Registered with the Lisbon registrar of Companies under 8.122 Share Capital: 479.293.220 Euros - Corporate Tax No. 500 100 144 Rua Tierno Galvan, Torre 3, 9º , Letra J - 1099-008 Lisboa
Jerónimo Martins, SGPS, S.A.
Public Company
Consolidated Financial Statements
At 31 December, years 2003 and 2002
(With Report of the Statutory Auditors)
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Table of Contents
Chairman’s Message
I. Jerónimo Martins Group
1. Group Profile and Positioning
2. Corporate Bodies
3. Business and Ownership Structure
4. Management Structure
5. Operational and Financial Highlights
6. Key Relevant Facts
II. Corporate Governance
Chapter 0. Declaration of Compliance
Chapter 1. Disclosure of Information
1.1. Organizational Structure and Sharing of Powers
1.2. Specific Company Committees
1.3. Risk Control System
1.4. Share Price Performance
1.5. Dividend Distribution Policy
1.6. Stock Option Plan
1.7. Business between Members of the Board and the Company
1.8. Investor Relations Office
1.9. Remuneration Committee
1.10. Amount of Annual Remuneration Paid to External Auditor
Chapter 2. Exercise of Shareholder Voting and Representation Rights
2.1. Statutory Rules on the Exercise of Voting Rights
2.2. Postal Voting
2.3. Electronic Voting
2.4. Requirements in terms of Deadline for the Deposit or Blocking of Shares
2.5. Required Deadline for Receiving Votes sent by Post
2.6. Number of Shares Corresponding to One Vote
Chapter 3. Company Rules
3.1. Code of Conduct and Internal Regulations
3.2. Measures Likely to Interfere with Public Tender Offers
Chapter 4. Board of Directors
4.1. Description of Board of Directors
4.2. Executive Committee
4.3. Structure and Role of Board of Directors
4.4. Remuneration Policy of Board of Directors
4.5. Remuneration of Members of the Board of Directors
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III. Consolidated Management Report
1. Macro Economic Environment
1.1. World Economy
1.2. Portugal
1.3. Poland
2. Industry Outlook
2.1. International Food Distribution Market
2.2. Food Retail Market – Portugal
2.3. Wholesale Food Market – Portugal
2.4. Food Retail Market – Poland
3. Overview of Group’s Consolidated Activity
3.1. Consolidated Sales
3.2. Operational Results
3.3. Debt and Financial Results
3.4. Net Results and Cash Flow
3.5. Return Analysis
4. Operating Activity
4.1. Functional Areas of the Holding
4.2. Food Distribution - Portugal
4.2.1. Operating Divisions
4.2.2. Functional Areas of the Operation
4.3. Food Distribution - Poland
4.4. Manufacturing
4.5. Services
5. Group’s Investment Programme
5.1. Investment
5.2. Divestment
6. Outlook for 2004
7. Events after Balance Sheet Date
8. Proposed Application of Results
Consolidated Management Report Annex
• Information concerning the shares held in the Company by Members of the Board of Directors and Statutory Auditor as at December 31st 2003
• List of shareholders with qualifying shares as at December 31st 2003
• Financial Glossary
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IV. Social Responsibility
1. Code of Conduct
2. Human Resources
2.1. Recruitment
2.2. Working Conditions, Remuneration and Social Benefits
2.3. Training and Personnel Development
3. Food Quality and Safety
3.1. Distribution
3.1.1 Strict Control of Stores and Distribution Centres
3.1.2 Supporting Rigour in Production
3.1.3 Monitoring Rigour in Private Labels
3.1.4 Investing in Knowledge Sharing
3.2. Manufacturing
3.2.1. Investing in a Rigorous Quality System
3.2.2. Quality System Stages and Processes
4. Environmental Management
4.1. Environmental Policy
4.2. Main Environmental Impacts
4.2.1. Distribution
4.2.2. Manufacturing
4.3. Environmental Management Programmes
4.3.1. Distribution
4.3.2. Manufacturing
5. Patronage
5.1. Social Patronage
5.2. Cultural Patronage
V. Consolidated Financial Statements
1. Consolidated Financial Statements
2. Auditors’ Report
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Chairman’s Message
Dear Shareholder, It is with great pleasure that I begin by saying that 2003 brought back the success that for so long has characterised Jerónimo Martins. The decisions taken to solve the problems that had affected the Group over the last decade have proved to be the right ones and we can now look to the future with renewed optimism, strengthened by experience and by a common vision as to what we want and where we are going. This is the beginning of a new era for the whole Group and we wanted to mark it by renewing the corporate identity. The new Jerónimo Martins image, launched in 2004, is a symbol of a unified, dynamic Group governed by strict ethical principles of professionalism and transparency and one that implements socially responsible practices. A Group that relies on the capitalisation of its extensive experience and is fully aware that its place in the future can only be guaranteed by continuous improvement based on solid, clear values. In 2003, Jerónimo Martins consolidated sales totalled 3,4 billion euros, with a net profit of 58,2 million euros, attaining an all-time peak in terms of cash flow. Operating cash flow totalled 289,6 million euros, corresponding to a 1.7 p.p. rise in the EBITDA margin. The decline in the total margin of the comparable portfolio by 0.5 p.p. was the result of the higher weight of Distribution in the sales mix, particularly of the Discount format, and also the huge competitive pressure in both Portugal and Poland. This performance reflects the intense work developed and carried out at the operational level, in all Group Divisions and its functional support areas, an effort that clearly constituted the strategic focus. In Food Distribution, the retail business in Portugal remained steady in a very negative economic environment, through continuing commercial aggressiveness and cost containment that was carried out for the second year running. Pingo Doce increased sales by 2%, while Feira Nova, notwithstanding market contraction and the temporary closing down of a significant number of its stores for refurbishment, was able to contain the decline in sales at 0.1%. In terms of store sales, retail business in Portugal increased by 1.1%, the market position being maintained despite the reduced number of openings. An EBITDA margin of 10.1% was posted in spite of adverse market conditions. The Recheio performance was quite remarkable, with substantial gains in the retail and “HoReCa” channels, strengthening its medium-term target to attain leadership in these markets in Portugal. By paying constant attention to cost management, and carrying out projects aimed at increasing growth in geographical areas of greater potential in the “HoReCa” channel, levels of efficiency rose again and operating cash flow (EBITDA) reached a new record high, with an increase of 1 p.p. (percentage of sales). In Poland, Biedronka progressed at the aggressive pace set by the Group. In a year marked by the implementation of a new organisational structure, business fully responded to decision levels coming closer to the market, having achieved substantial market share gains with a growth in sales of 14% in local currency (12% in a like-for-like basis). Due to the continuous improvement in operational efficiency levels, the operating cash flow margin (EBITDA) advanced by 0.8 p.p., despite a drop in the total margin caused by the aggressive behaviour of the market. Manufacturing and Services were favourably affected by the recovery of key markets such as olive oil, favourable weather conditions increased sales of ice cream and beverages, while constant attention was paid to the renewal of the personal and homecare product range. Catering performed excellently and all these facets combined to increase operating cash flow, showing an improvement of over 3% year-on-the year. Having come this far, the important thing is not to forget the lessons learned over the last 15 years, a period during which Jerónimo Martins simultaneously underwent the biggest growth phase in its history and also its most severe restructuring process. The decision to invest in the Food Market as a key area for the Group proved to be a complete success. After attaining leadership in Portugal, both in Manufacturing and Distribution, thanks to an ideal conjunction of activities in the wholesale and retail markets, Jerónimo Martins is today a top reference in this key sector of the national economy. The ability to build long-lasting relationships with international partners, conducted in an atmosphere of mutual respect and through a strategic rationale specific to the businesses in question, has always been one of our greatest strengths. In 1995, the reasons that led us to move into external markets appear even stronger today than they did at the time. The natural limitations of the domestic market have, in fact, now been further exacerbated by restrictions to growth imposed by years of government-led market administration. Poland, however, has confirmed our option for the largest Central European economy, possibly the driving force in the entire European Union enlargement process, whether for political or economic reasons The validity of our options was also revealed at the time of decisions in the disposal process that we had to undertake in 2001 and 2002, and it is further confirmed on a daily basis by the performance of Biedronka. The Group has gained invaluable experience in eight years of intense international activity. We are now a stronger organisation, and one that places great emphasis on keeping control over its various operations. The mistakes made
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during the growth and internationalisation process have also made us more resolute as regards decision making, both at the present time and in the future. We strongly believe in the need to build flexible structures, combining speed of reaction to market proximity. Our decisions are now more strongly founded on known areas, with a management team that combines older members with vast experience with a younger middle management generation that has had close contact with international business realities and intense competitive pressure. Our track record in the discount format will enable us to face with confidence the challenge to deliver strong value-content proposals to the consumer. To this end, every necessary decision will be made to guarantee the highest levels of efficiency in any operating areas in our portfolio. Poland is a firm, definitive investment. The position achieved in this market will be a fundamental growth driver for the Group as a food distributor. Every effort will be put into strengthening business conditions in the East and Southeast of Europe, where we believe there are opportunities to develop operations in areas where Group know-how and, in particular, skills developed in Poland will provide an important competitive advantage. No medium-term growth strategy will be viable, however, unless business stability in Portugal is ensured. The strengthening of the Group position in this market will involve both Distribution and Manufacturing, aimed at addressing the changes in patterns of consumption in today's society. Wherever we are, we will concentrate on the food market. We are now very confident as regards risk and opportunity assessment and clearly want to further optimise our capacities as food operators. Finally, I would like to refer to the important progress made by Jerónimo Martins in 2003 in developing a policy of Social Responsibility as a continuance of work done over the past few years. The Board of Directors is committed to Social Responsibility, for the Company must assume its role in society by becoming a pillar of reference for all its shareholders in these times of uncertainty and rapid social change, where we all have to modify our attitudes not only towards environmental problems, but also to the promotion of the entire development plan. Today, we are more than ever aware that sustainable development is not an option, but the only way to ensure a promising Future, a course of action that entails strict responsible conduct at economic, environmental and social levels. Increasing concerns in the Social Responsibility area plus activities that have been developed over the last three years have led us to organise and formally adopt principles and policies to build focus, concentrate resources and lead the entire Organisation in this matter. The willingness and involvement of all our employees have been key factors in the success of some of the initiatives undertaken, reflecting the importance given to interaction with the community and reiterating Group philosophy, culture and values. Last year, the Board of Directors formally approved the Jerónimo Martins Code of Conduct and Sustainable Development was established as the strategic driver for the food industry, thus reinforcing our earlier decision to join the World Business Council for Sustainable Development. We also joined COTEC Portugal, the Corporate Association for Innovation, as a founder member, and RSE, the Association for Social Responsibility in Corporations. Our concern with Sustainable Development will increasingly be at the core of Group management decisions. It is our sincere belief that in the future there will only be a place for companies that, while delivering economic prosperity and generating value for consumers and shareholders, also integrate sustainability in their management practices and provide an ethically, socially and environmentally responsible attitude that generates value for the whole community. This attitude will govern our business in interactions with various agents and in assessing the satisfaction of customers, shareholders, suppliers and employees, not forgetting supporting underprivileged groups, respecting environmental protection and guaranteeing food quality and safety. As Chairman of the Board of Directors, I must say a word about the particular significance of this year. The position we hold at present resulted solely from the strength of the decisions taken, a strength shared both during the growth and during the restructuring phases. On one hand, this strength stems from the support given by all our shareholders, and, on the other, it comes from the exemplary effort of tens of thousands of Group employees. It is this strength that enables us to face the future with the same determination that led us to build all that we are today. To all those who trusted us and in any way made it possible for us to implement our vision, I wish to express my personal esteem and thanks, and give you our assurance that Jerónimo Martins is committed to the intransigent defence of shareholder interests, and to the construction of a socially responsible economic Group. E. A. Soares dos Santos
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I. Jerónimo Martins Group
1. Group Profile and Positioning Business
The Jerónimo Martins Group has a balanced portfolio, combining the strength of the market positions held by the retail and wholesale operations in Portugal with the potential for growth of the Biedronka operation in Poland and the stability and ability to release cash flow from industrial assets held in partnership with Unilever.
In Portugal, the Group operates retail and wholesale formats, leading the market of fast moving consumer goods distribution through Pingo Doce (Supermarket’s leader), Feira Nova (third Hypermarket operator) and Recheio (second Cash & Carry operator).
In Poland, Biedronka is market leader in its format, clearly ahead of the competition both in the number of stores and brand awareness.
Jerónimo Martins is also the largest industrial Group in Portugal manufacturing fast moving consumer goods, through its joint-venture with Unilever in FimaVG (food products), LeverElida (personal and home care) and IgloOlá (ice cream and frozen food) and retains leadership positions in olive oil, margarine, ice tea, ice cream and laundry detergents, among others.
The Group portfolio also includes Jerónimo Martins Distribuição de Produtos de Consumo, a marketing and distribution services company representing, in Portugal, international brands of fast moving food products and cosmetics, some of which are leaders of their segment, Hussel (specialised retail of chocolates and confectionery) and Jeronymo (pilot-projects in specialised retail).
Mission
Jerónimo Martins is an international group operating in food industry in the distribution, manufacturing and services sectors. Its aims are sustained development of its companies, operational efficiency and generation of value, acting on principles of integrity and social responsibility.
Strategic Focus
To guarantee the sustainability of its current and future business and the return on its capitals, the Group relies on two factors: (1) offering strong value-content proposals and (2) building a solid relationship of trust with consumers, employees, business partners and institutions in general.
Priority is given to consumer needs in conducting business to guarantee the consistent and systematic delivery of strong value-content proposals in each business, country and point in time in terms of price, quality and innovation.
The conduction of business relies on dynamic and flexible organisations with the human resources to ensure the continuity of accumulated know-how and permanent adaptation to change. To this end, the Group has introduced management tools (strategic scorecard) and performance measures (EVA)1 to ensure that the organisation is focused on the strategic challenges, whether financial, market or efficiency related, and on the activities that truly add value.
In the conducting of business, the Group upholds a rigorous, responsible behaviour at the economic, environmental and social level. Social responsibility is a sine-qua-non condition for the sustainability of its companies, namely in terms of Human Resources, Food Quality and Safety, Environmental Protection2 and Patronage.
Jerónimo Martins has always been a standard reference in its sector and in the market in general, and believes that the pursuance of its strategic focus will ensure the delivery of strong value-content proposals to its Shareholders in the short, medium and long term.
Jerónimo Martins’ shares have been listed on the stock exchange since 1989 and are included in the PSI 20 index. On 31st December 2003 there were 95,858,644 listed shares, with a free float of 26.14%.
Identity
The eventful history of Jerónimo Martins dates back to 1792. In more than 210 years, the last decade has been particularly rich in experiences and learning. Today Jerónimo Martins is an international group, with a clear vision of its strategic focus. It is a cohesive, dynamic group, with modern, strict, ethical and transparent management practices aimed at a sustainable growth strategy.
The strength and vitality of the Group is most clearly expressed in its capacity for renewal, and the renewal of the Jerónimo Martins corporate identity is yet another proof of the profound changes that are taking place. The new
1 EVA = Economic Value Added 2 Jerónimo Martins is member of the Portuguese Chapter of the World Business Council for Sustainable Development
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corporate identity of the Group, introduced in 2004, reflects a new reality and embodies its solidity, rigour, professional excellence, ethics and transparency to reveal a cohesive, innovative Group. This identity reflects a Group that is prepared for a new phase in its history, ready and able to guarantee a stable, solid and lasting future.
Strategy
The strategic focus of the Group is to consolidate its food business in Portugal within its profitability standards, to uphold the growth dynamics in Poland to top level efficiency standards, and to carefully and in due time assess new business opportunities directed at the sustainable growth of the Group.
2. Corporate Bodies
Election Date:
29th June 2001 Composition of the Board of Directors in 2003
Executive Members:
Chairman and Managing Director Elísio Alexandre Soares dos Santos - Aged 69; - Chairman of the Group since February 1996; - In 1957 joined Unilever; From 1964 to 1967 worked as Marketing Manager at Unilever Brazil; In 1968 joined
the Board of Directors of Jerónimo Martins as Managing Director, combining this position with that of Jerónimo Martins representative in a joint venture with Unilever.
Responsible for Food Distribution Operations Pedro Manuel de Castro Soares dos Santos - Aged 44; - Executive Member of Jerónimo Martins’ Board of Directors since 1995; - In 1983 joined the Pingo Doce Operations Division; In 1985 started working in the Sales and Marketing
Department of Iglo/Unilever; In 1990 was appointed Assistant Manager of Recheio Operations; In 1995 was appointed General Manager of Recheio; Between 1999 and 2000 was responsible for operations in Poland and Brazil; In 2001 assumed responsibility for food distribution operations in Portugal.
Responsible for Financial Area Luís Maria Viana Palha da Silva - Aged 48; - Business Management Degree – Universidade Católica Portuguesa; Degree in Economics – Instituto Superior de
Economia e Gestão; - Executive Member of Jerónimo Martins’ Board of Directors since 2001; - Assistant Professor at the Universidade Católica Portuguesa from 1985 to 1992; From 1987 onwards appointed
to board of directors of several companies, namely Covina, SEFIS, EGF, CELBI, SOGEFI and IPE; Secretary of State for Trade from 1992 to 1995; Member of the Board of Directors of Cimpor from 1998 to 2001.
Non-Executive Members:
António Mendo Castel-Branco Borges - Aged 55; - Degree in Economics – Universidade Técnica de Lisboa; PhD in Economics – Standford University; - Non-Executive Member of Jerónimo Martins’ Board of Directors since 2001; - In 1980 joins the INSEAD; Appointed Vice-Governor of the Bank of Portugal in 1990 and INSEAD Dean in 1995;
Taught at Universidade Católica de Lisboa and Stanford University; Advisor to the USA Department of Treasury, the OECD and the Portuguese Government; Held various positions on the Board of Citibank Portugal, Petrogal, Vista Alegre Group, Paribas and SONAE, among others; Vice Chairman of Goldman Sachs since 2000.
Hans Eggerstedt - Aged 65; - Degree in Economics – University of Hamburg; - Non-Executive Member of Jerónimo Martins’ Board of Directors since 2001; - In 1964 joined and remained with Unilever; Among other positions, was Manager of Retail Operations and Ice
Cream and Frozen Products in Germany, Chairman and CEO of Unilever Turkey, Regional Manager for Central and Eastern Europe, and Financial and Information and Technology Manager at Unilever; In 1985 was appointed member of the Board of Directors of Unilever N.V. and Unilever PLC, remaining in this post until 1999.
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José Luís Nogueira de Brito - Aged 65; - Degree in Law – Faculdade de Direito da Universidade de Coimbra; - Non-Executive Member of the Board of Jerónimo Martins since 2001; - Appointed Under-Secretary of State for Labour and Social Security in 1969, and Secretary of State for Urban
Development and Housing in 1972; Executive member of Jerónimo Martins’ Board of Directors from 1980 to 2001; Legal Consultant of Fima/Lever/Iglo from 1980 to 1998; Member of the Board of Directors of the Bank of Portugal in 1981 and Member of the Assembly of the Republic from 1983 to 1989; Elected Vice Chairman of the Portuguese Manufacturing Confederation in 1989; Chairman of the Portuguese Red Cross since 2003.
Rui de Medeiros d`Espiney Patrício - Aged 71; - Degree in Law – Faculdade de Direito da Universidade de Lisboa; - Non-Executive Member of the Board of Jerónimo Martins since 2001; - Assistant Professor in Faculdade de Direito da Universidade de Lisboa from 1958 to 1963; Appointed Under-
Secretary of State for Overseas Development in 1970; Vice Chairman of Monteiro Aranha Group from 1976 to 1991; Subsequently has been on Board of Directors of several Brazilian companies, namely Monteiro Aranha, Masa-Alsthom, Hochtief, Ericson, Telesp Celular, Axa Seguros, and worked as advisor to Group Espírito Santo.
Substitute Member: Álvaro Troncoso
Single Auditor and External Auditor: Bernardes, Sismeiro & Associados, S.R.O.C., Lda. Represented by: José Manuel de Oliveira Vitorino, R.O.C.
Corporate Secretary: Henrique Soares dos Santos
Chairman of Shareholders’ General Meeting: Artur Santos Silva
Secretary of Shareholders’ General Meeting: António Neto Alves
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3. Businesses and Ownership Structure
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4. Management Structure
Jerónimo Martins, SGPS, SA is the Group’s Holding Company. A number of functional areas are part of the Holding Company which is responsible for supporting and assisting the Executive Committee, the Board of Directors and all Group Societies on matters specific to each area – Human Resources, Development and Strategy, Planning and Control, Consolidation and Accounting, Internal Audit and Risk Management, Financial Operations, Fiscal Affairs, Legal Affairs, Communication and Security. There is also an area responsible for Special Projects and another responsible for the Board of Directors’ Assistance.
Group business is divided in three key areas – Distribution, Manufacturing and Services.
Distribution is divided into geographical areas – Poland and Portugal.
The management structure in Portugal is organised under a “near-matrix”, with Business Divisions and Functional Divisions designed to maximise Group synergies in terms of scale, resources and know-how, and to ensure the requisite focus on the consumer and on business formats.
The Business Divisions – Pingo Doce, Feira Nova, Madeira and Recheio, are responsible for category management, operations, marketing and technical areas and are supported by management control and human resources managers, who report to the head of the business division and functionally to the respective areas in the Holding Company.
The Functional Divisions – Sourcing, Logistics, Quality Control, Financial and Information Systems – are grouped under Gestiretalho, a company that provides services to the Business Divisions in their respective areas of activity.
The Business Divisions and the Functional Divisions are represented in the Executive Management Committee of Distribution, a body that coordinates strategic decisions for Distribution in Portugal and Poland.
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In the Polish market, management structure is organised under an in-line model, with the head of the Business Division responsible for category management, marketing, operations, technical, human resources, logistics, financial, quality control and information systems.
Manufacturing management structure also follows a “near-matrix”, being organised into Business Divisions and Functional Divisions, so as to maximise 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, production and quality assurance and are supported by management control and human resources managers, who report in line to the head of the business area and functionally to the respective functional areas.
The Functional Divisions – Human Resources, Supply Chain (which includes purchases, planning and logistics), Financial and Information Systems – provide services to the business divisions in their respective areas of activity.
The General Managers of the Business Divisions and the General Managers of the Functional Divisions are members of the National Conference, the body that is entitled to coordinate the strategic decisions for the various manufacturing businesses.
Services’ management structure is organised by business areas – JMD (which comprises the Food, Cosmetics and Caterplus divisions), Hussel and Jeronymo – 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 purchases in the case of Hussel and Jeronymo.
Logistics, Financial and Information Systems are functional areas that provide services to JMD, Hussel and Jeronymo and all report to the same General Management.
General Management accumulates responsibility for human resources, along with the functional area of Human Resources in the Holding.
5. Operating and Financial Highlights
Group Operating Indicators
Store Network Evolution
Key Figures in Distribution
1999 2000 2001 2002 2003
Pingo Doce 173 189 190 192 190
Feira Nova 21 23 23 24 25
Recheio 29 30 32 34 33
Biedronka 579 589 621 638 672
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Group Financial Indicators
Sales and Services
1.891 2.1532.1062.1322.046
1.0581.509 982
1.4851.701331
360
282
270367
0500
1.0001.5002.0002.5003.0003.5004.0004.500
1999 2000 2001 2002 2003
Distribution Portugal Distribution o ther Countries M anufacturing & Services
€' 000.000
6,4%6,0%
4,7%
1,3%
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
7,0%
Retail Portugal * Cash & Carry M adeira B iedronka
EBITA Margin 2003 YE
* % store sales
% sales
799
125
42
152
0
100200
300
400500
600700
800
R etail P o rtugal C ash & C arry M adeira B iedro nka
Invested Capital 2003 YE
€' 000.000
11,0%
28,6%
10,8%
7,1%
0,0%
5,0%
10,0%
15,0%
20,0%
25,0%
30,0%
Retail Portugal Cash & Carry M adeira Biedronka
PreTax ROIC
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EBITDA Margin
3.280
4.2003.861
3.417
3.915
0500
1.0001.5002.0002.5003.0003.5004.0004.500
1999 2000 2001 2002 20030,0%
1,5%
3,0%
4,5%
6,0%
7,5%
9,0%
Sales & Services EBITDA Margin
€' 000.000 % sales
Pre-Tax ROIC
Comparable* EBITDA Margin
1.627
1.869 1.828
1.453
1.180
0
200
400
600
800
1.000
1.200
1.400
1.600
1.800
2.000
1999 2000 2001 2002 20030,0%
2,0%
4,0%
6,0%
8,0%
10,0%
12,0%
14,0%
16,0%
18,0%
Average OIC EBITA Margin ROIC
€' 000.000 %
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Comparable* Pre-tax ROIC
Net Result and Cash Flow
25
-64-87
-204
58
167139 133
223
168
-205
-155
-105
-55
-5
45
95
145
195
245
19 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3
Net Result to JM Cash Flow *
€' 000.000
* before M inority Interests
Comparable* Pre tax ROIC
1.207
1.286
1.190
1.262
1.169
1.1001.1201.1401.1601.1801.2001.2201.2401.2601.2801.300
1999 2000 2001 2002 20030,0%2,0%4,0%6,0%8,0%10,0%12,0%14,0%16,0%18,0%
Avg. OIC EBITA Margin ROIC
€' 000.000 %
* excluding Sé, Águas, Turismo, Lillywhites, Jumbo, JM &M and Eurocash but including Bakery and Diversey disposed in 2002.
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Balance Sheet
Associates
0
5.000
10.000
15.000
20.000
25.000
1999 2000 2001 2002 2003
Portugal Poland Brazil U.K.
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6. Key Relevant Facts
Operations
January - Transfer of Leiria Recheio store to new location. - Refurbishing of Feira Nova store in Rio Tinto (closed 2 weeks). - Start of the operational restructure of Biedronka – division into four integrated geographical regions.
February - Refurbishing of Feira Nova store in Valongo (closed 6 weeks). - Sale of Eurocash effective as of March 1st (Poland).
April - Opening of new warehouse for fresh fish in Portugal (Azambuja). - Opening of Feira Nova Hypermarket in Odivelas (first store with graphic interface POS and with the new
ElectricCo concept). - Opening of two Hussel stores (Odivelas Parque and Forum Montijo). - Closing of two Pingo Doce stores (Central de Francos and D. João V) to be transferred to new location.
May - Launching of Pingo Doce campaign “More than 1,000 prices lowered” in Madeira. - Visit of financial analysts and journalists to Biedronka (stores and warehouses).
June - JMR issues euro 115,000,000 bond loan. - Process of transfer to net price is concluded in Portugal.
July - Opening of first Hussel-Olá store, at Forum Aveiro in partnership with IgloOlá. - Anniversary Campaign “30 years of Recheio”. - Launch of Pingo Doce private label TV campaign. - Signing of property transfer promissory contract for 4 stores operated by Irmãos Costa Pais, SA, under the
Monteverde brand. - Closing of Pingo Doce Online (press release).
August - Feira Nova innovates on textile management, through a joint venture. - Closing of two Pingo Doce stores (Estrada da Falagueira and Passos de Ferreira), to be transferred to new
locations. - Refurbishing of Pingo Doce at Linda-a-Velha.
September - JM, SGPS, S.A. places euro 25,000,000, 5 years commercial paper programme. - Launch of “100% Feira Nova” promotional campaign. - Refurbishing of Feira Nova in Caldas da Rainha (closed two months). - Launch of Pingo Doce’s advertising campaign “This is not a promotion; PD has really lowered its prices…”. - New Biedronka advertising campaign “Half of Poland buys at Biedronka. Come and see why”.
October - JM, SGPS, S.A. issues euro 40,000,000 bond loan. - Opening of two Pingo Doce stores (Póvoa de Santa Iria and Damaia). - Refurbishing of Feira Nova in Loures (closed for one month). - Pingo Doce concludes introduction of the automatic restocking planning system (MRP) in all stores and all
product areas.
November - Biedronka consolidates position in Warsaw with 10 new stores.
December - Pingo Doce campaign – accepting payments in escudos. - Closing of Pingo Doce store in Alcântara, for two years, to be re-opened in a new residential complex.
Social Responsibility
January - Introduction of environmental management approach, which includes the requirements, defined in
Accounting Standard no. 29 “Environmental Matters”. - Introduction of productivity bonus in the distribution warehouses. - Performance appraisal system is extended to all non-management staff in FimaVG, LeverElida and IgloOlá.
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March - Environmental awareness campaign on energy consumption.
April - Introduction of productivity bonus in Recheio operations (Mainland and Madeira). - Implementation of water quality monitoring plan in the Stores and Distribution Centres. - Jerónimo Martins sponsors refurbishing of pediatric surgery ward Hospital Santa Maria. - Pingo Doce give financial support to Oceanário de Lisboa for 3 years.
August - Renewal of NP EN - ISO 14001:1999 Vítor Guedes certification.
September - Pingo Doce gets certification for its free-range chicken. - Start of Skip “Mão Amiga” fund-raising campaign to open a new home “Associação Novo Futuro”.
October - Publication of Jerónimo Martins Code of Conduct. - Víctor Guedes plant obtains approval in Japan Institute of Plant Maintenance (JIPM), level I audit, and is
awarded with respective prize for excellence. - Environmental awareness campaign on waste management.
November - LeverElida launches environmental initiative under the motto “Lever – an open plant”.
December - Accident Rate in Feira Nova falls by 20%. - Increase of 113% in audits and visits to suppliers of Perishables and Private Label and rate of returned
articles in the warehouses dropping by 28%.
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II. Corporate Governance Following the entry into force of the changes introduced by the Securities and Exchange Commission Regulation no. 11/2003 to Regulations no. 7/2000 and no. 07/2001 on the governance of listed companies, the Board of Directors of Jerónimo Martins SGPS, S.A. hereby presents the main guidelines followed by the Company on this matter following the reports of previous years. In full compliance with the requirements of legislation regarding the disclosure of information, this chapter is organised into the following sections: (Chapter 0) Declaration of Compliance, (Chapter 1) Disclosure of Information, (Chapter 2) Exercise of Shareholder Voting and Representation Rights, (Chapter 3) Company Rules and (Chapter 4) Board of Directors. Chapter 0. Declaration of Compliance The Company fully complies with the Securities and Exchange Commission’s recommendations on the governance of listed companies. However, it is our understanding that, in the light of the text in question, some of the recommendations are not fully respected in Company practice, namely as regards:
The Company actively encourages the exercise of shareholder voting rights, being in near full compliance with the provisions of the Securities and Exchange Commission’s recommendation on this matter. However, it should be mentioned that in the course of 2003, particularly with respect to the notice convening the annual general meeting, the deadline for the blocking of shares for shareholder participation was set at 8 days prior to the meeting, and no ballot papers were adopted for votes submitted by mail. To facilitate integration and full compliance with this recommendation, at the next General Meeting the Company will make ballot papers available to shareholders wishing to vote by post, and is considering a change in the by-laws regarding the deadline for the blocking of shares for shareholder participation.
As to the recommendation as to discrimination of individual remuneration paid to members of the Board of
Directors, the Company feels that there are other alternatives for verifying the internal distribution of remuneration and assessing the relationship between the performance of each sector in the Company and the remuneration level of members of the Board of Directors responsible for monitoring such sectors, which may be achieved by indicating separately the overall remuneration of Executive Members and that of Non-Executive Members. In addition, it is the opinion of the Board of Directors that the disclosure of such information may raise susceptibilities that will, in no way, contribute to improving the performance of the members of the Board of Directors, therefore, this recommendation is adopted only with regard to collective remuneration with discrimination of remuneration paid to Executive Members and Non-Executive Members.
Chapter 1. Disclosure of Information 1.1. Organisational Structure and Sharing of Powers The Jerónimo Martins Group is organised into 3 business areas - (1) Food Distribution, (2) Manufacturing and (3) Services. Food Distribution is in turn organised by geographical areas and Operating Divisions.
Functional AreasCorporate Centre
Functional AreasOperational Support
MadeiraSupermarketsCash & Carry
Pingo DoceSupermarkets
Feira NovaHipermarkets
RecheioCash & Carry
Portugal
BiedronkaFood Stores
Poland
Food Distribution Manufacturing Services
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Operating Divisions The Jerónimo Martins Group organisational model is aimed to ensure focus on the various Group businesses by the creation of operating areas and divisions that guarantee 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) - and one operating division in Poland - Biedronka (food stores). The Manufacturing business comprises a joint venture with Unilever in FimaVG (food products), LeverElida (personal and home care) and IgloOlá (ice cream and frozen food). The Services business includes Jerónimo Martins Distribuição de Produtos de Consumo (representation of international brands of fast moving food products and cosmetics), Hussel (specialised chocolates and confectionery retail) and Jeronymo (pilot-projects in specialised retail). Functional Divisions of Operational Support The Functional Divisions of operational support ensure that Group synergies are maximised through the sharing of resources and functions in relevant markets, thus boosting organisational efficiency and the sharing of relevant skills and know-how. The functional divisions of operational support are Sourcing, Logistics, Quality Control, Financial and Information Systems. These areas provide services to the various operating divisions in accordance with the Holding guidelines, ensuring the uniformity of policies and procedures.
Functional Areas in the Holding
Corporate SecretaryHenrique Santos
Fiscal AffairsCíntia Melo
Legal AffairsAntónio Neto Alves
Financial OperationsConceição Tavares
Internal AuditNuno Sereno
Planning and ControlAna Luísa Virginia
CommunicationAna Vidal
Special ProjectsFrancisco Martins*
Consolidation and AccountsAntónio Pereira
Human ResourcesJosé Padinha Ribeiro*
Development and StrategyMargarida Martins Ramalho
SecurityEduardo Dias Costa
Jerónimo Martins GroupFunctional Areas of Corporate Support
Jerónimo Martins SGPS S.A., as the head of the Group, is responsible for ensuring consistency between the objectives established and resources available. Holding is responsible for the definition and implementation of the portfolio development strategy, strategic planning and control of the various businesses, guaranteeing consistency with global objectives, the definition and control of Group financial policies, and the definition of human resources policies, taking direct responsibility for the implementation of the executive staff development policy (Management Development). Holding functional areas give support to the corporate centre, while simultaneously providing services to the operational and functional divisions of the Group. They are organised as follows: Corporate Secretary - Prepares the Board of Directors and Executive Committee meetings, ensuring that decisions taken are duly communicated and monitoring their implementation when necessary. Legal Affairs - Monitors Group corporate affairs and ensures compliance with the legal obligations of the Group companies; Assists the Board of Directors in the preparation and negotiation of contracts to which Jerónimo Martins SGPS, S.A. is a party and leads the development and implementation of strategies aimed at protecting Group interests in case of disputes and manages external counsel dealings. Internal Audit - Assesses the quality and effectiveness of internal control operating and non-operating systems set up by the Board of Directors and ensures its compliance with the Group manual of procedures; Also responsible for
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ensuring full compliance with the procedures set out in the manual of operations of each business unit, and the legislation and regulations applicable to the respective operations. Communication - Defines and implements Group communication strategy in the areas of Media Relations and Social Responsibility; Also responsible for developing external and internal communication instruments and actions involving Jerónimo Martins’ corporate image, and for co-ordinating media coverage for marketing initiatives undertaken by the business units. Consolidation and Accounts - Prepares consolidated financial information to comply with legal obligations and to assist the Board of Directors; Also implements and monitors the accounting principles and policies adopted by the Board of Directors and applicable to all Group companies and verifies compliance with the respective statutory obligations. Development and Strategy - Supports analysis of strategic focus and medium-term planning, ensuring that the strategic development of businesses is consistent with the strategic objectives of the Group. It also assists the Executive Committee in defining and assessing these objectives, and monitors the ensuing development projects; In addition, it is responsible for contacts with official entities and for representing and managing the Group interests vis-à-vis institutions and corporate associations in the Food Distribution Industry. Fiscal Affairs - Advises all Group companies on fiscal matters, ensuring compliance with legislation in force and the optimisation of business management initiatives; Manages tax litigation matters and also relations with external consultants and tax authorities. Financial Operations - Ensures the availability of more appropriate financial resources in terms of value, timing and cost, as well as selects and implements for selecting and implementing risk management solutions, in co-ordination with risk identification and control activities developed by the Internal Audit of the Group. Planning and Control - Defines and monitors policies and procedures in the planning and control area: validation of medium and long-term projections, performance analysis, budget control and analysis and control of investment projects; Also responsible for the relation with the Capital Market and for co-ordinating and supporting acquisition, disposal and corporate restructuring operations. Special Projects - Heads the simplification processes project, the main objective of which is to define and implement Best Practices in the various Food Distribution operational divisions in Portugal and respective functional divisions, in conjunction with the best functional solutions for the business, to optimise available resources across the organisation and improve productivity levels. Human Resources - Defines and implements Group policies in this area, specifically as regards wages and incentives, recruitment, career management, training and staff development; Also provides technical support to the Group’s Operating Divisions. Security - Defines and controls procedures aimed at preserving the safety of personnel and assets within the Group, as well as for monitoring any matters involving the police or legal authorities; Also provides support for the audit of safety systems and risk prevention. 1.2. Specific Company Committees Ethics Committee In 2003 the Board of Directors appointed an Ethics Committee, which succeeded the “Working Group for rules of conduct”. The first objective of the Committee was to draw up a code defining the guiding principles applicable to the activities of the companies in the Jerónimo Martins Group, namely responsibility to investors, customers, suppliers, competitors and employees. The Code of Conduct was approved at the beginning of the second half of 2003 and the Ethics Committee is responsible for divulging it and ensuring compliance with it. The Ethics Committee is made up of Ana Vidal (Communications Director), José Padinha Ribeiro (Director of Human Resources) and António Neto Alves (Director of Legal Affairs). Audit Committee The Audit Committee appointed by the Board of Directors, has as specific responsibilities on the assessment and supervision of risks and critical processes, reporting directly to the Executive Committee on all situations classified as high risk. The Audit Committee meets on a monthly basis. It is composed of the Committee Chairman (José Guimarães Assédio) and three members (José Gomes Miguel, Nuno Sereno and Henrique Santos), none of whom is a member of the Board of Directors.
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In the course of 2003, the Audit Committee held 10 meetings, of which minutes were taken, and assessed 42 reports that had been prepared by the Internal Audit Department. These meetings were attended by one external audit representative. The close collaboration between Internal Audit and this representative greatly contributed to increase efficiency and maximise work-team synergies. Internal Audit also co-operated with its counterpart in Ahold, which participated in the cross-audit programme simultaneously implemented in all the companies where Ahold has holdings. Work carried out within the ambit of this programme added greatly to information reporting procedures. Internal Control Committee The Company is currently considering the creation of an Internal Control Committee with responsibility for the assessment of corporate organisation and governance, as well as supervision of the risk management process. This Committee would be composed of three Non-Executive Members. 1.3. Risk Control System
The Company, and in particular its Board of Directors, regards risks inherent in its businesses as a very important issue. Given their relevance to the internal decision-making process and to market agents in general, the Group is committed to transparency and the quality of information disclosed with regard to issues having an impact, whether positive or negative, on its future. The aim is to convey a clear idea of value creation mechanisms as well as of any potential value-destructing causes while information is prepared with a view to presenting confident, accurate performance estimates. In this way, the Company hopes to provide its shareholders with as accurate as possible a picture of all endogenous and exogenous factors liable to have a significant impact on its profitability. Risk Management Objectives Risk management in Jerónimo Martins aims to achieve the following objectives:
• Identify and assess business and process risks; • Identify key value drivers and regularly assess strong and weak points; • Develop and implement risk hedging and prevention programmes; • Integrate risk management in business planning; • Define a risk identification, management and monitoring terminology common to the whole Group. • Consistently add maximum value to all activities within the Group in order to raise employee awareness of
the risks and the positive and negative effects of all factors influencing operations and constituting value creation sources;
• Improve the decision-making process and priority-definition process with a structured understanding of the Group’s business processes, their volatility and their opportunities and threats.
The Risk Management Process The Group’s risk management uses an Economic Value Added (EVA) approach applied to two universes - Consolidated and Operating. The objective is to make a bottom-up analysis, assessing first the elements that are at the basis of either the NOPAT (net operating profit after tax) or the cost of capital, so as to get an objective notion of how these interact, and ultimately, to discover the main risks in the value creation process, as a core management objective. The business processes in the various activities developed in the Jerónimo Martins Group form a value chain that includes a strategic group of key value drivers. The risk management process stems from the identification of these key value drivers and from the analysis of underlying risks. This approach will provide a systematic, interconnected perspective of the risks inherent in processes, functions and organisational divisions. The risk management process has a cyclical nature that addresses: (1) identification and assessment of risks, (2) definition of management strategies, (3) implementation of control processes, and (4) the monitoring of the risk management process. The “owners” of critical business processes are also responsible for the design and implementation of risk control processes, together with those responsible for Risk Management integrated in the functional area of Financial Operations in the Holding. In turn, the efficiency of the risk control processes is assessed by the Internal Audit Department. Insurance coverage, financial risk management and property risk management are some of the main risk control processes in force in Jerónimo Martins.
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Assessment of Internal Control The quality of internal control of the Group is assessed by an internal audit plan prepared every year to cover the auditing of processes, conformity, finances, and information systems. Having identified business and process risks and management procedures it is decided what critical processes will be taken to manage them. The steps to be taken by the Internal Audit Department are defined based on the connection between critical processes and risks (these steps are described in detail in the chapter on the activity of Functional Areas in Holding). Monitoring the Risk Management Process The Board of Directors, Operating and Functional Divisions, the Board of Auditors and Risk Management and Internal Audit are responsible for monitoring the risk management process within the Group. The Board of Directors has the following set of objectives and responsibilities as the body responsible for the success of Group strategy:
• Know the more significant risks affecting the Group; • Make sure that there is adequate knowledge within the Group as to risks likely to affect operations and how
to manage them; • Ensure that the Group risk management strategy is conveyed to all hierarchical levels; • Ensure that the Group has the capacity to minimise both the possibility of risks and their impact on the
business; • Make sure that the Group knows how to react to crisis situations; • Make sure that the risk management process is adequate and that Risk Management closely monitors more
probable risks and their impact on the Group operations. 1.4. Share Price Performance In 2003, stock markets went through three distinct periods, reflecting global geopolitical developments. Until mid-March, the world was submerged in a climate of pessimism and uncertainty that preceded the war with Iraq. Stock markets in general fell to their lowest over the last few years, the Portuguese PSI-20 index reaching a 6-year low on 28 February. As the war developed and the scenario became more optimistic, the second quarter showed a gradual recovery and a slight acceleration in stock markets. Investor confidence picked up and the world economy became more stable, positively translated into improved expectations. The second half of the year was marked by an acceleration of growth in most stock markets, the main indexes rising by 30% to 40%. Because these are weighted averages, they hide the much better performance of small caps, some of which soared by more than 100%. This growth in European reflected the increase of private consumption and GDP in the USA. Performance of Jerónimo Martins Share During the first quarter of the year the Jerónimo Martins share followed its 2002 trend reinforced by the pre-war situation, hitting a bottom-low of 5.88 on February 27th. The conclusion of the restructuring process with the sale of Eurocash (Poland) in February 2003 may have had a small positive impact on the Jerónimo Martins share price. During the second and third quarters the Jerónimo Martins share remained stable at euro 6.5 and 7.5, notwithstanding the upward revision of price targets and recommendations of all analysts monitoring the company and sector. Following the announcement of third quarter results on October 30th and the road show in London, Boston and New York between November the 10th and the 13th, which confirmed analysts' expectations and a return to profits, there was a strong demand for Jerónimo Martins share and the trading volume rose sharply - average trading on Jerónimo Martins share more than trebled over the first three quarters of the year - and the share price climbed, reaching the year’s high on December 17th: 11.05 euros per share.
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Increases occurred in the fourth quarter, both in the trading volume of Jerónimo Martins shares and in the share price (up by 55%), which greatly surpassed that of the general PSI-20 index (up by 10%).
JM shares price & Index Performance
0,00
2,00
4,00
6,00
8,00
10,00
12,00
Dez-02 Jan-03 Fev-03 Mar-03 Abr-03 Mai-03 Jun-03 Jul-03 Ago-03 Set-03 Out-03 Nov-03 Dez-030
100.000
200.000
300.000
400.000
500.000
600.000
700.000
800.000
JM PSI-20 Volum e
Disposal of Eurocash 2002 ye
results
2003 1st Quarter results
Roadshow
2003 1st half results
Bond Loan Issue
2003 3rd Quarter
Roadshow
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Stock Market Indicators:
The Investor Relations Office continued to provide updated information on performance indicators and to release Group results, having answered all the analyst and investor questions, either by phone or by the e-mail address - [email protected]. In May, journalists and analysts visited Biedronka operations in Poland (stores and warehouses), where they could learn about Group activities and the Polish market. In 2003, two Road Shows were part of the communication strategy with the Market. The first, in May, took place in Holland and in London, and the second, in November, was conducted in London, Boston and New York. These road shows presented the results of the restructuring process, the return to profits in 2003 and the Group’s strategic guidelines for 2004-2006. The following chart lists press releases and event communications issued in 2003 to keep analysts and investors informed about relevant Group activities:
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PRESS RELEASES AND EVENT COMMUNICATIONS
6-Jan Calendar of presentation of results 2003
8-Jan 2002 preliminary sales
3-Feb Sale of Eurocash
20-Mar Presentation of 2002 results and Conference with Analysts held in the Company
26-Mar Participation in the Iberian Mid-Cap Conference in Madrid, organised by the Deutsche Bank
28- Mar Notice convening general shareholders’ meeting
2 –Apr Meetings with Portuguese institutional investors, organised by BCP Investimentos
29-Apr Presentation of first quarter results
6-8-May RoadShow – Holland and London
15-16-May Visit of journalists and analysts to Poland
16-Jun Participation in the Food Retail Conference in Madrid, organised by the Deutsche Bank
8-Jul Disclosure of first half preliminary sales
18-Sep Presentation of first half results
2-Oct Participation in the European Retail conference in Paris organised by CDC IXIS
3-Oct Press Release on Bond Loan
30-Oct Presentation of third quarter results
10–13-Nov RoadShow - London, Boston and New York
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Shareholder Structure
In 2003, Companies, whose rights of voting, under the terms of Article 20, paragraph 1 of the Securities and Exchange Code are attributable to Banco Privado Português (see note to “List of Holders of Qualified Stakes as of 31 December 2003” on part III. Consolidated Management Report Annex), increased their holdings in Jerónimo Martins, SGPS, S.A. by 0.5 percentage points against December the 31st 2002. Plan to Acquire Own Shares In 2003, there were no movements in the treasury stock account. Jerónimo Martins SGPS, S.A. maintains a portfolio of 171,800 own shares purchased in 1999 at the average price of euro 35.28 each, representing 0.18% of its share capital. 1.5. Dividend Distribution Policy The Board of Directors of Jerónimo Martins SGPS, SA has established a dividend distribution policy based on the following assumptions:
The value of the dividend distributed should correspond to between 40% and 50% of ordinary consolidated
earnings. If as a result of the application of this criteria, the dividend distribution in a given year is lower than in the preceding year, the Board of Directors, if they consider that the reduction is a result of abnormal, merely circumstantial situations, may propose that the preceding year value is maintained. Or they may even resort to existing free reserves, providing that the use of these reserves does not jeopardise the principles adopted for balance sheet management. In accordance with the referred criteria, a gross dividend per share of PTE 60.00 was distributed in 1999, the last year in which dividends were distributed. Due to the consolidated losses posted in 2000, 2001 and 2002, no dividends were distributed for these years. Considering the net results of 2003, and viewing the reinforcement of equity, the Board of Directors of Jerónimo Martins SGPS, S.A. will propose to the General Shareholders’ Meeting the distribution of no dividends this year, as was the case in the previous years. 1.6. Stock Option Plan At its meeting on August 9th, 1996, the General Shareholders’ Meeting of the Company gave the Board of Directors full powers to establish the terms and conditions of a capital stake-holding plan, suppressing shareholders’ preference rights to subscribe 337,098 ordinary shares which, under the terms of the plan, were reserved for subscription by the Group board members and senior management. The capital increase was fully subscribed by Jerónimo Martins Stock Option Plan Trust, which is entirely independent of the Company and is managed separately.
Shareholder Structure
15,7%
26,3%
57,9%
Soc. Francisco Manuel dosSantos
BPP (StrandVentures+Multiplus+FitronManagement)
Floating and Own Shares
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Under the terms of the Trust, Jerónimo Martins shares exclusively subscribed by the Trust will be kept with the Trust and only transferred between it and the Company under due authorisations to acquire own shares approved by the shareholders at a general meeting, thus providing for its funding needs arising from the application of the incentive plan. The introduction of this plan is linked to the implementation in the whole Group of a target-led management system based on parameters of profitability analysis, business growth and value generation for the shareholders, which ensures that the Group’s management is highly committed to the strategic goals established. 1.7. Business Between Members of the Board and the Company In 2003 there were no business or transactions carried out between, on the one hand, the members of the Company’s Board or Directors and its Supervising Bodies, and on the other, the holders of Qualified Stakes or Companies under a Parent-Subsidiary or Group Relationship. 1.8. Investor Relations Office The objective of this Office is to give the market an up-to-date picture of the various Jerónimo Martins areas of business, in terms of performance and outlook. It is the favoured source of information for all institutional and private investors, as well as for analysts who give their opinions and recommendations on listed securities. The Office supplies information that may affect stock prices, which is also provided through institutional channels, especially through the Stock Exchange Commission web site. In addition, it offers general information and explanations about the various business areas. The Investor Relations Office is responsible for drawing up a financial market communication plan as part of the Group’s global communication strategy, and for implementing this plan. This includes not only releasing communications, but also co-ordinating and making conference calls and individual or joint meetings, preparing presentations and organising visits to the companies. E-mail is increasingly used to disclose this type of information, since it allows the Office to establish an individual, personalised contact to specifically reply to Shareholders’ queries on publicly disclosed information and Group Jerónimo Martins relevant facts. Quarterly results releases and convening notices for general meetings are examples of regular communications to the market that are also widely available on the Group’s institutional site. The Office may be contacted, not only through its Market Relations Representative, Ana Luísa Abreu Coelho Virgínia, but also through the Group’s institutional site, at www.jeronimo-martins.pt. The purpose of the site is also to facilitate access to certain types of information. In addition to disclosure of information as required by the new Article 3-A of Regulation no. 11/2003, the site provides general information on the Jerónimo Martins Group and the companies of which it is composed, as well as other information considered important, such as:
• Communications to the market concerning relevant facts; • The Group’s quarterly, semi-annual and annual accounts; • Economic and financial indicators and statistical data updated every six months or annually depending on
the company or business area; • Annual reports of the listed Companies in the Group; • Information on share price performance; • Calendar of corporate events issued at the beginning of each semester including, among others, General
Shareholders’ Meetings and presentation of annual, semi-annual, and when applicable, quarterly accounts; • Information concerning General Shareholders’ Meetings; • Information on corporate governance; • The Jerónimo Martins Group Code of Conduct;
Besides providing information, the site also includes a form for fast e-mail contacts/queries and the possibility of subscribing to a mailing list. Contacts for accessing the Investor Relations Office are as follows: Address: Rua Actor António Silva, nº 7, 14º andar, 1600-404, Lisboa Phone: +351 21 752 61 05 Fax: +351 21 752 61 65 E-mail: [email protected]
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1.9. Remuneration Committee On November 13th, 2001, the General Shareholders’ Meeting elected a Remuneration Committee composed of the shareholders Artur Santos Silva, José Queirós Lopes Raimundo and Arlindo do Amaral, none of whom is a member of the Board of Directors of the Company or has a spouse, relative or family member in that position. As provided by law, the establishment of remuneration payable to members of the Board of Directors was delegated to this Committee. At a meeting on November 15th, 2001, the Remuneration Committee, acting within its powers, established parameters for the above-mentioned remunerations, as well as the possibility of allowing the Chairman, following disclosure of the year’s results, to submit a proposal to the Committee concerning the attribution to other members of the Board a bonus linked to the Group’s performance. 1.10. Amount of Annual Remuneration Paid to External Auditor Total remunerations paid to the auditor in the reporting year was of 638,104 euros, which excludes travelling expenses and other costs borne directly by Group companies. In percentage terms, this amount may be broken down as follows: 1) Statutory audit services: 97% 2) Other non-statutory audit services and external audits: 3% Other non-statutory audit services totalling the amount of 20,454 euros concern to: (1) a training course on IAS, (2) the consideration paid for access to a fiscal database, (3) maintenance and use of the CLIME consolidation tool and (4) an opinion on the tax incidence of bank guarantee stamp duty. All these services were aside from the regular auditing works and were provided by officers who did not participate in any auditing works within the Group. Chapter 2. Exercise of Shareholder Voting and Representation Rights 2.1. Statutory Rules on the Exercise of Voting Rights The exercise of voting rights through representation and the form of exercising these rights are fully ensured in accordance with the law and Company by-laws under the terms set down in the notices convening general meetings. The Company is actively committed to promoting the exercise of shareholder voting rights, namely through votes submitted by mail. The Company guarantees the availability of suitable information to enable shareholders represented to give voting instructions, namely by providing them with the proposals to be submitted to the General Shareholders’ Meeting, within legally established time limits. Since 2003, preparatory documents for General Meetings have also been made available on the Group’s institutional site on the Internet. Under the terms of Company by-laws shareholders with voting rights who, no later than eight days prior to the day of the meeting, have their shares registered under their name in a securities account, may participate in General Shareholders’ Meetings. Shareholders owning a small number of shares may form a group in order to reach one hundred shares equivalent to one vote and be represented by one of the members of the group. Shareholders may be represented at General Shareholders’ Meetings by a spouse, ascendant or descendant, or by another shareholder, or else by a member of the Company’s Board of Directors, by means of a letter addressed to the Chairman of the General Meeting indicating the name and address of the representative and the date of the meeting. The instruments of representation, as well as communications from credit institutions confirming the register of shares must be addressed to the Chairman of the General Meeting and delivered to the Company at least eight days prior to the date established for the meeting. 2.2. Postal Voting The Company has established the right of shareholders to vote by post, in accordance with the form provided in the last convening notices, which aims to facilitate easier means of voting while, at the same time, ensuring the safety of the vote. In 2004, the Company intends to provide shareholders with ballot papers to make it even easier to vote by post. 2.3. Electronic Voting Although recognising that the use of the new technologies promotes the exercise of shareholder voting rights, particularly through absentee votes submitted by electronic mail, the Company has not yet instituted this mechanism as it considers that the underlying information systems do not offer guarantees of reliability, particularly for the reception of votes.
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2.4. Requirements in terms of the deadline for the deposit or blocking of shares Under the terms of the Company’s by-laws, shareholders with voting rights who, no later than eight days prior to the day of the meeting, have their shares registered under their name in a securities account, may participate in General Meetings. In this specific matter, the Company is constrained by a provision in its by-laws that limits the possibility of complying with the Securities and Exchange Commission’s recommendation in this regard. However, the Board of Directors may propose a change in the by-laws so as to include this recommendation. 2.5. Required Deadline for Receiving Votes Sent by Post As Company by-laws fail to provide an indication in this matter, the Company has established a deadline of 48 hours prior to the date of the General Meeting for the receipt of votes sent in by post, thus complying and even surpassing the Securities and Exchange Commission recommendation in this regard. 2.6. Number of Shares corresponding to One Vote According to Company by-laws, each one hundred shares corresponds to one vote. Chapter 3. Company Rules 3.1. Code of Conduct and Internal Regulations The Company must comply with the legislation in force and the appropriate rules of good conduct for its activity, adopting codes of conduct and internal regulations whenever the matters in question so justify. The Jerónimo Martins Group has always acted upon principles of absolute respect for rules of good conduct in the management of conflicts of interest, incompatibilities, confidentiality and the non-use of inside information by members of the Board of Directors. Although existing instruments and practice have proved adequate for the regulation of these matters, it was decided to draw up a code for existing rules of good conduct on the above-mentioned matters, as well as others that specifically apply to the activities of the companies in the Jerónimo Martins Group. The objective is to incorporate commitments that require high standards of behaviour from all involved with the Group and to provide a tool for optimising management. In 2002 the Board of Directors appointed a “Working Group for Rules of Conduct”. After a process of internal consultations, this Working Group submitted its conclusions to the Board of Directors at the end of the first half of 2003. The Code of Conduct was approved on July 30th 2003 and the process of divulgation was concluded on February 29th 2004. At the same time the Board of Directors also appointed an Ethics Committee to monitor the divulgation of and compliance with the Code of Conduct. The Code of Conduct is available for easy, free consultation on the Group’s institutional website, at www.jeronimo-martins.pt or may be requested from the Investor Relations Office.
3.2. Measures Likely to Interfere with Public Tender Offers No special rights are conferred upon shareholders or restraints on the exercise of voting rights are listed in the Company by-laws. As far as the Board of Directors is aware no shareholder agreements or any other arrangements exist that might interfere with public tenders. The Board of Directors feels that clear information must be provided in such matters and that the existence of such limitations may not be in the interest of shareholders. Chapter 4. Board of Directors 4.1. Description of the Board of Directors During the 2001-2003 mandate, the Board of Directors was composed of seven members, three of whom are Executive Members - Elísio Alexandre Soares dos Santos (Chairman of the Group), Luís Palha da Silva and Pedro Soares dos Santos - and four are Non-Executive Members - António Borges, Rui Patrício, Hans Eggerstedt and José Luís Nogueira de Brito.
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According to the principles governing the Company, all Board Members are accountable to all shareholders equally, but the existence of Independent Board Members further reinforces the independence of the Board of Directors work in relation to shareholders. According to the last amendment to Article 1, paragraph 2 of the Securities and Exchange Commission’s Regulation no. 07/2001, Board members regarded as independent are Luís Palha da Silva, António Borges and Rui Patrício. Members of the Board of Directors also holding positions in other companies are as follows: Elísio Alexandre Soares dos Santos Member of the Supervisory Board of Banco Comercial Português, S.A. Member of the Board of Sindcom, SGPS, S.A. Pedro Soares dos Santos Member of the Board of Jerónimo Martins Serviços, S.A.* Member of the Board of Imocash - Imobiliário de Distribuição, S.A.* Member of the Board of Recheio Cash & Carry, S.A.* Member of the Board of Recheio, SGPS, S.A.* Member of the Board of Noredis-Sociedade de Representações e Distribuição do Norte S.A.* Member of the Board of Lidosol II - Distribuição de Produtos Alimentares, S.A.* Member of the Board of Funchalgest - Sociedade Gestora de Participações Sociais, S.A.* Member of the Board of Lidinvest - Gestão de Imóveis, S.A.* Member of the Board of Larantigo - Sociedade de Construções, S.A.* Manager of Idole Utilidades, Equipamentos e Investimentos Imobiliários, Lda* Member of the Board of João Gomes Camacho, S.A.* Member of the Board of JMR - Gestão de Empresas de Retalho, SGPS, S.A.* Member of the Board of FEIRA NOVA - Hipermercados, S.A.* Member of the Board of COMESPA - Gestão de Espaços Comerciais, S.A.* Member of the Board of GESTIRETALHO - Gestão e Consultoria para a Distribuição a Retalho, S.A.* Member of the Board of SUPERTUR - Imobiliária, Comércio e Turismo, S.A.* Member of the Board of IMORETALHO - Gestão de Imóveis, S.A.* Member of the Board of CUNHA & BRANCO - Distribuição Alimentar, S.A.* Member of the Board of MOSER & BRANCO - Distribuição Alimentar, S.A.* Member of the Board of DANTAS & VALE, S.A.* Member of the Board of PINGO DOCE - Distribuição Alimentar, S.A.* Member of the Board 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* Luís Palha da Silva Member of the Board of Jerónimo Martins Serviços, S.A.* Member of the Board of Jerónimo Martins Restauração e Serviços, S.A.* Member of the Board of JMR - Gestão de Empresas de Retalho, SGPS, S.A.* Member of the Board of LIDOSOL II - Distribuição de Produtos Alimentares, S.A.* Member of the Board of FUNCHALGEST - Sociedade Gestora de Participações Sociais, S.A.* Member of the Board of LIDINVEST - Gestão de Imóveis, S.A.* Member of the Board 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* António Borges Vice-Chairman of Goldman Sachs International Member of the Supervisory Board of Sonae.com Chairman of Audit Board of Banco Santander de Portugal Chairman of Audit Board of Banco Santander de Negócios Portugal Hans Eggerstedt Member of Supervisory Board of Rodamco Europe N.V. Member of Supervisory Board of Unilever Deutschland Gmbh Non-Executive Director of Bolero.net Ltd. Non-Executive Director of Colt Telecom Group, plc Member of Advisory Board of the ING Group Member of Advisory Board of the Amsterdam Institute of Finance
* Companies that are part of Jerónimo Martins Group
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Rui Patrício Member of Board of Directors of Monteiro Aranha, SA Member of Board of Directors of Monteiro Aranha Participações, SA Member of Board of Directors of Companhia Industrial São Paulo e Rio Member of Board of Directors of Klabin SA Member of Board of Directors of UAP International do Brasil Member of Board of Directors of Espírito Santo International Holding Member of Board of Directors of Portugal Telecom do Brasil Member of Board of Directors of Companhia Brasileira de Botucatu J. L. Nogueira de Brito Chairman of Board of Sociedade Francisco Manuel Santos, SGPS, S.A. Chairman of General Meeting of Douro - Sociedade Gestora de Participações Sociais, S.A. Álvaro Troncoso Director of Uniarme, crl 4.2. Executive Committee The main role of the Executive Committee is to assist the Board of Directors in the exercise of management functions. As a delegate body of the Board of Directors, and according to its regulation, the Executive Committee is responsible for exercising the following functions:
• Define the strategic guidelines of the Group, as well as the key policies to be followed by the companies in the Group;
• Monitor the implementation by Group companies of the strategic guidelines and policies defined; • Exercise financial and accounting control over the Group and its companies; • Coordinate top-level co-ordination of operating activities developed by Group companies, whether or not
integrated in business areas; • Monitor new businesses during start-up and for as long as the respective companies are not integrated in a
business area; • Implement the human resources management policy set up for the entire Group’s executive staff.
The Executive Committee meets at Company headquarters or at any other location. The Chairman is responsible for convening the meetings, setting the respective date and time and establishing an agenda of matters to be dealt with. In 2003 the Executive Committee met 36 times. Although the Executive Committee exercises its duties in a collegiate way, each of its members has supervisory responsibilities over specific areas, namely: E. A. Soares dos Santos: Development and Strategy, Internal Audit, Human Resources, Communication and Investor Relations, Operations in the business area of Industry and Services; Luís Palha da Silva: Financial Area, Reporting and Business Control, Investor Relations and Legal Affairs; Pedro Soares dos Santos: Operations in the business area of Food Distribution including Sourcing, Logistics, Quality Control and Information Systems; According to the last amendment to Article 1, paragraph 2 of Securities and Exchange Commission’s Regulation no. 07/2001, Mr. Luís Palha is considered to be an Independent Member of the Executive Committee. 4.3. Structure and Role of the Board of Directors Under the terms of Company by-laws, the Board of Directors is made up of an odd number of effective members, from a minimum of seven to a maximum of twenty-one, and of one to three substitute members. Currently, the Board of Directors is composed of three executive and four non-executive members. The existence of independent members and of non-executive members also endows the Board with a diversified range of competencies, enabling it to enrich its contribution to the Company management. Moreover, it brings together a wide range of technical skills, sets of contacts, and connections with national and international entities, that optimise the Board’s contribution to the governance of Jerónimo Martins from the standpoint of shareholder value creation. A contribution that greatly enhances and broadens the defence of shareholder interests. The Board of Directors meets at least four times a year. Any member of the Board may be represented at board meetings by another board member, by means of a letter addressed to the Chairman. Except when otherwise provided, decisions are taken by a majority of votes. In the event of a tie, the Chairman holds a casting vote. The powers and duties of the Board of Directors are described in Article 11 of the Memorandum of Association.
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Matters referred to in paragraph 4 of Article 407 of the Commercial Companies Code are denied to the Executive Committee The Board of Directors has delegated several powers to the Executive Committee, as set down in the respective regulation, namely the management of corporate business within the ambit of the day-to-day running of the Company. This includes, among others, approving expansion plans, representing the company, financial management, and the appointment of executive members for Group Companies in each business area. However, the Board of Directors exercises effective control of the Company being duly informed at all times and ensuring supervision over the management of the Company. For this purpose, it meets at regular intervals, having met 6 times in 2003. To this end, the Board of Directors is informed of the content of all the minutes of Executive Committee meetings, where matters discussed and decisions taken are recorded. At each Board meeting, the Executive Committee reports on activity developed in the Company since the last meeting, Non-Executive Board members being available to provide any further clarification that may be required. 4.4. Remuneration Policy of Board of Directors The remuneration of the members of the Board is dependent on the Company’s results and on the performance of Company shares, as far as the executive members are included in the stock option plan referred to in Chapter 1 section 1.6 of Corporate Governance, and may also benefit from attribution of a complementary remuneration (bonus) as provided in section 1.9 of the same Chapter. It is the responsibility of the Remuneration Committee to establish the remuneration of board members and the respective remuneration policy. 4.5. Remuneration of Members of Board of Directors As referred to in section 1.9 of Chapter 1 of Corporate Governance, the Company’s Remuneration Committee allows the Chairman of the Board of Directors to, following disclosure of the year’s results, to submit a proposal to the Committee regarding the attribution to the other members of the Board of a complementary remuneration. However, given the results posted in 2002, the Chairman of the Board decided not to submit any proposal to this effect. The remuneration paid to members of the Board of Directors over the year totalled 997.595,81 euros of which 907,812.17 euros went to executive members and 89,783.64 euros to non-executive members.
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III. Consolidated Management Report
1. Macroeconomic Environment
1.1. World Economy The beginning of 2003 saw a continuation of the slowdown in the global economy that had begun at the end of 2002, the effects of which were felt especially in the industrialised countries. The uncertainties arising from a pre-war scenario led to stagnation in production and a weakening of world trade. Conditions in the labour markets, as well as confidence indicators remained gloomy. The stock markets registered steep drops until March, reflecting the risks and uncertainties of the geopolitical context and also the pace of economic activities. During this period the dollar continued to fall, especially against the euro. The price of oil, driven by the war in Iraq and the political crisis in Venezuela, registered a sharp rise, reaching US$34 per barrel. The period was also negatively marked by the SARS epidemics that particularly affected Asia. However, as the end of the war neared, there was a reversal in these trends and recovery began both on the main stock exchanges and in North-American currency. Forward-looking economic indicators also started signalling a change in agents’ expectations. The price of oil retreated. Until the end of the first half of the year, therefore, accumulated activity indicators were generally weak in most economies. During this period monetary conditions were further eased, with cuts in the key rates of the USA, the Euro Area and Great Britain, among other markets. In the USA, as a consequence of the possibility of a deflationary environment and the presumption that extraordinary monetary conditions would be kept unchanged for an abnormal period of time, long-term interest rates fell to historically low rates, hitting a 40-year bottom by mid-July. In the remaining economies the bond markets also followed this trend. As the year advanced, economic recovery became more visible, as lagging indicators started to catch up with expectation indicators. Long-term interest rates, particularly in the USA, rose again, and stock markets initiated what some call a new bull market, while credit markets revealed the positive impacts of corporate balance sheet restructuring measures. The dollar resumed its downward trend again particularly noticeable against the Euro - at this stage as a consequence of the limited attractiveness of fixed-income market and above all the growing concerns of international investors with regard to the size of the North-American twin deficits. Due to instability in Iraq and the Venezuelan and Nigerian crises, the price of oil once again climbed to US$30 per barrel. The stimuli to the economy, through both interest rate and tax cuts, produced an extraordinary third quarter in the USA in a period of low inflation. The country is preparing once again to assume its role as the world growth engine, even if subject to multiple risks (high level of household indebtedness, imbalances in its national accounts, off-shoring of jobs, etc.). The major driver of the economy continued to be private consumption. The stabilisation of the labour market in the last quarter contributed to a rebound in consumer confidence indices, once again supporting the economy during the period. In the Euro Area signs are much less encouraging, mainly due to the weakness of internal demand and the rise of the Euro, which climbed by more than 20% against the dollar, closing the year at over 1.26. The main economies in the region are struggling with numerous difficulties, namely pressure from conjunctional and structural problems and the Stability and Growth Pact impositions. Therefore, they have a limited capacity to re-launch their economies. Germany, in particular, is expected to register zero growth, following a technical recession in the first two quarters of the year. The failure by France and Germany to comply with the SGP this year and up to 2005 deserves special attention and will stand against a stronger growth in the Euro Area. China was once again in focus, with yet another year of robust economic performance, with the GDP growing more than 7% against a global increase of about 3%. World trade is expected to show similar trends, rising some 3%. 1.2. Portugal Economic activity is expected to have contracted about 1% in 2003, reflecting, on the one hand, a depressed internal demand and, in particular, investment (as a result of the expected fall in public expenditure) and, on the other hand, the weakness in external markets. Unemployment soared, while corporate and household indebtedness remained high. Inflation decreased to close slightly above 3%, but it was still far above the average of European Union members, which was about 2%. The economic recession raised difficulties to public expenditure reduction process and specially to the consolidation of the budget. In 2003 the Government once again resorted to one-off revenues, which, according to the European Commission, accounted for more than 2% of GDP, in order to post a deficit only marginally under 3%. On the positive side, exports performed well. 1.3. Poland The strong depreciation of the Zloty against the Euro, of around 14.5%, fuelled the competitiveness of the Polish export sector and strongly contributed to an increase of more than 3% in the Polish GDP. Internal demand also made good progress, all the more significant when the labour market continued to register unemployment rates above 17%. The local economy continued to benefit from successive cuts in local interest rates. Still, with annual inflation close to 1%, real interest rates remain quite high. Polish public accounts continued to deteriorate, exercising strong pressure on the sovereign debt, diverging from the criteria set for accession to the EU and hampering a more expansionist monetary policy.
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2. Industry Outlook 2.1. International Food Distribution Market3 Global private consumption, in Euros, is thought to have grown by 2.6% in 2003 as a result of worldwide economic difficulties. A large part of this growth came from emerging economies - Central and Eastern Europe and Asia - although these were somewhat affected by the effect of exchange rate fluctuations. In Europe, retailers struggled against huge pressure on prices. The introduction of the Euro in 2002 prompted discount chains to lower prices even further, an effect that spread all across Europe and did not go unnoticed by customers. As in 2002, the fight to maintain profitability ratios, along with the pressure exerted on prices to retain customers, could only be won thanks to huge operational focus on the achievement of efficiency gains, leaving development into new geographical and business areas in second place. The Food Distribution Industry continues to show signs of concentration at the national, regional and global level, a process that has definitely not yet run its full course. Concentration processes tend to be faster in Central Europe, Asia and Latin America. In Western Europe, the countries that present greater opportunities for concentration are thought to be Greece, Italy, Spain and Portugal. In Eastern Europe, markets such as Poland, Hungary and the Czech Republic have practically reached saturation and concentration is the next logical step. Large food retail companies are increasingly faced with mature markets, where chances for consolidation are limited, and they cross borders in search of opportunities for expansion. In turn, local retailers in these targeted markets develop defensive consolidation processes through mergers and alliances under buying groups. It can be said that the limit to concentration is correlated with companies’ degrees of competitiveness. Governments, however, namely in Europe and in the United States, have started intervening so as to guarantee that competition is preserved at local and national level. One such example may be found in the United Kingdom, where the authorities, in order to preserve healthy competition in the British food retail sector, did not allow access by any of the three major retailers to the acquisition of Safeway. 2.2. Food Retail Market - Portugal According to Banco de Portugal, private consumption in Portugal is expected to have registered a year-on-year nominal variation between - 1.25% and + 0.25%. The year was characterised by a climate of strong distrust in the economy and by intense competitive pressure on prices in all formats of food retail, which became particularly acute in the second half of the year. 2003 was further marked by a void in the law concerning the licensing regulations for new commercial units, a situation that continued to limit the capacity for expansion of most operators. In numerical terms, the increase in the number of stores stemmed mainly from the discount format, responsible for 60% of new store openings, while the supermarket format accounted for 30%. The year also saw the opening of 3 new 10,000sqm stores. On the whole, no more than 30 or 40 stores were opened. Once the quota for the Commercial Units of Relevant Size to which decree-law no. 258/97 referred was considered exhausted, it was expected that it would be replaced by a new legislative measure regulating the distribution sector, with effects in 2003. Regrettably this was not the case and the new law is only expected to take effect in 2004. No entry, merger or acquisition of size took place during the year and the following international operators remained present in the Portuguese market: Auchan, Carrefour, Intermarché, Lidl, Leclerc, Metro/Makro and Plus-Tenglemann. According to APED (the Portuguese Association of Distribution Companies), the Jerónimo Martins and Sonae groups, both of national origin, continue to account for 67% of the organised retail market in Portugal, holding dominant positions.
3 Source: M&M Planet Retail
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2.3. Wholesale Food Market - Portugal The Portuguese wholesale food market comprises the retail channel and the HoReCa channel. It is a highly fragmented market, being distributed by several local and regional operators. There are about 85 companies and 180 points of sale, but 5 chains alone account for 70% of total sales. According to internal estimates, this market is thought to have recorded sales of 2.6 billion euros in 2003*. Both channels essentially operate through small family or individually run firms. Traditional retail includes small supermarkets (not included in chains), self-service and grocery stores. The HoReCa channel comprises coffee shops, snack bars, restaurants, hotels, bars, institutional catering and catering firms. In 2003 traditional retail in mainland Portugal has registered purchases of about 1.3 billion euros and 23,000 points of sale* corresponding to a decline of 0.5% and 3.3%, respectively in sales and points of sale, although the average purchase per point of sale increased by 2.9%. Although this is a channel that is still maturing, there has been a tendency for stabilisation in the last few years. It should be mentioned that sharp decreases occurred mainly at point of sale level, but that the average purchase per point of sale registered consecutive increases. This fact indicates that this is a channel that remains attractive although it was forced, through the expansion of modern retail, to undergo a restructuring and adaptation process where only the stronger or better equipped survived. As opposed to traditional retail, the HoReCa channel posted consecutive increases. In 2003 it comprised 80,000 points of sale and posted sales purchases of 4.8 billion euros* (up by respectively 6.7% and 5.5% over the previous year). This is a large size channel where the level of penetration of cash & carry operators is still quite small. According to our estimates, only 32.9% of purchases are made in the cash & carry channel. 2.4. Food Retail Market - Poland The retail food market continued to feature a high number of store openings in various formats, while at the same time there were some restructuring and consolidation moves in the different formats, causing a continuous increase in competitive pressure. The Hypermarket format continued to see consolidation moves, of which Carrefour’s acquisition of several Hypernova hypermarkets in the Ahold chain was one of the more significant examples. 31 new hypermarkets were opened, raising their number to 186 by the end of the year. In the Supermarket format, new openings totalled 38, bringing to 550 the number of these units in the market. All operators kept their gradual growth pace, but the format witnessed a number of restructuring moves (the disappearance of the Rema 1000 chain was one of the more important events). The Discount food store segment registered greater dynamism and growth, its store network increased by 132 new units reaching a total of 1,276 at the end of the year. The changes that occurred in the sector attest to the high competitive pressure that exists in the retail food market. Except for Wal-Mart, all other major international food distribution operators are present in the Polish market. All these chains are aggressively seeking to raise their market share, which explains why Poland remains the most competitive market in Central Europe.
* Forecast based on Nielsen, Gira-Sic, Uniarme, internal data and trade press.
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3. Overview of the Group’s Consolidated Activity 2003 was marked by the return to profit with the net profit attributable to Jerónimo Martins reaching 58 million euros. With the sale of Eurocash, effective as of March 1st of 2003, the Group concluded its restructuring process, having operated during the year based on a solid business portfolio that proved capable of reacting to an adverse economic and competitive environment. 3.1. Consolidated Sales Group consolidated sales reached 3.4 billion euro, a year-on-year increase of 2.5% excluding disposed businesses. This growth was quite remarkable considering that the competitive environment in Portugal considerably deteriorated in the second half of the year, and that the excellent performance of sales in Poland was not reflected in consolidated sales due to the 12% average devaluation of Polish currency.
Retail chains in Portugal saw the second half of 2003 marked by increased competition, with all players relying on strong promotional campaigns and media advertising. Pingo Doce, thanks to consistent work on the price mix and communication, increased sales by 2% versus 2002. Feira Nova maintained sales, notwithstanding difficult commercial conditions in the last quarter and a particularly tough Christmas season. Even with a new unit in the Lisbon region, the performance of the Group hypermarkets chain in Portugal was strongly affected by the temporary closing of four of its stores for refurbishing. The Cash&Carry Recheio, notwithstanding the macro-economic environment, posted a sales growth of 4.7% confirming its success in responding to customer requirements, with innovation and quality. The performance of Recheio definitively bears out the strategy of segmentation outlined, which banked strongly on the HoReCa channel. In Poland, considerable knowledge of how to operate in the market allowed Biedronka to develop fundamental work in assortment consolidation, through the permanent optimisation of its exclusive brand versus industry brands, combined with a price mix adjusted to consumer behaviour. The success of this strategy is revealed by a 14% increase in sales in local currency, 12% on a like-for-like basis. Despite the reduced impact of the Polish chain’s performance on the consolidated accounts due to the devaluation of the Zloty, at the end of 2003 Biedronka already accounted for 27% of Group sales. Leadership on the Polish retail food market was consolidated not only by growth on comparable sales, but also through the expansion of the store network, which ended the year with 34 more units than in 2002. By the end of 2003, a milestone in this expansion was the reinforcement of the position of the chain with 10 more stores in Warsaw, where both population density and consumption potential are higher than the average in the country.
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In the Manufacturing and Services area a sales growth of 6.5%, excluding disposed businesses, reflects the good performance of the four companies. The excellence of manufacturing processes and the restarting of olive oil exports, enabled FimaVG to achieve an important sales recovery. In LeverElida continuous innovation backed further market share gains for some of its leading brands. A good summer season combined with the launch of new products (“Viva”) and of some special campaigns (“7 Pecados”) led Iglo to end the year with an excellent sales performance. In Marketing and Distribution Services, the performance of the catering division and some of its represented brands marked 2003 in a positive way.
Sales 2003 (YE)*
Retail Portugal43%
Manufacturing & Services
10%
Biedronka27%
Madeira3% Cash & Carry
17%
* excluding disposals
3.2. Operating Results Thanks to Group restructuring, operating results were up by 44.2% against 2002. Excluding disposed businesses, EBIT reflects the resilience of the current portfolio, and its confident response to a much higher competitive pressure. It also mirrors the problems that affected the Portuguese economy, the effort of the retail chains in Portugal to remain competitive, and, because of the devaluation of the zloty, it does not reflect the reinforcement of Biedronka’s capacity to generate cash flow.
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Concerns with efficiency, in anticipation of the new regulation on store openings, and of the greater need to step up competition, already had an effect on performance in 2003, with JMR and Madeira showing the impact that emphasis on the simplification process had throughout the entire organisation. The operating margins of these two businesses areas are affected by changes in commercial, financial and human resources policies, namely by the initial impact, at cost level, of 1) closing, for significant periods of time, for refurbishing, of several Pingo Doce and Feira Nova stores, 2) change in the accounting of some financial leasing and 3) introduction of variable remuneration policies. Despite these changes, and the commercial effort made by the two retail chains, JMR displayed a solid profitability, with the operating cash flow margin, in percentage of store sales, being kept above 10%. At Recheio the increase of 1 percentage point in the EBITDA margin is the result of a careful performance of the business area, helped by a reduction in the cost of services rendered by the Holding Company. In Madeira, the performance of the EBITDA margin was the result of measures taken to raise store competitiveness in this region and to reorganise internal processes, namely at the logistics level.
11,0%
10,1%
6,5%7,5%
9,7%
7,8%
3,6%4,4%
13,7%13,4%
8,9%8,6%
0,0%
2,0%
4,0%
6,0%
8,0%
10,0%
12,0%
14,0%
16,0%
Retail Portugal Cash & Carry M adeira Biedronka M anufacturing &Services
JMConsolidated *
EBITDA Margin
2002 2003
* excluding disposals
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In Poland, Biedronka achieved an increase of 0.8 percentage points in its operating cash flow margin, to 4.4% of sales. This rise in the profitability of operations combined with the growth of sales is the result of a strong market position based on a profound knowledge of the market. Biedronka’s performance greatly contributed to strengthening the Group’s capacity to generate operating cash flow. However, because of the mentioned devaluation of the zloty, such growth did not show up in the Group’s consolidated accounts. In the Manufacturing and Services areas, 2003 was marked by the success of several operating measures, the impact of which, on business profitability, was quite expressive sustaining the EBITDA margin at the 2002 level, even taking into consideration the strong advertising effort undertaken throughout the year. Although the Retail area in Portugal continues to be responsible for roughly half the Group operating cash flow, in 2003 Poland’s weight rose to 14%. Here too Recheio’s excellent performance is outstanding, with 15% of the consolidated EBITDA being generated in the Cash & Carry area.
3.3. Debt and Financial Results As a result of strict investment criteria, the Group pursued the announced reduction of debt, which ended the year at EUR 715 Million. It is important to refer, as regards this, not only the generation of operating cash flow and strictness in approving new capital outflows, but also the fact that working capital reached a temporary low level in the last days of the year.
A certain improvement in balance sheet equilibrium indicators was also achieved by extending the maturity of the consolidated debt through the issue of two new bond loans (40 million euros by JM, SGPS, S.A. and 115 million euros by JMR, SGPS, S.A.). With an average maturity of 2 years, the debt is still below cash flow generation capacity (Debt/EBITDA = 2.5).
EBITDA 2003 (YE)*
R etail P o rtugal50%
Others2%
M anufacturing & Services
16%
B iedro nka14%
M adeira3%
C ash & C arry15%
* excluding disposals
200%220%240%260%280%300%
320%340%360%380%400%
2000 2001 2002 2003
Deb
t / E
quit
y
0,01,02,03,04,05,0
6,07,08,09,010,0
Deb
t / E
BIT
DA
Debt/Equity Debt/EBITDA
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Although excellent progress has been made, gearing remains high (above 240%).
Following debt reduction, interest paid registered a 40% drop versus 2002.
3.4. Net Results and Cash Flow 2003 was marked by a return to profit. Through four quarters of consecutive, rising profits, the net profit attributable to Jerónimo Martins reached 58 million euros, leading to a rise of 33% in the cash flow per share (before investment). This result includes several non-recurrent items. On the negative side it includes the write-off of 4 non-profitable Pingo Doce stores that were closed down throughout the year, plus another 3 (two in Madeira) on the last day of the year - a loss of 4 million euros that affected the year’s profits. These stores will be transferred to more efficient locations, two of them already confirmed. In addition, the year results also include the 2 million euro operating loss registered by Eurocash (which was disposed of in March 2003).
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3.5. Return Analysis Despite 2003 restrictions the return on invested capital continued to show a positive evolution with special contributions from Biedronka and Recheio. In these two business areas performance gains had an important impact both on assets turnover and on the operating cash flow margin leveraging Group profitability to a Pre-tax ROIC above 16%.
11,0%
28,6%
10,8%7,1%
0,0%
5,0%
10,0%
15,0%
20,0%
25,0%
30,0%
Retail Portugal Cash & Carry M adeira Biedronka
PreTax ROIC
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4. Operating Activity
4.1. Functional Areas of the Holding Human Resources 2003 saw the consolidation of the organisational structure implemented in 2002, the objective of which was to combine maximum focus on operating efficiency with increased logistics and commercial centralisation. To this end, in 2003, some changes and adjustments were introduced in the operating divisions, aiming at an even better match between organisational structures and the business needs. The main change at the organisational level took place in Pingo Doce, where a new Operations structure was designed and prepared in 2003 for implementation at the beginning of 2004. To improve performance in the market where it operates and ensure greater control over the various aspects of the operation, Pingo Doce carried out extensive reorganisation of the Operational structure. This involved the redefinition of functions (the Regional Manager now accumulates responsibilities for the Technical Area and for Expansion and the District Manager has also been made responsible for supervision in the area of perishables), the widening of fields of responsibility, by giving employees new competences in the areas of quality, food safety and customer service (a new function was created, that of Technical Trainer in perishables), and structure reinforcement at District Manager level, so as to increase the capacity for store monitoring and control. Pingo Doce believes that, through these measures, conditions have been created to make the organisation more flexible, empowering operating teams for greater simplification of communication processes and increased speed in decision-making. As regards Recruitment Policies, Working Conditions, Wages and Benefits, and also Training and Development, the Social Responsibility programme set out in 2002 was further consolidated - and is described in great detail in the section of this report on “Social Responsibility”. Equally important, in 2003 the first steps were taken in the implementation of a Variable Remuneration Policy, based on a clear and objective appraisal system. This new scheme was applied to non-management staff employed in central warehouses, to all Recheio operational staff and to the Store Managers in Madeira. In 2004 the Group intends to extend the variable remuneration system to all Group management and non-management staff. Development and Strategy The Strategic Plan for the 2003-2005 period, approved by the Board of Directors of Jerónimo Martins, envisaged considerable reinforcement of the Group’s strategic control in its first year of implementation. This reinforcement involved the development and approval of the Group’s first Strategic Scorecard, which is coordinated and monitored by the Development and Strategy area. The Scorecard is a strategic planning and control tool with objectives in areas such as finance, the market, competitiveness and resource management, with the purpose of keeping the Holding and the operating and functional units focused on the Group’s strategic priorities and guaranteeing their efficient implementation. In 2003 the Development and Strategy area coordinated the preparation of the Strategic Plan for the 2004-2006 period, which has been approved by the Board of Directors. This document works as a basis for establishing the objectives set out in the Scorecard. Keeping its focus on its current portfolio of businesses, the Group Holding included in its agenda the monitoring of the more relevant markets in the two regions where it operates. To this end, in 2003, the Development and Strategy area implemented a data centre that monitors selected markets and operators, supporting the Group’s entire strategic and financial planning activity. Market monitoring activities also involved visits to the Spanish, Polish and Romanian markets, following up different initiatives undertaken in these markets. Such activities are part of an effort, the purpose of which is to substantiate the options that will be taken in the future, in a new growth step for the Group, and to provide the necessary information and knowledge to enable the Board of Directors and Executive Committee to take informed decisions. Investment in the Development and Strategy area, specifically in Scorecard activities, should be quite strong in 2004, with adequate implementation and coordination of the whole process, as well as the monitoring of individual projects, so as to keep the Board of Directors and Executive Committee duly informed.
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Planning and Control The Planning and Control activities remain focused on three crucial areas:
• Monitoring Medium and Long Term Business Plans impacts on the value of the Group’s portfolio. • Identifying and explaining deviations from budgeted figures through monthly performance analysis of all
business areas. • Investment Control.
With the conclusion of the restructuring plan, in which the planning and control department assumed an important role supporting disposal decisions, it is particularly important to continue to monitor business areas that constitute the current portfolio. In the course of 2003 financial statements from each business were analysed every month providing not only opportune awareness of business performance and any relative deviations but also allowing for the prompt implementation of any necessary corrective measures. This performance monitoring is the result of the development and improvement of controlling tools, completed by the end of 2002, which, right from the beginning of this year, provided detailed and rapid follow-up of operations, giving management proper knowledge about the existing portfolio. The new Jerónimo Martins Group Investment Manual came into force in 2003 and includes and clarifies all the procedures that have to be applied for the approval of new capital expenditure proposals, whether the investment concerns expansion or maintenance. The Manual also defines how each business area has to present proposals to the Executive Committee, clearly showing the key variables that guarantee project viability. The instructive nature of this Manual is intended to involve and familiarise business managers with the principles of value creation. The criterion of strict control in the application of available funds in 2003 was possible by the level of demand implicit on the Manual rules. In 2004 the Group will keep stringent criteria on all investment analysis without jeopardising growth potential and value creation. In 2004 the business performance and deviation analysis will continue, using the companies' budgets and medium and long term plans. The need to reformulate the figures in the planning maps will be evaluated according to the performance in each business area and the respective contribution to the consolidated accounts. Taking into consideration recent changes in several business areas and in the competitive and legal environment in which companies operate, the simulation of different scenarios for proactive actions and strategies will play an important role in 2004. In this context, medium and long term projection models for each business area will be highly important in studying the impact of different business strategies and changes in the operating environment, in all business areas. As to the Group’s consolidated accounts, the business plans will be simplified and improved in the early part of 2004. Finally, bearing in mind that 2004 will be a decisive year for the simplification of processes so enabling all business areas to be more efficient and competitive, the planning and control department will co-ordinate and co-operate in various projects (some began in 2002), included in a wide ranging plan of action that will embrace all Companies and all functional areas in the Group. Consolidation and Accounting Throughout 2003, the Accounting area focussed on improving the quality of financial information produced for all stakeholders. As described in the notes to the financial statements, it has been decided to revise and adjust the accounting treatment given to a number of matters that had, in some way, been harming the comparability of financial information. Comparability is, in fact, one of the critical requirements in the presentation of quality information to allow respective addresses to compare the evolution of organisational operating performance. The concept of sales and services rendered was revised to the effect that all supplementary costs with sales negotiated according to volume are now deducted from this heading. This change is aimed at reducing possible impact on sales of industrial companies through Net Price1 negotiation. The accounting treatment given to the lease of vehicles was also revised. Companies nowadays are faced with so many options for renting vehicles that operating advantages rather than financial issues take precedence when making decisions. For this reason, all vehicle lease contracts of less than 48 months without a purchase option are now treated as operational leases, according to IAS 17.
1 Net Price - Contribution from the companies to suppliers, previously considered as services rendered are now directly deducted in the invoice, allowing a clear margin management.
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In terms of Reporting, in 2003 the aim was to deliver more value to our shareholders by releasing more and better financial information, extending the detail of financial statements and disclosing all relevant information permitting everyone to understand the Group position at any given moment as well as known risks and forecast trends. Despite all efforts made to disclose comparable information, it must be pointed out that changes foreseen for 2004 in international accounting standards (IAS) may give rise to a number of relevant changes, namely in the treatment of assets with an indefinite useful life, such as Goodwill and other intangible assets. The Group remains convinced that it will be possible to attain full compliance with the IAS before 2005, which is the deadline established by the European Union for compulsory application of these standards.
Internal Audit and Risk Control
Property Risks The renewal of insurance contracts that took place in December 2002 was still significantly affected by the impact of the events of September 11th on the insurance and reinsurance markets. In addition, the behaviour of stock markets in 2002, with the main indices falling by more than 20%, without doubt, was another factor that conditioned the situation in these markets. Despite some reductions in insurance cover imposed by insurance companies, the Board of Directors decided to maintain the insurance programme as near as possible to that of the 2002 programme. The All Risks policy, led by AIG Europe, and co-led by ICI-Império, suffered the most significant increase, with the commercial premium rising by 15%. The Civil Liability policy, led and co-led by the same companies, and the Employers’ liability policy, placed with Fidelidade-Mundial, saw the respective premiums increase by almost 10%. This situation will not be repeated, however. The Group has intensified its search for future alternatives in this area, while it is not yet viable to increase self-insurance levels or to raise insurance franchises as it is felt that they are adequate to the Group’s financial conditions. Activities developed in 2003 focused on reinforcing inspections and enhancing safety measures in places of high risk. A risk identification programme was launched at management level and in the operating support functional areas of the various companies. Among other objectives, this programme aimed to standardise methods and terminology used in risk assessment and prospecting. This programme also gave rise to a project in the food distribution area, included in the scope of Strategic Scorecard projects, which have already begun to be implemented. This involves the definition of a rating scale that will place the store and warehouse risks of the different companies on a comparable basis. Many contacts were developed aimed at providing the Group with a single insurance control tool permitting it to optimise both current management, for instance in the collection of indemnities, and long-term management, namely the analysis of accident records in the occupational hazards branch. In terms of accidents, 2003 was a good year, like the two preceding years. The only accident worth mentioning was a fire of some importance in a Pingo Doce store, which is still awaiting the result of the insurance process. In a recessive economic environment, it is worth noting that thefts remained within the usual parameters. Financial Risks Interest Rate Risk In a scenario of extremely benign Euro interest rates and rather high volatilities, Group action in this area largely sought to take advantage of both in order to achieve the targets it had set. Executive Committee decisions included in the Strategic Scorecard determined that 75% of the medium/long term debt maturing beyond 2006 should be hedged through a diversified portfolio of derivative instruments. Based on the Group’s liabilities in December 2003, this meant the hedging of €135 million, of which €80 million has already been contracted. This was done through seven different operations carried out at different times, in each case taking opportunities provided by specific market conditions. Some of these operations have an underlying dollar curve exposure without incurring foreign exchange risk. They were taken based on cost optimisation principles as well as on a strong correlation between the Euro and Dollar curves since 2000. In June, taking advantage of historical lows reached by medium-term interest rates, three operations were concluded: (i) Fixed Rate Swap at 2.85%; (ii) Fixed Rate Swaption at 2.50% and (iii) Cap Spread Floored with protection from 3.25% and a minimum level of 2.95% to apply at 1.80%.
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In September, following a rise in long-term rates and consequent steepening of yield curves, a fourth instrument was contracted: USD Quanto Knock-in Cap with protection at 2.07%. In October, benefiting from the singular shape of the Euro and Dollar curves, a Maxi Range Swap at 1.775% was contracted. In November, a Knock-out Cap at 3.345% was added to the portfolio. Finally, a Maxi Cap Floored at 2.45% was contracted in December. In terms of exposure to the Polish yield curve arising from currency swaps, the year was marked by a detachment from the Euro curve, which became particularly noticeable from mid-September onwards. There are currently two currency swaps contracted totalling PLN398.5 million and maturing in November 2007. Under the original terms of this operation, the Group swaps interest at floating rates, both in the euro and zloty. In view of developments in the Polish market, the uncertainties regarding the course of the Polish monetary policy plus the differential between 6-month rates and the Interest Rate Swap (IRS) for the tenor of currency swaps, it was decided to fit the Polish rate in a combined caps and floors structure. Thus preventive measures were taken regarding the component due under these operations. In October the first restructuring of the Polish floating-rate leg was made. This operation allows the range to be limited to the interval between 4.50% and 5.80%, in a scenario of relative instability, i.e., providing that the limit rates do not exceed 8.50%. In November, after a correction in the Polish debt market, it was possible to increase the amount restructured with an improvement in the limit for a rise in interest rates to 8.75%. At the moment, roughly 45% of the amount involved in EUR/PLN currency swaps has a restructured interest rate, and another €10 million are under consideration. Currency Risk
Apart from small amounts involved in imported goods, the Group’s foreign exchange exposure is almost entirely concentrated in a single currency, the Zloty. The investment in Poland implies material risks to the Group’s financial statements. The hedging target for this investment, set by the Executive Committee in the Strategic Scorecard, is to cover 75% of its value. From the PLN398.5 million hedged, it was necessary in 2003 to restructure the foreign exchange component of the PLN59.8 million structure, due to the extent of the fluctuation of the zloty, which in the last two years has suffered an erosion of 32% versus the euro. In annual terms maintaining these positions implied a net disbursement of €2.7 thousand, closing the year with a positive market value of €11.3 million. To attain the targets established, entry points were sought at more favourable moments than those at the end of the year. For 2004, two objectives were added to the Strategic Scorecard: the first is to minimise the operating, financial and currency risk by hedging interest and foreign exchange rates exposures, buying protection for 75% of the notional debt and with 75% equity coverage (DCF value); the second concerns risk and loss management by establishing an objective for the Group’s risk rating and for the Insurance income statement. Internal Control Assessment Internal Control Assessment is the responsibility of the Internal Audit Department, which acts within the scope of the Risk Management strategy in force in the Group. The internal audit works carried out in 2003 sought to assess the quality of existing controls in critical processes associated to the more relevant risks, based on hazard probability and potential impact on the operations. These works permitted to identify opportunities for improving internal control procedures viewing the optimisation of the existing framework. The activity of the Internal Audit Department is supported on a Plan of Activities approved at the beginning of the year by the Group Audit Board. This Plan took into account the risks and processes critical for the Group as revealed by the operating risks matrix created in 2002 and continuously updated. In 2003 the Internal Audit Department’s action focused on the following critical processes, which are the source of risks identified as being more relevant:
Sales and cash reporting - management of selling prices, credit control (wholesale business) and management of promotions;
Logistics and inventory control - Replenishment, value build-up, management of dead loss and inventory losses, physical inventories;
Purchases, sourcing and suppliers - choice of suppliers, orders, receipt of shipments, returned articles, management of accounts payable, management of master data and management of contracts;
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Business management - management of shopping arcades and insurance management; Management of Human Resources - Wage processing and control of working schedules; Information Systems - general information systems controls, security of information, control of accesses
and management of operations; Management of Investments - analysis of investments and project management;
As a result of the audits made to the existing controls in these critical processes, 42 audit reports were produced, where opportunities for improving internal control procedures were identified. Cases of deviation from the approved procedures were also identified, and, when constituting high-risk situations, the Group Executive Committee was immediately informed. To ensure that recommendations issued by the Internal Audit Department are implemented by those responsible for the critical processes subject to auditing, a bi-annual consultation process was initiated in 2003 to assess the progress made in implementing recommendations produced by audit reports classified as medium or low risk - recommendations concerning audit reports classified as high risk are immediately implemented. This approach is aimed at making the Group’s internal auditing process more efficient and committing those in charge to implementing recommendations on schedule. The result of these consultations was analysed by the Group Board of Auditors and Executive Committee. In 2004, to enhance commitment to the implementation of recommendations, analysis regarding the level of implementation will be held on a quarterly basis. In 2003 the Audit Board met 10 times, supervising and assessing risks and critical processes, and analysing reports prepared by the Internal Audit Department. Since a representative of the External Auditors is invited to take part in these meetings, he informs the Audit Board as to the conclusions of external auditing work performed throughout the year. Based on this information, the feasibility of the Internal Audit Department’s plan of action is continuously assessed. Financial Operations After efforts carried out in 2002 to reduce the level of the Group consolidated debt, 2003 was characterised by tight discipline in the control of items influencing the cash flow of business divisions. Along with close analysis and management of daily cash flow from store sales and payments to suppliers, criteria for analysing new investments were maintained, and only those clearly contributing to effective creation of value for the Group were approved. Store refurbishing and store maintenance were mainly financed with leasing credit lines. One of the challenges faced by Financial Operations Managements in 2003 was the renegotiation of the bond loans totalling 268 million euros that matured throughout the year. Total refinancing needs amounted 67% of medium and long-term debt coming to maturity. At the end of 2002 the Group was able to reach an agreement in principle with a group of national banks for the underwriting of issues planned for 2003. In June 2003 the Group placed a bond loan to the amount of 115 million euros issued by JMR. The proceeds of this issue were used to redeem a 125 million euro bond loan. In September and October Jerónimo Martins SGPS issued a bond loan in the amount of 40 million euros and negotiated a 5-year 25 million euro commercial paper programme. This debt allowed the redemption of a bond loan (JMH96) in the amount of 98 million euros. These new issues also enabled the maturity of the total financial debt of the Group to be extended by about 1 year. In 2004 Jerónimo Martins will stand by its objective of increasing the average maturity of the debt, adjusting the structure of the Group’s own funds to its assets structure. This objective is included in the Group’s Strategic Scorecard, as is also that of reducing the risk of investments outside Portugal, by contracting financing in local currency to allow natural coverage of investment. Communication In a Group made up of several divisions and business units, it is important that all employees become acquainted with the overall perspective, not just that of the units where they work, and also that information is held to be a source of motivation and inspiration. The Jerónimo Martins Group has a programme of permanent internal communication based on modern information technology, which was pursued in 2003. The Group issues two internal magazines as part of this permanent information system: “A Nossa Gente”, addressed to all the staff employed by Distribution and Services in Portugal, carries quarterly news about Group companies to the nearly 20,000 employees in this area; “WorkOut”, a bilingual bi-annual magazine, is designed for middle-management and senior staff in all business areas in the Group, both in Portugal and Poland, to promote the sharing of knowledge and experiences. In 2003 it explored themes of interest to the reality of the Jerónimo Martins Group, such as: “Crisis - how to win in an adverse environment” and “New management practices: in search of simplification”.
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Addressing its external public, the Group’s privileged communication instruments are the Annual Report and the institutional website. These instruments aim to be as clear and as in-depth as possible, in an effort to perceive and answer the information needs of established target-audiences. The Jerónimo Martins website is becoming increasingly well known and visited - the average monthly number of visitors totalled 8,350 in 2003, and has reached 10,880 in the last three months. Turning to social responsibility, one of the highlights of 2003 was our entry as a founder member of RSE, the Portuguese Association for Social Responsibility in Companies, where the participation of Jerónimo Martins has yielded good results. In the specific area of sponsorship, the plan outlined for the year was fulfilled, developing several activities at the corporate level to reinforce Jerónimo Martins’ commitment as a socially responsible group. This subject is developed in more detail in the section on “Social Responsibility” in this report. 2003 marked a turn round in the history of the Jerónimo Martins Group, signalling the return to profit following the implementation of a successful restructuring plan. The Communication area coordinated the entire process of renovating the visual identity of the Jerónimo Martins Group - the visible face of far-reaching change. Special Projects The Special Projects area was created by mid-2003. The main project undertaken is “Project for the Simplification of Internal Management Processes” (SGPI). The leading objective of the SPGI project is to provide the business areas and functional divisions of Food Distribution with an efficient and market-adjusted organisation, by proposing more flexible and innovating structures, abandoning or changing unnecessary or inefficient processes. As its final objective, the Special Projects area will identify alternative paths, by changing and simplifying processes with a view, not only to increasing effectiveness but also the efficiency of the organisation. In 2003, areas of engagement were typified and a methodology was defined to achieve results according to each case:
The project will be continued during 2004 and part of 2005, and it is expected that the impact of savings obtained by improving operating efficiency will be visible throughout the 2004 to 2006 period. At the end of this period new objectives will be defined in search of further gains in operating efficiency, a search that should ultimately be set as a permanent business concern.
Define and clarify strategy
Strategy
Improve organisational structure Organisation
Standardisation of procedures Procedures
Information
Systems
Simplification of processes Processes
Reduce costs and boost efficiency
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4.2. Food Distribution - Portugal 4.2.1. Operating Divisions Pingo Doce About Our Mission… “To be the best supermarket chain working with perishables in Portugal. To deliver a quality food solution to the entire family, while maintaining a long-lasting trustworthy relationship with customers.” Eduardo Cid Correia General Manager In 2003, Pingo Doce continued the strategic guidelines defined in 2002: “to be the best supermarket chain operating fresh products in Portugal, increasing the market share in non-perishable products by transforming peripheral regular customers into nuclear customers, and reducing obstacles to the expansion of the purchase basket”. Using the consumers' expression, these guidelines were announced in outdoors: “no distress, no doubts, no stress and prices that make it worthwhile”. Sales reached 798 million euros, up by 2% over 2002 and by 1.1% in a like-for-like basis - this resulted from a 0.6% rise in the average purchase and an increase of 1.4% in the number of transactions. Such results were achieved against a situation of strong pressure on prices, namely exerted by hypermarkets and discount operators, in the second half of the year. Prices practiced by Pingo Doce remained absolutely flat, which compares with an average increase of 3.3% in the Portuguese consumer price index between January and December. Investment made in communications throughout the year was largely directed at consolidating the perception of the competitiveness of Pingo Doce prices, culminating with the TV campaign launched in September “This is not a promotion - Pingo Doce really has lowered its prices …”. In the second half of the year Pingo Doce promoted its private label brand through a TV campaign featuring innovative Charcuterie, Dairy and Frozen Products. In the area of Fresh product quality and differentiation, several successful ventures can be listed: quality cod fish, where we refused to sell dried cod from frozen cod, the launch of Pingo Doce free-range beef, and the introduction of certified Pingo Doce free-range chickens. Sales of Fresh produce rose by 3.4%, clearly above the growth of the chain. The assortment rationalisation process initiated in 2002 was consolidated, translating into a 22% drop in the number of articles purchased and, in turn, significantly reducing the complexity of the operation and improving stock turnover ratios. In the second half of 2003 there was a reduction of 2 days in the store average stock coverage relative to the cost of sales, not only through the improvement in stock turnover ratios but also through the adoption of the net price system. Efforts to lower selling prices led to a drop of 0.7 percentage points in the margin - this was fully offset by the reduction in operating costs, with operating results rising by 0.2 percentage points. Another pillar in the strategy outlined - to raise the efficiency of operations - was mainly achieved through the reengineering of processes at store level. This involved, among others, the introduction of the MRP system (an automatic store replenishment planning system) that permits reducing the resources used in replenishing stores, simultaneously improving operating efficiency levels. The ratio of stock breaks at Pingo Doce, measured as the percentage of articles in shortage in a store from within a previously defined representative basket, dropped from 7.7% to 2.2% between January and December 2003. Two new stores were opened, at Póvoa de Santa Iria and Damaia, and major refurbishing works were carried out in another two, at Pombal and Linda-a-Velha. In the latter, a new urban store concept was successfully tested, resulting in significant progress in the non-food and take-away areas. Five Pingo Doce stores were closed down during the year (D.João V, Central de Francos, Passos de Ferreira, Estrada da Falagueira and Alcântara). The Alcântara store will be reopened in two years, integrated in a residential and office complex to be built in the same area. The other stores were closed because they were not meeting targets in terms of return, and will be transferred to more efficient locations. Pingo Doce online was deactivated in 2003, in view of the weak sales expectations for this type of segment. The key pillars of company activity in future will continue to be reinforcing the conversion of regular peripheral customers into nuclear customers and to reducing obstacles to larger purchases, namely in lower brand penetration categories, while simultaneously gaining more experience in category and operations management. The crucial contribution of a motivated team focused on providing increasingly better service and the contribution of all the suppliers who endorsed our strategic vision have been and will continue to be absolutely essential.
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Feira Nova About Our Mission… ”To offer the Portuguese woman and her family a range of products that best suits their needs. Providing the lowest prices in food products, and simple promotional solutions, our stores are set to become an important part of your daily life.” João Queimado General Manager 2003 was characterised by the strategy initiated in 2002, aimed at enhancing the focus on the end consumer and concentrating efforts on the simplification of processes for increasingly efficient management. Key progress was achieved in the following areas: (i) conclusion of the process of transfer to the net price system, bringing considerable improvements to the management of the Company margin; (ii) implementation of the concept of assortment modularisation in the Food and Bazaar sections, raising availability (measured in number of articles, theoretical assortment versus actual store assortment) respectively by 9 and 16 percentage points, and also a more efficient management of the heterogeneous Feira Nova store network; (iii) development of the area of perishables, capitalising on the Group’s overall know-how; (iv) development of the bazaar and textiles areas, which are regarded as having a high potential for growth at Feira Nova; and (v) investment in the refurbishing of the store network. The year saw the opening of another Feira Nova unit at Odivelas, with 10,000 m2, and the temporary closing down for refurbishing works of four Feira Nova stores (Caldas da Rainha, Rio Tinto, Loures and Valongo). This was a year marked by a highly recessive climate in consumption and by the appearance of several new large-sized stores in the area of influence of Feira Nova’s current store network (Almada, Loures, Montijo, Gondomar and Caldas da Rainha), bringing strong pressure to bear on the chain’s sales and margins. Feira Nova attained a sales volume of 660 million euros, to remain at practically the same level as the previous year. The 1.9% increase in sales in the hypermarket segment is worth mentioning in view of the adverse climate affecting the format, which was slightly offset by the opening of a new Feira Nova store. The medium-sized stores in the chain are still posting interesting growth rates. If we exclude the Loures, Póvoa de Santo Adrião, Caldas da Rainha and Valongo stores, which in 2003 were closed for quite a long period of time for refurbishing, or suffered from the opening of rival stores in their area of implantation, medium-sized stores grew by 2.7%. Thanks to the investment made in fresh products and bazaar to boost store traffic, Feira Nova registered an increase of 2.8% in the number of transactions. The promotional concept of a “daily campaign” was introduced in the area of fresh products, pushing up respective sales by 4.3%. This new concept, backed by strong investment in communication, featured very interesting prices and assortment. In the bazaar section, the store layout was redefined, the promotional programme was emphasised and the ElectricCo concept was renewed. The areas sales grew by 5.8% (light bazaar, 4.6% and heavy bazaar 8.1%). The new ElectricCo store concept, gradually focussed more on the customer, features a wider range of music and films geared to traffic generation, and also a more modern, dynamic and aspiring communication, with strong segmentation by groups of products. This new concept was implemented in the new Odivelas store, and introduced as part of the refurbishing work carried out at the end of the year in the Caldas da Rainha and Sintra stores. During the short period available for analysis (Caldas da Rainha: 24 October to 31 December; Sintra: 23 September to 31 December), sales by the ElectricCo section of these stores grew by respectively 71.3% and 16.1%. In the area of textiles, an outsourcing management contract was signed with a partner with experience in the sector. This will significantly improve the offer to the customer and enable us to compete more effectively in this highly specialised and competitive area. 2003 represented a period of transition, but 2004 should already bring results. The effort undertaken to modernise the store network, initiated in 2002, was continued in 2003, and the following stores were remodelled: Valongo, Caldas da Rainha, Rio Tinto and Loures. Caldas da Rainha was the first unit where the new concept for medium-sized stores was introduced. In the months following the refurbishing it posted growth rates of about 67%. This new store concept places emphasis on the area of fresh produce, also introducing new merchandising and promotion concepts in the bazaar, textiles and ElectricCo areas. With the objective of reinforcing the chain’s positioning in terms of price/variety, and also to convey a more consistent image of a low price hypermarket, a new communication line was devised under the motto “lower prices even lower” supported by continuous and differentiated promotional activity. The “Feira Nova 100% campaign” was launched in a period of fierce aggressiveness in terms of market prices, and was aimed at attracting/retaining customers and increasing their average purchase basket.
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A renewed, more objective and stronger impact in-store communication was also defined and implemented in the Odivelas, Caldas da Rainha and Loures stores, putting more emphasis on the price factor and on promotional aggressiveness, and featuring differentiated environments according to product categories. The effort put into reducing operating costs (down by 0.4%) on a like for like basis was not enough to fully maintain operational efficiency. This was due to the impact of the new unit, which, in this first year, was unable as yet to post sales in line with its size. However, the effort of the organization to reduce investment in working capital yielded a 10.8% reduction in stocks. In 2004 Feira Nova will remain focussed on the customer, and above all, will develop processes for improving operating efficiency with a view to maximising results. Madeira José António Nogueira de Brito General Manager In Madeira, the year was marked by Pingo Doce’s price repositioning, following the same move initiated in mainland Portugal in 2002. In May, the chain introduced the “Pingo Doce Selection” concept, lowering the prices of around 1,000 articles, permanently and consistently, with the aim of guaranteeing competitive positioning. The purpose of this important measure was to increase the average purchase, and to induce more and more customers to establish Pingo Doce stores as their main shopping area. As happened in the mainland, the effort to reduce prices was mainly felt in non-perishables (branded products, particularly in the Drugstore and Personal Hygiene categories). In the area of Fresh produce, promotional intensity was reduced so as to allow the entire Company and also customers to focus on the new competitive and stable positioning of the chain. The year closed with a small increase in sales, 0.7% on a like for like basis and 3% on total sales - the latter achieved thanks to the opening of a store at Câmara de Lobos in November 2002, the impact of which was felt in 2003. Finally, on the last day of the year, two stores (Santo Amaro and Caniço) were closed - they will be transferred to new locations - and the “Hyper” store was refurbished. Recheio Madeira increased sales by 0.2%. Being a business that is increasingly an Every-Day-Low-Price operation, and where sales through the sales force (sellers on the ground and telesales) account for about 50% of total sales, the chain has shifted investment in advertising to investment in price. A programme for assortment rationalisation was initiated in Madeira in 2003. Its objective was to reduce complexity and optimise shelf space, raise quality standards and innovate assortment, particularly in Perishables and Private Label, by doing store replenishment in Just in Time (JIT) and having transportation by plane. The new appraisal system for managers (Quality Control visit reports using classification points) as well as the new “mystery customer” programme proved crucial for the quality of the operation. The restructuring of logistics, concluded early in 2003, brought considerable improvements to the quality of deliveries to Pingo Doce Madeira stores and to Recheio Madeira customers. Considerable progress was also made at the working capital level, where a reduction of around 4 million euros was achieved. This performance resulted from a continued effort to reduce stocks, only made possible due to the assortment rationalisation process initiated in 2003 and the change in the methods used for store replenishment, by increasing the use of tools made available by SAP. In 2004 the main objective is to consolidate Pingo Doce in Madeira through the opening of a new store that will be the chain’s largest store in the sales area. The new competitive price policy will be stabilised and initiatives developed aimed at raising operating efficiency. Recheio Cash & Carry About Our Mission… “Our aim is to meet the needs of our customers in traditional retail and in the HoReCa channel. We deliver value for money to the customer and believe in enduring relationships, offering each segment the value that best suits their needs. Our employees, with their motivation, competence and dedication, are the best tool for building such a relationship, with customers and suppliers alike. Keeping everyone focussed on the customer and on company efficiency is the best way to ensure profitability and return on our shareholders’ investment.” Jorge Santos Dias General Manager
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At 30 years of age, Recheio is the oldest Wholesale Distribution chain operating in Portugal - and during a particularly difficult 2003 year profoundly marked by contraction in private consumption, Recheio was able to post its best results ever. In 2003 Recheio attained a sales volume of 595 million euros, an increase of 4.7% over 2002. The number of customers and the average purchase grew by respectively 1.3% and 3.8%. This growth was achieved based on the same number of stores as in the previous year, which greatly enhances the excellent performance of the Company. The only change concerns the Leiria store, which was transferred to a new location and naturally benefited from new installations, increasing its sales by 22%. An analysis of each specific business channel shows that:
Retail grew by 3.5% over 2002, with Recheio strengthening its leadership position in this channel. This performance resulted mainly from customers’ recognition of the role played by Recheio over the last 30 years as a wholesale distribution chain in defence of traditional retail.
The HoReCa channel, the worst hit by the crisis throughout the year, increased sales by 6.4% over the
previous year. The fact that this growth was achieved against a particularly difficult backdrop reflects the success of the strategy adopted by Recheio for the HoReCa channel, which translates into the delivery of a value proposal adapted to the needs of the different segments of HoReCa. An adequate product assortment combined with a level of service that surpasses that of any other operator have decisively contributed to increasing penetration in this business channel.
Still in the HoReCa channel, the sales performance of the Food Service MasterChef platform was quite remarkable, registering an increase of 30%. The “full service” concept represents an innovative proposal and as such has considerable potential for attracting and retaining customers. The continuous improvement in operating efficiency levels, at both store and central level, enhanced the aggressiveness of the price strategy implemented (Every-Day-Low-Price), and in turn contributed to increased sales and ended up as an exceptional year in terms of results. In 2003 operating cash flow (EBITDA) attained 45 million euros, corresponding to 7.5% of sales and to an increase of 21.4% when compared to the previous year. This performance had a very positive impact on the liquidity of the Company, whose debt was reduced by 22.3 million euros year-on-year. In 2004, Recheio intends to continue enlarging the Food Service Business with the opening of a new distribution platform in the Lisbon area in the first semester. 4.2.2. Functional Areas of the Operation Gestiretalho is the Group Company under which the functional areas of the operation that work transversally with the various Operating Divisions of Food Distribution in Portugal are grouped. It includes the Sourcing, Logistics, Quality Control, Financial and Information Systems divisions. Gestiretalho aims to maximise synergies at Group level through the sharing of resources and know-how in relevant markets, to optimise the efficiency of the organisation and the overall scale of the Group. The Executive Management of Distribution Portugal is a forum where managers of Operating Divisions and managers of Functional Divisions meet to take coordinated, concerted decisions on the principal matters pertaining to Distribution areas in Portugal. Sourcing The mission of the Sourcing division is to generate value for the Group and for its operating divisions by (1) creating know-how in key areas of competitive differentiation - fresh products and private labels, (2) leveraging the Group’s bargaining powers through the establishment of agreements with the main manufacturers, and (3) developing a programme of commercial synergies with selected partners. After reiterating the option for private labels development as a strategic instrument to sustain Companies competitiveness - an option recognised in the Group’s strategic scorecard for 2004-2006 - a project viewing the acceleration of this option was initiated in 2003. For this purpose, pioneering decisions were taken regarding the creation of labels that will be carried throughout the various retail companies. To support this strategic development option, medium and long-term partnerships have been agreed, mostly with national suppliers, and efficiency-generating measures have been implemented in the supply chain, as a result of which the purchase base registered a significant deflation of 4.5%.
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Activity developed in private label innovation was very strong - in 2003 more than 250 products were launched in the retail and wholesale operation (under the MasterChef brand), some of which have become new benchmarks in the Food Distribution industry. Note, in this regard, the introduction of a line of regional charcuterie products, and a new line of frozen desserts and dairy products. The area of fresh produce has traditionally been a sales and differentiation driver within the different companies in the Group. Despite this strong tradition, sales performance and profitability in 2003 was quite surprising, fresh produce having clearly surpassed the established targets, more than doubling the average growth rate of the operating divisions in Portugal. A clear, lasting choice for suppliers guaranteeing high quality products, combined with the development of commercial programmes to extend the range of procuring, were crucial contributors to the performance achieved, which was further enhanced by important initiatives in the area of innovation and the reinforcing of consumer confidence (namely the launching of Pingo Doce free-range chicken, in a year marked by the crisis of nitrofurans in poultry). The deflation that occurred in this area of fresh products is worthy of note, as it emphasises even more the sales performance. The effort put into developing purchasing from source, only possible after the concluding the centralisation of logistics, was an important factor in price reduction (that in the case of fresh fish was higher than 10%). Commercial relations with manufacturers of industrial brands have undergone in-depth mutation over the last two years. Once the pioneering decision in Food Distribution in Portugal of introducing net price methodology and applying it to all suppliers was taken, the advantages gained in the management of the different categories, in terms of simplification of processes, transparency and joint planning of activities with the suppliers, became immediately clear. It is particularly rewarding that this in-depth process of change took place without affecting normal commercial relations with suppliers and without jeopardising the targets that had been established. A final word on the various joint-venture programmes that were developed at several levels. Several joint purchasing operations of fruit and vegetables of Portuguese origin were carried out with Biedronka, along with a joint programme for importing non-food products. In both cases considerable cost savings were obtained, which will be further enhanced in the future through the rapidly approaching dismantling of customs barriers. The development of pan-European programmes with Ahold was pursued, through the establishment of central agreements with the main multinational manufactures, generating an additional cash inflow for Jerónimo Martins of nearly 2 million euros. These synergy programmes are an area where significant competitive gains may be obtained as they widen the scale of the operation and it is expected that they will continue in 2004. Logistics The aim of Logistics is to support the purchasing, transport and warehousing activities of the Group operating divisions, respecting each business format and the respective commercial decisions. Gestiretalho, as the logistics company, will have to operate at low costs, according to the service standard and level required of it and observing operating discipline and respect for individuals. The trend for increasing efficiency observed in 2002 was further intensified in 2003: if in 2002 the costs per unit moved had already dropped by 8.7%, in 2003 they fell by another 11.3%. Several measures taken to reorganise activities and redefine delivery and reception flows contributed to these results, as did the development of new added value activities (namely the backhauling of goods, using our transportation fleet to take goods from the suppliers’ warehouses on return from distribution to the stores). Shipping volume has registered significant growth over the last two years (18.3% versus 2002 and 21.9% versus 2001). The increase in volume outgoings occurred in all warehouses. A key factor in the 2003 results was the introduction of a variable wage component - a performance bonus rewarding aspects such as assiduity, individual productivity and team productivity - in the remuneration of non-management staff employed in central warehouses. Through the introduction of this bonus, productivity rose 16%, overtime work was reduced by 29% and the payroll was cut by 2.4%. In terms of staff costs per unit moved, these two factors translated into a reduction of 11.4% on a like for like basis.
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The opening in April 2003 of the Fresh Fish Warehouse at Azambuja centralised product flow into all the Pingo Doce, Recheio and Feira Nova stores, across the entire assortment. Besides the benefits obtained in terms of quality, control and simplification of processes, this extended to all stores and products gains already yielded by the opening of the Vila do Conde warehouse. In 2004, Logistics will focus its activity on the start-up of the certification process of perishable warehouses, on the construction of the new warehouse for perishables at Guardeiras, on the roll out of integration processes with suppliers through the JM Direct platform and on the consolidation of backhauling purchasing processes. Quality Control It is the aim of the Quality Control and Environment area to guarantee the quality and food safety of the products sold in Group stores, as well as the associated operating processes, so as to satisfy the needs and expectations of customers, and fully comply with environmental protection rules. 2003 was a stable year, dedicated to the implementation and consolidation of quality, food safety and environmental policies, to encourage increasingly effective prevention mechanisms in these areas. Activities developed during the year are described in great detail in the section of this report on “Social Responsibility”. At the operational level, upstream control of warehouses for perishables and private label products was considerably reinforced. As a result, the rate of products rejected on reception at warehouses was reduced by 28% and that of articles returned by stores for quality reasons by 76%. In April, fresh fish warehousing in the southern region was centralised. The Quality Control area monitored the construction of warehouse and provided training to the team of quality controllers responsible for the daily inspection and control of fresh fish at Azambuja. The implementation in the European Community of more sensitive analytical methods for detecting nitrofurans in meat made possible to find traces of these products in poultry in Portugal. The Group closely followed this crisis, and decided to stop selling poultry and by-products until health authorities issued the safety guarantees required. Sales of these products were suspended in our stores for one and a half months. After the nitrofurans crisis, and to provide accrued guarantees to our customers, Pingo Doce Free-range chicken was launched. The method of production and intrinsic quality of this product were certified by an external entity. In 2004, the Quality Control area will launch of the process for certification of food safety systems and environmental management of Gestiretalho warehouses and food safety service and system in Recheio stores. Financial The aim of the Gestiretalho Financial Division is to keep efficient accounting, fiscal and management records of the transactions of the operating divisions, making information available to the management of each operating division and for the preparation of the Group’s consolidated management information. The Division also effectively controls transactions and is responsible for reporting on sales, the cost of sales, the margin and inventory losses. It also controls and plans the cash management of the operating divisions on a daily basis, to ensure the consolidated centralised planning of all payments to suppliers of goods, services and fixed assets. When it involves the release of funds required or the application of available funds, cash management is centralised by the Holding area of Financial Operations. Gestiretalho total invoiced sales in 2003 (million euros)
2003 Pingo Doce Feira Nova Recheio C&C* Lidosol J.G.Camacho
557.6 237.9 82.4 13.3 1.3
TOTAL
892.7
* Outside JMR consolidation scope
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In 2003 Gestiretalho processed total invoiced sales to the amount of 892.7 million euros, remaining practically at the level of the previous year due to transfer to the net price system. From January 2003 Gestiretalho started applying the net price system to DPH areas (detergents, personal care and home hygiene, perfumery and bijouterie), Light Bazaar (articles for the home, seasonal products, bookshop) and Heavy Bazaar (video/audio and appliances), extending it to Drinks in April and to Food products in July. This concluded the net pricing process in all product areas and operating divisions. The whole process was carried out without causing any negative impact on the total margin. In 2003 Pingo Doce accounted for 62% of Gestiretalho invoiced sales (versus 68% in 2002), a drop that was a result of the Group’s increased centralisation of logistics. Feira Nova increased its weight in Gestiretalho invoiced sales by 4.7%, to 27% (versus 25% in 2002). This rise in its relative position was due to the conclusion of the process, started in 2001, of centralising logistics in the area of Perishables. Recheio was responsible for 9% of Gestiretalho’s total invoiced sales in 2003. As was the case of Feira Nova, this increase in sales invoiced through Gestiretalho resulted from the consolidation of the Recheio centralisation of logistics initiated in 2001. Finally, Madeira (Lidosol and J.G.Camacho) kept its relative weight in Gestiretalho invoiced sales stable, at 2%. Information Systems The aim of the Information Systems division is to develop and provide data processing services to the operating divisions, securely and using the most appropriate, efficient technology, according to the business objectives and to contribute to improving operations in each division. Following the development of several projects in 2002, 2003 was characterised by the rationalisation of the existing Information Systems and by an effort to cut costs (down by 20%). The implementation of the new Warehouse Management System was pursued, involving the migration of six warehouses to a management platform for friendlier distribution centres with more functions, so significant improvements were obtained in warehouse management. The permanent development of the “Central Reporting Tool” project, aimed at the continuous improvement of management information processes, continues to involve considerable resources. The “JM Direct” (B2B) project, viewing the administrative and commercial integration of the operating divisions with business partners, was concluded in 2003 and will be rolled out as from 2004. Taking advantage of conditions in the IT market, the SAP systems infrastructure was partially renewed in 2003 - production and Disaster Recovery Systems - resulting in a considerable reduction of costs. The renegotiation of the Communications Network outsourcing contract, involving the replacement of equipment installed, enabled a decrease in associated expenses. Also, a new radio frequency system was installed in stores, which besides productivity gains obtained through its new functions, consolidated the server infrastructure and reduced resources required for its support and maintenance. In the area of development, smaller size projects but with faster return on investment took precedence. Supporting the commercial centralisation of Feira Nova and productivity management in the stores, and working on the requirements for implementation of the environmental policy are some examples of these projects. As regards the commercial joint venture in the area of textiles, an information system was developed for the Group’s commercial partner, which runs a JMR information systems infrastructure. Finally, 2003 also saw the installation of the first POS with graphic interface in a store (Feira Nova, Odivelas) as well as the coming on stream of the Lisbon-Poznan communications circuit, which will certainly contribute to furthering Group cohesion and will generate important synergies in the area of Information Systems. In 2004 the division will focus on the development of internal know-how, to reduce dependence on external entities and also to maximise the potential of already implemented solutions, both in terms of processes and of users.
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4.3. Food Distribution - Poland Biedronka About Our Mission… “Biedronka is a chain of food stores offering a basic stock of high quality, carefully selected products to meet the everyday needs of its customers, always at low prices. Biedronka is focused on customer satisfaction, and all its employees must ensure that it operates with high efficiency and at low costs”. Pedro Silva General Manager In 2003, Biedronka kept its focus on the continuous, sustained growth of sales. This was supported by constantly increasing efficiency in all business areas and by strengthening leadership in low prices, to give the assurance to customers that they could buy “quality at low prices, every day”. The food retail market continued to see a large number of openings in various formats, provoking considerable increase in competitive pressures. Intense competition combined with the sluggishness of the economy exerted strong pressure on selling prices, resulting in a phenomenon of deflation that spread across most categories of food prices. Although the economic scenario was not favourable, Biedronka maintained its growth dynamics, opening 38 new stores during the year and refurbishing another 62. At the end of the year the chain had 672 stores. Sales were up by 14.0% on the whole and by 11.7% if considering the same number of stores (like for like). This growth resulted both from physical expansion and from a 16.2% rise in visitors to the stores. In 2003, Biedronka customers totalled 284 million, further reinforcing the brand awareness of the chain and its leadership position on the Polish food market. Progress in sales and services provided by Biedronka (million PLN) 2000 - 2,237.470 2001 - 2,946.244 2002 - 3,561.799
2003 - 4,061.889 A steady effort to optimise and rationalise product assortment and a reinforced leadership position in every day low prices were critical growth factors both in terms of sales and in the number of customers. In terms of product assortment, the chain continued to expand the range of exclusive brands, launching 68 new items and re-launching another 123, involving a continuous effort for constant technological updating. The development of innovative packaging solutions also required particular, constant incessant attention, seeing the optimisation of merchandising and greater efficiency in replenishment methods across the entire chain. The development of categories of perishables was also emphasised. This involved a specific programme of investments in the store with the purpose of enlarging the display areas of these categories and improving their merchandising. The concept of Non-Food In&Out campaigns was redefined. The purpose was to improve exposure by offering a smaller number of products per week to boost attractiveness, generate traffic and achieve a considerable increase in turnover levels. At store operation level, several activities were carried out to increase efficiency, always keeping in mind the main objective of improved service to the customer. Due to the stabilisation of assortment, the enhancement of the store layout and the new replenishment method adopted (strictly linked to the operation of the distribution centres, and also involving the redefinition of some administrative and operating control processes), inventory losses registered a year-on-year reduction of 0.5 p.p., while sales rose by 14.0% and store operating costs increased by only 10.2%. At the Logistics level, the implementation of a number of changes also achieved remarkable gains in efficiency. The redefinition of the layout of all the distribution centres, synchronising store replenishment methods with the distribution centres, the optimisation of parallel ingoing and outgoing flows, the consolidation of processes in the WMS SAP system and the rationalisation of the organisation of each distribution centre boosted the efficiency of picking processes and resulted in an average productivity increase of 32.9%. The implementation of the new fleet management system in all the distribution centres also optimised travelling distances.
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Thanks to all the efficiency gains obtained, transportation and logistics costs rose by 3.4% only, which compares with an increase in the volume transported of 19.2%. The creation of regional structures at the beginning of the year made the organisation more flexible and boosted the capacity for implementing the vast number of changes introduced, at the same time reinforcing control levels in all the areas and enhancing a proactive and dynamic stance across the organisation. After creating regional structures and disposing of the Eurocash business unit in March, the organisation was adjusted and redefined to simplify a number of business processes. The particular emphasis placed on our training policy at all levels of the organisation and the launch of the “Academy of Managers” programme, in the ambit of the Management Development and Career Planning policy, were decisive not only in terms of the motivation and commitment of the organisation in 2003, but also prepared the operation for future challenges. Thanks to the measures implemented to better serve the customer, and the efficiency and productivity gains obtained - and notwithstanding increased competitive pressure, Biedronka’s EBITDA rose by 37.0% and its average stock level was reduced by 1.1 days when compared to the previous year. Projects under way, the consolidation of optimisation processes implemented, greater flexibility, the quality of Human Resources and their permanent development, and our determination to provide an increasingly better service to the customer allow us to face 2004 with optimism, aware of the challenge facing us, but feeling the mission we have set ourselves can be fully accomplished. 4.4. Manufacturing José Soares dos Santos Jean Alfonsi Board of Directors of FimaVG LeverElida IgloOlá The Companies included in the Food Industry, held by Jerónimo Martins through a joint venture with Unilever, had in 2003 a frankly positive year, experiencing a rebound following a difficult 2002. The net sales of FimaVG, LeverElida and IgloOlá reached a total of 591 million euros, up by 6.6% year-on-year (excluding the disposed businesses). Continuous and persistent commitment to innovation and the rationalisation of the portfolio of higher added-value products, supported by the constant optimisation of operating costs, made for an increase in the operating cash flow (EBITDA) of roughly 1.1 million euros. FimaVG Notwithstanding an adverse economic environment, marked by the retraction of private consumption and the deterioration of consumer confidence, 2003 was an excellent year for FIMAVG. FimaVG totally recovered from its negative performance in 2002, posting an increase of 8.8% in net sales (excluding business disposed of in 2002), which reached 239 million euros. 2003 was also marked by the construction of fundamentals for sustained growth in the coming years, specifically, an agreement signed with a new olive oil distributor in Brazil, the reorganisation of the sales force and the restructuring of the organisation into business units, enabling greater focus, flexibility and the capacity to react promptly to market conditions. The excellent performance of the brand sales, together with an noticeable improvement in profitability, should also be stressed. According to Nielsen data, Becel consolidated its position as the first-ranking brand in Spreads (seven market share points ahead of the second-ranking brand), driven by the success of Pro-Active, which hit an impressive growth rate of 32.6%. The successful launch of Flora low-fat butter was another highlight, allowing FIMA VG to strengthen its market position with a share of 51%. In Olive Oil, Gallo brand achieved a total growth of 8.6%. Exports were up by 13%, thanks to the extraordinary rise in sales to the Brazilian market (+44.6%), which allowed the market share to recover to 22.1%, notwithstanding the difficulties felt in the Venezuelan market. In the domestic market, Gallo grew by 8.3% in a year marked by strong promotional activities and heavy pressure on prices. Lipton Iced Tea, after a difficult year in 2002, was able to recover its growth path (net sales were up by 6.2%) and once again asserted its position as the second-ranking brand (after Coca-Cola) in the highly competitive soft drinks market. In the culinary market, Calvé grew by 6.9% on the back of an enriched mix of sales, maintaining its lead in this market with a share of 44%.
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Finally, the Food Service business made very good progress, increasing sales by 5.8%, in a market that was highly penalised by a recessive economic environment. This growth resulted from an effort for continuous innovation, which in 2003 saw the launch of Gallo olive oil in individual portions in McDonalds, TAP and Casa das Sopas, which even further enhanced brand visibility in the HoReCa channel. Turning to the industrial area, the Santa Iria and Abrantes plants attained indispensable productivity gains to remain competitive. Productivity and efficiency gains were obtained thanks to a policy geared to the reduction of plant costs (which fell by 3.2% year-on-year), a policy specifically involving the continuation of the TPM (Total Productive Maintenance) programme and staff cuts. The Santa Iria plant obtained ISO9001/2000 quality certification and the Abrantes plant obtained the TPM level I excellence award. Operating cash flow (EBITDA) fell by 10.7%, influenced by the disposal of the Bakery business in 2002 and by restructuring costs incurred in modernising and increasing the efficiency of the manufacturing facilities and adapting Company organisation to the new challenges brought about by an increasingly global, highly competitive market. If the effect of the Bakery business were eliminated, the operating cash flow (EBITDA) would have had a positive progression. LeverElida In 2003 LeverElida’s total net sales made a strong recovery, growing in line with the ambitious plan that had been established, excluding the effect of the disposal of Diversey in 2002, they were up by 4.7%, reaching the 200 million euro threshold. Skip brand returned to positive ground, and, posting an increase of 4.5%, rose above the budgeted figure and maintained clear market leadership. Likewise, the four main Personal Care brands (Dove, Axe, Rexona and Organics) continued to make outstanding progress, in terms of market share, but above all in terms of sales (+17%). The concentration of investment and resources in fewer brands but in brands with higher growth potential is producing visible effects, with these four brands growing at a two-digit pace. 2003 was also marked by the consolidation of consumer preference for LeverElida brands. The leadership position won in laundry softeners in the Hypers+Supers channel through the Comfort brand, and a market share in deodorants that rose to more than 50% at the national level are the two examples that best illustrate this fact. Also striking was Dove’s market share progress across all the markets in which it operates, with a promising entry into the facial care market. The brand reinforced its position not only in its core business, where it advanced by more than two market share points in soaps, rising above the 27% level, but also in new segments such as Skin (+42%) and Hand Cream (+14% in the first half of the year). Axe and Rexona also performed exceptionally well, both growing by 40%. The vigour of both brands was shown by the unstoppable climb of Rexona Deodorant (at a peak of 14%, it already represents the 2nd brand in the market) as well as Axe’s progress across all segments, but most particularly in Deodorants. As to the area of home cleaning and dishwashing detergents, 2003 proved a particularly tough year due to hugely competitive prices. However, Sun resumed its market leadership, thanks largely to the innovative Sun Capsules, and the CIF brand advanced in abrasive and all-purpose detergents. Growth rates achieved were supported by a continuous effort towards local-based development and innovation, producing several successful initiatives, namely Vasenol Hydro-Summer and Cif Active Liquid, backed up by a constant search to deliver innovative added value to the customer, essentially relying on concepts already tested in other regions. Dove’s summer line and Organics’ seasonal campaigns were both successfully adapted from Brazil and the two proved important levers for motivation and growth. On the whole, rapid innovation in the market was a determining factor in the year’s results, with around twenty concepts being launched in just 6 months of operation. Highlighting just a few: the new segment created under the Rexona brand, “Crystal, the first Deodorant that will not stain your clothes”; Comfort Fast Dry, featuring faster drying as its key benefit; and Sun’s 3-in-1 dishwasher capsules, the first in the world. Finally, Skip revolutionised the concept of detergent, in the summer launching Skip Aloe Vera, which offers unique softness and performance. The Lever plant again proved a keystone in the Company’s success strategy, both through excellent control of costs, posting a reduction of 10% in fixed manufacturing costs, and through its flexibility and capacity to react, by raising output per labour shift and reducing change-over times. Having increased output by 12% (which included a remarkable 57% rise in the volume for export), the plant improved productivity by 30%, measured by volume to direct labour. The TPM (Total Productive Maintenance) programme was substantially developed in areas such as autonomous maintenance, improvement projects and tightening discipline in several sectors of the plant. The plant maintained certification of its Integrated Management System in the areas of the environment, safety and quality, and had a zero record of accidents leading to sick leave.
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The progress made in sales combined with efficiency gains obtained in terms of production costs maintained the EBITDA margin at the 2002 level, despite investment made in advertising and promotion. IgloOlá IgloOlá performed very well in 2003, both in terms of sales and in terms of results. In a tough economic situation, the Company posted total net sales of 151 million euros (+5.9%), which corresponded to an increase in operating results (EBITDA) of 21.0%. Both its two business areas, In-Home and Out-of-Home, gave a positive contribution to these results, sustained by the excellent progress made in the Ice Cream and Frozen Foods segments. Out-of-Home Division In the Out-of-Home segment, the Company recovered from the difficult summer of 2002, in volume and sales alike, once again rising to the strong 2001 level of results. The increase in net sales (up by 8.8% on 2002) stemmed as much from volume as from the considerable improvement in the portfolio of products sold. The “Magnum 7-Sins” promotion was a major success, leading to a 30% increase in the Magnum Out-of-Home line. As regards innovation, the launch of the “Olá Viva” variety was an important step towards building a platform to respond to the consumers’ rising concerns with health and well-being. At the end of the year, the “Magnum Hot” was introduced in the segment of hot drinks, as a first step in the development of a portfolio of alternative winter products under the Olá brand, exploiting new consumption opportunities. Olá stores located in shopping malls registered organic growth of 29%, thanks to the continuous optimisation of the concept and of the product range. Including the contribution of the recently opened outlets, total sales by the retail operation grew by 76%. The Foodservice area had a difficult year, with net sales dropping by 8.2%. This was in part caused by the performance of Cornetto Soft, and to the crisis suffered by the Portuguese restaurant business (-20%) as a result of the difficult economic context undergone in 2003. Overall, the Company reinforced its position in the Out-of-Home market, particularly in the north of the country, where considerable investment in increasing visibility contributed to maintain its leadership position. In-Home Division In the In-Home business, Ice Cream advanced net sales by 1.5%. Carte D’Or performance, thanks to investment in innovation and advertising, was very significant (+14%). And to meet the consumers’ demands in terms of health and well fair, ‘Fruit & Fresh’, a new Carte D’Or product line was launched. In the Frozen Food business the market grew by 3.5%, with Iglo raising its market share by more than 4 percentage points, to 23.2%. The programme to re-launch the Captain Iglo brand was successfully pursued in 2003, translating into an increase of 30% in sales and of 2 percentage points in market share. This brand is the clear, undisputed leader in the market of frozen food for children. The traditional segment of Vegetables and Fish also showed a vigorous performance, introducing the “Steamed” range, which greatly contributed to the growth of sales and business profitability. In 2003 the plant reinforced its strategic role as a source of innovation and profitability for the business of IgloOlá and for that of the European ice cream market. In addition to the “Olá Viva” line, “Magnum Hot” was also developed in the Santa Iria plant. Its introduction at the beginning of winter in both the In-Home and the Out-of-Home segments constituted an important step in the fight against Olá seasonal sales. The launch of "Magnum Hot" drew international attention so export to three European countries started, and it is expected that it will soon be exported to some other countries. Still in 2003, the development of the New Business Development and www.novideia.com initiatives were pursued. These initiatives significantly contributed both to the generation of new ideas (e.g. Magnum Hot, Olá Viva) and to the sharing of ideas and enhancement of the corporate culture within the Company. On the industrial front, the plant advanced with its TPM (Total Productive Maintenance) programme, which is aimed at the continuous improvement of plant operating efficiency. After obtaining the Level I excellence prize, the Santa Iria plant is on its way to gaining the Level II award, in 2004. In 2003 production costs, both direct and indirect, were reduced by 2.7 million euros, with a positive impact on the Company’s operating results (+3%). The rise in sales, combined with increased profitability (through investment in higher added value products and the reduction of operating costs) led to a considerable increase in the EBITDA margin, which advanced by more than 2.5 percentage points over 2002.
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4.5. Services Jerónimo Martins Distribuição (JMD) Pedro Veloso General Manager 2003 was one of the best years ever in the history of Jerónimo Martins Distribuição de Produtos de Consumo (JMD). Although the economic environment was not favourable, JMD increased its sales by 4.7%, posting an extremely positive performance. The 2003 results were chiefly achieved through the excellent performance of the company in the reducing of operating costs, which translated into an 87% increase in EBITDA, to 5.2% of sales. Food Division The Food Division posted an increase of 4% over the previous year. Practically all brands represented performed well, but Kellogg’s progress was quite outstanding (+15%), with its star product “Special K” rising by a remarkable 25%. Equally noteworthy was the successful launch of the Cereal Bar for adults, which already accounts for 5% of the total sales of this brand. The performance of Idal/Heinz, which increased sales by 5%, was also worthy of praise. In this case, the key driver for business development was the Guloso brand, particularly its tomato-based products. Nestlé’s chocolate snacks had a particularly difficult year, not just because of the market slowing down but also due to an increase in competitive pressure. Still, it should be stressed that “Kit Kat” brand maintained its strong leadership position. Finally, the strong growth of the Jerónimos Line (+13%) presages an optimistic future for this range of products. Still in the food area, the year was marked by the launch of a new representation, Perfetti/Van Melle chewing gum, one of the largest world operators in the confectionery market. The first selling indicators were frankly positive and everything seems to point to another successful JMD launch in the Portuguese food market. Cosmetics Division By the very nature of the products it represents, the cosmetics division is highly exposed to economic conditions and therefore its performance in 2003 may be regarded as quite positive. Calvin Klein, even without launching any new fragrance, a decisive factor in this sector, maintained a stable turnover and saw its market participation increased in the selective segment. In the mass market, sales of Myrurgia products (Puig Group) rose by 4% year-on-year, which is noteworthy given the particular economic conditions affecting this segment. The total sales of the division were adversely affected by the loss of the Valentino brand, following its sale by Unilever and consequent transfer to the Portuguese organisation of the new owners. In 2004, the priority will be to seek new represented brands to effectively complement the current portfolio, in particular the cosmetics division. Caterplus In 2003 Caterplus increased sales by 17.7% over 2002, despite the unfavourable economic situation in the food service segment. Growth was evenly distributed throughout the year, thanks to the commercial strategy implemented at the beginning of the year, and a sales team that was rejuvenated in 2002, greatly raising motivation and to a large extent explaining the results obtained in 2003. The Company grew significantly in its main product categories and registered considerable growth rates: culinary, +10%; canned tuna, +15.7%; tomato products, +43.5%; and grated cheese, +19.3%. These increases seem to indicate that the market is starting to view Caterplus as a specialist, combining competitiveness with the know-how provided by its partner Heinz - a contribution that may prove determining for the future of this business area. Caterplus’ results, rising by 26% versus 2002, considerably exceeded the increase in sales. This increase in profitability was the result of the smart commercial policy implemented and the quality of the commercial work developed. For the first time, Caterplus took part in the Lisbon Food Fair, reinforcing the visibility and credibility of an operation that is proving to be quite consistent.
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In the current economic situation no great changes are expected in 2004, apart from those resulting from “Euro 2004” which should bring new vitality to the food service segment, temporarily releasing it from the pressure to which it has been subject due to the weakening of the Portuguese economy and consequent restrictions on consuming “out of home”. Caterplus will pursue its commercial strategy, combining the increasing involvement of the Heinz organisation, on the products side of the business, with the vitality of the new commercial structure, on the sales side, to build an increasingly consistent image of a specialist operator, and consequently to grow and generate positive results for shareholders. Jeronymo The Jeronymo coffee kiosks project has reached the end of the testing period in line with expectations. At the end of the year there were 8 coffee kiosks inside the commercial areas of hypermarkets (5) and supermarkets (3), and more should open next year. Hussel The Hussel specialised retail chain (confectionery and chocolate) stores increased sales by 12.8%, exclusively through new openings in 2003, a situation that clearly translates the difficulties felt during the year. The business was visibly affected by the economic situation, which did not favour “premium” concepts, and also by the opening of stores in new shopping centres that ended up originating some cannibalisation between Hussel stores. The chain, with 16 stores at the end of 2003, opened three new units (Odivelas Shopping Centre, Montijo and Forum Aveiro) and closed one (Gare do Oriente) during the year. The new stores performed differently: while the Montijo and Aveiro stores seemed to be doing well, the Odivelas store failed to meet expectations, having a negative impact on the year’s sales. The new store at Forum Aveiro introduced a fresh business concept, which is innovating even at the European level. This is a mixed store, combining Hussel chocolates and Olá ice cream that resulted from a joint venture with the ice cream leader in Portugal, IgloOlá. The complementarity of the product assortment, the symmetry in seasonal peaks and the sharing of fixed costs are crucial factors for the success of this joint venture, particularly in locations where traffic is low. The first indicators are frankly promising and the consumer has apparently endorsed this new approach. This new store concept may represent the ideal business model for giving continuity to Hussel’s objective of expansion in Portugal, which was showing some constriction under the current business model. The difficulties felt in sales did not have a direct reflex on results, thanks to a successful programme to reduce operating costs. This allowed established objectives to be attained and even surpassed, with operating cash flow (EBITDA) growing by 13%. The main target for 2004 is to validate and plan the roll out of this new store concept, in partnership with IgloOlá. 5. Group Investment Programme 5.1. Investment A strict and thorough analysis of investments has been one of the main priorities of the Group and one that has deserved increasing attention. A careful analysis of investments (namely in expansion and refurbishing), in addition to being a key area for fostering the profitable growth of sales, seeks to guarantee that in the future the value created in each project attains anticipated parameters and contributes to the good performance of global results. To this end, the new Group Manual of Investments came into effect in 2003, providing the business areas with a comprehensive, updated tool, raising the level of requirements in analysis and clearly defining the practices and procedures to be observed. In addition to sensitivity analysis and tests, these requirements were also extended to approval levels and consequently to the accountability of each area involved in the carrying out of respective assumptions. Besides being analysed by each Operating Division, the data on investments considered strategic for the growth of the Group are passed on to the Planning and Control Division, for analysis, and are subject to final approval by the Executive Committee. In 2003, 185 capital outlay proposals were analysed, for a total of 86 million euro. Of these, 6 received a negative opinion (totalling 19 million euro). Despite uncertainties caused by the current economic backdrop, the Group decided to continue channelling a significant part of operating cash flow to investment activities, to reflect its commitment in guaranteeing sustained future growth and quality operations.
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The decline in the overall amount of investment is explained by the fact that a considerable sum had already been spent in Poland in 2002, on information systems and logistics (without which the expansion plan outlined for our operation would be constrained), otherwise expenditure on expanding and refurbishing the store network exceeded the amount spent last year, as can be seen below by the number of stores opened and refurbished.
The JMR Group, without any impact in terms of investment figures, has signed a promissory property transfer agreement concerning 4 stores currently operated by the company Irmãos Costa Pais, SA, under the trade name Monteverde. The Competition Authority has already issued a non-opposing opinion regarding this operation, in September 2003, and it is now pending an order from the State Secretary for Trade, Industry and Services. Apart from investing in expansion (42% of the total), it was also important to renovate older stores, modernising them and adjusting them to present-day requirements, according to the standards of each chain. This effort was particularly noteworthy in the Feira Nova and Biedronka stores. Maintenance was another aspect that was not neglected, both to ensure hygienic and sanitary conditions and to offer the consumer a pleasant environment, while simultaneously avoiding future and certainly more expensive interventions. 5.2. Divestments The disposal of the Polish cash & carry chain Eurocash was concluded in March 2003, under a management buy-out operation involving a group of former and current employees of the company. With this disposal, Jerónimo Martins deemed its divestment plan concluded. The Group’s current portfolio now exclusively contains businesses that give a positive operating contribution and at the same time have a growth potential.
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Another aspect that must be considered when analysing the variation in the Group’s fixed assets is the closing down of units which had a negative operating contribution and would be too expensive to redefine or even impossible to make profitable. This was the case, in 2003, of four Biedronka stores and seven Pingo Doce stores (2 in Madeira), which were closed down from the middle to the end of the year as the Company considered them to be “irrecoverable” in terms of return on investment, opting for writing them off (see non recurrent items). These stores will be transferred to more efficient locations, to be selected. 6. Outlook for 2004 2004 will bring new challenges to the Jerónimo Martins Group, now concentrated in the consolidation and growth of companies included in its current portfolio to guarantee the sustained creation of value in the future. The Group is essentially committed to the growth of the distribution business in Portugal and in Poland, and in making operations more competitive and innovative to better serve the consumer who is ever more demanding in terms of quality and increasingly sensitive to price. 2004 should mark the beginning of economic recovery in Europe, and consequently in Portugal given the degree of openness of the Portuguese economy. Nevertheless, the year should still see an increase in unemployment and the application of restrictive wage policies that will certainly affect the consumption of families in Portugal. A new law on store opening is expected to come into force in 2004, after a three-year freeze on the award of new licenses to open food retail stores in Portugal. Depending on the final text that is approved, this new law may provide an opportunity for the Group to expand its businesses in national territory, following a phase of restructuring that imposed some restrictions on investment. Despite the threats that a liberalisation process can also bring, the Group believes it can take advantage of the resilience and profitability of the different formats under which it operates, by reinvesting in price the amount of savings it will be able to obtain in terms of operating costs. Although it has several projects under consideration, given the gaps that still exist in the approval process, the Group does not expect to be granted a significant number of licenses before the end of 2004. In order to increase the efficiency of its operations, Jerónimo Martins will continue to implement cost-cutting measures, having set up several working groups to study and put into practice solutions for simplifying processes. Pingo Doce will continue to strengthen its leading position in supermarkets, offering quality at attractive prices, namely by improving the management of perishables and by developing its own brand products. The chain expects to end the year with 3 more stores. Feira Nova, without neglecting competitiveness in food products, will continue to implement more efficient ways of developing the Non-Food area, capitalising on the joint venture set up in September 2003 with a company specialised in textiles, while making management more autonomous and focused on the area of household appliances and leisure, relying on the ElectricCo brand and spaces. Recheio is set on maintaining its positioning in cash & carry with the best prices, and to continue to grow in the HoReCa channel, taking advantage of the opportunities that will arise in connection to the European Football Championship (Euro 2004) to be held in Portugal. Recheio plans to open the new Food Service platform for the Lisbon area, plus one new store in Lisbon, and expects to obtain a licence to open yet another store in the country. In the Polish market, Biedronka will pursue its plan of expansion (40/50 stores per year) and refurbishing (60/80 stores per year), so as to have a well dimensioned and very competitive retail chain when Poland formally joins the European Union. The Company will also develop the non-food area as a traffic builder, through In&Out campaigns in the stores along the year. The reinforcement of its position in Warsaw, at the end of 2003, will also constitute a growth driver for the chain. In Manufacturing it is expected that the strength of the brands and the excellence of the production processes in Portugal will allow it to maintain activity levels. In this area too, it is anticipated that events that will take place in Portugal such as the “Euro 2004” and the “Rock in Rio” festival will prove advantageous. With the objective of speeding up expansion and refurbishing plans, especially in Portugal, the Balance Sheet strengthening has become a priority. The Board expects the approval, at the next General Shareholders’ Meeting, of its proposal for a share capital increase of 150 million euro. Although 2004 is still expected to be a difficult year, the Group will continue to consolidate its strategy, expecting, not only to improve its profitability ratios, but also to create value for its shareholders, to better serve its customers and consumers, motivating its employees and guaranteeing a good relationship with all its stakeholders.
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7. Events after Balance Sheet Date Up to the conclusion of this Report there was no relevant event to highlight. 8. Proposed Application of Results In 2003, Jerónimo Martins, SGPS, SA posted a consolidated profit of euro 58,246,452.75 and a profit in the individual accounts of euro 111,664,801.93. The Board of Directors proposes that the net profit for the year to be transferred to:
• Legal Reserve = 5.583.240,10 Euros • Retained Earnings = 106.081.561,83 Euros
Lisbon, March 9th 2004 The Board of Directors
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Consolidated Management Report Annex Information concerning the stakes held in the Company by Members of the Board of Directors and Statutory Auditor as at 31st December 2003 (As provided in article no 447 of the Commercial Companies Code and under the terms of sub-paragraph b), paragraph no 1 of article no. 7 of the Securities and Exchange Commission Regulation no. 24/2000)
Board of Directors
Shares B onds Warrants Shares B onds Warrants Shares B onds Warrants Shares B onds Warrants
27.281 - 773 2.500.000 12.000 773 15.281 2 .500 .000 -
3.000 - - 3 .000 - -
16.133 - 16 .133 - -
23.014 704.901 - 5.000 269.949 18.014 434.952 -
- - - - - -
- - - - - -
- - - - - -
- - - - - -Á lvaro Carlos Gonzalez Troncoso
José Luís Nogueira de B rito
Luís M aria V iana Palha da Silva
Pedro M anuel de Cast ro Soares dos Santos1
Rui M anuel de M edeiros d `Espiney Pat rí cio
Held on 31.12.03
Elisio A lexandre Soares dos Santos
A ntónio M endo Castel-B ranco B orges
Hans Eggerstedt
M embers o f t he B oard o f Directors
Held on 31.12.02 Increases during the year Decreases during the year
Notes: 1 The Jerónimo Martins bond issues were converted into euros. The 938 bonds held, resulted in 704.901 bonds with the nominal value of 0,01 euros. That information was not referred in previous statements. Detail of the year movements: Elísio Alexandre Soares dos Santos: Sold: on November 13th, 5.000 shares at price 9,00 euros, on November 14th, 2.000 shares at price 9,10 euros, on November 18th 1.000 shares at price 9,49 euros, on November 19th, 1.000 shares at price 9,75 euros, on November 21st, 1.000 shares at price 9,80 euros, on November 24th, 1.000 shares at price 9,80 euros and on November 28th, 1.000 shares at price 9,13 euros. Bought: on August 12th, 2.500.000 bonds JM/97 Cupon zero, at price 0,01 euros. JMARTINS/96 bonds were redeemed in September 2003 and the outstanding warrants extinguished. Pedro Manuel de Castro Soares dos Santos: Sold: on October 30th, 2.500 shares at price 7,33 euros and 2.500 shares at price 7,35 euros. JMARTINS/96 bonds were redeemed in September 2003, at nominal value of 0,01 euros. Statutory Auditor
As at December 31st 2003, the Statutory Auditor Bernardes Sismeiro & Associados, SROC, Lda., did not hold any shares, bonds or warrants of Jerónimo Martins, SGPS, S.A. and had not made any transactions with Jerónimo Martins, SGPS, S.A. securities.
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List of Shareholders with Qualifying Shares as at December 31st 2003 (Under the terms of articles no. 447 and 448 of the Portuguese Commercial Companies Code and for the purpose of section e), paragraph no. 1 of article no. 6 of the Portuguese Securities Market Commission Regulation no. 11/2000 and in the terms of the Portuguese Securities Code).
Shareholder
No of Shares
Held
% of Capital
% of Voting Rights*
Sociedade Francisco Manuel dos Santos, SGPS, SA
Directly 55.541.472 57,941% 58,045% Strand Ventures Inc.**
Directly 7.946.239 8,290% 8,304% Through Fitron Management Ltd. ( Held 100% by Strand Ventures, Inc.)
3.177.836 3,315% 3,321%
Through Multiplus Investments Ltd. (Held 100% by Strand Ventures, Inc.)
3.963.583 4,135% 4,142%
Total Attributable
15.087.658
15,739%
15,768%
* (% of Voting Rights = N.º Shares held / (Total No JM Shares – Own Shares))
** Under the terms and for the purpose of paragraph 3, article no. 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 CVM to the following Companies:
- Banco Privado Português (Cayman) Ltd., under a portfolio management contract for the entire stake in Jerónimo Martins, SGPS, S.A.;
- 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.
Note: JMARTINS/96 bonds were redeemed in September 2003 and the outstanding warrants (1.403.869) held by Sociedade Francisco Manuel dos Santos, SGPS, S.A. have been extinguished.
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Financial Glossary
EBITDA Margin = Operating Cash Flow Margin = (+ Operating results + Depreciation + Goodwill amortisation - consolidation differences - Non-recurrent operating Items)
/Sales and services)
EBITA Margin =
(+Operating results + Depreciation - Non-recurrent operating Items)
/Sales and Services
OIC (Operating Invested Capital = + Gross Goodwill + Net Fixed Assets (tangible and intangible assets) + Working Capital
NOIC (Non Operating Invested Capital) =
+ Goodwill Accumulated Amortisation + Net Financial Investments + Deferred Taxes Provision + Income Tax Provision
Pre Tax ROIC (Return, before taxes, on Invested Capital) = [Sales & Services / ((OIC + NOIC - Def. Taxes provision - Goodwill acc. amortisation) average] x EBITA margin
Cash Flow = + Net Results + Amortisation, depreciation e provisions - Deferred Taxes - Non-recurrent items (operating, disposals and financial)
Net Debt =
+ Bond loans + Debts to credit institutions + Other loans obtained - Marketable securities and bank deposits + Leasing
+ Accrued interest
Gearing = + Net debt /+ Shareholders funds
Interest Cover Ratio
+ EBITA /(+Financial Results (excluding non-recurrent items) - Partner loans interest - Zero coupon bonds interest - IAS 39)
Note: This financial glossary is based on the income statement by functions.
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IV. Social Responsibility The Board of Jerónimo Martins considers Social Responsibility to be one of the core cultural values of the Group. Its aim is to maintain standards of conduct that are a reference to all. Sustainable Development is increasingly a core issue in key management decisions of the Group to ensure added value for consumers, shareholders and business partners, and an ethically responsible attitude to social and environmental conditions that will safeguard the well being of the community as a whole. 1. Code of Conduct Attaining ends through rigorous ethical means By issuing a Code of Conduct, Jerónimo Martins has merely formalised the practices that have always governed its actions. The Group’s major interest is not solely the attainment of financial targets, but it has long been concerned as to how these are attained. An attitude that reflects values that translate into the business principles set out in the Code of Conduct. Strict rules are applicable in the conducting of business operations and include total compliance with legislation in force, respect for the legitimate interests of individuals, transparency and intrinsic honesty in transactions and the prevention of situations where personal interest may conflict with Group responsibilities. In its business practices Jerónimo Martins also guarantees and respects the rights of its employees and business partners, the scrupulous quality and food safety of the products it puts on the market, concerns for environmental protection in the framework of its activity and concerns with the needs of the community. Based on mutual trust and respect, it is expected that all those involved will feel responsible for the performance and reputation of Jerónimo Martins and comply with the Code of Conduct. As regards shareholders, the Group conducts its operations in accordance with internationally accepted corporate rules of governance, by regularly providing information on its activities, organisation and financial situation. The Executive Committee and entire senior management are responsible for ensuring that the principles of the Code of Conduct are communicated, understood and put into practice by all employees and any failure is always reported so that adequate corrective measures may be taken. Adopting a pro-active attitude to the clarification and possible correction of omissions or failures is also part of management responsibility in the various Companies, responsibility being gauged through audits made by the competent bodies. The Code of Conduct, approved in October 2003 by the Board of Directors, was made available to all employees and business partners on the Group website, and was also translated into Polish and given to all Company managers. Delivery to all employees was concluded in February 2004. In the Manufacturing business, the Code of Conduct is called the Code of Business Principles, and in 2003 was communicated in workshops for all the employees by analysis and discussion of case studies to ensure that the principles were understood and adhered to. 2. Human Resources To create conditions encouraging each individual to do his/her best for the Company, business and him/herself Group Companies seek to provide, at all times, the fairest and most suitable conditions so that employees can give of their best. Special attention is paid to all issues related to Working Conditions, Remuneration and Social Benefits, Training, Personnel Development and Recruitment.
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2.1. Recruitment The Jerónimo Martins Group creates jobs in both Portugal and Poland, employing some 30,000 people. Total No. Employees in Jerónimo Martins Group in 2003: Holding Company 58 Distribution Portugal 16.359 Distribution Poland 10.045 Manufacturing and Services 1.406 27.868 The Group maintains strict respect for individuals, valuing the difference, not only because it reflects the dynamics of society but also because it is a source of competitive advantage translated into innovation, creativity and it also stimulates options in the decision-making process. In terms of Recruitment, the Group is determined to continue to:
Promote the exchange of professional backgrounds, through inter- and intra-company transfers.
Encourage expatriation, and in some cases the subsequent return of high potential executives who will benefit from exposure to other business, cultural and social realities.
Broaden the external recruitment base, in terms of the geographical origin and type of formal education of
management trainees and it is important to tap the new centres of university excellence that are emerging.
The Group has long maintained close links with the academic world, not only in the search of talent, but also by supporting trainee programmes for graduate and undergraduate degrees, students' scientific research and by taking part in University seminars and curricular subjects. The Group also provides traineeships in the ambit of technical vocational courses.
Internal Recruitment The following transfers too place in 2003 as part of career planning, and in line with existing opportunities in the Organisation, and providing an opportunity broaden professional experience with greater challenges and responsibilities: (1) Inter-company transfers 21; (2) Intra-company transfers 44 in Portugal and 16 in Poland; (3) Expatriations: 2 to Poland in a total of 13 and 1 to Portugal in a total of 3. External Recruitment
In 2003, 9 executives were recruited externally in Portugal for various business areas (Sourcing, Operations, Quality Control, Information Systems, etc.) and 317 jobs were filled for the opening of the new Feira Nova Store in Odivelas. In this case the Company actively co-operated with other partners in the community, besides using advertisements and on-line recruitment, it approached the Employment Centres at Loures and Odivelas, the Community and Parish Centre of Ramada and Pontinha School for Food Manufacturing were used. In Poland, the Management Trainees Recruitment Programme was launched in October 2003, through a media campaign. This programme was concluded in March 2004, with the recruitment of 13 Management Trainees for various business areas (Category Management, Finance, Operations and Logistics). A total of 4,018 Non-Executives were also recruited in 2003. Traineeships and Other Actions In 2003, 47 traineeships in Marketing, Communication Sciences, Agricultural and Food Engineering, Veterinary Medicine and Psychology were given to university students in various Group Companies in Portugal, as well as technical courses (Commercial Operator, Safety, Hygiene and Health at Work Technician, Secretariat Technician, etc.).
Distribution – Facts in 2003
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Jerónimo Martins has collaborated with Universidade Nova de Lisboa for the last 5 years. One session of the Management Course is taught by senior Group Executives and in 2003 the theme was “internationalisation”. The Group also collaborated with the Faculty of Veterinary Medicine on a post-graduation course in Food Quality, by lecturing on Food Quality in Food Distribution. In Poland, 21 traineeships were given to university students in the Marketing, Human Resources, Purchasing, Communications and Quality Control areas.
Internal Recruitment
The following management staff transfers took place in 2003, within the ambit of the internal recruitment and personal development policy: (1) Inter-company transfers 5; (2) Intra-company transfers 20; (3) Expatriations: 5 in a total of 16 expatriates in several countries with 3 Portuguese in top management positions. External Recruitment In 2003, 5 Management Trainees were recruited externally. The selected candidates, in the first eighteen months follow an on-the-job training programme. At the end of this period they must have experience of at least two business areas before taking up a management position. Traineeships and other Actions Manufacturing Companies offered 53 traineeships in 2003, mainly in the Marketing and Sales areas. The contact with the main Universities is constant, particularly through summer traineeships, Marketing and Sales Workshops and also recruitment presentations and University Job Shops. Students are selected from Universities across the country providing a solid academic basis in different areas of study. 2.2. Working Conditions, Remuneration and Social Benefits With reference to Working Conditions, Remuneration and Social Benefits, Jerónimo Martins constantly tries to find the fairest and most competitive solutions to attract, retain and motivate high flyers on the staff. This policy takes into account four basic pillars: (1) responsibility, (2) performance, (3) potential and (4) market value. Hygiene, Health and Safety in the Working Place is also a priority for the Group, and its position to the application of regulations in force is one of “zero tolerance”. The Group strongly invests in intensive on-job-training and formal training sessions and strictly monitors the employee practices. The Group also believes that the introduction of fixed and variable remuneration systems, the latter linked to growth in operating results in each Company, stimulates the Organisation to deliver high levels of performance. All the employees of Manufacturing Companies are covered by the variable remuneration system, based on the Employee Performance Evaluation and Production Employee Performance Evaluation system (EPE/PEPE) or on Unilever’s “Reward for Growth” system. In Distribution a variable remuneration system was introduced in 2003 and the objective is to introduce this throughout the Organization by the end of 2004. In Poland, employees in Operations and Distribution Centres are already covered by this system. In Jerónimo Martins, Distribution Companies assess levels of remuneration on a regular basis by comparing them with the market. Every year Manufacturing Companies carry out a survey covering 16 local or multinational companies of similar or larger size, with an average of 35 different job positions, in order to gauge how its wages compare with the market. Distribution Companies also provide various social benefits to their employees: canteens in Azambuja and Recheio Braga for 600 and 220 employees respectively, while all the other employees receive a food subsidy above the minimum set by the Collective Contract. There are also Day Nurseries in Azambuja Distribution Centre and Recheio Braga. Distribution Centres in Azambuja and Guardeiras provide transport to the employees. There is a canteen in Ruda Distribution Centre, Poland and all the other employees receive a food subsidy. Other social benefits also available in Portugal and Poland: The Group has signed an agreement with a permanent medical care clinic, a communications operator, an insurance company, a bank and leisure centres so employees will benefit from more favourable rates for specific products or services. Health insurance is in place for all executive staff. Coupons for Christmas Toys (Portugal) and a Christmas basket (Poland) are offered to all the employees’ children under 12. Subsidies are available for language courses or
Manufacturing – Facts in 2003
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any other course that is relevant to the job (decided case by case). In Poland, under the law, the Company supports a social fund designed to provide help to employees in emergency situations or social support whenever justified. In Manufacturing, the Companies of Jerónimo Martins provide the following social benefits: Free health insurance to all the employees and their families, life and personal accidents insurance, a defined contribution pension plan funded by the Company, and seniority bonuses at 20, 30 and 40 years of service in Group Companies. There is also a Staff Club, an independent entity funded by the Companies, membership fees and activities. This Club promotes leisure time activities (culture, sport and travel), provides financial support for employees' studies and organizes Christmas events (dinner, circus, children’s gifts).
Working Conditions - Hygiene, Health and Safety In Portugal, accident average rates in Distribution showed a significant improvement in 2003 with reductions in the frequency average (minus 12,6%) and in the “dangerous” average (minus 7%). Feira Nova saw an improvement of 20% in both rates. In Poland, the number of accidents decreased by 3% (from 195 to 189) but it is important to highlight the low level of accidents taking into consideration the fact that overall employees number 10,045). The improvement in accident average rates was the result of the training program on Work Hygiene, Health and Safety a total of 3.852 training hours in Portugal and 13.532 hours in Poland (3.867 employees, 548 sessions). To improve overall Working Conditions in terms of Hygiene Health and Safety investments were made and activities carried out, the most important being as follows: Portugal
- Improvements in 4 Pingo Doce Stores (Pombal, Figueira Foz II, Guarda, Peniche), - Refurbishing of Pingo Doce, Linda-a-Velha, - Noise, lighting and air audits in 6 Feira Nova stores (Aveiro, Águeda, Guarda, Valongo, Braga e
Bragança) by the Ricardo Jorge Institute, Oporto. There was no major cause for concern and only a few improvements had to be made to meet standards required,
- Improvements in 2 Feira Nova stores (Sintra and Póvoa-Stº-Adrião), - Refurbishing of 4 Feira Nova stores (Caldas da Rainha, Loures, Rio Tinto and Valongo), - Improvements in Recheio-Braga, - Refurbishing of Recheio-Leiria, - Investment for good mantainance of personal equipment in Pingo Doce, Feira Nova, Recheio and
Distribution Centres. Poland
- Refurbishing of 62 stores, - Every store has had a Fire Protection Manual and a Crisis Management Manual since 2003, - Evacuation plans and simulations were carried out in the Central Offices and Distribution Centres.
Remuneration and Other Social Benefits In 2003 a productivity bonus system was implemented, applicable to all Recheio Store Operators in metropolitan Portugal and in Madeira and to Distribution Centre Operators. By rewarding employees who meet the targets at the respective stores/sections, the system fosters the involvement and motivation of the whole team. First indicators show that the productivity level at Distribution Centres rose by 16% and that overtime levels fell by 29%. In Recheio-Madeira, the variable remuneration system for Store Managers, based on points attributed by Quality Control visit reports and by the “Mystery Customer” programme, proved crucial to improving the quality of the operation. The variable remuneration system will be extended to all management and non-management Distribution staff in 2004.
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In Poland, remuneration levels were assessed against the market in 2003 and the variable remuneration system covering Operations and Distribution Centre staff was revised. In 2003, 35 employees in Portugal and Poland (of whom 10 are executives) also received grants to subsidise their university studies, which are considered important to their positions in the Company.
Working Conditions - Hygiene, Health and Safety In 2003, LeverElida registered zero accidents with lost time. The Company organised 5 training actions in the safety area (one of which involved 80 employees), as well as several awareness-raising initiatives (a total of 22). There were also 180 safety-related initiatives on adequate protection and machine signals, greater electrical safety and better ergonomic conditions, among others. In FimaVG the number of lost-time accidents was reduced by 60% (from 5 to 2 accidents) over last year. The Company provided 665 hours of training in safety and hygiene in the work place. The plant pavement and protection doors on a raised platform were also improved, and a lockout system was installed. Víctor Guedes registered no lost-time through occupational accidents. The Company organised 3 training courses on safety. In IgloOlá, the number of accidents with lost time was reduced by 70% (from 7 to 2 accidents). The Company provided 60 hours of training divided into 4 parts, one involving all the staff. A post-graduation course on Safety Engineering (230 hours) was another initiative. Remuneration and Other Social Benefits In 2003 the variable remuneration system was extended to all non-executive employees in all Manufacturing Companies. 2.3. Training and Personal Development The Group believes that investment in personal and professional development is crucial for the construction of differentiated organizations. Training is the visible and more easily quantifiable face of this philosophy. The importance it assumes is crucial when it provides the Organisation with continuously updated, pedagogically efficient and economically rational knowledge in every possible way (on-the-job, in room, self-study, team learning, etc.). Training can be either internal, by gathering and structuring the know-how available in the Organization, or external, by having access to conceptual centres of excellence and innovation and to third parties experience. Manufacturing Company Executives also participate in international courses within Unilever, given by Unilever trainers, on matters as varied as Leadership, Know-How Processes, Customer and Consumer Trends, among others; Training plans specific to the manufacturing units, combine methodologies such as TPM (Total Productive Maintenance) with the development needs detected through performance assessment instruments; these included, among others, technical training as well as training in hygiene and safety, the environment, and new technical and technological tools. In terms of Personal Development, matching the needs of the Companies with individual aspirations is another dominant concern of the Group. Professional promotion, transfers between companies, lateral moves within each company, and the possibility of an international career are actively implemented. Motivation and the satisfaction of personal aspirations are promoted, contributing to maintaining strong performances. All this process is supported on the individual Performance Development Plan (PDP), which annually identifies key strengths and key areas for improvement in terms of professional competence for strong performance in the Group and the technical skill to carry out functions. The PDP process defines the next steps in an individual plan in terms of training and career development, while the Group constantly tries to ensure “ the right person in the right place”.
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Training and Personal Development In 2003, 2 training courses were held at the IMD (International Institute for Management Development), and programmes were established with institutions such as the Catholic University (Advanced Management Programme for Executives) and were attended by a total of 23 participants. A SAP training project was also begun in 2003 in the Retail, Financial and Human Resources areas, covering SAP users in Distribution Companies (5,739 hours of training). A project was also undertaken on a national scale to provide training in “Hygiene, Food Safety and Good Practices”, where some 1,800 employees received training. In terms of the overall training provided in Distribution in Portugal, initiatives involved Customer Service and Food Quality and total hours of training were 65,672 in Pingo Doce, 9,720 in Feira Nova and 26,132 in Recheio. In Poland, 86 employees received external training in Finance, Information Systems, Quality Control and Strategic Management and 17 executives participated in University sessions (IMD 1, PAGE 2003 1, Euro Manager Competition 15). There was also PDP training (19 executives, 6 days), Customer Service (217 employees, 6 days, 48 hours) and Food Safety (2.950 employees, 984 hours). A training program was implemented to develop 50% of substitutes in several management levels in Operations (Store Deputies and Store Area and District Managers). The program “Management Academy”, designed to develop best management practices in the organisation, was attended by 167 executives and had a total of 208 hours. “Management Academy”, launched in 2003, is aimed at improving personal efficiency, the development of a set of common management tools throughout the Organization, increasing focus on results, team building and personal satisfaction. The 9 sessions program has theoretical and practical exercises and an individual task in the end of each session that has to be implemented before the next training session. The content is common to all participants but exercises are adapted to the needs of different business areas. Career Management Following the restructuring process carried out in 2002 in Portugal and in 2003 in Poland, a Group priority was the revision and updating of job profiles, with a view to resuming the appraisal process supported by PDP in 2004. Overall retention of Management Executives was 90% in Portugal and 85% in Poland (including 8 executives who were transferred with the sale of Eurocash).
Training and Personal Development
With regard to training, four main pillars marked 2003:
Intensification of internal training initiatives, at a time when it is essential to promote approximation and the bridge-building process - National Training Plan (for Managers), involving 25 training initiatives;
Considerable reinforcement of international training, recognising that it is important to stay abreast of new
realities in this area (vanguard knowledge in different) from the start;
Opening training courses for managers and non-management staff, rewarding those whose potential is combined with their level of responsibility to advise an acceleration of training. At the same time, it is intended to convey a clear signal that our culture is increasingly one of integration and team spirit, at all levels and in all our companies;
Specific training plans for factory staff.
Manufacturing – Facts in 2003
Distribution – Facts in 2003
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In 2003, training hours in the Manufacturing area totalled 10,557 of which 3,624 were devoted to international training. This number does not include on-the-job training or self-study and team learning. Career Management 2003 was the first year in which the performance appraisal system for non-management staff (EPE/PEPE) was running at cruising speed, covering all employees. This is a simplified PDP, which means that it will tend to become central, as employees and management increasingly realise its advantages in terms of variable remuneration (already considerable), access to more training (already visible) and professional advancement, in its strictest sense (i.e., emerging development, detecting talent, and therefore catalysing lateral or vertical mobility). The overall retention index of the workforce in the Industry was of 97% in 2003. Before concluding the report of activities in the Human Resources area, attention should be drawn to an employee survey that was conducted by Biedronka in 2003 after the restructuring process aimed at increasing productivity and efficiency levels in the different areas of the Organization took place. The objective of the survey was essentially to find out how employees evaluated: (1) Company behaviour in the market; (2) personal satisfaction and identification with the Company; (3) process of objective definition, quality of supervision, departmental relations and team spirit in general. The survey was confidential and all employees from central and regional offices, distribution centres and 300 stores chosen randomly were invited to participate. The number of those answering was quite high and the results are representative of 43% of employees. The conclusions were as follows: (1) employees are quite satisfied with the Company’s behaviour in the market (vis-à-vis competition); (2) they identify with the Company and are proud to work in Biedronka, like their job, feel that team-spirit exists and are overall quite satisfied; (3) they clearly understand the strategy and business objectives and believe that they make a relevant contribution; (4) they see the restructuring implemented in the Organization as positive. Three priorities were identified as areas for improvement: (1) internal communication of restructuring processes and business objectives; (2) simplification or clarification of procedures and (3) investment in the development of management skills. In order to respond to the need for better internal communication, it was decided to issue a regular house magazine to be prepared by a team of employees from various areas, among other communication tools to be implemented. A team will be appointed to head a simplification project. As regards the training and development of skills, the “Management Academy” programme, started in 2003, will be continued and the internal EMBA (Executive Master Business Administration) program will begin in 2004. 3. Food Quality and Safety Quality and Safety from source to Consumer Food Quality and Safety are an absolute priority for all Jerónimo Martins employees in the Manufacturing and Distribution areas and all companies in the Group work preventively to ensure food is safeguarded from the source of raw materials to delivering to the consumer. 3.1. Distribution 3.1.1. Strict Control of Stores and Distribution Centres The Quality and Food Safety of products is guaranteed from their entry into Distribution Centres to their exit from the Store, through adequate conservation and transport installations and equipment, and through established policies and procedures that provide for the correct handling of products as well as high standards of hygiene aimed at protecting the health of the consumer. Products delivered to Distribution Centres are subject to systematic controls, and all perishables are inspected on a daily basis. The process of revising the auto control system installed in Stores and Distribution Centres was initiated in 2003, with a view to increasing the overall food safety level. It was also decided to start the certification process of the Recheio stores (HACCP according to Codex Alimentarius) and that of the Distribution Centres for Perishables (HACCP under DS 3027 and Environmental Management ISO 14001). These two processes will begin in 2004.
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In addition to the continuous training of the staff, specialised technicians made internal audits to measure the quality index of Group stores in Portugal. This index is obtained not only by assessment of installations and equipment, but also by evaluating the store installations themselves as well as the degree of general and personal hygiene, the quality and freshness of the products on display, and how they are handled, conditioned and labelled. During these audits, teams are always reminded of food safety procedures. The following actions were taken in the ambit of quality:
• 1,196 audits in stores of the various Companies, • 422 specific support visits to stores, • 382 hours training in quality and good practices, hygiene and auto control systems, given by the Quality
Control team, • 7,200 hours of training, given by external entities
The following tests were made, specifically to monitor hygiene and quality:
• 760 analyses of working surfaces; • 384 analyses of handlers (hands); • 772 analyses of confectionery; • 84 analyses of take-away products;
Aware that Take-Away is a particularly sensitive area, the respective manual of procedures has been updated and 184 hours of exclusive training given. The Manual of Procedures was also placed on the internal computer network, to ensure its disclosure and to make it permanently available for consultation. Thanks to all these initiatives, the store performance indicators for hygiene, good practices and quality have increased by 6.3% overall (Recheio 4%; Feira Nova 9.8%, Pingo Doce 5%). In Poland 127 external store audits were made by official entities (Sanitary and Commercial Inspection) and 2,950 employees received training on Food Hygiene and Safety, a total of 984 hours. It is important to underline that in 2003, Biedronka was also audited by the Official Consumer and Market Protection Authority. This Authority issued a report concluding that Biedronka stores operate satisfactorily in relation to legislation in force and consumer requirements. This conclusion was supported by the small number of consumer complaints that the Authority received between 2001 and 2003 and by the results of audits in 48 Biedronka stores in 2003. 3.1.2. Supporting Rigour in Production In addition to carefully selecting suppliers, the Quality Control team makes frequent audits and control visits to suppliers to check:
Installations and equipment, Level of hygiene, Technology and production capacity, Food Quality and Safety systems Origin and conformity of the various products.
Besides these controls, advice and training is also given to smaller-sized Companies to help them achieve the quality levels required by the Jerónimo Martins Group. Suppliers of Perishables and Private Label products are monitored with particular care. In 2003, 1,038 audits and visits were carried out in these two categories of products (an increase of 113%). In Perishables, the level of rejections on reception dropped by 28% (measured in unit sales). 3.1.3. Monitoring Rigour in Private Labels Pingo Doce, Feira Nova, Masterchef and Euroshopper product lines provide a consistent quality standard that guarantees a very attractive price/quality ratio. Quality and Safety are a clear imperative in the development and control of all products. The product development process is carefully monitored both in terms of manufacturing (production technology, raw materials, packaging materials, labelling) and in terms of supplier (quality control systems, commercial competence and financial health).
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The development of a new Private Label product goes through several stages:
Sensorial and/or laboratory evaluation of the product Evaluation /approval of supplier specifications Approval of supplier by means of an audit performed by Quality Technicians Approval of packaging and labelling
Besides being very demanding in terms of product specifications, only producers/manufacturers with advanced Quality and Food Safety systems are accepted. After launch, Private Label products are subject to pre-planned analytical control according to the level of risk presented by the product, the supplier and the variation of raw materials at origin. This control is performed through lab analyses (chemical, physical and microbiological) carried out by independent entities, as well as by sensorial analyses made at appropriate intervals. It is also part of the Group policy to inform customers of what is required by law and give relevant additional information. Packages of products sold under Private Label include nutritional information, information on the adequate use of the product, information on the origin of the raw materials or the manufacturing process, whenever it is relate to product quality, and an indication on possible allergenic substances, where appropriate. As regards Genetically Modified Organisms (GMOs), Group policy is not to use them in Private Label products. Whenever a given formulation includes GMOs, a change in the formulation is requested, should that not be possible Jerónimo Martins looks for alternative suppliers. Should there be no other alternative, the Group alerts consumers to the fact, by providing information on the package in accordance with European Community regulations. The following activities were carried out in 2003 in the area of Private Label products in Portugal:
• Product launches - 396; • Audits and visits to suppliers - 566, 291 of which were to check conformity of products at source; • Sensorial analyses - 1,241; • Laboratory analyses - 1,295; In Poland the following Private Label activities were carried out: • Processes of development of new articles in Poland - 68 launches and 123 re-launches, 564 product tests
carried out; • Sensorial analyses - 193 tests; • Laboratory analyses - 1.074 routine control tests and 156 new product tests;
3.1.4. Investing in Knowledge Sharing In 2003 the Group increased its participation in technical and scientific discussion fora, at the national and international level. It is integrated in the Global Food Safety Initiative Task Force, the Quality Committee of the AMS*, the Quality Committee of the APED, and the Food Safety Steering Committee of Royal Ahold. The Group has also begun to participate in manufacturers working groups studying and developing traceability systems for meat, fish, fruit and vegetables. 3.2. Manufacturing 3.2.1. Investing in a Rigorous Quality System FimaVG, LeverElida and IgloOlá are committed to placing products on the market that consistently deliver added value in terms of price and quality and which are safe in terms of the specific purpose for which they are intended. For this purpose:
The most appropriate equipment and technology is used to maintain demanding quality standards, aimed at good production first time,
The Group is committed to training and raising employee awareness in matters related to food quality and safety,
Methodologies, namely HACCP, are used to prevent the risk of accidents and contamination. Existing practices are verified and monitored by carrying out quality audits.
Quality Systems are certified under the NP EN ISO 9001:2000 standard and are applied in strict compliance with the legislation in force and with Unilever’s internal regulations.
* European Association of Retailers;
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3.2.2. Quality System Stages and Processes FimaVG, LeverElida and IgloOlá view their suppliers as important business partners, favouring those who observe compatible quality standards (preference for suppliers certified under ISO standards). In addition, companies seek to establish a close working relationship with their suppliers, with a view to achieving mutual benefits. The production process follows auto control principles, i.e. operators can take immediate corrective action. At both project level and in the existing lines, critical control points are determined by using HACCP methodology, which by definition implies an audit plan. All these activities are monitored by a pool of internal auditors, who follow a pre-defined plan for their audits of the different sectors and determine possible non-conformities. As regards finished product, a pre-established plan of analysis ensures that they comply with the specifications at the time they are delivered to the customer. The entire system operates within a framework of full involvement by all staff, and continuous improvement, using TPM (Total Productive Maintenance) techniques, some of which have already been implemented and others are currently being applied with the help of JIPM (Japanese Institute of Plant Maintenance). After FimaVG and Olá in 2002, in 2003 it was the turn of the Víctor Guedes plant to obtain JIPM approval, level I audit, and in a ceremony held in Japan, the factory was awarded the respective prize for excellence. The implementation of this methodology involved collecting of 1,300 proposals for improvements. The result was a 50% increase in the efficiency of the production lines, a reduction of 32% in maintenance costs, a reduction of 43% in waste and a drop of 84% in the average time to change product. The Lever plant consolidated its Integrated Management System, which not only includes processes for compliance with ISO 9001 (quality), ISO 14001 (the environment) and OHSAS 18001 (Safety and Health in the Workplace), but also established strategy and general objectives, with the result that the planning of activities was made more consistent with the overall objectives of the Company. In 2003 this system was integrated under the general system of HPCE (Home & Personal Care Europe, one of the Unilever Business Groups), both being certified by the German SGS. In 2004 this system will be aligned with TPM methodology. 4. Environmental Management The future is for those who promote the sustainable community development Companies in the Jerónimo Martins Group are committed to responsible, proactive behaviour, regarding the preservation of the environment as an indispensable factor in the way in which businesses are conducted and in their growth. In line with these principles, this report already includes the requirements set out in Accounting Standard no. 29 - Environmental Matters (in force since 1 January 2003). Also stated are environmental indicators that help evaluate Company behaviour with regard to environmental matters, specifically Water and Energy Consumption and Waste Management4 4.1. Environmental Policy The environmental policy of the Jerónimo Martins Group aims to achieve the following objectives:
Continuous improvement of the environmental performance of its 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 of good environmental practices; Responding to and satisfying consumers’ environmental concerns;
The Jerónimo Martins Group plays an active role in the communities where it carries out its activities, by collaborating with business partners, authorities and institutions in the preservation of the environment, and assuming its responsibilities from the standpoint of sustainable development.
4 These environmental indicators were calculated according to the principles of transparency, rigour and comparability. However, due to lack of basic information and the diversity of existing procedures, some of them, namely the indicator on water consumption, are only presented for the Manufacturing Companies. It is, however, the Group intention in 2004 to define procedures permitting to determine the data required for a global presentation of these indicators, as well as, to define others contributing to a broader evaluation of the behaviour of its Companies with regard to environmental matters.
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The Environmental Management Systems of the companies in the Distribution and Manufacturing areas are based on NP EN - ISO 14001:1999. Some Companies in the Jerónimo Martins Group have already had their Environmental Management Systems certified under the NP EN - ISO 14001:1999 standard and the remaining companies’ systems will be certified in the medium to long term.
4.2. Main Environmental Impacts 4.2.1. Distribution The most important environmental issues at the Distribution level are energy consumption, waste management and the transportation of goods. Energy consumed in distribution units is mainly electric energy, used in the preservation of food products, lighting, and the climatisation of Stores and equipment in general. The main residues are the following:
• Paper/cardboard and plastic employed in the production of packages used to transport and condition the goods in stores and distribution centres;
• Organic solid waste mainly resulting from wastage in the Perishable sections, product losses, canteens and offices;
Finally, the transportation of goods entails the burning of fuel that cause gas (namely CO2) and noise emissions. 4.2.2. Manufacturing Under the Environmental Management System implemented in conformity with the requirements of the NP EN - ISO 14001:1999 Standard, environmental issues associated with activities in the Manufacturing sector are revised and evaluated on an annual basis. In 2003 the following main environmental-related issues were identified:
Water consumption, various heating and cooling systems, cleaning/sanitation and personal hygiene, Energy consumption, mainly electricity, natural gas and steam, Solid waste arising from the manufacturing process, namely packages, Manufacturing and domestic liquid effluents.
4.3. Environmental Management Programmes 4.3.1. Distribution The Environmental Management Programme implemented in 2003 in stores and Distribution centres was systematised into the various actions described below: Water Quality Control The Water Quality Monitoring Plan was projected in 2002 and implemented in 2003. It provides more efficient control of water consumption and guarantees food safety. A total of 141 analyses were made, essentially on the more important microbiological and physico-chemical characteristics of water.
Units Number of Units Covered % of Total Number of Units
Stores 96 40%
Distribution Centres 5 100%
With most units connected to the water mains, results on the whole were satisfactory. Waste Management To reduce the impact of residues on the environment to a minimum, residues produced by Stores and Distribution Centres were adequately managed through duly licensed entities to guarantee they reach an appropriate final destination and the share of recycled cardboard and plastic residues was increased. Environmental indicators:
2002 2003 Change
Total residues forwarded for reuse (t) 20,445 23,909 16.9%
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The increase in the quantity of residue forwarded for recycling is largely due to strong commitment and awareness on the part of Jerónimo Martins’s staff. In 2003 a Residue Database was developed to optimise efficient management of residues produced, each individual unit being responsible for loading the respective data. Energy Consumption Management To improve energy efficiency in stores and distribution centres, and also to rationalise energy consumption, several solutions have been adopted to provide considerable energy saving. These are some of the measures taken:
• Fitting manufacturing refrigeration with the “Adap-Kool” system, which reduces energy consumption by up to 20%,
• Using more efficient light bulbs, namely those equipped with electronic ballast • Purchasing more efficient equipment, • Installing a Centralised Technical Management System in some of the higher consumption units.
In addition, in 2003, the following actions achieved energy savings:
• Purchasing gel batteries for Recheio stores stackers, as they emit less pollutant gases, do not consume water, all their components can be recycled, and they guarantee higher energy efficiency,
• Two stores were equipped with a system to recycle energy resulting by cooling the gas discharge of cold compressor units to heat sanitary waters and water for the perishables sections,
• 7 units joined the European Green Light Project, a voluntary programme aimed at rehabilitating lighting applications in units to improve energy efficiency and prevent the emission of greenhouse gases and other pollutants.
Environmental Indicators: Stores In 2003 electricity consumption weighted by sales area (m2) was reduced by more than 5% in Distribution stores in Portugal and by 2.5% in Polish stores. Distribution Centres In 2003 electricity consumption weighted by the number of boxes moved in distribution centres fell by 13.5% in Portugal and by 21.8% in Poland. Environmental Issues in the Construction and Remodelling of Units Environmental issues are always taken into account when remodelling or building stores and distribution centres, and the performance of these units is duly assessed. In 2003, 23 projects to build or remodel stores were subjected to environmental tests, resulting in the implementation of several measures for improvement. The chart below shows some of the measures taken: Environmental issue Examples of measures taken Mains Water Installation of timed taps and flushing systems/lavatories equipped with flow
meters in the toilets for customers and in shower rooms. Installation of sub-meters to measure water consumption in the more relevant sectors.
Energy Consumption Installation of sub-meters to measure electricity consumption in the more relevant sectors. Installation of a centralised technical management system (in the units with higher consumption). Installation of an Manufacturing refrigeration management system (Adap-Kool). Fitting lighting fittings with electronic ballast.
Energy Consumption Installation of sub-meters to measure electricity consumption in the more relevant sectors. Installation of a centralised technical management system (in the units with higher consumption). Installation of an Manufacturing refrigeration management system (Adap-Kool). Fitting lighting fittings with electronic ballast.
Management of Residues Optimisation of the waste collection system. Cooling the compartments for the storage of residue containers.
Liquid Effluents Installation of solid waste retention boxes in the sections of perishables (specifically in the Butchery and Fish section). Installation of fat retention boxes.
Noise Sound proofing potentially noisy places (i.e. cold compressor compartments). Selection of less noisy equipment.
Emissions to the Atmosphere
Installation of electrostatic filters in take-away sections to retain odours and fat. Replacing the Manufacturing refrigeration system’s gases for other, less pollutant gases (i.e. glycol).
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Staff Adoption of Good Practices Saving Energy A new chapter on Energy Consumption was added to the Manual of Good Environmental Practices in March 2003. This chapter addresses the procedures that must be followed by the staff when carrying out their duties, so as to improve consumption control, promote the efficient use of energy and minimise waste. This chapter was divulged in training initiatives to about 300 employees. Controlling Residues To guarantee the adequate management of residues i.e., reduce their production, increase the percentage of recyclable materials and save on natural resources, a chapter on Waste Management has been prepared to integrate the Manual of Good Environmental Practices. In 2003, 55 units were subject to audits to assess compliance by store staff with the Manual of Good Environmental Practices, and the corresponding measures for improvement were taken. Reducing the Impact of Products on the Environment Reusable Transportation Packaging Since 2002 the fruit and vegetables areas have used reusable plastic boxes. This minimises residue from non-reusable packaging, optimises space in transportation vehicles, consequently minimising pollution by reducing fuel consumption and making better use of cooling systems to minimise emission of pollutant gases. A system of reusable transportation box was also developed with our meat suppliers, which has the same advantages referred to above. In 2003, approximately 44% of all boxes used in this sector were reusable. Environmental Campaigns In 2003, two Environmental Campaigns were launched in the ambit of the implementation of Good Environmental Practices: “Energy Consumption” (March) and “Waste Management” (October). The purpose of these campaigns was to make staff and customers aware of the need for a “Better Environment” and to alert the community to the scarcity of natural resources, and problems caused by their poor management, while suggesting good practices to be followed. The information was spread out in stores through large posters, leaflets and stickers, distributed to clients and employees. Recheio stores distributed a leaflet on these issues addressed to small retail professionals, hotel units and catering companies. The leaflet contained not only awareness-raising information, but also procedures to be followed to ensure that the main residues produced by their activities are given an adequate final destination. These campaigns had the institutional support of the General Directorate for Energy and the Institute for Waste. 4.3.2. Manufacturing Control of Water Consumption The companies in the Manufacturing sector have been taking steps to rationalise water consumption and minimise waste. To attain these objectives, the following actions, were, among others, taken in 2003:
• Reduce water consumption, Fima and Olá factories continued to monitor consumption, alerting their staff throughout the year to the need to rationalise the use of water.
• LeverElida installed equipment-integrated technologies, namely a special pipe washing system and changes to the CIP - Cleaning in Place System (closed-circuit washing).
Environmental Indicators:
2002 2003 Change
Global water consumption (thousand m3) 515,1 461,5 -10.4%
Water consumption per ton of product produced (m3/t) 3,094 2,658 -14.1%
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Management of Liquid Effluents Liquid effluents from the Manufacturing sector represent one of the areas with heavier environmental impact. To reduce such impact and ensure compliance with legal limits, Fima 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 of EPTARI (Manufacturing waste water pre-treatment plant), using specialised firms, in order to lower the pollution burden of liquid effluents. At LeverElida, the management of liquid effluents is carried out through monitoring (namely computer-assisted monitoring of liquid effluents) and several measures to reduce generation of effluents at source (namely the reuse of boiler condensates and closed-circuit washing). These actions greatly contribute to reduce water consumption. Finally, Víctor Guedes also continued to control and monitor effluents, which are subsequently drained into the municipal wasted water treatment plant, to comply with legal limits. Waste Management Duly licensed companies are contracted to ensure that residues are given an adequate final destination, and, whenever possible, these are reused and forwarded for recycling. To minimise the production and impact of residues, the Group companies put a number of measures into place in 2003. Víctor Guedes took steps to promote the reduction of residues, as well as the share of waste disposal, namely by:
• Reducing losses in materials, and developing lighter packages, in a joint effort with the suppliers, • Incorporating filtration residues in ceramic materials and burning non-recyclable cloth and paper in a steam
generator. FimaVG carried out a number of projects to reduce the size of some transportation packaging, optimising pallet space, with direct benefits in terms of transportation and reduction of packaging residues. In this area, LeverElida took the following steps:
• Installation of a sludge reduction stirrer, and changing the Manufacturing effluent circuit to incorporate a pre-decantation system,
• Development of improvement projects, namely in packaging, in order to reduce losses and consequently residues,
• Increasing staff use of residue separation system (which has been installed for several years). Thanks to these measures, in 2003 the company achieved a 90% reduction in landfill residues. IgloOlá carried out several staff awareness-raising campaigns so they use only what they require, recognise and use the adequate places for waste separation, separate as much as possible and ensure that each residue is given an adequate destination. Environmental Indicators:
2002 2003 Change
Ton or residues generated (t) per ton of product produced (t) 0,029 0,026 -10.5%
Total residues forwarded for recycling (t) 3,029 2,961 -2.2%
Residues forwarded for recycling as a percentage of total residues generated
61.7%
64.7%
4.9%
Energy Consumption Rationalisation To rationalise energy consumption and contribute to the preservation of energy resources, the Manufacturing area has carried out several actions. In 2003 these included:
• Energy audits at IgloOlá, Fima and Víctor Guedes, performed by an external entity and preparation of 4 to 5-year plans for consumption rationalisation,
• Also in IgloOlá, heating system deposits were changed to a closed-circuit system, circulation of hot water replacing direct steam.
• Several measures to make better use of energy were implemented by LeverElida, to achieve a reduction of approximately 10% in total energy consumption.
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Environmental Indicators:
2002 2003 Change
Global electricity consumption (thousand kWh) 27,029 28,324 4.8%
Electricity consumption per ton of product produced (kWh/t)
162.3
163.1
0.5%
The increase in global electricity consumption in 2003 resulted from several factors inherent to the optimisation of the plant’s operation for better adjustment to market needs. These included measures taken to comply with quality requirements, the reduction in some transportation units, increasing the use of raw materials the treatment of which requires more energy consumption, changing some product characteristics and extending the climatisation of premises to work round-the-clock in one of the plants. Noise Control Compliance with the legal noise limits was another matter for attention in 2003, to ensure legal conformity. At Fima, a duly accredited external entity measured environmental noise with satisfactory results. Víctor Guedes sound proofed some of its equipment. Staff Adoption of Good Practices Environmental training/awareness raising initiatives addressed to all staff are organized periodically. In 2003 these included: FimaVG held training sessions to raise staff awareness to the environmental impacts of production activities, addressing themes such as a correct segregation of residues, reducing waste and the rational use of water. These actions were backed with posters on good environmental practices placed in key points of the installations. LeverElida organised awareness-raising sessions on the minimisation of the Manufacturing effluents generated. Víctor Guedes promoted regular “Environmental Verifications”, results and recommendations having been widely divulged, in posters or by electronic means. The company also makes wide use of visual signs as to procedures to be followed in each particular case and place. All the companies provide initial training to new employees, where environmental matters are highlighted, as well as compliance with Good Practices in this area. TPM Methodology (Total Productive Maintenance) Companies in the Manufacturing sector have been implementing TPM methodology, which places great emphasis on the Environment and Safety. TPM aims processes optimisation and the main objectives are:
• Zero losses (aimed at the increasingly disciplined use of natural resources and the reduction in/reuse of residues generated),
• Zero defects, • Zero accidents.
The companies rely on training, qualifying and motivating their staff to achieve these objectives. Environmental Criteria to Select Suppliers and Service Providers It is essential that suppliers comply with environmental legislation and act in an environmentally correct way. These requirements are taken into account in selection criteria, and are subsequently verified through audits of suppliers. In 2003 FimaVG carried out 13 supplier audits. To integrate workers employed by contractors and other service providers when work is being carried out in the various Manufacturing facilities, the companies in question are provided in advance with a paper setting out the rules that workers must follow while in the plants. This helps to ensure that work is carried out without accidents, damage to equipment or environmental hazards.
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Environmental Campaigns Eco-Schools Programme In the 2002/03 school period, FimaVG, LeverElida and IgloOlá sponsored the Eco-Schools Programme, a Europe-wide initiative launched by the European Blue Flag Association/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 their every day life. In the ambit of this joint cooperation, FimaVG, LeverElida and IgloOlá launched a National Competition entitled “Green Brigade”, where students were asked to make a critical analysis of various company brands, such as Gallo, Skip and Olá and their possible impact on the environment, and to make suggestions for improvement. Lever - Open Plant In 2003 LeverElida’s Environmental Management programme initiated two major actions to develop links with the community. In the community where Lever has been established for over 50 years, the company launched the “Lever - Open Plant” initiative, which aims to bring the plant closer to the involving community to prove that a healthy interconnection between the two is possible. Around 650 people, including members of the central and regional administration, employee family members and local entities visited the plant. Tree Day On 21 March 2003, to celebrate the National Tree Day, LeverElida invited students from Sacavém primary schools to plant trees in the factory grounds, together with the company employees. Each tree was given the name of the student who planted it and the surname of the Lever employee who helped plant it. Olá “Clean Beach, Safe Beach” Operation This is the 8th time in a row that Olá has endorsed this initiative designed to highlight proper behaviour with regard to residue on beaches. In 2003, 3,477 children took part in the Olá "Clean Beach, Safe Beach" campaign and collected nearly 2 tons of residues from 16 beaches. 5. Patronage Commitment to the Community Jerónimo Martins has always been conscious, and often pioneering in awareness of the need to find the harmonious development of business and community relationships while searching for profit. In this context, Jerónimo Martins has supported and developed projects where the community plays an important role, either at the corporate level, or through employees, voluntary contributions in specially organised campaigns. All these activities follow defined Sponsorship Policy directives based on three key guidelines: the Food World, the Portuguese Character and Innovation as a business stance. All these activities are carried out through two major sponsorship programmes:
“Jerónimo Martins Feeds Smiling Futures”: a programme of a markedly social nature essentially addressed to providing support to children;
“Jerónimo Martins Supports National Culture”: a programme specifically addressing cultural issues,
in particular the preservation and dissemination of the Portuguese historical and cultural heritage. 5.1.Social Patronage
Aware of the community to which it belongs and of social problems in general, the Jerónimo Martins Group actively collaborates with institutions and projects supporting the underprivileged. Aiming for continuous improvement and actively participating in society, year after year Jerónimo Martins has carried out actions with a clear sense of social responsibility, providing funds, time and products to a number of causes for social solidarity, mainly for children.
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Renovation of Paediatric Surgery Ward, Hospital Santa Maria In 2003 one of the projects supported by Jerónimo Martins was the reconstruction of the Paediatric Surgery Ward of the Santa Maria Hospital. The aid provided came in answer to a public appeal made through the media by Professor Doctor Mena Martins, the Director of Paediatric Surgery. The Jerónimo Martins Group answered the call, studied the support model that would best meet the Department’s needs, and financed part of the work. On April 7th 2003, the new Paediatric Surgery Ward was inaugurated, marking the high point in an undertaking that was only made possible thanks to the support given by Jerónimo Martins and other entities. The department was rebuilt and enlarged answering to the two main objectives: making it more human and putting an end to 2-year waiting lists for operations required by a thousand children. New surgery rooms were built, bed capacity expanded by 25% and a happy, cosy environment was created. Thanks to this initiative, the children are now much more comfortable, and more than one thousand operations can be carried out every year. Feeding the Smile, Bicesse SOS Village Jerónimo Martins has been providing support to the Bicesse SOS Village since 2002. This year, the Group continued to fully finance meals for 75 children and young people in the care of this institution. During the Christmas holidays, the Jerónimo Martins Group took these children to visit the Lisbon Oceanarium - this initiative, called “An Ocean of Smiles”, took place in the ambit of Pingo Doce support to the largest oceanarium in Europe. Supporting “Obra do Ardina” The “Obra do Ardina” is a hundred year old institution that provides support for boys at risk. It has several homes, education and recreation centres, nursery schools, and vocational training courses, assisting around 550 underprivileged children and young people. In 2003 Jerónimo Martins began to help “Obra do Ardina”. This institution is faced with acute, daily financial problems, even to the point of being unable to guarantee that the children and young people in its homes are adequately fed. Jerónimo Martins is seeking to reduce one of the main needs of the institution by financing the perishables component of meals provided to the 52 children and young people who live in the Institution. The Group has also tried to find other ways to help by appealing to its own employees. So, besides helping to make it better known, it has promoted a campaign addressed to its staff to raise funds to buy much-needed mattresses. The campaign was highly successful and funds collected acquired not only the mattresses but other necessary items. The Jerónimo Martins Group also gave “Obra do Ardina” children a special Christmas gift, making them part of the “An Ocean of Smiles” initiative, and taking them to see the “Oceanario de Lisboa”. At the end of the day the children were given Christmas presents. Supporting the “Acreditar” cause “Acreditar” is an institution devoted to easing the conditions of the daily life and treatment of children with cancer, as well as that of their families, surrounding them with a spirit of hope, a fundamental factor in facing this disease. This was another of the institutions supported by the Jerónimo Martins Group in 2003, contributing to the costs of a home built by the institution to allow the parents of children subjected to prolonged treatments to stay close to them. The Companies in the Manufacturing area also support “Acreditar”, having paid for the kitchen and one of the rooms in the institution home in Lisbon, and giving two welcome packages containing articles for personal hygiene and food to families accomodated in the home. Internal Campaign “Everything for the Baby” “Ajuda de Berço” looks after babies at risk, providing better living conditions. “Crianças Sem Fronteiras” is an institution helping families in economic difficulty and in danger of being split up by creating adequate conditions to allow the children to stay at home rather than being placed in an institution. It is currently the only institution in Portugal to act at the prevention level.
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To provide support to these two institutions, Jerónimo Martins launched a campaign addressed to its employees in Central Offices in order to collect child-care articles. The answer to this plea was excellent, even extending to some of the Group’s suppliers, and more than seven hundred articles were collected. Promoting Blood Donation The Jerónimo Martins Group, together with the Portuguese Institute of Blood, organised a campaign to collect blood in its central offices. This campaign took place in November of 2003, a period when blood requirements are particularly acute. Pingo Doce With 200 stores all over the country and in Madeira, Pingo Doce is particularly committed to providing support to local communities. In 2003, food and monetary aid raised in the campaign - “Jerónimo Martins Feeds Smiling Futures” were channelled to the following institutions: “Ajuda de Berço”, “Casa dos Rapazes”, “Acreditar”, Volunteer Fire Brigade Associations, Parish Councils, Youth Communities, Scouts Groups and also to the social and cultural initiatives organised by city councils. In addition, for several years, the company has fully subsidised the education of a handicapped student who lives abroad. The Pingo Doce contribution to Food Bank initiatives has also been important, as the retail food chain collects the largest amount of food. In 2003 the relationship established between the company and Non Governmental Organization was further reinforced, and the result was an increase of 13% in the Pingo Doce contribution. More than 360 tons of food products were collected. Feira Nova Feira Nova takes into account the needs and specific characteristics of the areas where its stores are located in its patronage activities. Because what is important to one region is not necessarily so in another, and even because local events sometimes require immediate intervention (such as the forest fires in the summer of 2003), Feira Nova distributes its support to a large number of local institutions, most of them dedicated to child care. In 2003 the chain was involved in a number of activities in partnership with the city councils of the areas of influence of its stores. These included, among others, the Sintranima, an annual event organised by the Sintra store in collaboration with the city council, initiatives of the Odivelas Store and the Municipal Health Department, several initiatives developed by the Braga store together with the local authorities, and a broad-based initiative launched by the Póvoa de Varzim store to assist a local institution, supported by the local city council. Recheio Recheio Cash & Carry believes that it is essential to support the economic and therefore the social development of the community in which it operates. Such support is even more imperative if one takes into account the company’s specific characteristics: it is a Portuguese chain which, although operating at national level, has strong local and even regional links. Therefore the aid it provides consists mainly of food products and equipment and is essentially directed to childcare institutions and Volunteer Fire Brigades. Biedronka Biedronka supports institutions that care for children or handicapped adults, small country schools, orphanages, and organisations for the help of single mothers, old people or invalids. The most important initiatives take place four times a year; Easter, World Children's Day, St. Nicholas Day, and Christmas. The company participated in Food Bank campaigns designed to help underprivileged families, particularly during the Easter and Christmas seasons.
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Manufacturing In 2003 FimaVG, Lever and IgoOlá cooperated with more than 20 social solidarity institutions in Portugal, by offering donations in cash or in goods. The involvement with schools in the companies’ areas of influence has become current practice in the last few years, namely with Open days for primary and secondary schools and universities to visit its plants. In 2003, 4,300 students visited Fima plant and 8,300 students visited Olá plant. As part of this involvement, children from Santa Iria da Azóia Basic Education no.2 school were invited to draw 2003 Christmas cards, which were later animated electronically and put on the intranet, contributing to reduce paper Christmas cards. The pupils were taken on trips to Badoca Park as a reward. Following the Skip/Helping Hand initiative to help AMI (International Medical Assistance) recover a building at Vila Nova de Gaia which became a new AMI “Open Door”, in 2003 a new Skip/Helping Hand initiative raised funds for the “Novo Futuro” Association, which was able to open its seventh home. In LeverElida brands, Dove continued to sponsor breast cancer prevention in Portugal, through its close collaboration with the Portuguese League against Cancer (for more information visit www.dove.pt). Finally, Olá supported the fund-raising Terry Fox Race in favour of the Portuguese League against Cancer. 5.2. Cultural Patronage
In the cultural area, various companies in the Jerónimo Martins Group have provided support to preservation projects and the divulgation of the Portuguese historical and cultural heritage Support to Orquestra Sinfónica Juvenil For several years now the Group has sponsored the Orquestra Sinfónica Juvenil New Year Concert. This Orchestra was chosen for its role in the education of young musicians and also by the professionalism of their performances. Pingo Doce In March 2003, for a three year period, Pingo Doce became the official sponsor of the Lisbon Oceanarium. The Oceanarium is a remarkable Portuguese achievement of a scientific, educational and cultural nature, which seeks to expand knowledge of the Oceans. Through its initiative “Pingo Doce for the preservation of the Oceans”, Pingo Doce joined this important Portuguese project helping in the protection of sea life, and in alerting the community in general to the future of the oceans and the environment. Biedronka The financial or material support provided in this area is targeted at organisations, institutions or single events (exhibitions, shows or concerts). Biedronka sponsored the Art Biennale for Children that took place in Poznan, where company (headquarters) are located. In 2003 it also supported several events intended to promote Portugal and the Portuguese language, namely the Portuguese Festival of Lublin (in May) the International Linguistics Congress and the Portuguese Festival of Lodz (in October).
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V. CONSOLIDATED FINANCIAL STATEMENTS
89
JERÓNIMO MARTINS, SGPS, S.A.
CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2003 AND 2002 (euro thousand)
ASSETS 2003 2002
GROSS ASSETS DEPR/PROV NET ASSETS NET ASSETS
FIXED ASSETS INTANGIBLE ASSETS Start-up expenses 153 153 - 59 Research and development expenses 28,610 20,429 8,181 14,498
Industrial property and other rights 42,377 25,477 16,900 20,495 Key money 27,184 14,831 12,353 14,475 Work in progress - - - 27 Goodwill 428,758 151,377 277,381 327,748
527,082 212,267 314,815 377,302 TANGIBLE ASSETS Land and natural resources 273,439 - 273,439 284,004 Buildings and other constructions 692,221 160,719 531,502 526,202 Plants and machinery 473,978 309,125 164,853 187,317 Transport equipment 30,729 23,415 7,314 17,260 Tools and utensils 26,813 17,808 9,005 14,671 Office equipment 78,645 57,956 20,689 28,777 Other tangible assets 8,235 6,266 1,969 2,398 Work in progress 11,883 - 11,883 41,741 Advances on account of tangible assets 8,326 - 8,326 6,717 1,604,269 575,289 1,028,980 1,109,087 FINANCIAL INVESTMENTS Investments in associated companies 39 25 14 24 Investments in others companies 17,670 2,729 14,941 5,266 Investments in property and securities 116,909 5,525 111,384 49,968 Advances on account of investments 4,988 - 4,988 4,988 139,606 8,279 131,327 60,246
CURRENT ASSETS INVENTORIES Raw materials and consumables 4,406 3 4,403 4,733 Goods and work in progress 703 - 703 738 Finished and semi-finished goods 279 - 279 183 Merchandise 199,263 7,195 192,068 246,013 204,651 7,198 197,453 251,667 ACCOUNTS RECEIVABLE – medium & long-term Other debtors 59,980 - 59,980 58,398 59,980 - 59,980 58,398 ACCOUNTS RECEIVABLE – short-term Trade debtors 75,526 6,408 69,118 62,238 Notes receivable - - - 49 Doubtful debts 24,506 23,877 629 1,072 Subsidiaries and associated companies 50 - 50 50 Advances to suppliers 1,683 1,683 1,756 Advances to suppliers of fixed assets 1,505 1,505 1,448 State and other public entities 10,261 - 10,261 19,708 Other debtors 46,746 19,410 27,336 19,601 160,277 49,695 110,582 105,922 TRADING SECURITIES Other trading securities 74 57 17 17 Other cash investments 46,416 - 46,416 26,095 46,490 57 46,433 26,112 CASH AND CASH EQUIVALENTS Bank deposits 101,639 101,639 102,125 Cash 1,803 1,803 1,999 103,442 103,442 104,124 ACCRUALS AND DEFERRALS Deferred taxes 87,227 87,227 91,494 Accrued income 12,324 12,324 33,005 Deferred costs 12,601 12,601 17,902 112,152 112,152 142,401
Total depreciation 787,556 Total provisions 65,229
Total assets 2,957,949 852,785 2,105,164 2,235,259 To be read together with the attached notes to the Consolidated Financial Statements
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JERÓNIMO MARTINS, SGPS, S.A. CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2003 AND 2002
(euro thousand) SHAREHOLDERS' EQUITY AND LIABILITIES 2003 2002
SHAREHOLDERS' EQUITY
Share capital 479,293 479,293 Own shares - nominal value (859) (859) Own shares - discounts and premiums (5,201) (5,201) Share premium 22,452 24,262 Warrants premium - 4,796 Consolidation differences (261,456) (261,537) Revaluation reserves 66,163 65,080 Legal reserves 22,054 22,054 Reserves for incorporation into share capital - 12,424 Reserves for own shares 6,060 6,060 Currency translation differences (23,136) 2,813 Retained earnings/losses (286,924) (98,587) Net profit/loss for the year 58,246 (204,377)
Total shareholders’ equity 76,692 46,221
MINORITY INTERESTS 205,073 229,063
LIABILITIES
PROVISIONS FOR RISKS AND CONTINGENCIES 47,318 62,270
ACCOUNTS PAYABLE – medium & long-term Bond loans with share redemption option - 169,919 Non-convertible bond loans 254,760 99,760 Bank debt 341,411 300,065 Other loans payable 508 765 Suppliers of fixed assets – trade creditors 13,488 12,025
610,167 582,534 ACCOUNTS PAYABLE – short-term Bond loans with share redemption option 180,760 - Non-convertible bond loans - 174,579 Non-convertible bond loans with warrants - 93,327 Bank debt 66,637 100,211 Suppliers - trade creditors 634,578 621,575 Suppliers - invoices pending 32,597 38,998 Subsidiaries and parent companies 2 33,920 Other shareholders 7 7 Customers prepayments 172 228 Suppliers of fixed assets – trade creditors 32,967 30,048 State and other public entities 27,041 31,767 Other creditors 54,115 39,697 1,028,876 1,164,357 ACCRUALS AND DEFERRALS Deferred taxes 42,584 36,685 Accrued costs 90,450 80,469 Deferred income 4,004 33,660
137,038 150,814
Total liabilities 1,823,399 1,959,975
Total shareholders' equity, minority interests and liabilities 2,105,164 2,235,259 To be read together with the attached notes to the Consolidated Financial Statements
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JERÓNIMO MARTINS, SGPS, S.A. 2003 AND 2002 CONSOLIDATED PROFIT AND LOSS ACCOUNT
(euro thousand) 2003 2002
COSTS & LOSSES
Cost of goods sold and materials consumed Goods 2,581,494 3,285,961 Materials 101,160 2,682,654 84,919 3,370,880 Supplies and external services 317,607 402,623 Staff Costs: Salaries and wages 216,150 241,062 Social security charges: Pensions 4,160 1,854 Others 66,699 287,009 75,287 318,203 Depreciation and amortisation 124,480 149,731 Provisions 8,599 133,079 9,722 159,453 Taxes 8,961 12,670 Other operating costs and losses 1,597 10,558 6,222 18,892 (A) 3,430,907 4,270,051 Amortisation and provisions for financial investments 7,074 4,326 Interest and similar costs: Relative to associated companies 22 106 Others 78,955 86,051 159,930 164,362 (C) 3,516,958 4,434,413 Extraordinary costs and losses 18,952 209,920 (E) 3,535,910 4,644,333 Tax on income for the year: Income tax 17,285 20,902 Deferred taxes 3,148 20,433 (8,812) 12,090 (G) 3,556,343 4,656,423 Minority interests 23,647 20,160 Consolidated profit/loss for the year 58,246 (204,377)
3,638,236 4,472,206
INCOME & GAINS Sales: Goods 3,392,527 3,869,573 Products 12,226 10,928 Services rendered 12,538 3,417,291 11,245 3,891,746 Production variation 20,971 4,955 Own work capitalised 33 190 Supplementary income 128,428 466,705 Subsidies to the operation 691 271 Other operating income and gains 7,994 158,117 5,120 477,241 (B) 3,575,408 4,368,987 Income from equity holdings 608 113 Income from trading securities and other financial investments 283 282 Other interest and similar income 44,820 45,711 72,408 72,803 (D) 3,621,119 4,441,790 Extraordinary income and gains 17,117 30,416 (F) 3,638,236 4,472,206
Summary: Operating results: (B) - (A) = 144,501 98,936 Financial results: (D - B) - (C- A) = (40,340) (91,559) Current profit/loss: (D) - (C) = 104,161 7,377 Profit/loss before taxes: (F) - (E) = 102,326 (172,127) Consolidated profit/loss with minority interests,: (F) - (G) 81,893 (184,217) To be read together with the attached notes to the Consolidated Financial Statements.
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JERÓNIMO MARTINS, SGPS, S.A. CONSOLIDATED INCOME STATEMENT BY FUNCTIONS FOR THE YEARS ENDED 31 DECEMBER 2003 AND 2002
(euro thousand)
Notes 2003 2002
Sales and services rendered 4 3,417,291 3,891,746
Cost of sales (2,732,017) (3,382,906)
Supplementary income and costs 7 185,048 432,099
Gross profit 870,322 940,939 Distribution costs (559,945) (651,252)
Administrative costs (121,920) (148,944)
Other operating costs 8 (23,299) (26,175)
Exceptional operating losses 12 (3,995) (4,409)
Operating profit 3 161,163 110,159
Net financial costs 10 (57,053) (109,004)
Losses on disposal of discontinued operations 6 (1,466) (173,945)
Profit/loss before taxes 102,644 (172,790)
Income taxes 11 (20,751) (11,427)
Profit/loss before minority interests 81,893 (184,217)
Minority interests (23,647) (20,160)
Net profit/loss 25 58,246 (204,377)
Basic earnings per share – Euros 25 0.6087 (2.1359)
Diluted earnings per share – Euros 25 0.6037 (2.0274)
To be read with the attached notes to the Consolidated Financial Statements
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JERÓNIMO MARTINS, SGPS, S.A.
CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2003 AND 2002
(euro thousand)
Notes 2003 2002
Assets
Tangible assets 13 1,028,980 1,109,087
Intangible assets 14 314,815 377,302
Investments in associated companies 16 14 24
Available for sale investments 17 42,728 11,466
Non-current debtors 18 59,980 58,398
Deferred tax assets 20.1 87,227 91,494
Total non-current assets 1,533,744 1,647,771
Inventories 19 197,453 251,667
Fixed assets held for sale 15 88,585 48,756
Taxes receivable 20.3 10,261 19,708
Trade debtors, accrued income and deferred costs 21 125,246 137,121
Available for sale investments 17 17,117 -
Cash and cash equivalents 22 132,758 130,236
Total current assets 571,420 587,488
Total assets 2,105,164 2,235,259
Shareholders’ equity and liabilities
Share capital 479,293 479,293
Share premium 22,452 24,262
Own shares (6,060) (6,060)
Consolidation differences (261,456) (261,537)
Fair value and other reserves 24.1 43,027 71,510
Retained earnings (200,564) (261,247)
76,692 46,221
Minority interests 205,073 229,063
Total shareholders’ equity 281,765 275,284
Borrowings 26.1 610,167 582,534
Employee benefits 27.2 20,426 18,096
Deferred profits – state grants 1,792 1,873
Provisions 28 26,892 44,174
Deferred tax liabilities 20.1 42,584 36,685
Total non-current liabilities 701,861 683,362
Trade creditors, accrued costs and deferred income 29 837,375 832,281
Borrowings 26.1 257,122 412,565
Taxes payable 20.3 27,041 31,767
Total current liabilities 1,121,538 1,276,613
Total shareholders’ equity, minority interests and liabilities 2,105,164 2,235,259
To be read with the attached notes to the Consolidated Financial Statements
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JERÓNIMO MARTINS, SGPS, S.A.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (euro thousand)
Shareholders’ equity attributable to shareholders of Jerónimo Martins, SGPS, S.A.
Notes Capital Share Premium Own Shares Consolidation Differences
Fair value and other reserves
Retained Earnings
Total Minority Interests
Shareholders’ equity
Balance Sheet at 1 January 2002 479,293 24,262 (6,060) (261,537) 13,538 (57,371) 192,125 87,492 279,617
Equity changes in 2002
Currency translation differences: 24
- amount arising in year (87,916) (197) (88,113) (1,900) (90,013) - to net results on disposal of subsidiary 118,731 118,731 118,731
Revaluation of fixed assets: 24
- amount arising in year 26,941 26,941 21,274 48,215 - fixed assets held for sale (transfer) 313 (313) - - - on disposal of subsidiary (970) 970 - -
Measurement of financial instruments at fair value (IAS 39) 24 1,284 35 1,319 149 1,468
Revaluation of financial investments 24 (411) (411) (411)
Other changes in retained earnings 6 6 (138) (132)
Gains/losses directly recognised in equity - - - - 57,972 501 58,473 19,385 77,858
Net losses in 2002 (204,377) (204,377) 20,160 (184,217)
Total gains/losses recognised during the year - - - - 57,972 (203,876) (145,904) 39,545 (106,359)
Dividends - (40,985) (40,985)
Acquisitions and share capital increase - 143,011 143,011
Balance Sheet at 31 December 2002 479,293 24,262 (6,060) (261,537) 71,510 (261,247) 46,221 229,063 275,284
Changes in accounting policies (5,808) (5,808) (5,808)
Balance sheet re-expressed 479,293 24,262 (6,060) (261,537) 71,510 (267,055) 40,413 229,063 269,476
Equity changes in 2003
Currency translation differences: 24
- amount arising in year (25,949) (25,949) (25,949)
Revaluation of fixed assets: 24
- amount arising in year 2,700 2,700 (65) 2,635 - fixed assets held for sale (transfer) (1,617) 1,617 - -
Measurement of financial instruments at fair value (IAS 39) 24 1,179 1,179 1,179
Warrants premium matured 24 (4,796) 4,796 - -
Share premium matured (1,810) 1,810 - -
Minority interest adjustments 81 81 (81) -
Other changes in retained earnings 22 22 304 326
Gains/losses directly recognised in equity - (1,810) - 81 (28,483) 8,245 (21,967) 158 (21,809)
Net Profits in 2003 58,246 58,246 23,647 81,893
Total gains/losses recognised during the year - (1,810) - 81 (28,483) 66,491 36,279 23,805 60,084
Dividends (47,795) (47,795)
Balance Sheet at 31 December 2003 479,293 22,452 (6,060) (261,456) 43,027 (200,564) 76,692 205,073 281,765
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JERÓNIMO MARTINS, SGPS, S.A. CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEARS ENDED 31 DECEMBER 2003 AND 2002 (euro thousand)
Notes 2003 2002
Operating activities Cash received from customers 3,804,235 4,418,378 Cash paid to suppliers and employees (3,448,975) (3,995,012) Cash generated from operations 23 355,260 423,366 Interest paid (45,743) (108,509) Income taxes paid (20,954) (12,279)
Cash flow from operating activities 288,563 302,578
Investment activities Disposals of tangible assets 13 5,546 18,086 Disposals of Group and associated companies - 147,560 Disposals of other investments 6,618 36,332 Interest received 5,161 2,901 Dividends received 608 113 Acquisition of Group and associated companies (11,428) (7,206) Acquisition of tangible assets 13 (74,149) (95,804) Acquisition of other investments (17,106) - Acquisition of intangible assets 14 (1,144) (34,110) Cash flow from investment activities (85,894) 67,872
Financing activities Received from other non-current loans 208,001 - Reimbursement of loans (335,502) (306,804) Dividends paid 24.5 (47,795) (40,985)
Cash flow from financing activities (175,296) (347,789)
Net increase in cash and cash equivalents 27,373 22,661 Cash and cash equivalents at the beginning of period 130,236 115,260 Net increase in cash and cash equivalents 27,373 22,661 Disposal of subsidiaries (17,010) - Effect of currency translation differences (7,841) (7,685)
Cash and cash equivalents at the end of period 22 132,758 130,236 To be read with the attached notes to the Consolidated Financial Statements
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
96
Index to the notes to the consolidated financial statements Page
1 Activity ................................................................................................................................................96
2 Accounting policies .........................................................................................................................................96
3 Conciliation between statutory operating profit and operat ing statement by functions..................................104
4 Reporting by segments ........................................................................................................................105
5 Discontinued operations.......................................................................................................................105
6 Disposals ...........................................................................................................................................106
7 Supplementary income and costs ..........................................................................................................106
8 Other operating costs ..........................................................................................................................107
9 Staff costs..........................................................................................................................................107
10 Net financial costs ...............................................................................................................................107
11 Income tax recognised in the income statement......................................................................................108
12 Exceptional operating losses.................................................................................................................108
13 Tangible assets ...................................................................................................................................109
14 Intangible assets.................................................................................................................................110
15 Fixed assets held for sale .....................................................................................................................110
16 Investments in associated companies ....................................................................................................111
17 Available for sale investments...............................................................................................................111
18 Non-current debtors ............................................................................................................................111
19 Inventories.........................................................................................................................................111
20 Taxes ................................................................................................................................................111
21 Trade debtors, accrued income and deferred costs ..................................................................................113
22 Cash and cash equivalents ...................................................................................................................113
23 Cash generated from operations ...........................................................................................................113
24 Capital and reserves ............................................................................................................................114
25 Earnings per share ..............................................................................................................................115
26 Borrowings.........................................................................................................................................115
27 Employee benefits ...............................................................................................................................117
28 Provisions ..........................................................................................................................................118
29 Trade creditors, accrued costs and deferred income.................................................................................118
30 Financial instruments...........................................................................................................................118
31 Guarantees ........................................................................................................................................120
32 Operational lease ................................................................................................................................121
33 Capital commitments...........................................................................................................................121
34 Contingencies .....................................................................................................................................121
35 Related parties ...................................................................................................................................122
36 Group companies ................................................................................................................................123
37 Interests in joint ventures ....................................................................................................................124
38 Events after the balance sheet date.......................................................................................................124
COMPLEMENTARY INFORMATION .............................................................................................................125
39 Reconciliation between Portuguese GAAP and IAS ...................................................................................125
40 Information on environmental matters...................................................................................................126
41 Interest Rate Derivatives (IRD) Portfolio Risk Report ...............................................................................127
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
97
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 foodstuffs and other fast moving consumer goods products. The Group operates in Portugal and Poland, and employs 27,868 people (30,722 in 2002, including businesses disposed during the year).
JMH has been listed on Euronext Lisbon (ex-Lisbon and Oporto Stock Exchange) since 1989.
2 Accounting policies
The principal accounting policies adopted in the preparation of these consolidated financial statements are as follows:
2.1 Basis of preparation
All amounts are shown in thousand euros (EUR) unless otherwise stated.
The consolidated financial statements of JMH were prepared in accordance with generally accepted accounting principles in Portugal, with the derogation required to make them conform to the International Accounting Standards (IAS) issued by the International Accounting Standards Board (IASB) and with the interpretations of the IASB’s Standings Interpretation Committee (SIC).
The JMH consolidated financial statements were prepared in accordance with the historical cost principle, except for land recorded in tangible assets, fixed assets held for sale and equity holdings referred in note 2.9, which were stated at their 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.
Changes in Accounting Policies and Basis of Presentation
In December 2003 the Group adopted the changes introduced in the IAS 1 – Presentation of Financial Statements, issued by the IASB in December 2003, in particular to minority interests presentation as an equity component, and also a separated presentation of shareholders and minority interests in the statement of changes in equity.
In 2003 the Group started reporting sales net of all supplementary costs (“rappel”, discounts, bonuses, promotion campaigns) conceded based on sales volume. This change seeks to reduce the possible impact on sales of industrial companies through net price negotiation, also in compliance with IAS 18, according to which sales should be presented net of all negotiated discounts, regardless of the legal form of such transactions.
December 2003 December 2002 December 2002
Restated Official
Sales and services rendered 3,417,291 3,860,854 3,891,746
Cost of sales (2,732,017) (3,383,229) (3,382,906)
Supplementary income and costs 185,048 466,488 432,099
Gross profit 870,322 944,113 940,939
Distribution costs (559,945) (657,057) (651,252)
Administrative costs (121,920) (146,290) (148,944)
Other operating costs (23,299) (26,198) (26,175)
Exceptional operating losses (3,995) (4,409) (4,409)
Operating profit 161,163 110,159 110,159
In December 2003 the IASB released a revised version of IAS 39 – Financial Instruments, which includes changes, namely relative to the accounting treatment of Embedded Derivatives.
In 2002 the Group recognised in the consolidated financial statements the fair value of embedded derivatives resulting from lease contracts of stores in Poland, which are denominated, in Euro, a different currency from the local currency (Zloty).
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
98
The revised standard clarifies that contracts entered in a currency other than the local currency, which is the currency used by the market for this type of transaction, should not be treated as contracts containing embedded derivatives.
As a result of this change of accounting policy the fair value recognised in the 2002 financial statements was adjusted to retained earnings.
2.2 Basis of consolidation
Reference dates
The consolidated financial statements include, as of 31 December 2003, 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 36 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.
Consolidation differences
Positive consolidation differences (goodwill) represent the surplus of acquisition cost over the fair value of assets and liabilities identifiable at the date of acquisition or first consolidation. Negative consolidation differences represent the surplus of the fair value of identifiable assets and liabilities at the date of acquisition or first consolidation over acquisition cost.
Positive consolidation differences arising prior to 1991 are stated under equity. From 1991 onwards positive consolidation differences found in Group companies are recorded under intangible assets, being depreciated over a period of 20 years, in accordance with best international practices.
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
Foreign operations that conduct their businesses as if they were an extension of the parent company’s operations are considered as integral to JMH operations. All others are considered as foreign entities.
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
99
The financial statements of a foreign operation deemed integral to JMH operations are translated into Euros based on the closing exchange rate for monetary items and historic exchange rates for non-monetary items and 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, arising exchange differences being recognised as cost or revenue.
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 2.6).
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.
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 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 fixed assets held for sale are recognised as financial revenues in the income statement in the period to which they relate.
Net financial costs
Net financial costs represent the interest on borrowings, the interest on investments 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 fixed assets held for sale, costs and income with financing operations.
Net financial costs are accrued in the income statement in the period in which they are incurred. Dividends are recognised as revenues at the time they are declared.
2.4 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.
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
100
The main exchange rates applied on the balance sheet date are those listed below:
Rate on 31 December 2003
Average rate for the year
Polish Zloty € 0.2127 € 0.2278
Sterling Pound € 1.4188 - US Dollar € 0.7918 -
2.5 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 IAS39 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.
2.6 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, in accordance with IAS regulation, are booked at fair value on the Balance sheet. To the degree that they are considered effective, changes to their fair value are initially booked against equity and afterwards reclassified as financial expenses. 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.
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).
2.7 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 (extraordinary results in statutory income statement). When revalued 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.
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
101
Accounting for leases
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
2.8 Intangible assets
Intangible assets are stated at acquisition cost net of accumulated depreciation 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.
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.
Depreciation
Depreciation 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
2.9 Financial investments
Equity holdings
Equity holdings other than Group companies, joint ventures or associated companies are classified as financial investments available for sale, 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.
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
102
If the investments are unlisted, they are stated at cost. When so justified, provisions are set up for loss of value.
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.
Whenever potential losses represent more than 20% of the acquisition cost of available for sale investments, those losses are transferred from reserves to the income statement.
Fixed assets held for sale
Fixed assets held for sale are recorded at market value as determined by specialised independent agents.
Changes in fair value of fixed assets held for sale are recognised in the income statement, in net financial costs, in accordance with IAS 40.
Whenever, as a result of changes in their expected use, tangible assets are transferred to the heading of fixed assets held for sale, the transfer value corresponds to their carrying amount, which should correspond to the respective market value on the date of transfer.
2.10 Customers and debtors
Customers and debtor balances are recorded at nominal value net of the provision 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 net of provisions corresponding to estimated losses.
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.
2.13 Impairment
Except for fixed assets held for sale (Note 2.9), inventories (Note 2.11) and deferred tax assets (Note 2.21), all other Group assets are considered at each balance sheet date in order to assess for indicators of possible impairment losses.
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.
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 themselves 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.
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
103
An impairment loss recognised as related to positive consolidation differences (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 Own shares (treasury shares)
Own shares purchased are shown at cost as a deduction in equity.
2.15 Dividends
Dividends are recognised as liabilities when they are declared.
2.16 Detachable warrants
Detachable warrants issued with Group bonds are recognised in equity.
The value of detachable warrants issued with Group bonds is determined as the difference between the present value of future cash inflows from the bonds, calculated on a market rate for operations without warrants of similar risk and maturity, and the respective value at issue.
2.17 Bond loans
Zero-coupon bonds with share redemption option
Zero-coupon bonds with share redemption option issued by the Group are stated as liabilities at the respective value at issue and accrued every year of interest on outstanding principal. Issuance costs are recognised in the income statement during the loan’s life.
Other bond loans
Bond loans are booked as liabilities at par. Issuance costs are recognised in the income statement during the loan’s life.
2.18 Employees benefit
Retirement benefits
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 the employees enjoy the respective 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 projected unit credit method. 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.
2.19 Provisions
Provisions are booked in the balance sheet whenever the Group has a present obligation (legal or constructive) 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.
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
104
2.20 Suppliers and other creditors
Suppliers and other creditors’ balances are stated at their nominal value.
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. No deferred tax is calculated on consolidation differences 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.
2.22 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 and personal hygiene and home consumption 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, Poland, Brazil and United Kingdom. The last two were sold during 2002.
3 Conciliation between statutory operating profit and operating statement by functions
2003 2002 EBITDA 289,638 264,299 Depreciation (101,653) (125,590) Goodwill Amortisation (22,827) (24,141) EBIT 165,158 114,568 Exceptional gains/losses (Statutory Operating Profit) (2,056) (2,014) Exceptional gains/losses (Statutory Extraordinary Profit) (1,939) (2,395) Operating Profit Statement by Functions 161,163 110,159 Cash discounts and credit card commissions (Statutory Financial Results) (16,716) (16,789) Exceptional gains/losses (Statutory Extraordinary Profit) 1,939 2,395 Other exceptional gains/losses (Statutory Extraordinary Profit) (1,885) 3,171 Statutory Operating Profit 144,501 98,936
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
105
4 Reporting by segments
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 “non allocated” column refer essentially to financial operations, also including consolidation adjustments.
4.1 Detailed Information by Segment
DISTRIBUTION MANUFACTURING AND SERVICES
NOT
Portugal Poland Brazil Portugal United Kingdom
ALLOCATED TOTAL
2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002
Revenues from external customers Sales 2,150,803 2,105,325 974,474 1,277,819 - 192,544 278,888 296,543 - 7,507 588 763 3,404,753 3,880,501 Services rendered 2,343 843 7,694 7,177 - 1 503 - - 2,500 2,722 12,539 11,245
2,153,146 2,106,168 982,168 1,284,996 - 192,544 278,889 297,046 - 7,507 3,088 3,485 3,417,291 3,891,746
Inter-segments revenues 554 183 - - - - 65,387 77,027 - - (65,941) (77,210) -
TOTAL REVENUES 2,153,700 2,106,351 982,168 1,284,996 - 192,544 344,276 374,073 - 7,507 (62,853) (73,725) 3,417,291 3,891,746
SEGMENT RESULTS 107,475 113,798 6,519 (17,093) - (37,701) 43,045 39,333 - (1,063) 4,124 12,885 161,163 110,159 Net financial costs (57,053) (109,004) Losses on disposal of discontinued operations
(1,466)
(173,945)
PROFIT/LOSS BEFORE TAXES 102,644 (172,790)
Income taxes (20,751) (11,427) Minority interests (23,647) (20,160)
NET PROFIT/LOSS 58,246 (204,377)
TOTAL ASSETS 1,546,509 1,635,110 403,741 508,068 - - 139,034 142,253 - - 15,880 (50,172) 2,105,164 2,235,259
TOTAL LIABILITIES 1,172,269 1,030,221 286,168 339,060 - - 114,174 97,437 - - 250,788 493,257 1,823,399 1,959,975 Cash flow from operating activities 288,563 302,578
Cash flow from investment activities (85,894) 67,872
Cash flow from financing activities (175,296) (347,789)
Investment in tangible and intangible assets 55,490 77,315 24,823 73,144 - - 3,097 4,469 - - 190 2,927 83,600 157,855
Amortisation and depreciation 83,621 87,984 37,839 46,581 - 10,525 4.327 5,302 - 355 (1,307) (1,016) 124,480 149,731
5 Discontinued operations
In 2003 the Group disposed of its businesses in Eurocash, a company that holds a cash and carry business in Poland.
In 2002 the Group disposed of its businesses in Lillywhites, Bakery, Diversey, JMD Brazil, Apoio and Jumbo.
The net assets of these businesses, on the date of disposal, were as follows:
Distribution Manufacturing and Service
Total
2003 2002 2003 2002 2003 2002
Non-current assets 26,619 247,733 - 26,942 26,619 274,675 Current assets 39,211 99,894 - 19,691 39,211 119,585
Total assets 65,830 347,627 - 46,633 65,830 394,260
Shareholders’ equity 28,525 211,542 - 26,723 28,525 238,265 Current liabilities 37,305 136,085 - 19,910 37,305 155,995
Total liabilities and shareholders’ equity 65,830 347,627 - 46,633 65,830 394,260
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
106
In terms of results, the summarised amounts recognised in the consolidated income statement were as follows:
Distribution Manufacturing and Service
Total
2003 2002 2003 2002 2003 2002
Sales and services rendered 45,125 552,866 - 17,109 45,125 569,975
Operating profit/loss (1,918) (49,653) - (530) (1,918) (50,183)
Profit/loss before taxes (1,883) (62,455) - (614) (1,883) (63,069)
Net profit/loss (1,883) (63,510) - (863) (1,883) (64,373)
Additionally, the companies J.P.S. – Gestão de Imóveis, S.A., Bivol – Utilidades, Equipamentos e Investimentos Imobiliários, Lda., A. Soares Mendes, Lda. and Lidogest – Gestão de Espaços Comerciais, S.A. were wound up in 2003, with no impact on the consolidated financial statement once theirrespective assets remained in the Group.
6 Disposals
On February 3rd Jerónimo Martins, through its subsidiary Jerónimo Martins Dystrybucja, Sp. Zo.o, signed an agreement to sell 100% of its stake in Eurocash Sp. Zo.o to a group of current and former employees of this company, under a management-buy-out operation effective on 1 March 2003.
The amount of this transaction was approximately M PLN 122,000. Payment will not be immediate, but deferred and partial according to the performance of the business itself.
Although the agreement establishes the sale of 100% of Eurocash’s share capital, Jerónimo Martins, for reasons related to the recoverability of credit, will maintain a certain degree of influence on the control of the company for as long as the credit subsists.
From time to time the operating performance of Eurocash will be analysed and gauged, and the assumptions taken for determining the price and the intrinsic risk of the business will be revised through impairment tests to the value of the investment. Whenever a relevant difference arises between the values assumed for determining the value of the investment and actual values a provision will be recorded for the purpose.
Effects of disposals
The disposals carried out in 2003 had the following impact on consolidated assets and liabilities:
Cash (1) 17,010 Fixed assets 26,619 Inventories 16,656 Debtors 5,545 Creditors (37,305)
Net assets sold 28,525
Disposal value (2) 28,525 Exchange differences of receivable value (3) (2,379) Value receivable in 31 December 2003 (4) 26,146 Net cash flow in 31 December 2003 (2) – (4) ± (3) – (1) (17,010)
An amount of EUR 1,466 thousand was recognised in losses on disposal of discontinued operations, related to adjustments of the selling price of the disposed businesses in 2002.
7 Supplementary income and costs
2003 2002
Supplementary gains 173,646 455,486
Cash discount received 31,569 34,308
Cash discount paid (4,196) (4,372)
Credit card commissions (10,657) (13,147)
Others supplementary costs (5,314) (40,176)
185,048 432,099
The supplementary gains concern profits obtained by the Group through the distribution of goods, namely rappel, rental of spaces, participation in birthday events, rental of shelf’s, etc. Supplementary costs concern to the same nature of discounts mentioned, paid by subsidiaries operating in the manufacturing and services segments.
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
107
8 Other operating costs
2003 2002
Goodwill amortisation 22,827 24,141
Direct/indirect taxes not related to operational activity 472 2,034
23,299 26,175
9 Staff costs
2003 2002 Wages and salaries 216,150 241,062 Social security 44,008 51,083 Pension costs 4,160 1,854 Other staff costs 22,691 24,204
287,009 318,203
Other staff costs include labour accident insurance, social action costs, training costs, indemnities and other costs.
Of total staff costs, approximately EUR 29,427 thousand corresponds to staff costs of subsidiaries and associated companies consolidated by the proportional method, the total amount of which was EUR 66,344 thousand.
The average number of Group employees during the year was 28,185, distributed as follows:
2003 2002 Portugal 17,929 18,026 Other countries 10,256 16,485 Total number of employees 28,185 34,511
Of the total number of employees, approximately 1,264 are employed by subsidiaries and associated companies consolidated by the proportional method.
Of the average number of employees in 2003, 206 are related to discontinued operations.
The number of employees at the end of 2003 was 27,868, in 2002 it was 30,722 (1,238 of disposed businesses in 2003).
10 Net financial costs
2003 2002 Interest expense (45,917) (73,768) Interest received 2,996 2,485 Dividends 608 112 Net foreign exchange loss (601) (2,145) Assets held for sale Gains/(losses) on disposal (982) (656) Changes to fair value 729 (35,198) Other financial costs and gains (13,741) (14,702) Changes to fair value in financial instruments that do not qualify for hedge accounting (Note 30.4)
(115)
14,868
(57,053) (109,004)
Other financial costs and gains include borrowings costs.
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
108
11 Income tax recognised in the income statement
11.1 Income taxes
2003 2002 Current income tax
Current tax of the year (17,285) (20,902)
Adjustment to prior year estimation (318) 663
(17,603) (20,239) Deferred tax of the year
Origination and reversal of temporary differences 761 34,789
Reduction in tax rate (21,011) (407) Change to the recoverable amount of tax losses and temporary differences from prior years
17,102 (25,570)
(3,148) 8,812
Total income taxes (20,751) (11,427)
11.2 Reconciliation of effective tax rate
2003 2002
Profit before tax 102,644 (172,790)
Income tax using the Portuguese corporation tax rate 33.0% (33,873) 33.0% 57,021
Fiscal effect due to:
Different tax rates in foreign jurisdictions 3.1% 3,189 0.7% (1,152)
Non taxable or non recoverable results 16.1% 16,553 22.2% (38,400)
Non-deductible expenses (2.0)% (2,097) 3.0% (5,141)
Reduction in tax rate (20.5)% (21,011) 0.2% (407)
Adjustment to prior year estimation (0.3)% (317) (0.4)% 663
Gains on sale of financial investments - - (1.2)% 2,015
Change to the recoverable amount of tax losses and temporary
differences of prior years 16.7% 17,102 14.8% (25,570)
Results subject to special taxation (0.3)% (297) 0.3% (456)
Income tax of the year 20.2% (20,751) (6.6)% (11,427)
12 Exceptional operating losses
2003 2002 Losses with closing down stores (6,646) (4,756) Gains/losses on lands disposal (352) 593 Extraordinary stock losses (1,068) - Reduction of provisions 3,884 - Others 187 (246)
(3,995) (4,409)
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
109
13 Tangible assets
13.1 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 284,004 667,129 499,010 151,552 48,458 1,650,153 Foreign exchange differences (535) (20,153) (7,937) (6,892) (635) (36,152) Increases 1,798 24,338 30,300 8,071 17,911 82.418 Revaluation 2,808 - - - - 2,808 Disposal of subsidiaries - (8,407) (7,084) (2,876) (12) (18,379) Disposals (1,331) (3,234) (6,368) (4,172) (67) (15,172) Transfers and write off's 83 39,055 (7,130) (28,074) (45,446) (41,512) Transfer to assets held for sale (12,785) (6,089) - - - (18.874) Impairment losses (Note 12) (603) (418) - - - (1,021) Closing balance 273,439 692,221 500,791 117,609 20,209 1,604,269 Depreciation and impairment losses
Opening balance - 140,927 297,022 103,117 - 541,066 Foreign exchange differences - (5,698) (4,463) (4,490) - (14,651) Increases - 26,697 47,267 16,934 - 90,898 Disposal of subsidiaries - (339) (646) (358) - (1,343) Disposals - (767) (5,452) (3,906) - (10,125) Transfers and write off's - (151) (6,795) (23,660) - (30,606) Transfer to assets held for sale - (550) - - - (550) Impairment losses (Note 12) - 600 - - - 600 Closing balance 160,719 326,933 87,637 - 575,289
Net value
As at 1 January 2003 284,004 526,202 201,988 48,435 48,458 1,109,087 As at 31 December 2003 273,439 531,502 173,858 29,972 20,209 1,028,980
An impairment loss of EUR 1,621 thousand was recorded in 2003, related to real estate at Caniço and S. Roque in Madeira, Legnica and Lodz in Poland.
13.2 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 entered as fixed assets. Financial lease payments do not include values relative to contingent rentals. Unsettled liabilities on financial lease contracts are referred in note 26.4. The value of assets under financial lease are shown below:
2003 2002 Land and natural resources Tangible assets 1,123 1,367
1,123 1,367 Buildings and other constructions Tangible assets 1,765 2,241 Accumulated depreciation (227) (270)
1,538 1,971 IT and office equipment and tools and utensils Tangible assets 22,702 35,369 Accumulated depreciation (10,173) (21,111)
12,529 14,258 Transport equipment Tangible assets 5,249 9,512 Accumulated depreciation (1,723) (3,326)
3,526 6,186
Work in progress - 686 In 2003 the Group decided to start treating all vehicle lease contracts with duration of less than 48 months and without a purchase option as operational leases.
13.3 Guarantees
No assets have been pledged as security for the fulfilment of bank or other obligations.
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
110
13.4 Tangible assets in progress
Tangible assets in progress as at 31 December 2003 refer to the building and refurbishment of stores.
13.5 Revaluation
The Group records land allocated to its operating activity at market value. In 2003 new revaluations were carried out, creating an increase of EUR 2,808 thousand (Note 24.1).
Revaluation values under fixed assets amount to EUR 139,950 thousand (EUR 141,266 thousand in 2002), with the following impact on shareholders’ equity:
2003 2002 Revaluation of land 139,950 141,266 Deferred taxes (32,418) (33,198) Minority interests (41,369) (42,988)
Net revaluation (Note 24.1) 66,163 65,080
14 Intangible assets
Changes occurring during the year
Goodwill
Start-up expenses
R&D expenses
Software, ind. property and other rights
Key money Work in progress
Total
Cost
Opening balance 465,421 355 30,740 44,816 27,907 27 569,266 Increases 646 - 364 139 - 33 1,182 Disposal of subsidiaries (13,075) - - (265) - - (13,340) Disposals - (2) - (57) - - (59) Transfers and write off's (1,677) (181) 405 (1,343) (723) (60) (3,579) Foreign exchange differences (22,557) (19) (2,899) (913) - - (26,388) Closing balance 428,758 153 28,610 42,377 27,184 - 527,082 Amortisation and impairment losses
Opening balance 137,673 296 16,242 24,321 13,432 - 191,964 Increases 22,827 - 5,898 3,027 1,830 - 33,582 Disposal of subsidiaries (3,689) - - (68) - - (3,757) Disposals - (2) - (54) - - (56) Transfers and write off's (527) (127) 54 (994) (578) - (2,172)
Impairment losses (Note 12) - - - - 147 - 147
Foreign exchange differences (4,907) (14) (1,765) (755) - - (7,441)
Closing balance 151,377 153 20,429 25,477 14,831 - 212,267
Net value As at 1 January 2003 327,748 59 14,498 20,495 14,475 27 377,302 A at 31 December 2003 277,381 - 8,181 16,900 12,353 - 314,815
In 2003 an impairment loss of EUR 147 thousand was booked related to “key money” of the São Roque store in Madeira.
15 Fixed assets held for sale
2003 2002 Opening balance 48,756 55,364
Increases due to acquisitions 26,285 6,296 Transfers from tangible assets (note 13.1) 18,324 16,355 Changes to market value 2,172 - Disposals (6,952) (29,259)
Closing balance 88,585 48,756
Fixed assets held for sale 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.
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
111
16 Investments in associated companies
In 2003 and 2002 the movement under this heading was as follows: 2003 2002
Net value as at 1 January 24 3,124
Decreases (10) (3,100)
Net value as at 31 December 14 24
17 Available for sale investments
2003 2002 Non-current BCP shares 17,602 9,525 Eurocash 26,149 - Advances on account of investments 4,988 4,988 Others 2,268 1,308
51,007 15,821
Provision for realisable value (Note 28) (8,279) (4,355)
42,728 11,466
Current
The short-term available for sale investments in the amount of EUR 17,117 thousand, with respect to treasury bonds that will mature in August 2004.
18 Non-current debtors
Non-current debtors balance in 31 December 2003 includes EUR 59,972 thousand related to tax liquidation. The Group has already contested the amount paid and made a legal claim for reimbursement (Note 34).
19 Inventories
2003 2002 Raw and subsidiary materials and consumables 4,406 4,733 Goods and work in progress 703 738 Finished and semi-finished goods 279 196 Merchandise 199,263 255,544
204,651 261,211
Provisions for inventories (Note 28) (7,98) (9,544)
Net inventories 197,453 251,667
No inventories have been pledged as guarantee for the fulfilment of contractual obligations.
20 Taxes
20.1 Deferred tax assets and liabilities
Change in deferred tax accounts
2003 2002 At the beginning of period 54,809 97,204
Currency translation differences (6,474) (23,952) Revaluation and reserves (544) (13,308) Disposal of subsidiaries - (13,947) On results of the year (3,148) 8,812 At the end of period 44,643 54,809
Deferred taxes are presented in balance sheet as follows:
2003 2002 Deferred tax assets 87,227 91,494 Deferred tax liabilities (42,584) (36,685)
44,643 54,809
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
112
Movement in deferred taxes during the period
01/01/2003
Impact on results
Impact on equity
Foreign exchange
differences
31/12/2003
Deferred tax liabilities Revaluation of assets 35,246 (1,691) 142 - 33,697 Deferred income for fiscal purposes - 1,619 - (108) 1,511 Differences on accounting policies in other countries - 5,415 - (359) 5,056 Other temporary differences 1,439 881 - - 2,320
36,685 6,224 142 (467) 42,584 Deferred tax assets Excess over legal provisions 3,957 1,506 - (76) 5,387 Revaluation of assets 218 412 (31) - 599 Pension costs 916 (370) - - 546 Costs with foreign exchange risk hedging operations 372 245 (371) (3,343) (3,097)Recoverable losses 74,729 (6,347) - (2,729) 65,653 Profit in inventories 854 (291) - - 563 Provisions for inventories 1,705 (370) - - 1,335 Other deferred costs for fiscal purposes 5,655 5,378 - (732) 10,301 Differences on accounting policies in other countries 906 - (60) 846 Other temporary differences 3,088 2,006 - - 5,094
91,494 3,075 (402) (6,940) 87,227
Net change in deferred tax 54,809 (3,148) (544) (6,474) 44,643
Deferred tax assets arising from recoverable losses are as follows: 2003 2002 Consolidated tax Group Recheio, SGPS, SA 38,791 33,687 Consolidated tax Group JMR, SGPS, SA 14,483 18,992 Jerónimo Martins Dystrybucja, Sp. Zo.o. 12,333 22,045 Others 46 5
65,653 74,729
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.
20.2 Unrecognised deferred taxes on tax losses
The Group did not recognise deferred tax assets relative to tax losses in respect of which no sufficient tax profits are expected to guarantee the recovery of deferred tax assets. Total unrecognised tax assets amount to EUR 43,002 thousand (2002: EUR 82,246 thousand). No deferred tax assets were recognised relative to losses generated in 2003 in Jerónimo Martins Dystrybucja Sp. Zo.o., Jerónimo Martins, SGPS, S.A. and Jerónimo Martins Finance Company (1) Limited.
20.3 Receivable and payable taxes
Receivable taxes 2003 2002 Income tax receivable 219 759 VAT receivable 10,024 18,949 Others 18 - 10,261 19,708
Payable taxes Income tax payable 735 5,175 VAT payable 12,305 13,123 Income tax withheld 2,736 2,763 Social security 5,118 5,465 Other taxes 6,147 5,241
27,041 31,767
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
113
21 Trade debtors, accrued income and deferred costs
2003 2002
Commercial customers 69,747 63,359 Associated companies and subsidiaries 50 50 Suppliers debt balances 6,857 2,526 Staff 603 931 Other debtors 23,064 19,348 Accrued income 12,324 33,005 Deferred costs 12,601 17,902
125,246 137,121
Accrued income essentially respects recognition of supplementary revenues contracted with suppliers, in the amount of EUR 10,015 thousand.
The deferred costs heading includes EUR 1,984 thousand of pre-paid rents, EUR 5,284 thousand of bond issue and credit opening costs, EUR 1,370 thousand of interest on bank loans paid in advance, EUR 3,963 thousand relative to costs attributable to future years and paid in 2003, or, when not paid, were already charged by the competent entities.
22 Cash and cash equivalents
2003 2002 Bank deposits 101,639 102,125 Short-term investments 29,316 26,112 Cash and cash equivalents 1,803 1,999
132,758 130,236
23 Cash generated from operations
2003 2002
Net results 58,246 (204,377)
Adjustments for:
Minority interests 23,647 20,160 Taxes 20,750 11,426 Amortisations and depreciations 124,480 149,731 Financial results 56,466 106,193 Impairment of assets 1,768 - Losses on sale of financial investment 47 135,483 Losses on sale of tangible assets 3,493 34,486 Losses on sale of intangible assets 306 8,213
289,204 261,315
Changes in working capital:
Inventories 30,560 2,700 Trade debtors, accrued income and deferred costs (3,569) 10,494 Trade creditors, accrued costs and deferred income 53,759 29,669 Subsidiaries and associated companies - 112,724 Provisions (14,693) 6,464
355,260 423,366
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
114
24 Capital and reserves
24.1 Movements in reserve accounts
Land and buildings
Hedging reserve
Currency translation
reserve
Warrants and other reserves
Total
Balance at 1 January 2002 38,796 (2,463) (28,002) 5,207 13,538
Disposal of subsidiaries: - Gross value (1,383) 141,716 140,333 - Deferred tax 413 (22,985) (22,572)
Fixed assets held for sale: - Gross value (1,027) (1,027) - Deferred tax 54 54 - Minority interests 1,286 1,286
Revaluation: - Gross value 60,512 60,512 - Deferred tax (12,297) (12,297) - Minority interests (21,274) (21,274)
Remeasurement of financial instruments at fair value (IAS 39):
- Gross value 2,348 2,348 - Deferred tax (915) (915) - Minority interests (149) (149)
Revaluation of financial investments: - Gross value (315) (315) - Deferred tax (96) (96)
Currency translation differences: - Gross value (88,849) (88,849) - Deferred tax (967) (967) - Minority interests 1,900 1,900
Balance at 31 December 2002 65,080 (1,179) 2,813 4,796 71,510
Fixed assets held for sale: - Gross value (4,124) (4,122) - Deferred tax 953 951 - Minority interests 1,554 1,554 Revaluation: - Gross value 2,808 2,808 - Deferred tax (173) (173) - Minority interests 65 65
Remeasurement of financial instruments at fair value (IAS 39):
- Gross value 1,550 1,550 - Deferred tax (371) (371) Overdue warrants premium (4,796) (4,796) Currency translation differences: - Amount arising in year (19,475) (19,475) - Deferred tax (6,474) (6,474)
Balance at 31 December 2003 66,163 - (23,136) - 43,027
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
115
24.2 Share capital and share premium account
Authorised share capital is represented by 95,858,644 ordinary shares (2002: 95,858,644), at par value EUR 5 (five Euros) each.
Holders of ordinary shares are entitled to receive dividends, as decided by the General Meeting, and have one vote per each 100 shares held. There are no preference shares. The rights inherent in the shares held by the Group in portfolio are suspended until such shares are again placed on the market.
24.3 Own shares
The reserve for own shares reflects the cost of shares held by the Group in portfolio. As of 31 December 2003, the Group held 171,800 own shares (2002: 171,800).
24.4 Warrants
Warrants matured in September 15th (Note 26), as well as the correspondent bond loan.
24.5 Dividends
Taking into consideration Group results in 2003, and with a view to reinforcing equity, the Board of Directors of Jerónimo Martins SGPS, S.A. will propose to the General Meeting that no dividends be distributed this year, as was the case in the preceding years.
The dividends distributed in 2003 of EUR 47,795 thousand were paid to minority interest of JMR, related to 2002.
25 Earnings per share
25.1 Basic earnings per share
Basic net results per share are calculated based on the net profit of EUR 58,246 thousand (2002: loss of EUR 204,377 thousand) attributable to ordinary shareholders and on weighted average outstanding ordinary shares, numbering 95,686,844 (2002: 95,686,844).
25.2 Weighted average outstanding shares
2003 2002
Ordinary shares issued at beginning of year 95,858,644 95,858,644 Own shares at beginning of year 171,800 171,800
95,686,844 95,686,844
25.3 Diluted earnings per share
Diluted results per share are calculated based on the net profit of EUR 59.535 thousand (2002: loss of EUR 202,394 thousand) attributable to ordinary shareholders and on diluted average ordinary shares, numbering 98,614,158 (2002: 99,828,200).
25.4 Diluted net results attributable to ordinary shareholders
2003 2002 Net profit/(loss) of the year attributable to ordinary shareholders 58,246 (204,377) Effect (net of tax) of interest on warrants (until September 15) 1,289 1,983
Diluted net profit/(loss) of the year attributable to ordinary shareholders 59,535 (202,394)
25.5 Diluted weighted average ordinary shares
2003 2002 Weighted average ordinary shares 95,686,844 95,686,844 Warrants conversion effect (until September 15) 2,927,314 4,141,356 Diluted weighted average ordinary shares 98,614,158 99,828,200
Results per share – Euros 0.6087 (2.1359) Diluted results per share – Euros 0.6037 (2.0274)
26 Borrowings
This note provides information on the terms of Group loan contracts and other forms of financing. For further details regarding the Group’s exposure to interest and foreign exchange rates see note 30.
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
116
26.1 Current and non-current loans
2003 2002 Non-current loans Bank loans 341,411 300,065 Bond loans 254,760 269,679 Financial lease liabilities 13,488 12,025 Other borrowings 508 765
610,167 582,534
Current loans Bond loans 180,760 267,906 Bank overdrafts 58,637 100,107 Bank loans – short term 8,000 104 Loans from subsidiaries and parent companies 2 33,920 Financial lease liabilities - short-term 9,723 10,528
257,122 412,565
26.2 Loan terms and maturities
Average
rate
Total
Payable in less than 1 year
Payable between 1 and 5 years
Bank loans
Commercial paper 4.69% 325,000 - 325,000
Cross currency swap PLN EUR 2.22% PLN 5.82%
(11,589) - (11,589)
Loan in EUR 4.36% 36,000 8,000 28,000
349,411 8,000 341,411
Bond loans 4.63% 435,520 180,760 254,760
Bank overdrafts 3.88% 58,637 58,637 -
Financial lease liabilities 7.19% 23,211 9,723 13,488
Subsidiaries and parent companies 2 2 -
Others Loans 508 - 508
517,878 249,122 268,756
26.3 Bond loans
2003 2002 Bonds with warrants - 93,327 Zero-coupon bonds with share redemption option 180,760 169,919 Non-convertible bonds 254,760 274,339
435,520 537,585
The following bond loans reached maturity in the course of 2003:
- June - Grouped issue JMR – Pingo Doce – Feira Nova – Imoretalho of 25 million bonds, par value PTE 1,000, which, when translated into euros, were transformed into 12,469,947,427 bonds, par value EUR 0.01, distributed as follows
JMR: 3,242,186,331 bonds Pingo Doce: 3,092,546,962 bonds Feira Nova: 2,643,628,855 bonds Imoretalho: 3,491,585,279 bonds
- September - JMH/96 issue of 2,281,761 bonds with Jerónimo Martins warrants, par value PTE 8,200, which, when translated into euros, were transformed into 9,332,728,225 bonds, par value EUR 0.01.
- September - Recheio/98 – 2nd Series issue of 10 million bonds, par value PTE 1,000, which, when translated into euros, were transformed into 4,987,978,970 bonds, par value EUR 0.01.
• Bond loans as at 31 December 2003:
In December 1997 the Company issued 25 million JMH zero-coupon bonds, which, when translated into euros were transformed into 12,469,947,419 bonds, par value EUR 0.01 each. As the call option was not exercised in December 2002, these bonds may be redeemed at maturity, in December 2004, either in cash or against the
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
117
issue of JM shares. The cash or shares payment option lies solely with the issuer. The interest rate is fixed at 6.38%.
Non-convertible bonds were as follows:
In August 1998, issuance of 20 million Recheio, SGPS, SA bonds, par value PTE 1,000, which, when translated into euros were transformed into 9,975,957,941 bonds, par value EUR 0.01. These bonds mature in August 2005 and the interest rate is variable.
In June 2003, issuance of 23 million JMR – Gestão de Empresas de Retalho, SGPS, S.A. bonds, par value EUR 5.00. These bonds mature in June 2008 and the interest rate is variable.
In October 2003, issuance of 8 million Jerónimo Martins, SGPS, S.A. bonds, par value EUR 5.00. These bonds mature in October 2008 and the interest rate is variable.
The redemption dates of the bond loans are as follows:
2004 180,760 2005 99,760 2008 155,000
Total 435,520
26.4 Financial lease liabilities
2003 2002
Payments in less than 1 year 10,660 11,697 Payments between 1 and 5 years 13,460 12,652 Payments in more than 5 years 738 -
24,858 24,349
Payment of future interest (1,647) (1,796)
Present value of liabilities 23,211 22,553
27 Employee benefits
The Group has implemented a number of benefit plans, as follows:
27.1 Defined contribution plans for employees, in third party managed fund
In the first half of 2003 the pension plans existing in Jerónimo Martins, SGPS, S.A., Jerónimo Martins Serviços, S.A. and Jerónimo Martins Distribuição de Produtos de Consumo, Lda. were changed from defined benefit to defined contribution plans, similar to those existing in the food industry companies. This measure allows to control the costs incurred with the attribution of benefits and at the same time encourages employee participation in their own retirement plans. This change took effect on 1 June 2003.
The defined contribution plan was maintained for former employees who at the date of the change were receiving complementary retirement benefits.
The liabilities arising from the former plan, as yet unfunded, as well as the contributions under the new plan are recognised in the financial statements.
The amounts involved are as follows:
2003
Liabilities value at 1 January 685
Staff costs 941 Contributions of the year 1,185
Liabilities value at 31 December 441
The amount of EUR 441 thousand, referring to unfunded liabilities at 31 of December, are recognised in liabilities, under trade creditors, accrued costs and deferred income.
27.2 Group managed defined benefit plans for former employees
The liabilities arising from these plans are secured directly by the Group. Independent agents also assess these plans every six months. According to the actuarial valuation referred to 31 December 2003 these liabilities are fully provided for.
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
118
Amounts shown in the balance sheet
The amount of EUR 20,426 thousand is shown under liabilities in the provisions for pensions heading.
In 2003 the movement in the heading employee benefits for pensions was as follows:
2003 2002 Balance on 1 January 18,096 17,969 Staff costs 3,224 1,030 Retirement pensions paid in (894) (903)
Balance on 31 December 20,426 18,096
Actuarial assumptions used:
Mortality table TV – 73/77 Difference between rate of return and pension growth rate 3%
28 Provisions
Balance on 01/01/2003
Provisions set up
Provisions used
Foreign exchange difference
Disposal/ Acquisitions
of subsidiaries
Balance on 31/12/2003
Doubtful debtors 56,784 327 (5,444) (1,972) - 49,695 Inventories 9,544 211 (1,136) (333) (1,088) 7,198 Financial investments 4,355 5,524 (1,600) - - 8,279 Other securities 57 - - - - 57 Employee benefits 18,096 3,224 (894) - - 20,426 Other risks and costs 44,174 6,112 (22,591) (803) - 26,892 Total 133,010 15,399 (31,665) (3,108) (1,088) 112,547
The provision for risks and costs mainly includes amounts for pending legal suits, and an amount related to potential capital losses in put option (Note 34).
29 Trade creditors, accrued costs and deferred income
2003 2002 Payables to associated companies 7 7 Other commercial creditors 690,591 680,321 Other non-commercial creditors 54,115 39,697 Accrued costs 90,450 80,469 Deferred income 2,212 31,787
837,375 832,281
The heading “accrued costs” is composed essentially of salaries and wages to be paid to the employees, in the amount of EUR 32,725 thousand, interest payable in the amount of EUR 3,759 thousand, rappel payable to customers in the amount of EUR 1,401 thousand, and advertising costs in the amount of EUR 24,625 thousand. The remaining EUR 27,940 thousand respects to sundry costs (utilities, insurance, consultants, rents, etc), for 2003, 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 1,110 thousand, which are deferred until the respective goods are sold.
30 Financial instruments
30.1 Interest rate risk
Portfolio of Interest Rate Derivatives (IRD)
The Group 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 interests due.
All changes in fair values are recognised in results, as the existing derivatives do not qualify for hedging accounting.
At the end of 2003, the Group had the following positions open in IRD:
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
119
Designation KO Cap Maxi Cap Floored Designation Cap Spread Floored Interest Rate Swap Swaption USD Quanto KI Cap Maxi Range Swap
Exposure Commercial Paper Sept/03 Bond Loan Oct/03 Exposure Bond Loan Jun/03 Bond Loan Jun/03 Bond Loan Jun/03 Bond Loan Jun/03 Bond Loan Jun/03
Notional 10,000,000 € 10,000,000 € Notional 20,000,000 € 10,000,000 € 10,000,000 € 10,000,000 € 10,000,000 €
M2M (36,525) € (142,924) € M2M 265,861 € 256,328 € 24,394 € (107,880) € (106,030) €
Trade Date 14-Nov-03 10-Dec-03 Trade Date 06-Jun-03 09-Jun-03 09-Jun-03 24-Sept-03 23-Oct-03
Start 12-Mar-04 03-Apr-04 Start 12-Jun-03 12-Jun-03 12-Jun-03 12-Dec-03 12-Dec-03
End 12-Sept-08 03-Oct-08 End 12-Jun-08 12-Jun-08 12-Jun-08 12-Jun-08 12-Jun-08
JMH Pays Semi-annually Semi-annually JMR Pays Semi-annually Semi-annually Semi-annually Semi-annually Semi-annually
Rate I, if I < C F, if I < F Rate F, if I < 1.80% 2,85% 2,50%, from 1st to 4th Coupon
C, if I < B F, if I < B
C, if C < I < B I, if F < I < C I, if 1.80% < I < C 2,50% or Euribor 6m siar-0,45%,
I, if I > B I, if I > B
I, if I > B C, if C < I < B C, if C < I < B if counterparty exercises option
I, if I > B I-(B-C), I > B to receive floating rate until maturity
JMH Receives Quarterly Semi-annually JMR Receives Semi-annually Semi-annually Semi-annually Semi-annually Semi-annually
Rate Euribor 3m, siad Euribor 6m, siad Rate Euribor 6m, siad Euribor 6m, siad Euribor 6m, siad Euribor 6m*(n/N), siad Euribor 6m*(n/N), siad
n N/A N/A n N/A N/A N/A Weekly fixings in which Euribor 6m < 6,25%
Weekly fixings in which US Libor 6m < 7.00%
N N/A N/A N N/A N/A N/A Total weekly fixings in each coupon period
Total weekly fixings in each coupon period
Index (I) Euribor 12m, siar Max {US Libor 12m siar; Euribor 12m siar}
Index (I) Euribor 6m, siad N/A N/A US Libor 12m, siar Max {US Libor 12m siar; Euribor 12m siar}
Floor (F) - 2.20% Floor (F) 2.95% - - - 1.775%
Cap (C) 3.345% 2.45% Cap (C) 3.25% - - 2,07% -
Barriers (B) Barriers (B)
Coupon #1 N/A N/A Coupon #1 N/A N/A N/A N/A N/A
Coupon #2 3.75% 3.85% Coupon #2 3.75% N/A N/A 3,25% 3.55%
Coupon #3 4.25% 4.25% Coupon #3 3.75% N/A N/A 3,75% 4.00%
Coupon #4 4.50% 4.65% Coupon #4 3.75% N/A N/A 4,50% 4.40%
Coupon #5 4.65% 5.00% Coupon #5 3.75% N/A N/A 5,00% 4.85%
Coupon #6 5.00% 5.40% Coupon #6 4.00% N/A N/A 5,25% 5.35%
Coupon #7 5.10% 5.65% Coupon #7 4.00% N/A N/A 5,50% 5.75%
Coupon #8 5.30% 5.85% Coupon #8 4.50% N/A N/A 5,75% 6.10%
Coupon #9 5.50% 6.00% Coupon #9 5.00% N/A N/A 6,00% 6.35%
Coupon #10 5.50% 6.10% Coupon #10 5.50% N/A N/A 6,25% 6.45%
“said” – set in advance; “Siar “– set in arrears
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
120
30.2 Foreign Exchange Risks
At present, the Group’s exposure to foreign exchange risk is almost exclusively the result of its investment in Poland. Apart from that the remaining FX exposures are the result of merchandise imports, mostly in USD’s.
30.3 Hedging investments in foreign subsidiaries
Investments in Poland
In 2002, a new program to hedge the currency exposure in Poland was designed, amounting to 100.000.000 Euros or 398.500.000 PLN. From these amounts, 85% were placed in a standard currency swap, where by zloty leg interest payments are on WIBOR 6M + 12.5 bp’s. In exchange, the EUR leg interests are calculated over EURIBOR 6M flat. The reference exchange rate at maturity is 3.9850. All changes in fair values are recognised in translation reserves (equity).
Interest payment conditions in the remaining 15% are: on the PLN leg, WIBOR 6M - 20.0 bp’s against EURIBOR 6M flat on the Euro leg. The reference exchange rate at maturity is 3.8275, subject to an accumulation process depending of the frequency that EUR-PLN fixes inside the 3.50-4.32 range. All changes in fair values are recognised in the income statement once it’s not classified as hedge.
In 2003, some changes were introduced due the developments in the Polish markets. Risks to polish interest rate exposures rose. Caps and floors were introduced in order to curb that exposure on 43.33% of the total amount hedged. We are now hedged against a rise of up to 8.50% in WIBOR 6M. On the accumulator swap, and given the strong depreciation of the zloty the accruing range was restructured. The upper barrier was raised to 4.85 for 2004 observations. To finance that increment the spread over WIBOR had to be raised from minus 20.0 bp to plus 38.0 bp, diluting the restructuring cost over the remaining life of the swap (it matures in November of 2007).
At the end of the year, the mark-to-market of these swaps amounted to EUR 11,266 thousand, in our favour. This amount includes an interest expense of EUR 323 thousand and a currency exchange gain of EUR 11,589 thousand.
30.4 Fair value of financial instruments
Value recognised in reserves
Some of the bond loans that matured over the course of 2003 had associated interest rate derivatives for hedging purposes. The impact in reserves, net of taxes and minority interests, in 2002, were as follows:
2003 2002
Interest rates swaps - (1,179)
Value recognised in reserves - (1,179)
Value recognised in profit/loss (net of tax and minority interests): 2003 2002
Currency swaps (268) 14,868 Interest rates swaps 153 - (115) 14,868 Deferred taxes (18) (4,761) Minority interests (118) - Value recognised in profit/loss: (251) 10,107
The value recognised in currency translation reserve referred to hedging of investment in Poland is EUR 8,580 thousand (net of tax).
31 Guarantees
The guarantees are as follows:
Guarantees provided to EDP (Electricity company) 715 Guarantees provided to suppliers 5,250 Bank guarantees 296 Guarantees for D.G.C.I. (Portuguese tax authorities) 10,584 Other guarantees provided 10,214
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
121
32 Operational lease
The amounts of liabilities related to medium and long-term contracts which have penalty clauses if broken, are the following:
2003 2002
Payments in less than 1 year 39,070 41,469 Payments between 1 and 5 years 111,477 126,424 Payments in more than 5 years 55,178 61,477
205,725 229,370
These amounts respect to stores and warehouses rent contracts, with initial term between 5 and 20 years, renegotiated after that period. The payments are annually updated, reflecting inflation and market valuation.
Operational lease contracts were recognised as costs during the year an amount of EUR 59,304 thousand. The amounts in 2002 were EUR 69,810 thousand.
33 Capital commitments
Capital expenditure contracted for at the balance sheet date amount EUR 907 thousand, and referred essentially to fleet renovation, work in progress, contract jobs and equipment acquisition.
34 Contingencies
• An amount of EUR 59,972 thousand is recognised in the financial statements under non-current debtors (Note 18) relative to tax liquidations claimed by the Tax Administration. In 2003 were paid EUR 1,583 thousand and the rest in 2002, settled under the arrangement for the exceptional regularisation of tax debts (see note 33 to the 2002 accounts).
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.
• As referred in note 33 to the 2002 accounts, Jerónimo Martins SGPS, SA, through its subsidiary JMFC(1) Ltd, sold several put options on shares of a public company quoted on the Euronext Lisbon stock exchange (ex-Lisbon and Oporto Stock Exchange market). Given that, under current market conditions, the put options sold are deeply in-the-money and acknowledging that there was a minimal probability of a significant surge in the share prices at least strong enough for the options to become out-of-the-money at maturity, an opinion shared unanimously among stock analysts, a EUR 12,740 thousand provision was made under risk and contingency provisions to cover the expected loss associated to these derivatives. The expected loss was calculated as the options strike price and its market value on 31 December 2003.
• Besides several claims related to normal Group activities, the following 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 Seguraspresso, Lda claims EUR 546 thousand to Gestiretalho – Gestão e Consultoria para a Distribuição a Retalho, SA, as a consequence of the termination, by the later, of the contract for services rendered, without the prior notice as laid down in the settlement. No provision was booked concerning this situation because it is Gestiretalho’s conviction that there is no basis for the amount claimed. The first court hearing has beet set for March 2004.
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
122
c) The company Fagor, Lda claims payment of bills considered as pending relative to an alleged supply of goods to Feira Nova. The amount claimed totals EUR 900 thousand. The first court hearing has been set for March 2004. Feira Nova has no proof of having received said goods and challenges this fact in court. It is the Board of Directors’ belief that the amount requested will probably not be granted, therefore no provision has been set up.
d) 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 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.
e) The Tax Authorities claim from JMR - Gestão de Empresas de Retalho, SGPS, SA the amount of EUR 4,589 thousand and from Imoretalho - Gestão de Imóveis, S.A. the amount of EUR 435 thousand concerning withholding tax on dividends and interest on non resident entities, alleging that no residence certificates were presented. The certificates proving validity of exemption from withholding tax on such payments had already been presented, so no provision has been set up.
f) The Tax Authorities claim from Recheio, SGPS, SA the amount of EUR 1.753 thousand concerning VAT officious liquidations, the reasons for which are the application of the method of VAT deduction from the actual affectation. The Board of Directors of Recheio, with the support of its tax advisers, considers that, in this situation, right is on their side. Both liquidations have already been contested, therefore no provision has been set up.
g) The company Águas do Marão, Lda. claims payment of EUR 501 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. The period for submitting contestation is running.
h) The company Flashvila – Confecções Têxteis, Lda., claims payment of EUR 511 thousand from Feira Nova with regard to bills contracted in a commercial supply relationship. Feira Nova contests the debt and claims payment of EUR 91 thousand. The process is in the initial stage and waiting for the date of a preliminary hearing to be set.
35 Related parties
35.1 Benefits attributed to directors
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 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.
35.2 Remuneration paid to directors
The members of the board of directors received the following remuneration in 2003 and 2002:
2003 2002 Executive directors 907 907 Non-executive directors 90 95
997 1,002
The remunerations mentioned above, that include all companies, refer to 3 executive directors and 4 non-executive directors of Jerónimo Martins, SGPS, S.A.
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
123
36 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
Bento & Martins, Lda Wholesale of consumer goods 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 Sal
51.00
Cunha & Branco – Distribuição Alimentar, S.A. Retail sales in supermarkets Águeda 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 Porto 100.00
Noredis - Sociedade de Representações e Distribuição do Norte, S.A. Wholesale of food products 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 Sp. zo.o Retail and wholesale of food and consumer goods Poznan (Poland)
100.00
Tip Marken – Discount Handelsgesellschaft mbh Business portfolio management Sarstedt
(Germany)
100.00
PITT Sp. Zo.o Retail sale of food and consumer goods Poznan (Poland)
100.00
Sklepy Spozywece Sp. Zo.o. Retail and wholesale of food and consumer goods Poznan (Poland)
100.00
Twoje Sklepy Spozywece Sp. Zo.o Retail and wholesale of food and consumer goods Poznan (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. Coffees 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 – Portugal
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 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
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
124
b) Proportional consolidation method
Company Business area Head office % Owned
Fima/VG Distribuição de Produtos Alimentares, Lda Distribution of food products Lisbon 60.00
Fima - Produtos Alimentares, S.A. Production of margarines and similar products Lisbon 60.00
Victor Guedes – Indústria e Comércio, S.A. Production of olive oil Lisbon 60.00
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) Companies excluded from the consolidation
The following companies were not included in the consolidation, as they were not considered as materially relevant:
Company % Owned
Transportadora Central do Infante, Lda 25.48
Empal – Empresa Industrial de Produtos Alimentares, S.A. 60.00
Socorel – Sociedade Comercial de Representações, Lda 90.00
d) Companies disposed of in 2003 whose results contributed to the Group’s consolidated results
Company
Business area
Head office
% Owned
Monte Dourado, S.A. Real estate purchase and sale Braga 51.00
Eurocash SP. Zo.o (ex. JM Polska Sp. Zo.o) Wholesale of food and consumer goods Poznan (Poland)
100.00
e) Companies dissolved and wound up in2003 whose results contributed to the Group’s consolidated results
Company Business area Head office
% Owned
A. Soares Mendes, Lda Wholesale of food products Amarante 100.00
J.P.S. - Gestão de Imóveis, S.A. Real estate purchase and sale Braga 100.00
Bivol-Utilidades, Equipamentos e Investimentos Imobiliários, Lda Real estate purchase and sale Lisbon 100.00
Lidogest – Gestão de Espaços Comerciais, S.A. Real estate management and administration Funchal 75.50
37 Interests 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 holds 60% of Fima Group share capital;
● Lever Group - this group of companies manufactures and sells personal, home and industrial hygiene products for the hotel and food sectors. The brands marketed are the property of the Unilever Group. The Group Jerónimo Martins has a 40% stake in Lever Group;
● Iglo Group – this group of companies manufactures and markets ice cream and frozen and deep frozen food products under Unilever Group brands. The Group Jerónimo Martins has a 26% stake in these companies.
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:
2003 2002 Non-current assets 123,112 125,997 Current assets 78,987 64,846 Non-current liabilities (176,526) (177,446) Current liabilities (83,467) (68,057)
Net assets (57,894) (54,660)
Income and gains 294,390 346,241 Costs and losses (274,432) (325,393)
19,958 20,848
Businesses disposed of in 2002 (Diversey, Bakery and JM&M) are not recognised in the net assets for that period. The profit and losses include the impact of disposed businesses.
38 Events after the balance sheet date
By the closing of this report, there are no relevant events that should be mentioned.
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
125
COMPLEMENTARY INFORMATION
39 Reconciliation between Portuguese GAAP and IAS
Differences between accounting principles adopted by the Group and the Portuguese GAAP are as follows:
• Revaluation of assets held for sale are accounted in profit and loss accounts (IAS 40), while, according to Portuguese GAAP, are accounted in reserves, in shareholders’ equity;
• The Group has financial instruments such as interest rate swaps, currency swaps (Notes 2.6 and 30.4), recognised in the financial statements at fair value, in accordance with IAS 39. Portuguese GAAP does not cover this subject;
• Detachable warrants in bond issued by the Group are recognised in shareholders’ equity (Note 2.16). Portuguese GAAP does not cover this subject.
The information presented below, reflects the reconciliation between the principles adopted by the Group, and the general accepted accounting principles in Portugal:
Balance sheet on 31 December 2003
Consolidated Financial Statement
Adjustments to Portuguese GAAP
Consolidated Financial Statement in accordance with Portuguese GAAP
ASSETS
Intangible assets 314,815 - 314,815 Tangible assets 1,028,980 - 1,028,980 Financial investments 131,327 - 131,327 Inventories 197,453 - 197,453 Accounts receivable – medium & long-term 59,980 - 59,980 Accounts receivable – short-term 110,582 - 110,582 Trading securities 46,433 - 46,433 Cash and cash equivalents 103,442 - 103,442 Accruals and deferrals 112,152 (798) 111,354
Total assets 2,105,164 (798) 2,104,366 SHAREHOLDER’S EQUITY
Share capital 479,293 - 479,293 Reserves and retained earnings (460,847) 1,864 (458,983) Net profit/loss for the year 58,246 (696) 57,550
Total shareholder’s equity 76,692 1,168 77,860
Minority interests 205,073 205,073 LIABILITIES
Provisions for risks and contingencies 47,318 - 47,318 Accounts payable – medium & long-term 610,167 (1,036) 609,131 Accounts payable – short-term 1,028,876 - 1,028,876 Accruals and deferrals 137,038 (930) 136,108
Total liabilities 1,823,399 (1,966) 1,821,433
Total shareholder’s equity, minority interests and liabilities 2,105,164 (798) 2,104,366
Balance sheet on 31 December 2002
Consolidated Financial Statement
Adjustments to Portuguese GAAP
Consolidated Financial Statement in accordance with Portuguese GAAP
ASSETS
Intangible assets 377,302 - 377,302
Tangible assets 1,109,087 - 1,109,087
Financial investments 60,246 - 60,246
Inventories 251,667 - 251,667
Accounts receivable – medium & long-term 58,398 - 58,398
Accounts receivable – short-term 105,922 - 105,922
Trading securities 26,112 - 26,112
Cash and cash equivalents 104,124 - 104,124
Accruals and deferrals 142,401 (6,669) 135,732
Total assets 2,235,259 (6,669) 2,228,590
SHAREHOLDER’S EQUITY
Share capital 479,293 - 479,293
Reserves and retained earnings (228,695) 308 (228,387)
Net profit/loss for the year (204,377) (5,426) (209,803)
Total shareholder’s equity 46,221 (5,118) 41,103
Minority interests 229,063 229,063
LIABILITIES
Provisions for risks and contingencies 62,270 - 62,270
Accounts payable – medium & long-term 582,534 - 582,534
Accounts payable – short-term 1,164,357 - 1,164,357
Accruals and deferrals 150,814 (1,551) 149,263
Total liabilities 1,959,975 (1,551) 1,958,424
Total shareholder’s equity, minority interests and liabilities
2,235,259 (6,669) 2,228,590
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
126
40 Information on environmental matters
Environment expenses intended for durable use in Group activity to avoid or reduce future damage or preserve resources while providing future economic benefits, are capitalised, otherwise they are recognised as costs for the year in which they are incurred.
No public grants were obtained directly related to environmental protection and fitting the concept of environment expenses.
As far as the Group is aware, there is no contingent liability or present obligation arising from past events concerning environmental matters, therefore no provisions were set up for environmental matters nor does the balance sheet include any relevant environment liabilities.
Environment expenses
2003
WATER
Investments made and costs incurred by the Group in the domain of water concerns the monitoring of water quality through frequent testing, water treatment systems and the rationalisation of consumption.
Capitalised investments: Gross Value Accumulated depreciation Costs incurred in the year: Depreciation for the year Equipment maintenance Third-party specialised work
2,000 (1,573)
100 19 24
LIQUID EFFLUENTS
The investments made by the Group related to liquid effluents concern effluent treatment and separation plants in its industrial units and distribution warehouses, as well as the costs incurred with the maintenance of this equipment, removal of effluents and municipal taxes.
Capitalised investments: Gross Value Accumulated depreciation Costs incurred in the year: Depreciation for the year Equipment maintenance Third-party specialised work Costs with company staff Taxes
3,302 (1,958)
270 81
261 39
208
ENERGY
As referred in the management report, investments made by the Distribution companies concerned the installation of equipment for managing and reducing energy consumption and for managing cold. In the industrial area investments made concerned the rationalisation of consumption.
Capitalised investments: Gross Value Accumulated depreciation Costs incurred in the year: Depreciation for the year Equipment maintenance Third-party specialised work
3,889 (2,641)
537 16 12
RESIDUES
Investments made in this area concerned residue treatment and conditioning equipment. The costs incurred concerned mainly the collection of residues for recovery.
Capitalised investments: Gross Value Accumulated depreciation Costs incurred in the year: Depreciation for the year Third-party specialised work Taxes Costs with company staff
1,039 (315)
110 923 68 99
NOISE
Investments made in this area concerned acoustic isolation and noise reduction equipment. The costs incurred in the year resulted from noise tests carried out by external entities.
Capitalised investments: Gross Value Accumulated depreciation Costs incurred in the year: Depreciation for the year Third-party specialised work
964 (240)
89 14
GAS
EMISSIONS
Investments in this area mainly concerned filters, dust removal lines and air treatment equipment.
Capitalised investments: Gross Value Accumulated depreciation Costs incurred in the year: Depreciation for the year Equipment maintenance Third-party specialised work
58 (23)
7 3
96
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
127
Environment-linked expenses
2003
BIODIVERSITY AND
LANDSCAPE PROTECTION
Investments made concerned the landscape recovery of expansion areas
Capitalised investments: Gross Value Accumulated depreciation Costs incurred in the year: Depreciation for the year Equipment maintenance Third-party specialised work
41 (28)
2 7
49
ENVIRONMENTAL MANAGEMENT
As referred in the management report, several environment preservation initiatives were undertaken in the course of 2003, either at Group internal level or intended for the community.
Costs incurred in the year: Third-party specialised work Costs with company staff
13 26
41 Interest Rate Derivatives (IRD) Portfolio Risk Report
The following analysis portrays the consolidated impacts of changes to the relevant pricing inputs to the IRD portfolio.
1. Delta Analysis
The Delta sensitivities measure the impact of parallel shifts, in basis points, in yield curves on the portfolios mark-to-market value. The portfolio is sensitive to two yield curves: Euro and USD. The combined effect of parallel shifts in both yield curves is illustrated in the following matrix:
USD -50 -25 -10 0 +10 +25 +50
-50 (216) (479) (651) (772) (896) (1,091) (1,433) -25 186 (66) (232) (349) (470) (659) (992) -10 389 144 (17) (131) (248) (433) (760) 0 508 268 111 - (115) (297) (619)
+10 614 381 228 119 6 (172) (488) +25 753 529 383 278 168 (5) (311)
EU
R
+50 937 727 590 491 388 225 (65)
These amounts reflect the change in Euro thousands to the current overall mark-to-market.
2. Vega Analysis
The Vega sensitivities measure the impact of shifts, in basis points, of the volatility term structures on the portfolios mark-to-market value. The portfolio is sensitive to two volatility curves: Euro and USD.
The combined effect of parallel shifts in both volatility curves is illustrated in the following matrix:
USD -200 -150 -100 0 +100 +150 +200
-200 205 182 (160) 117 73 52 31 -150 175 153 131 88 44 24 2 -100 146 124 102 59 16 (5) (26)
0 87 65 43 - (43) (63) (84) +100 28 6 (16) (58) (100) (121) (142) +150 (1) (23) (44) (87) (129) (149) (170)
EU
R
+200 (30) (52) (74) (116) (158) (178) (199)
These amounts reflect the change in Euro thousands to the current overall mark-to-market.
3. Correlations Analysis
Correlation sensitivities measure the impact on the portfolios mark-to-market value attributable to changes in the degree of correlation between the underlying pairs:
Pair +10%
Correlation Euro Interest Rates/ USD IR 35
Euro IR/EUR-USD Fx 0 USD IR/EUR-USD Fx 25
These amounts reflect the change in Euro thousands to the current overall mark-to-market.
Jerónimo Martins, SGPS, S.A.
Notes to the consolidated financial statements for the years ended
31 December 2003 and 2002
128
4. Projected Cash flows
The following graph depicts expected nominal cash flows according to implicit forward interest rates, both Euro and USD, on the 31st of December. In terms of total future amount a positive EUR 2,615 thousand inflow to JM companies from IRD is expected. Also included in the analysis are two limiting bands of +/- 50 basis points against the forward interest rates.
5. Cash flows Risks
Expected cash flows are subject to risks coming from incorrect estimates of market future rates. The following matrix illustrates the impact of deviations from current expectations (EUR 2,616 thousand) should the future evolve differently from what is currently anticipated as the most likely scenario by the markets. It measures deviations both in Euro and USD yield curves:
USD -50 0 +50
-50 (1,475) (1,290) (1,064) 0 (123) - 188
EUR +50 1,379 1,402 1,529
Lisbon, 9 of March 2004
The Certified Accountant The Board of Directors
-400.000
-200.000
0
200.000
400.000
600.000
800.000
1.000.000
1S04 2S04 1S05 2S05 1S06 2S06 1S07 2S07 1S08 2S08
+50bp Forwards -50bps
Bernardes, Sismeiro e Associados, S.R.O.C., Lda. Inscrita na lista dos Revisores Oficiais de Contas sob o nº25
Sede: Edifícios "As Caravelas", Rua Dr. Eduardo Neves 9 - 5º Dtº., 1050 - 077 Lisboa Inscrita na Comissão de Valores Mobiliários sob o nº 219
NIPC 501 255 958 Capital social Euros 11.200 Correspondente da PricewaterhouseCoopers
Matriculada na Conservatória do Registo Comercial sob o nº10675
Bernardes, Sismeiro e Associados, SROC, Lda. Avenida da Liberdade, 245 - 7º C 1250 - 143 Lisboa Portugal Tel +351 21319 70 00 Fax +351 21316 11 12
Sociedade de Revisores Oficiais de Contas
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 2003, (which shows total assets of Euros 2.105.164 thousand, a total of minority interests of Euros 205.073 thousand and a total of shareholder's equity of Euros 281.765 thousand, including a net profit of Euros 58.246 thousand), the consolidated statements of income by nature and by functions 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 generally accepted accounting principles in Portugal 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.
(2)
Sociedade de Revisores Oficiais de Contas
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 2003, the consolidated results of their operations and their cash flows for the year then ended in conformity with the generally accepted accounting principles in Portugal, modified to bring the accounts in line with the International Accounting Standards, as mentioned in note 2.1, and duly comply with principles of completeness, truthfulness, accuracy, clarity, objectivity and lawfulness.
Lisbon, March 10, 2004 Bernardes, Sismeiro & Associados, S.R.O.C., Lda. represented by: José Manuel Oliveira Vitorino, R.OC.
Bernardes, Sismeiro e Associados, S.R.O.C., Lda. Inscrita na lista dos Revisores Oficiais de Contas sob o nº25
Sede: Edifícios "As Caravelas", Rua Dr. Eduardo Neves 9 - 5º Dtº., 1050 - 077 Lisboa Inscrita na Comissão de Valores Mobiliários sob o nº 219
NIPC 501 255 958 Capital social Euros 11.200 Correspondente da PricewaterhouseCoopers
Matriculada na Conservatória do Registo Comercial sob o nº10675
Bernardes, Sismeiro e Associados, SROC, Lda. Avenida da Liberdade, 245 - 7º C 1250 - 143 Lisboa Portugal Tel +351 21319 70 00 Fax +351 21316 11 12
Sociedade de Revisores Oficiais de Contas
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 2003. 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 nature
and by functions, the Consolidated Cash Flow Statement and corresponding Notes, present adequately the financial position and the results 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.
Jerónimo Martins, SGPS, SA.
(2)
Sociedade de Revisores Oficiais de Contas
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, March 10, 2004 The Statutory Auditor Bernardes, Sismeiro & Associados, S.R.O.C., Lda. represented by: José Manuel de Oliveira Vitorino, R.O.C.
Jerónimo Martins, SGPS, S.A.
Jerónimo Martins financial performance 1999-2003 Eur Million
2003 2002 2001 2000 1999
BALANCE SHEET
Fixed Assets Net Goodwill 277 328 415 504 512 Net Intangibles Assets 37 50 66 67 69 Net Tangible Assets 1,029 1,109 1,339 1,436 1,182
Financial Investments 131 60 75 66 31
Working Capital -524 -450 -389 -238 -151
Income Tax Provision -1 -4 -3 10 -11
Deferred Taxes 45 55 97 108 98
Invested Capital 996 1,147 1,600 1,952 1,731
Net Debt Financial Debt 842 938 1,268 1,564 1,281 Leasings 23 23 32 29 17 Accrued Interest -3 5 21 21 15 Marketable Securities and Bank Deposits -148 -128 -109 -78 -86
Shareholders Loans 0 35 109 27 51
Minority Interests 205 229 87 106 120
Equity 77 46 192 284 333
0 0 0 0 0INCOME STATEMENT
Net Sales & Services 3,417 3,861 4,200 3,915 3,280
EBITDA 290 264 260 235 263 EBITDA margin 8.5% 6.8% 6.2% 6.0% 8.0%
Depreciation -100 -124 -143 -120 -94
EBITA 189 140 117 115 169 EBITA margin 5.5% 3.6% 2.8% 2.9% 5.2%
Amortisation -24 -26 -32 -34 -31
EBIT 165 115 85 81 138 EBIT margin 4.8% 3.0% 2.0% 2.1% 4.2%
Financial results Net Interest -43 -71 -115 -116 -74 Other financial costs/income -14 -15 -13 -14 -5
Non recurrent items (*) -5 -201 5 -14 -2
EBT 103 -173 -38 -63 57
Income Tax -18 -20 -20 -22 -33Deferred Tax -3 9 -15 25 22
Net income 82 -184 -73 -59 46Minority interests -24 -20 -14 -5 -21Net income attr. to JM 58 -204 -87 -64 25
Cash Flow 223 168 133 139 167
0 0 0 0 0MARKET RATIOS
Total Shares 95,858,644 95,858,644 95,858,644 95,858,644 95,858,144Own Shares 171,800 171,800 171,800 171,800 171,800
EPS (Euros) 0.61 -2.13 -0.90 -0.67 0.26Cash Flow per share (Euros) 2.33 1.75 1.39 1.45 1.74
Share Price at the Lisbon Stock Exchange High (Euros) 11.05 9.35 11.80 25.15 41.90 Low (Euros) 5.88 5.40 5.61 9.83 19.04 Average (closing) (Euros) 7.24 7.38 8.36 16.84 30.52 Closing at year end (Euros) 10.46 6.95 9.25 11.00 25.40 Market Capitalisation (31 Dec) (Euro tho.) 1,003 666 887 1,054 2,435
(*) Including IAS 39
133
