 810 (870) (60)

Net profit in 2004 - - - 32,387 32,387

Total gains/losses recognised during the year - - - - 32,387 32,387

Capital increase 150,000 150,000

Balance sheet at 31st December 2004 629,293 22,452 (6,060) 810 322,010 968,505

Balance sheet at 1st January 2005 629,293 22,452 (6,060) 810 322,010 968,505

Fair value gains/losses of available-for-sale financial investments 14 3,895 2,729 6,624

Fair value of cash flow hedgings (IAS 39) 24

- Gross amount 23 23- Deferred tax (6) (6)

Gains/losses directly recognised in equity - - - 3,912 2,729 6,641

Net profit in 2005 79,418 79,418

Total gains/losses recognised during the year - - - - 79,418 79,418

Fair value of services rendered - stock options plan 25 61 61

Options cancelation of the stock options plan 25 (137) 137 -Dividend payment (45,247) (45,247)

Balance sheet at 31st December 2005 629,293 22,452 (6,060) 4,646 359,047 1,009,378To be read with the attached notes to the Individual Financial Statements


STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

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CASH FLOW STATEMENT


Euro thousand

Notes 2005 2004

Operating Activities

Cash received from Customers 12,935 15,539Cash paid to Suppliers and Employees (13,397) (10,847)Cash generated from operations 18 (462) 4,692

Interest paid 4 (5,525) (3,332)Income taxes paid (49) 121

Cash Flow from operating activities (6,036) 1,481

Investment activities Disposals of tangible assets 9 5 6Disposals of available-for-sale financial investments 14 9,096 3Reimbursement of loans and capital contributions from subsidiaries 13 5,620 195,696Interest received 7 8,747 18Dividends received 7 52,115 40,838Acquisition of available-for-sale financial investments - (12,849)Loans and capital contributions given to subsidiaries 13 (101,855) (261,828)Acquisition of tangible assets 9 (69) (84)

Cash flow from investment activities (26,341) (38,200)

Financing activities Received from non-current loans 21 160,000 99,857Received from issuance of ordinary shares - 147,728Interest and similar income received 4 386 351Reimbursement of loans 21 (81,308) (217,553)Dividends paid (45,247) -

Cash Flow from financing activities 33,831 30,383

Net increase in cash and cash equivalents 1,454 (6,336)

Cash and cash equivalents changes Cash and cash equivalents at the beginning of the year 28 6,364Net increase in cash and cash equivalents 1,454 (6,336) Cash and cash equivalents at the end of the year 17 1,482 28

To be read with the attached notes to the Individual Financial Statements

Notes to the individual financial statements 31 December 2005 and 2004

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Index to the Notes to the Individual Financial Statements Page

1. Activity ........................................................................................................................................ 228 2. Accounting policies........................................................................................................................ 228 3. Staff costs.................................................................................................................................... 233 4. Net financial costs ......................................................................................................................... 234 5. Operating lease ............................................................................................................................ 234 6. Income tax recognised in the income statement................................................................................ 235 7. Profit/loss in subsidiaries and associated companies .......................................................................... 235 8. Exceptional operating profits/losses................................................................................................. 235 9. Tangible assets............................................................................................................................. 236 10. Intangible assets......................................................................................................................... 236 11. Investment property.................................................................................................................... 237 12. Investments in subsidiaries and joint ventures ................................................................................ 237 13. Loans ....................................................................................................................................... 237 14. Available-for-sale financial investments.......................................................................................... 238 15. Taxes ........................................................................................................................................ 238 16. Trade debtors, accrued income and deferred costs .......................................................................... 239 17. Cash and cash equivalents ........................................................................................................... 239 18. Cash generated from operations ................................................................................................... 240 19. Capital and reserves .................................................................................................................... 240 20. Earnings per share ...................................................................................................................... 241 21. Borrowings................................................................................................................................. 242 22. Provisions and adjustments to the net realisable value..................................................................... 243 23. Trade creditors and accrued costs ................................................................................................. 244 24. Financial instruments................................................................................................................... 244 25. Employee benefits ....................................................................................................................... 245 26. Guarantees ................................................................................................................................ 245 27. Contingencies ............................................................................................................................. 245 28. Related parties............................................................................................................................ 246 29. Subsidiaries, joint-ventures and available for sale investments.......................................................... 247 30. Group Companies – Direct and indirect stakes ................................................................................ 248 31. Transactions with related parties ................................................................................................... 249 32. Interests in joint ventures ............................................................................................................ 251 33. Information on environmental matters ........................................................................................... 251 34. Events after the balance sheet date............................................................................................... 251


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1. Activity Jerónimo Martins, SGPS, S.A. (JMH) is the parent company of Jerónimo Martins Group (Group) and has its head office in Lisbon, Rua Tierno Galvan, Torre 3, Piso 9, Letra J, 1099-008 Lisboa. The activity of JMH results mostly in the management of investments in Group companies. JMH employs 63 people (62 in 2004). Jerónimo Martins Group is essentially devoted to the production, distribution and sale of food and other fast moving consumer goods products. The Group operates in Portugal and Poland, and employs 30,753 people (28,914 in 2004). JMH has been listed on Euronext Lisbon (ex-Lisbon and Oporto Stock Exchange) since 1989. The Board of Directors approved these individual financial statements on 20th February 2006. 2. Accounting policies

The principal accounting policies adopted in the preparation of these financial statements are as follows:

2.1 Basis for preparation

All amounts are shown in thousand euros (EUR) unless otherwise stated.

The consolidated and individual financial statements of JMH were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU).

The financial statements were prepared in accordance with the historical cost principle, except for investment property, derivative financial instruments and available-for-sale financial investments referred in note 2.8, which were stated at their fair value (market value).

The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Although these estimates are based on management’s best knowledge of current event and actions, actual results ultimately may differ from those estimates.

It is, however, firmly believed by the management that the estimates and assumptions adopted do not involve significant risks that may, over the course of the coming financial year, cause material adjustments in the value of the assets and liabilities.

Change in Accounting Policy and Bases for Presentation

The Group decided to adopt effective from 1st January 2004, all the recent changes introduced by the International Accounting Standards Board (IASB), until 31st December 2004, that constitute the stable platform of standards applicable by all companies listed on European stock markets in 2005.

In this way, the financial information presented in this annual report is perfectly comparable with the previous year.

During 2005, IASB issued a new accounting standard IFRS 7 – Fnancial Instruments: Disclosures and have made improvements/changes on IAS 1 – Presentation of Financial Statements, IAS 19 – Employee Benefits, IAS 21 – The Effects of Changes in Foreign Exchange Rates, IAS 39 – Financial Instruments: Recognition and Measurement, IFRS 1 – First-time Adoption of International Financial Reporting, IFRS 4 – Insurance Contracts and IFRS 6 – Exploration for and Evaluation of Mineral Resources.

The new IFRS 7 and also the changes made to the above mentioned standards, shoud be applied on 1st January 2006, or after this date, none of which have material effects on the financial statements of the company, and some of which are not applicable to the activities of JMH.

The International Financial Reporting Interpretations Committee (IFRIC), issued in 2005 the interpretations IFRIC 6- Liabilities arising from Participating in a Specific Market and IFRIC 7- Applying the Restatement Approach under IAS 29, which are not applicable to the activities developed by JMH.

2.2 Transactions in foreign currencies

Transactions in foreign currencies are translated into Euros at the exchange rate prevailing on the transaction date.

On the balance sheet date, assets and liabilities expressed in foreign currencies are translated at the exchange rate prevailing on that date and exchange differences arising from this conversion are recognised in the income statement.


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The main exchange rates applied on the balance sheet date are those listed below:

Rate on 31 December 2005

Sterling Pound € 1.4592

2.3 Derivatives

The Group uses derivatives with the sole intention of managing any financial risks to which it is subject. In accordance with its financial policies, the Group does not enter into speculative positions.

Although derivatives carried currently in its books correspond to effective economic hedges against risks to be hedged, not all of them qualify as hedge instruments for accounting purposes, according to IAS 39 rules. Those that do not qualify as hedge instruments are booked on the Balance sheet at fair value and changes to that amount are recognized in the Profit and Loss statements.

Whenever available, fair values are estimated based on quoted instruments. In absence of quotes, fair values are estimated through discounted cash flow methods and option valuation models, in accordance with generally accepted assumptions.

2.4 Hedging operations

Interest rate risk (cash flow hedge)

Whenever expectations surrounding movements in interest rates so justify, JMH tries to anticipate any adverse impact through the use of derivatives, such as, interest rates swaps (IRS), caps and floors, forward rates agreements, etc. The selection process that each instrument is subject to, praises economic contribution more than anything else. The implications of adding any new instrument to a portfolio of derivatives are also taken into account, namely, in terms of volatility reduction it brings to the earnings.

The instruments that qualify as cash flow hedging instruments are booked at fair value on the Balance sheet, and to the degree that they are considered effective, changes to their fair value are initially booked against equity and afterwards reclassified as financial expenses.

The ineffective part of any hedging instrument is recognised directly in the profit and loss. This way, in net terms, all costs associated to the underlying exposure are carried at the interest rate fixed by the derivative instruments.

The profits or losses incurred with the unwinding of any of these interest rate swaps are recognised, through the income statement, on the unwinding date.

2.5 Tangible assets

Tangible assets are recorded at acquisition cost, including all costs necessary to put them in use, net of accumulated depreciation and impairment losses.

Gains and losses on disposals are determined by comparing proceeds with the carrying amount and are included in the operating profit.

Repairs and maintenance costs that do not extend the useful life of these assets are charged directly to the income statement during the financial period in which they are incurred.

Financial lease agreements

Assets used under financial lease contracts relative to which JMH substantially assumes all the risks and rewards of ownership of the leased asset are classified as tangible assets.

Financial lease contracts are recorded at the time they are entered into as assets and liabilities for the lower of fair value of leased assets or present value of outstanding lease payments.

The depreciation of leased assets is based on the policy established by JMH for tangible assets.

Rental payments are split into a financial charge and a reduction of liability. Financial charges are recognised as costs over the lease period, so as to produce a constant periodic rate of return on the lessor’s remaining net investment.

Depreciation

Depreciation is calculated by the straight-line method, on duodecimal basis on acquisition cost according to the useful life estimated for each class of asset. Most important annual depreciation rates are as follows (in %):


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%

Buildings and other constructions 10 Tools 25 Transport equipment 25 Office equipment 10-25 Other tangible fixed assets 10

2.6 Intangible assets

Intangible assets are stated at acquisition cost net of accumulated amortisation and impairment losses.

Research and development expenditure

Research expenditure incurred in the search for new technical or scientific knowledge or alternative solutions are recognised in the income statement as incurred.

Development expenditure is recognised as intangible assets when the technical feasibility of the product or process being developed can be demonstrated and JMH has the intention and capacity to complete their development and start trading or using them.

Computer software

Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred. If those costs are directly associated with development projects that will probably generate future economic benefits (reliably measured), they are recognised as research and development in intangible assets.

Depreciation

Depreciation of the other intangible assets is calculated by the straight-line method, on a duodecimal basis on acquisition cost, over the estimated useful life of the intangible assets, except if that life is considered indefinite.

The most important annual depreciation rates are as follows (in %):

%

Development expenditure 20

2.7 Investments and loans to subsidiaries Investments in subsidiaries, associates and joint ventures are stated at cost. When so justified, provisions are set up for loss of value. Loans to subsidiaries are stated at cost. When so justified, provisions are set up for loss of value.

2.8 Available for sale financial investments Investments other than subsidiaries, joint ventures or associated companies are classified as available for sale financial investments, and recognised in the balance sheet as non current assets. These financial investments are marked to market, i.e., they are stated at the respective listed value as at balance sheet date. When there is medium term expectation of significant decrease of the value below the listed value, provisions are set up to reflect permanent losses. If the investments are unlisted, the Group uses, whenever possible, valuation techniques to obtain the fair value of those investments. These includes the use of recent arm’s length transactions, reference to other instruments that are substantially the same or estimation of discounted cash flow to be received in the future. Not being possible the use of any of these valuation techniques, they are stated at cost. When so justified, provisions for impairment losses are recognised. Unrealised capital gains and losses are recognised directly in equity, until the financial asset is de-recognised, at which time the accumulated gain or loss previously recognised in equity is included in net gains or losses for the period.


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2.9 Investment Property

Investment properties are registered at fair value, determined by specialised independent entities, with appropriate recognised professional qualification and experience in valuations of these kind of assets.

The fair value is based on market values, being this the amount that two independent willing parties would be interested in making a transaction of the asset.

Changes to fair value of investment property are recognised in the income statement, in net financial costs, in accordance with IAS 40, since it is related with the expected return of a financial investment in assets owned for appreciation.

Whenever, as a result of changes in their expected use, tangible assets are transferred to investment property, the transfer value corresponds to their carrying amount, which should correspond to the respective market value on the date of transfer.

If an investment property starts to be used by the business operations, it is transferred to tangible assets and its fair value at the date of transfer becomes its acquisition cost for accounting purposes.

2.10 Customers and debtors

Customers and debtor balances are recorded at fair value of the originated transaction, net of any provision for impairment losses required to restate their expected recoverable amount.

2.11 Cash and cash equivalents

The cash and cash equivalents heading includes cash, deposits on hand and short-term investments with high liquidity. Bank overdrafts are presented as current Borrowings.

2.12 Impairment

Except for investment property (Note 2.9), the JMH assets are considered at each balance sheet date in order to assess for indicators of possible impairment losses. If such indication exists, the assets recoverable amount is estimated.

It is determined the recoverable amount of assets with indication of potential impairment loss. Whenever the carrying value of an asset, or the cash-generating unit to which the same belongs, exceeds its recoverable amount, its value is reduced to the recoverable amount and the impairment loss recognised in the income statement.

Determining the recoverable amount of assets

The recoverable amount of medium and long-term receivables corresponds to the present value of estimated future receipts, using as discount rate the actual interest rate implicit in the original operation. For all other assets, the recoverable amount is the higher of net selling price and value in use.

The value in use of an asset is calculated as the present value of estimated future cash flows. The discount rate used is a pre-tax rate that reflects current market assessments of the time value of money and the specific risks of the asset in question.

The recoverable amount of assets that by them do not generate independent cash inflow is determined together with the cash-generating unit to which these assets belong.

Reversal of impairment losses

An impairment loss recognised in a medium and long-term receivable is only reversed if justification for the increase in the respective recoverable amount is based on an event-taking place after the date the impairment loss was recognised.

Impairment losses for other assets are reversed whenever there are changes in the estimates used to determine the respective recoverable amount. Impairment losses are reversed to the extent of the amount (net of amortisation or depreciation) that would have been determined for the asset if no impairment loss was recognised.

2.13 Capital

Costs incurred with the issuance of new shares are recognised directly in reserves, net of respective taxes.

Own shares purchased are shown at cost as a deduction in equity. When they are disposed, the amount received, net of costs related with the transaction and taxes, are recognised directly in equity.


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2.14 Dividends

Dividends are recognised as liabilities when they are declared.

2.15 Loans

Loans are registered as liabilities at their nominal value. Issuance costs are recognised in the income statement during the loan’s life. This procedure, without material differences, corresponds to the application of amortised cost method. In other words, the costs recorded reflect the application of the effective interest rate on the loans.

2.16 Employees benefit

2.16.1 Post-employment benefits (Retirement)

Defined contribution plans

Defined contribution plans are pension plans for which the Group makes defined contributions to independent entities (funds), and for which it has no legal or constructive obligation to pay any additional contribution at the time when the employees come into said benefits.

JMH contributions to defined contribution plans are recognised as expenses at the time they are incurred.

Defined benefit plans

Defined benefit plans are pension plans where the company guarantees the attribution of a certain benefit to the employees included in the plan at the time such employees retire.

The Group’s obligation for defined benefit plans is estimated, for each plan separately, every semester at the accounts closing date by a specialised independent agent.

Actuarial valuation is made using the immediate rents method, having present that the plans includes only retired ex-workers. The discount rate is the interest rate on medium and long-term risk-free bonds. The obligation thus determined is shown in the balance sheet net of plan assets.

The year’s current service costs, interest, return on plan assets and actuarial gains or losses are recognised as costs or income for the year.

The effect on defined benefit liability arising from improvements on the plan, related to past services costs, are recognised as an expense on a straight-line basis over the average period until the benefits become vested, except the effect related to reteired beneficiaries that is recognised immediately as cost in the year that the improvements are done.

2.16.2 Stock Options

In 2005 the Group extinguished the compensation plan based on shares, which assumed the characteristics of an equity-settled, in other words, where equity instruments are attributed to its senior staff.

The fair value of services provided by employees in compensation for the granting of options is recognised as cost against a Stock Options reserve within equity, during the vesting period.

The value recognised as a cost corresponds to the fair value of the options at grant date.

With the extinguishment of the plan, the Group recognised in 2005, all of the remaining fair value, that would be otherwise recognised in the future years.

2.17 Provisions Provisions are booked in the balance sheet whenever the Group has a present obligation (legal or implicit) as a result of a past event and it is probable that a rationally estimated outflow of resources embodying economic benefits will be required to settle the obligation. para liquidar a obrigação.

2.18 Suppliers and other creditors Suppliers and other creditors’ balances are stated at their nominal value, due to the fact that they are short term payables, and the impact of applying the amortised costs would not be material. The benefits of the


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application of this procedure in the financial statements would not compensate the costs incurred with that.

2.19 Recognition of revenue

Services rendered Revenues from the services rendered are recognised as income in accordance with their stage of completion as of the balance sheet date. Dividends

Dividends are recognised as revenues at the time they are declared.

2.20 Costs

Operational Leasing

Payments made for operational leasing contracts are recognised in the income statement on a linear basis for the duration of same contracts.

Net financial costs

Net financial costs represent the interest on borrowings, the interest on investment made, dividends, foreign exchange gains and losses, gains and losses in financial instruments that do not qualify for hedging accounting, gains and losses in the valuation of investment property, costs and income with financing operations.

Net financial costs are accrued in the income statement in the period in which they are incurred.

2.21 Income tax

Income tax includes current and deferred taxes. Income tax is recognised in the income statement except when relating to gains or losses directly recognised in equity, in which case it is also stated directly in equity.

Tax on current income is calculated in accordance with tax criteria prevailing as of the balance sheet date.

Deferred tax is calculated in accordance with the balance sheet liability method on temporary differences between the book value of assets and liabilities and the respective tax base.

The measurement of deferred tax assets and liabilities should reflect the tax consequences that would follow from the manner in which the Group expects, at the balance sheet date, to recover or settle the carrying amount of its assets and liabilities.

The rate used to determine deferred tax is that in force during the period when temporary differences are reversed.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which temporary differences can be utilised. Deferred tax assets are revised on an annual basis and reduced when it is no longer probable that they may be used.

2.22 Segment information No segment information has been provided in these individual financial statements. Detailed information is presented in the consolidated financial statements. 3. Staff costs

Other staff costs include namely labour accident insurance, social action costs, training costs and indemnities.

2005 2004

Wages and salaries 4,235 3,332

Social security 410 350

Employee benefits (180) (780)

Other staff costs 543 149

5,008 3,051


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The number of employees at the end of 2005 was 63 (2004 was 62). The company’s average number of employees during the year was 61 (52 in 2004). 4. Net financial costs

2005 2004

Financial costs

Interest expense (5,306) (13,579)Fair value in financial instruments that do not qualify for hedge accounting (654) (335)

Other financial costs (393) (1,504)

(6,353) (15,418)

Financial gains

Interest gains 13 335Other financial gains 374 8

387 343

Net financial costs (5,966) (15,075)

Other financial costs include, namely, stamp tax and issuance costs related to non-current debt recognised in the income statement for the loan’s term. Changes to fair value in financial instruments that do not qualify for hedge accounting are referred in note 24.2. 5. Operating lease

The cost recognised in the income statement as operating leases are as follows:

2005 2004

Buildings – Third parties 198 188Buildings - Group 356 324Plants & tools – Third parties 15 14Vehicles – Third parties 261 237IT equipment – Third parties 3 1Others – Third parties 22 11

Total cost recognised in the income statement 855 775

The total costs with operatings leases includes EUR 23 thousand regarding occasional renting.

5.1 Vehicles rents Vehicle lease contracts entered by JMH are treated as operating lease. These contracts do not include renewal or purchase option at termination date, nor any amount relating to contingent rents. All contracts may be cancelled by means of prior notice and do not provide any type of restrictions concerning dividends or debt. The minimum lease payments related with vehicles lease are as follows:

2005 2004

Payments in less that 1 year 198 217

Payments between 1 and 5 years 103 183

Payment in more that 5 years - -

Total future payments 301 400

As referred above, all the contracts may be cancelled upon the payment of a penalty clause. At the end of 2005, the liabilities arising from penalty clauses were EUR 93 thousand (2004: EUR 146 thousand).


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6. Income tax recognised in the income statement

6.1 Current tax

2005 2004

Current tax

Current tax of the year (39) (54) Adjustment to prior year estimation (1) -

(40) (54) Deferred tax Change to the recoverable amount of tax losses and temporary differences from previous years

6,777 -

6,777 -

Total income taxes 6,737 (54)

6.2 Reconciliation of the effective tax rate

2005 2004

Profit/loss before taxes 72,681 32,440

Income tax using the Portuguese corporation tax rate – 27.5% (19,987) (8,921)

Non taxable or non recoverable results 19,987 8,921

Change to the recoverable amount of tax losses and temporary differences from previous years

6,777 -

Adjustment to prior year estimation (1) -

Results subject to special taxation (39) (54)

Income tax of the year 6,737 (54)

Effective tax rate (9.27%) 0.17%

On 31 December 2005 a deferred tax was recognised for part of the tax losses from prior years and temporary differences outstanding on balance sheet at this date, in the amount of EUR 6,777 thousand, as explained in note 15. 7. Profit/loss in subsidiaries and associated companies

2005 2004

Dividends received 51,091 39,682

Interests in loans to subsidiaries and associated companies 10,279 207

Increase/decrease of financial investments adjustments1 5,337 (1,269)

Increase/decrease of provisions for contingencies1 7 3,910

66,714 42,530

1 In December 2004, these amounts were presented in “Non-recurrent profit/loss”, since they are related to investments in subsidiaries, were reclassified. 8. Exceptional operating profits/losses 2005 2004

Extinguishment of Jerónimo Martins Stock Options Plan 7,708 -

7,708 -


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9. Tangible assets 9.1 Changes occurred during the year

Gross assets

Opening Transfers and Closing balance Increases Disposals write-offs balance

Buildings and other constructions

130 - - - 130

Transport equipment 121 - (60) - 61

Tools and utensils 2 - - - 2

Office equipment 1,675 29 (2) (47) 1,655

Other tangible assets 389 - - - 389

2,317 29 (62) (47) 2,237

Accumulated depreciation and impairment

Opening Transfers and Closing balance Increases Disposals write-offs balance

Buildings and other constructions

33 13 - - 46

Transport equipment 121 - (60) - 61

Tools and utensils 2 - - - 2

Office equipment 1,482 80 (2) (44) 1,516

Other tangible assets 260 33 - - 293

1,898 126 (62) (44) 1,918

Net book amount 419 319

9.2 Equipment under financial lease JMH has IT equipment under financial leases. These leases include a purchase option at the end of the contract and do not include any amount relating to contingent rents or any restriction of any nature concerning dividends or debt. Unsettled liabilities on financial lease contracts are referred in note 21.5. The value of assets under financial lease is shown below:

2005 2004

Administrative and IT Equipment

Tangible assets 225 291

Accumulated depreciation (170) (198)

Net book amount 55 93

9.3 Guarantees No assets have been pledged as security for the fulfilment of bank or other obligations. 10. Intangible assets Intangible assets, fully depreciated in the end of year 2005, are made up of research and development expenses and include expenses borne with the implementation of the SAP information system, which became operational in 1999, in the amount of EUR 247 thousand.


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11. Investment property JMH owns a building in Vila Franca de Xira (land and building), which is not allocated to the operational activity and unknown destination. This building was revaluated to its market value and, in 2005, no change occurred in its state or in current market circumstances.

2005 2004

Opening balance 2,459 2,459

Changes to market value 11 -

Depreciation - -


12. Investments in subsidiaries and joint ventures 12.1 In subsidiaries

2005 2004

Net value at 1 January 228,656 227,620

Increases - -

Decreases - -

Increases in provisions for impairment loss (49) (14)

Decreases in provisions for impairment loss 5,467 1,050

Net value at 31 December 234,074 228,656

12.2 In joint ventures The investment in joint ventures was EUR 6,285 thousand (2004: EUR 6,285 thousand) – see note 32. 13. Loans 13.1 Loans to subsidiaries

Non-current loans 2005 2004


Increases 95,354 4,129

Decreases (5,620) (195,042)

Increases in provisions for impairment loss (81) (2,305)

Decreases in provisions for impairment loss - -

Transfer from current loans - 351


Current loans 2005 2004


Increases - 100,000

Decreases - (654)

Transfer to non-current loans - (351)


Current loans are liable to interest rates at normal market levels. Non-current loans are taken as supplementary capital lump sums (which do not bear interest), and as medium and long-term shareholders loans (remunerated at normal market rates).


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13.2 Loans to joint ventures

Non-current loans 2005 2004

Net value at 1 January 157,699 -

Increases 6,500 157,699

Decreases - -


Non-current loans are granted as medium and long term shareholders loans remunerated at normal market rates. 14. Available-for-sale financial investments 2005 2004

BCP shares 35,080 28,456JM stock options trust plan (see note 25) - 1,402

35,080 29,858

As of 31 December 2005, all BCP shares in the company’s portfolio were marked to market – price as of 31 December 2005 of Euro 2.33 – Euronext Lisbon.

Changes in the fair value of these assets are recognised directly in equity and originated a positive variation of EUR 4,629 thousand.

15. Taxes

15.1 Deferred tax assets and liabilities Following the policy mentioned in note 2.21, until 2004, the company did not recognize deferred tax assets on tax losses because it did not expect to make enough future tax profits to recover the deferred tax assets mentioned bellow. In 2005, the company began to generate a positive tax result. Furthmore, the company’s medium/long term plans point towards the start of enough future tax profits to recover part of the tax losses of previous years. A deferred tax on other temporary differences outstanding in balance sheet was also recognized, as detailed below. Deferred taxes are presented in balance sheet as follows:

2005 2004

Deferred tax assets 7,221 -

Deferred tax liabilities (450) -

6,771 -

Movement in deferred taxes during the year:

01/01/2005

Impact on results

Impact on equity

31/12/2005

Deferred tax liabilities

Revaluation of assets - (450) - (450)

- (450) - (450)

Deferred tax assets

Pension costs - 3,995 3,995Recoverable losses - 2,885 2,885Fair value in derivative financial instruments - 347 (6) 341

- 7,227 (6) 7,221

Net change in deferred tax - 6,777 (6) 6,771


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15.2 Unrecognised deferred taxes on tax losses The company did not recognise deferred tax assets relative to tax losses in respect of which, with reasonable assurance, no sufficient tax profits are expected to guarantee the recovery of deferred tax assets. Unrecognised deferred taxes on tax losses are as follow:

2005 2004

Tax losses 28,167 54,425Tax rate 27.5% 27.5%Deferred tax assets (Unrecognised) 7,746 14,967

15.3 Taxes receivable and payable

Taxes receivable 2005 2004

Income tax receivable 92 72

VAT receivable – Outside Portugal 1 1

93 73

Taxes payable

VAT payable 154 181

Income tax payable 37 26

Income tax withheld 87 73

Social security 44 44

Municipal real estate tax 38 38

360 362

16. Trade debtors, accrued income and deferred costs 2005 2004

Subsidiaries and associated companies 3,977 1,936

Receivables from suppliers 345 31

Staff 22 13

Other debtors 31 10

Accrued income 3,846 1,552

Deferred costs 995 567

9,216 4,109 Amounts entered in subsidiaries and associated companies concern mainly invoices issued to group companies relating to services provided of various natures. Accrued income respects namely to EUR 2,479 thousand regarding the rendering of technical and administrative services to subsidiaries and joint ventures and EUR 1,352 thousand of interest receivable. Deferred costs heading includes EUR 639 thousand of prepaid expenses with bonds, bank loans and commercial paper, EUR 236 thousand regarding prepaid interests and M EUR 120 thousand of other costs relating to future periods, paid in 2005 or when not paid, already charged by the competent entities. 17. Cash and cash equivalents 2005 2004

Bank deposits 34 20

Short-term investments 1,440 -

Cash and cash equivalents 8 8

1,482 28


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18. Cash generated from operations

2005 2004

Net results 79,418 32,387

Adjustments for: Taxes (6,736) 54 Amortisations and depreciations 126 177 Profit/loss from stock options plan 61 76 Net financial costs (56,440) (25,943) Profit/loss in subsidiaries (5,337) 1,269 Profit/loss in available-for-sale financial investments (7,708) Profit/ Losses on tangible assets disposals (5) 3

3,379 8,023 Changes in working capital: Trade debtors, accrued income and deferred costs (3,610) 2,888 Trade creditors, accrued costs and deferred income 809 (197) Provisions and employee benefits (1,040) (6,022)

(462) 4,692

19. Capital and reserves

19.1 Share capital and share premium account The authorised share capital is represented by 125,858,644 ordinary shares (2004: 125,858,644), at par value EUR 5 (five Euros) each. The owners of ordinary shares have the right to receive dividends in accordance with the deliberations of the General Meeting, and have the right to 1 vote for every 100 shares owned. There are no preferential shares. Rights relating to shares held in portfolio by the company are suspended until they are placed on the market again. During the year 2005, no changes occurred in the amount of EUR 22,452 thousand showed in share premium account.

19.2 Own shares

The reserve for own shares reflects the cost of shares held by the company in portfolio. As of 31 December 2005, the company held 171,800 own shares (2004: 171,800).

19.3 Costs with share capital increase

The costs regarding the share capital increase, approved in the General Meeting of 15 April 2004 amounted EUR 2,272 thousand and were booked directly in equity (debit of retained earnings).


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19.4 Reserves

Cash Flow Hedging reserve

Available-for-sale financial instruments

Stock options reserve

Other reserves Total

Balance as at 1 January 2004 - - - 394,543 394,543

Reclassification to retained earnings (394,543) (394,543)

Fair value adjustment of available-for-sale financial instruments:

734 734

Fair value of services rendered - stock options 76 76

Balance as at 1 January 2005 - 734 76 - 810

Fair value of cash flow heldging instruments (IAS 39):

- Gross value 23 23 - Deferred tax (6) (6)

Fair value adjustment of available-for-sale financial instruments

3,895 3,895

Fair value of services rendered - stock options 61 61

Options maturity of the stock options plan (137) (137)

Balance as at 31 December 2005 17 4,629 - - 4,646

19.5 Retained earnings

On 31st December 2005, the total amount of retained earnings was EUR 359,047 thousand, resulting from profit generated in the financial year, and previous years. Of this amount, the following was not able to be distributed: EUR 29,256 thousand corresponding to the legal reserve (articles 218, 295 and 296 of the Legal Code for Commercial Companies); and EUR 6,060 thousand corresponding to the own shares reserve. (Article 324 of the Legal Code for Commercial Companies).

19.6 Dividends In accordance with the dividend distribution policy announced several years ago and described in chapter 1.5 – Corporate Governance, which is an integral part of the consolidated annual report, the Board of Directors proposes to the shareholders the distribution of the amount 52,788,474.48 Euros, which corresponds to a dividend per share of EUR 0.42. 20. Earnings per share

20.1 Basic and diluted earnings per share

Basic earnings per share are calculated based on the net profit of EUR 79,418 thousand (2004: profit of EUR 32,387 thousand) attributable to ordinary shareholders and on weighted average outstanding ordinary shares, numbering 125,686,844 (2004: 110,850,778). The diluted earnings per share are equal to basic earnings per share as there are no dilution events.

20.2 Weighted average outstanding shares

2005 2004

Ordinary shares issued at the beginning of year 125,858,644 95,858,644

Own shares at the beginning of year 171,800 171,800

Own shares acquired during the year - -

Ordinary shares issued during the year (30/06/2004) - 30,000,000125,686,844 110,850,778


242

20.3 Diluted net results attributable to ordinary shareholders

2005 2004

Net profit of the year attributable to ordinary shareholders 79,418 32,387

Diluted net profit of the year attributable to ordinary shareholders 79,418 32,387

20.4 Basic and diluted weighted average ordinary shares 2005 2004

Weighted average ordinary shares 125,686,844 110,850,778

Diluted weighted average ordinary shares 125,686,844 110,850,778

Earnings per share – Euros 0.632 0.292

Diluted earnings per share – Euros 0.632 0.292

21. Borrowings

This note provides information on the terms of loan contracts and other forms of financing. For further details regarding the company’s exposure to interest rates see note 24.

21.1 Current and non-current loans 2005 2004 Non-current loans

Bank loans – Commercial Paper 110,000 -

Bond loans 90,000 40,000

Financial lease liabilities 9 34

200,009 40,034

Current loans

Bank loans 22,000 22,000

Bank overdrafts 21 81,329

Financial lease liabilities 33 60

22,054 103,389

21.2 Loan terms and maturities

Average rate

Total Payable in less than 1

year

Payable between 1 and 5 years

Bank loans 2,95% 22,000 22,000 -

Bank loans – Commercial Paper 2,68% 110,000 - 110,000

Bond loan: JMH/03 3,63% 40,000 40,000

Bond loan: JM2009 e JM2010 2,92% 50,000 - 50,000

Bank overdrafts 3,33% 21 21 -

Financial lease liabilities 7,18% 42 33 9

222,063 22,054 200,009

21.3 Bond loans 2005 2004

Bond loan: JMH/03 40,000 40,000

Bond loan: JM2009 e JM2010 50,000 -

90,000 40,000


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Non-convertible bonds In October 2003, the company issued a bond loan in the amount of EUR 40,000 thousand, with variable interest rate, with maturity in 2008. During the year, the bond loan terms were renegociated, with reduction of the spread applicable to the cupon interest rate, and the maturity was extended to 2010. In August 2005, the company issued a new bond loan, in the amount of EUR 50,000 thousand, with variable interest rate, with maturity in 2009 and 2010. The redemption date of bond loans is as follows:

Maturity Amount

2009 25,000

2010 65,000

21.4 Bank loans: Commercial paper JMH contracted several bank loans in the form of a commercial paper programme, in the global amount of EUR 195,000 thousand, with variable interest rate. In the end of 2005, from the total contracted, only EUR 110,000 thousand were in use, with the following maturity:

Maturity Amount

2008 10,000

2010 100,000

21.5 Financial lease liabilities The responsibilities with financial lease is as follow:

2005 2004

Payments in less than 1 year 34 62

Payments between 1 and 5 years 10 38

Total future payment 44 100

Payment of future interest (2) (6)

Present value of liabilities 42 94

22. Provisions and adjustments to the net realisable value

Opening balance

Provisions set up

Provisions used

Closing balance

Doubtful debtors 187 - (187) -

Investments in subsidiaries 271,243 49 (5,467) 265,825

Loans to subsidiaries 26,110 82 - 26,192

Available-for-sale financial investments 1,995 - (1,995) -

Employee benefits 15,560 - (1,033) 14,527

Other provisions 20 - (8) 12

315,115 131 (8,690) 306,556


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23. Trade creditors and accrued costs 2005 2004

Payables to subsidiaries 94 86

Other trade creditors 251 464

Other non-trade creditors 20 11

Accrued costs 2,645 1,555

3,010 2,116

The heading accrued costs is made up of salaries and wages payable in the amount of EUR 1,107 thousand, and interest payable in the amount of EUR 975 thousand. The remaining EUR 563 thousand respects to various costs (utilities, insurance, consultants, rents, etc.), relating to 2005 and not invoiced by the respective entities prior to the end of the year. 24. Financial instruments

24.1 Interest rate risk Portfolio of Interest Rate Derivatives (IRD) The company uses derivatives, such as swaps and options, to manage its exposures to interest rate risks. Derivatives are efficient, low cost tools to hedge against adverse effects on cash flows associated with debt service payments, namely interest due.

At the end of 2005, the company had the following positions open in IRD:

Designation Trade date Amount Marked-to-Market (M2M)

KO Cap 14-Nov-03 €10,000,000 (€69,796) Maxi Cap Floored 10-Dez-03 €10,000,000 (€87,469)

Interest Rate Swap 03-Mar-04 €10,000,000 (€108,875) Lowered Coupon Swap 20-Abr-04 €10,000,000 (€921,763)

Quanto 2*6M CHF 20-Abr-04 €10,000,000 (€108,138)

Total €50,000,000 (€1,296,041)

24.2 Impacts on Financial Statements The M2M of the referred financial instruments is booked as liabilities, in the heading derivative financial instruments, in the amount of EUR 1,240 thousand (2004: EUR 548 thousands) and in the heading Trade creditors and accrued cost in the amount of EUR 56 thousand (2004: EUR -9 thousands), related to interest already incurred. Starting 1st January 2005, the interest rate swap qualified as cash flow hedging accounting. The fair value change of the effective hedge component was booked in reserves. 2005 2004

Fair value of the financial instruments at 1st January (539) (179)

(Receivings) / Payments made (54) (25)

Fair value of financial instruments that do not qualify as hedge accounting (P&L) (654) (335)

Fair value of financial instruments that qualify as hedge accounting (Reserves) 23 -

Interest expense from financial instruments that qualify as hedge accounting (P&L) (72) -

Fair value of the financial instruments at 31st December (1,296) (539)


245

25. Employee benefits

25.1 Defined contribution plans for employees, with a third party managed fund The company has a defined contribution plan for all employees who have permanent contract status, with a third party managed fund. This kind of plan allows costs control related to the attribution of benefits, while simultaneously creates an incentive for the employees to participate in their own pension scheme. Changes in the year: 2005 2004

Liabilities at 1 January - 78

Staff costs on the year 157 21

Contributions on the year (157) (99)

Liabilities at 31 December - -

25.2 Group managed defined benefit plans for former employees Independent actuaries evaluate this plan 6-monthly. According to the actuarial calculation reported on 31 December 2005 the liability is EUR 14,527 thousand, provisioned in its entirety in employee benefits. Changes in the year:

2005

Balance at 1 January 15,560

Interest costs 766

Actuarial (gains)/ losses (1.164)

Retirement pensions paid in (635)

Balance at 31 December 14,527


Mortality table TV 73/77

Discount rate 4.5%

Pensions growth rate 3%

25.3 Compensation Based on JM shares

In 2005 the compensation plan based on Jerónimo Martins shares, which consists of purchase options in Jerónimo Martins stock - Stock Options Plan Trust, was extinguished.

According to last years addopted principles there were no options to exercise on 31 December 2005, and the amount of EUR 61 thousand was recognised as cost of the year.

Due to the maturity of the options, the amount recognised in Stock Options Reserve was transferred to retained earnings (EUR 137 thousand).

26. Guarantees The guarantees given to D.G.C.I (Portuguese Tax Authority) amounts to EUR 56 thousand. 27. Contingencies JMH holds a stake in a company that has a negative shareholders’ equity. The company set up a provision for financial investments that reduces investment down to zero. Additionally, there is a provision for risks and


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contingencies relating to potential liabilities associated with negative shareholders’ equity. 28. Related parties 28.1 Benefits attributed to directors Complementary retirement plans Directors of Jerónimo Martins, SGPS, S.A. board are entitled to complementary retirement benefits, providing they have been board members for at least 10 years, and retire at 65 years old in the function. This benefit corresponds to a complementary pension so as to receive an amount equivalent to the net salary earned as of retirement date. At the Annual General Meeting in 2005, an alternative retirement pension plan was approved. It is a fixed-contribution Pension Plan, with a pre-determined contribution value, with the value of benefits depending on earnings received. The Remuneration Committee defines the contribution rate of the company and of the initial contribution. Participants in the Plan are the Executive Directors of the Company, and those Directors who opted for the current Pension Plan forewent eligibility for the Retirement Complement Plan, which had to be expressly and irretrievably renounced. 28.2 Remuneration paid to directors The members of the board of directors received the following remuneration (fixed, variable and contributions to the pension plans):

2005 2004

Executive directors 1.968 1.683

Non-executive directors 1.292 598

3.260 2.281

The amount considered remuneration for non-executive Directors, in 2005, included EUR 10 thousand relating to remuneration paid to non-Executive Directors taking part in the Auditing Commission (2004: EUR 3 thousand. None of the Directors received any additional remuneration from any other Group company.


247

29. Subsidiaries, joint-ventures and available for sale investments The direct investments owned by JMH, at 31 December 2005, are as follows:

Head

% Stake held Total Shareholder’

s Net profit Companies Notes Oficce Owned directly assets Equity /loss

Investments in subsidiaries

Jerónimo Martins – Distrib. de Prod. de Consumo, Lda. a) Lisboa 99.99% 1,746 130,739 5,054 (614)

Recheio, SGPS, S.A. a) Lisboa 15.93% 23,850 841,405 706,571 (19,262)

Desimo – Desenvolvimento e Gestão Imobiliária, Lda. a) Lisboa 100.00% 50 604 152 (5)

JMR - Gestão de Empresas de Retalho, SGPS, SA a) Lisboa 51.00% 168,300 1,331,295 1,028,189 3,677

Comespa-Gestão de Espaços Comerciais, S.A. a) Lisboa 51.00% 26 2,621 235 114

Jerónimo Martins Serviços, S.A. a) Lisboa 100.00% 50 2,974 50 2

Servicompra - Consultores de Aprovisionamento, Lda a) Lisboa 96.00% 5 198,878 198,878 (2)

Imocash – Imobiliário de Distribuição, S.A. a) Lisboa 1.00% 30 53,542 6,055 1,303

Larantigo – Sociedade de Construções, S.A. a) Lisboa 0.20% 1 5,325 5,301 (66)

Hermes - Soc. de Invest. Mobiliários e Imobiliários, Lda. a) b) Funchal 99.99% 999 38,864 37,455 1,516

Eva – Soc. de Investimentos Mobiliários e Imobiliários, Lda

a) Funchal 5.60% 28 71,994 71,994 23,149

PSQ – Soc. de Investimentos Mobiliários e Imobiliários, Lda

a) Funchal 11.00% 55 23,542 23,541 (175)

Friedman – Soc. de Investim. Mobiliários e Imobiliários, Lda

a) Funchal 100.00% 5 36 33 10

JMFC1 – Jerónimo Martins Finance Company, Limited a) b) d) Dublin 100.00% 100 2 (32) (74)

JM Holdings UK, Ltd a) b) Londres 100.00% 8,548 37 16 (25)

Soc. Com. de Representações Socorel Lda a) b) Angola 90.00% 7 c) c) c)

Empal - Emp. Ind. de Produtos Alimentares, Lda. a) b) Angola 60.00% 18 c) c) c)

Investments in joint-ventues

Fima/VG - Distribuição de Produtos Alimentares, Lda Lisboa 31.23% 5,400 364,836 49,502 22,970

LeverElida – Distrib. de Prod. Limp. e Higiene Pessoal, Lda.

Lisboa 40.00% 2,000 183,936 20,540 14,540

IgloOlá - Distribuição de Gelados e UltraCongelados, Lda Lisboa 26.00% 1,300 215,158 19,045 13,045


BCP - Banco Comercial Português, S.A. b) Porto 0.42% 15,056 76,849,602 4,602,020 840,487

a) For the purposes of the article 486, paragraph 3, of the Portuguese Commercial Companies Code, we declare that we hold the control of the companies indicated.

b) A value adjustment provision has been set up

c) Not available d) This company presents annual financial statements ending November 30


248

30. Group Companies – Direct and indirect stakes Table below describes the companies directly and indirectly held by Jerónimo Martins, SGPS, SA, as of 31 December 2005 according to business areas: Retail Portugal

Companies

Head Oficce

% Owned

JMR – Gestão de Empresas de Retalho, SGPS, S.A. Lisboa 51.00

Pingo Doce – Distribuição Alimentar, S.A. Lisboa 51.00

Supertur – Imobiliária, Comércio e Turismo, S.A. Lisboa 51.00

Feira Nova – Hipermercados, S.A. Lisboa 51.00

Bazar Novo – Distribuição de Produtos Não Alimentares, Lda. Lisboa 51.00

Gestiretalho – Gestão e Consultoria para a Distribuição a Retalho, S.A. Lisboa 51.00

Imoretalho – Gestão de Imóveis, S.A. Lisboa 51.00

Casal de São Pedro – Administração de Bens, S.A. Lisboa 51.00

Jerónimo Martins Finance Company (2), Limited Dublin (Irland)

51.00

EVA – Sociedade de Investimentos Mobiliários e Imobiliários, Lda. Funchal 51.00

Moser & Branco – Distribuição Alimentar, S.A. Carregal do Sal

51.00

Cunha & Branco – Distribuição Alimentar, S.A. Águeda 51.00

Electric Co – Distribuição de Produtos não Alimentares, Lda. Lisboa 51.00

Dantas & Vale, S.A. Lisboa 51.00

Madeira

Companies

Head Oficce

% Owned

Funchalgest– Sociedade Gestora de Participações Sociais, S.A. Funchal 75.50

João Gomes Camacho, S.A. Funchal 75.50

Lidosol II – Distribuição de Produtos Alimentares, S.A. Funchal 75.50

Idole–Utilidades, Equipamentos e Investimentos Imobiliários, Lda. Lisboa 75.50

Lidinvest – Gestão de Imóveis, S.A. Funchal 75.50

Wholesale Portugal

Companies

Head Oficce

% Owned

Recheio, SGPS, S.A. Lisboa 100.00

Recheio-Cash & Carry, S.A. Lisboa 100.00

Imocash – Imobiliário de Distribuição, S.A. Lisboa 100.00

Larantigo – Sociedade de Construções, S.A. Lisboa 100.00

PSQ – Sociedade de Investimentos Mobiliários e Imobiliários, Lda. Funchal 100.00

Marketing and Distribution Services and Specialised Retail

Companies

Head Oficce

% Owned

Jerónimo Martins – Distribuição de Produtos de Consumo, Lda. Lisboa 99.99

Caterplus – Comercialização e Distribuição Produtos de Consumo, Lda. Lisboa 49.00

Hussel Ibéria – Chocolates e Confeitaria, S.A. Lisboa 51.00

PGJM – Importação e Distribuição de Perfumes e Cosméticos, S.A. Lisboa 49.99

Jerónimo Martins – Restauração e Serviços, S.A. (ex. Centro Dominó) Lisboa 100.00


249

Retail Poland

Companies

Head Oficce % Owned

Belegginsmaatschappij Tand B.V. Rotterdam (Holland) 100.00

Jerónimo Martins Dystrybucja S.A. Poznan (Poland) 100.00

Tip Marken – Discount Handelsgesellschaft mbh Sarstedt (Germany) 100.00

Optimum Mark Sp. Zo. O, Poznan (Poland) 100.00

Industry The above mentioned companies results from the joint-venture with Unilever Group:

Companies

Head Oficce

% Owned

Fima/VG Distribuição de Produtos Alimentares, Lda. Lisboa 51.00

Fima - Produtos Alimentares, S.A. Lisboa 51.00

Unilever Bestfoods Portugal – Produtos Alimentares, S.A. Lisboa 51.00

Victor Guedes – Indústria e Comércio, S.A. Lisboa 51.00

LeverElida – Distribuição de Produtos de Limpeza e Higiene Pessoal, Lda. Lisboa 40.00

Indústrias Lever Portuguesa, S.A. Lisboa 40.00

IgloOlá – Distribuição de Gelados e Ultracongelados, Lda. Lisboa 26.00

Iglo – Indústria de Gelados, S.A. Lisboa 26.00

Gelcasa – Comercialização de Gelados e Ultracongelados, S.A. Lisboa 26.00

Other

Companies

Head Oficce % Owned

JM Holdings UK, Ltd London (England)

100.00

Hermes–Sociedade Investimentos Mobiliários e Imobiliários, Lda. Funchal 100.00

Friedman - Sociedade Investimentos Mobiliários e Imobiliários ,Lda. Funchal 100.00

Jerónimo Martins Finance Company (1), Limited Dublin (Irland)

100.00

Desimo – Desenvolvimento e Gestão Imobiliária, Lda. Lisboa 100.00

Jerónimo Martins – Serviços, S.A. Lisboa 100.00

Servicompra – Consultores de Aprovisionamento, Lda. Lisboa 100.00

Jerónimo Martins Retail Services, S.A. Klosters (Switzerland)

51.00

Comespa - Gestão de Espaços Comerciais, S.A. Lisboa 51.00

31. Transactions with related parties

Note: transactions with related parties are always carried out at market prices. 31.1 Technical and administrative services provided JMH provides a set of technical, administrative and management services to operational companies within the Group, being remunerated for those services. In the light of the above, income from technical and administrative services provided during 2005 was EUR 11,857 thousand (2004: EUR 10,437 thousand), as follows:

Companies 2005 2004 Joint-ventures 3,869 3,962Subsidiaries 7,988 6,475

Total 11,857 10,437


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31.2 Financial services The Financial Operations Division of the holding ensures part of the financial management of Group companies. This management includes acting on behalf of the companies in the negotiation and contracting with banks and other financial institutions, debt conditions and application of funds. The purpose of this centralized management is to obtain more favourable conditions for funding and applications than would be obtained if negotiated on an individual basis. For this centralised management, JMH charged the Group companies for EUR 983 thousand (2004: EUR 1,322 thousand). This management includes also the centralised threasury, responsible for payments to suppliers, employees and other entities, as well as daily cash management. For this management, JMH charged the Group companies for EUR 413 thousand (2004: EUR 148 thousand). 31.3 Lease of property JMH develops its activity in premises rented to a subsidiary, which represented costs of EUR 356 thousand (2004: EUR 344 thousand). 31.4 Supplementary income JMH makes an annual debit to a joint-venture company relating to a sales commission. In 2005, this debit was EUR 103 thousand (2004: EUR 101 thousand). 31.5 Loans to subsidiaries (current and non-current loans) JMH granted loans to subsidiaries, which generated interest in the amount of EUR 10,279 thousand (2004: EUR 207 thousand).

Companies 2005 2004 Joint-ventures 5,841 160Subsidiaries 4,438 47

Total 10,279 207 31.6 Debts relating to staff As a group, JMH takes advantage of the synergies existing amongst its various companies and frequently transfers staff from one company to another, according to the needs of the various businesses. In 2005, total costs incurred with personnel from other companies amounted to EUR 2,039 thousand (2004: EUR 2,242 thousand). 31.7 Open balances as of 31 December 2005 Subsidiaries Joint-ventures Total

Loans* 100.411 164.199 264.610 100.411 164.199 264.610 Trade debtors, accrued income and deferred costs - Customers and other debtors 2.786 1.191 3.977 - Receivable interest 6 1.346 1.352 - Accrued income – services 2.479 - 2.479 5.271 2.537 7.808 Trade creditors and accrued costs - Suppliers and other creditors 94 - 94 - Accrued costs - services 330 - 330 424 - 424 * Do not include amounts related to supplementary capital


251

32. Interests in joint ventures

The company has interests (directly and indirectly) in the following joint ventures:

● Fima – This group of companies manufactures and sells food products, specifically edible fats and drinks, and private labels as well as Unilever Group brands. JMH holds 51% of the capital of Fima Group;

● Lever - This group of companies manufactures and sells personal, home and industrial hygiene products for the hotel and food sectors. The brands marketed are property of the Unilever Group. JMH holds 40% of the capital of Lever Group;

● Iglo – This group of companies manufactures and markets ice cream and frozen and deep frozen food products under Unilever Group brands. JMH holds 26% of the capital of Iglo Group.

33. Information on environmental matters As referred in the management report, there are no environmental matters likely to affect the company’s financial performance and situation, and the company is unaware of any contingent liability or obligation concerning environmental matters. Likewise, the company did not recognise in its financial statements any relevant costs or investment of environmental nature. 34. Events after the balance sheet date At the date this report was issued, no significant events occurred that should be disclosed. Lisbon, 20 February 2006 The Certified Accountant The Board of Directors



Report of the Auditors for Statutory and Stock Exchange Regulatory Purposes in respect of the Individual Financial Information

(Free translation from the original version in Portuguese)

Introduction

1 As required by law, we present the Report of the Statutory Auditors for Stock Exchange Regulatory Purposes in respect of the Financial Information included in the Directors’ Report and the financial statements of Jerónimo Martins, SGPS, SA., comprising the balance sheet as at 31 December 2005, (which shows total assets of Euros 1.251.040 thousand and a total of shareholder's equity of Euros 1.009.378 thousand, including a net profit of Euros 79.418 thousand), the statements of income by functions, the statement of changes in equity and the cash flow statement for the year then ended and the corresponding notes to the accounts.

Responsibilities

2 It is the responsibility of the Company’s Board of Directors (i) to prepare financial statements which present fairly, in all material respects, the financial position of the company, the results of its operations and cash flows; (ii) to prepare the historic financial information in accordance with International Financial Reporting Standards as adopted by the EU while also meeting the principles of completeness, truthfulness, accuracy, clarity, objectivity and lawfulness, as required by the Portuguese Securities Market Code; (iii) to adopt appropriate accounting policies and criteria; (iv) to maintain an adequate system of internal control; and (v) the disclosure of any relevant matters which have influenced the activity and the financial position or results of the company.

3 Our responsibility is to verify the financial information included in the financial statements referred to above, particularly as to whether it is complete, truthful, accurate, clear, objective and lawful, as required by the Portuguese Securities Market Code, for the purpose of expressing an independent and professional opinion on that financial information, based on our audit.


(2)

Scope 4 We conducted our audit in accordance with the Standards and Technical Recommendations approved by the Institute of Statutory Auditors which require that we plan and perform the examination to obtain reasonable assurance about whether the financial statements are free of material misstatement. Accordingly, our examination included: (i) verification, on a test basis, of the evidence supporting the amounts and disclosures in the financial statements, and assessing the reasonableness of the estimates, based on the judgements and criteria of Management used in the preparation of the financial statements; (ii) assessing the appropriateness and consistency of the accounting principles used and their disclosure, as applicable; (iii) assessing the applicability of the going concern basis of accounting; (iv) assessing the overall presentation of the financial statements; and (v) assessing the completeness, truthfulness, accuracy, clarity, objectivity and lawfulness of the financial information.

5 Our audit also covered the Directors’ Report, having included the verification of its conformity with the financial information disclosed.

6 We believe that our examination provides a reasonable basis for our opinion.

Opinion

7 In our opinion, the financial statements referred to above, present fairly in all material respects, the financial position of Jerónimo Martins, SGPS, SA. as at 31 December 2005, the results of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU and duly comply with principles of completeness, truthfulness, accuracy, clarity, objectivity and lawfulness.

Lisbon, 21 February 2006 PricewaterhouseCoopers & Associados, S.R.O.C., Lda. represented by:

Jorge Manuel Santos Costa, R.OC.



Report and Opinion

of the Statutory Auditors

(Free Translation from the original in Portuguese)

To the Shareholders 1 In accordance with the law and our mandate, we herewith present the report on our supervisory activity and our opinion on the Directors’ Report and the corresponding Financial Statements presented by the Board of Directors of Jerónimo Martins, SGPS, SA. with respect to the year ended 31 December 2005. 2 During the course of the year, we have accompanied the evolution of the company’s activities, as and when deemed necessary, and have verified the timeliness and adequacy of the accounting records and supporting documentation. We have also ensured that the law and the company’s statutes have been complied with. 3 As a consequence of our work, we have issued the attached Report of the Auditors for Statutory and Stock Exchange Regulatory Purposes in respect of the Individual Financial Information. Furthermore we have considered the Statutory Auditors’ Report sent to the Board of Directors in which the audit procedures undertaken are described, as required by Article 451º of the Commercial Companies Code. 4 Within the scope of our mandate, we have verified that: i) the Balance Sheet, the Statements of Income by functions, the Statement of changes

in equity, the Cash Flow Statement and corresponding Notes, present adequately the financial position, the results and the cash flows of the company;

ii) the accounting policies and valuation methods applied are appropriate; iii) the Directors’ Report is sufficiently clear as to the evolution of the business and the

position of the company and highlights the most significant aspects.

iv) the proposed distribution of the results is adequately supported.


(2)

5 On this basis, and taking into account the information obtained from the Board of Directors and the company’s employees, together with the conclusions in the Report of the Auditors for Statutory and Stock Exchange Regulatory Purposes in respect of the Individual Financial Information, we are of the opinion that: i) the Director’ Report be approved; ii) the Financial Statements be approved; iii) the proposed distribution of the results be approved. Lisbon, 21 February 2005 The Statutory Auditor PricewaterhouseCoopers & Associados, S.R.O.C., Lda. represented by: Jorge Manuel Santos Costa, R.O.C.

256


PUBLIC COMPANY

Rua Tierno Galvan, Torre 3, Piso 9, Letra J – 1099-008 Lisboa Registered with the Lisbon Registrar of Companies under no. 8.122

Share Capital: EUR 629.293.220 Corporate Tax No. 500 100 144

EXCERPT OF THE ANNUAL GENERAL MEETING DRAFT MINUTE

Jerónimo Martins, SGPS, S.A.’s Annual General Meeting was held at 11:00 a.m., on the

31st of March, 2006, at Rua Actor António Silva, 7 – 15th floor, Lisbon.

(…)

Starting the Meeting, the Chairman of the Meeting after analysing and signing all

respective documentation, referred that all the legal requests were fulfilled so that the

Meeting could legally meet and resolve, being present or represented seventy eight dot

forty six per cent of Shareholders.

(…) The Chairman of the Meeting read the Summoning for the General Meeting and referred

that he was going to start with the first and third issues of the Agenda which would be

presented together, if all Shareholders present, were in accordance.

As any shareholder presented no objection, the Chairman of the Meeting invited the Board

of Directors to speak about any of these issues if considered relevant.

(…)

Having occurred no other interventions, the Chairman of the Meeting announced that he

was going to proceed with voting for the first issue under discussion – resolving on the

Management Report and Financial Statements for the year 2005.

Results of this voting were announced by the Chairman of the Meeting having the first

issue of the Agenda been approved by 976,852 favourable votes, corresponding to 99.06%

of the Shareholders in attendance, 3,530 votes against and 5,750 abstentions.

Concluded the voting of the first issue of the Agenda, the Chairman of the Meeting

announced that he was going to proceed with voting for the third issue under discussion –

resolving on the Consolidated Management Report and Consolidated Financial Statements

of 2005.

The Consolidated Management Report and Consolidated Financial Statements of 2005 were

approved by 976,852 favourable votes corresponding to 99.06% of Shareholders in

attendance, 3,530 votes against and 5,750 abstentions.

Moving forward to the second issue of the Agenda – resolving on the Proposal on Results’

Application – the Chairman of the Meeting invited the Board of Directors to speak about

this issue if considered relevant.

257

(…)

Concluding, Mr. Luis Palha proceed to the presentation of the Proposal on Results’

Application, considered in the Annual Report, as follows:

In the final year 2005, Jerónimo Martins, SGPS, S.A. declared consolidated profit of EUR

110,379,181.

In accordance with the dividend distribution policy announced several years ago, and

described in the chapter of the Corporate Governance Report, included in the Consolidated

Annual Report, the Board of Directors proposes a distribution to the Shareholders of EUR

52,788,474.48, an amount which corresponds to 47.8% of consolidated net profit.

Therefore the application of the Jerónimo Martins, SGPS, S.A. individual net result, that in

2005 was 79,418,358.12, is proposed to be as follows:

• Legal Reserve = EUR 3,970,917.91

• Dividend Distribution= EUR 52,788,474.48

• Free Reserves = EUR 22,658,965.73

This proposal represents a dividend payment of 0.42 euros per share, excluding own

shares in the portfolio.

(…)

The Chairman of the Meeting announced results of this voting, having the second issue of

the Agenda been approved by 982,632 favourable votes, corresponding to 99.65% of the

Shareholders in attendance, 3,500 votes against.

(…)

Since there were no more issues on the Agenda, the Chairman of the Meeting thanked all

present for their collaboration and declared the Meeting over and ordered the elaboration

of the present draft minutes which, after being read, will be signed by the members of the

table of the General Meeting.

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ANNUAL REPORT 2005 - CMVMweb3.cmvm.pt/sdi2004/emitentes/docs/PC9049.pdf · 2020. 8. 23. · Annual...

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