Annual Report (ESEF) • Feb 22, 2024
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Download Source File| 30 September 2023 | 30 September 2022 | 1 October 2021 | |
|---|---|---|---|
| ASSETS | |||
| Non-current assets | |||
| Property, plant and equipment | 2,249,451 | 1,911,593 | 1,283,747 |
| Right-of-use assets | 1,665,741 | 1,465,250 | 1,065,900 |
| Intangible assets | 1,648,770 | 1,584,481 | 1,338,801 |
| Goodwill | 1,043,878 | 1,001,189 | 774,530 |
| Investments | 3,000 | 3,000 | 3,000 |
| Deferred tax assets | 173,584 | 107,107 | 70,442 |
| Other non-current assets | 23,898 | 19,407 | 7,865 |
| Total non-current assets | 6,808,322 | 6,082,027 | 4,544,285 |
| Current assets | |||
| Inventories | 1,403,665 | 1,166,461 | 776,555 |
| Trade and other receivables | 534,413 | 484,511 | 357,606 |
| Cash and cash equivalents | 799,631 | 651,060 | 470,324 |
| Total current assets | 2,737,709 | 2,302,032 | 1,604,485 |
| Total assets | 9,546,031 | 8,384,059 | 6,148,770 |
| EQUITY AND LIABILITIES | |||
| Equity | |||
| Issued capital | 1,298,813 | 1,272,033 | 1,237,841 |
| Share premium | 1,838,627 | 1,793,891 | 1,761,059 |
| Merger reserve | 36,221 | 36,221 | 36,221 |
| Reserve of exchange differences on translation | (143,026) | (175,140) | (116,068) |
| Reserve of cash flow hedges | 15,576 | 17,842 | 8,241 |
| Reserve of share-based payments | 18,747 | 13,717 | 10,203 |
| Retained earnings | 714,817 | 666,012 | 523,962 |
| Total equity | 3,779,755 | 3,628,576 | 2,861,459 |
| Non-current liabilities | |||
| Lease liabilities | 1,515,482 | 1,336,127 | 974,426 |
| Borrowings | 327,294 | 295,893 | 125,153 |
| Deferred tax liabilities | 145,638 | 112,561 | 65,926 |
| Provisions | 36,415 | 31,325 | 21,264 |
| Other non-current liabilities | 37,724 | 23,791 | 16,853 |
| Total non-current liabilities | 2,062,553 | 1,799,697 | 1,203,622 |
| Current liabilities | |||
| Lease liabilities | 181,839 | 186,572 | 138,108 |
| Borrowings | 168,861 | 133,112 | 35,075 |
| Trade and other payables | 2,672,281 | 2,024,917 | 1,647,888 |
| Provisions | 45,636 | 24,820 | 12,924 |
| Current tax liabilities | 235,116 | 394,065 | 149,674 |
| Total current liabilities | 3,303,733 | 2,763,486 | 1,983,669 |
| Total liabilities | 5,366,286 | 4,563,183 | 3,187,291 |
| Total equity and liabilities | 9,546,031 | 8,384,059 | 6,148,770 |
The accompanying notes form an integral part of these consolidated financial statements.
All amounts are in € thousands unless otherwise stated.
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Building a foundation for profitable growth
We are a large-scale variety discount retailer operating across Europe. We are committed to offering our shoppers – and especially families on a budget – everything they need to replenish and enhance their home across key apparel, general merchandise and FMCG categories.
Introduction
Financial statements
Other information
1 Highlights
87 Consolidated income statement
145 Articles of Association provisions governing the distribution of profit
2 At a glance
88 Consolidated statement of other comprehensive income
146 List of branches
89 Consolidated statement of
147 Statutory list of all subsidiaries and
Strategic report
financial position
affiliated companies
4 Executive Chair’s statement
90 Consolidated statement of
149 Glossary of terms
6 Q&A with Executive Chair
changes in equity
151 Shareholder information
8 Business model
92 Consolidated statement of
10 Our strategy
cash flows
14 Key performance indicators
93 Notes to the financial statements
16 Sustainability
128 Separate income statement
38 Risk management
129 Separate statement of
45 Going concern
financial position
46 Financial review
130 Separate statement of changes in equity
58 Introduction to governance
131 Separate statement of cash flows
60 Board of Directors
132 Notes to the separate financial statements
62 Corporate governance statement
139 Independent auditor’s report
68 Audit Committee report
72 Nomination Committee report
74 Remuneration Committee report
77 Remuneration report
82 Deviation from the Dutch Corporate Governance Code and Warsaw Code
84 Directors’ report
For more on Pepco Group, visit our website: www.pepcogroup.eu
| FY23 | +17% | FY23 | 6.0% | +0.8pp | FY22 | +13% | FY22 | 5.2% | -1.3pp | |
|---|---|---|---|---|---|---|---|---|---|---|
| Stores¹ | 4,629 | +17% | 3,961 | +13% | ||||||
| Revenue | €5,649m | FY23 | 6.0 | €4,823m | FY22 | 5.2 | ||||
| Like-for-like sales | ||||||||||
| Underlying (IFRS16) EBITDA² | €753m | +3% | FY23 | €731m | +13% | FY22 | ||||
| Underlying (pre-IFRS16) EBITDA³ | €396m | -10% | FY23 | €439m | +10% | FY22 | ||||
| Underlying PBT⁴ | €202m | -33% | FY23 | €300m | +23% | FY22 | ||||
| Net debt⁵ | €411m | +€136m | FY23 | 17.0% | -8.0pps | €275m | +€167m | FY22 | 25.0% | -0.5pps |
| ROIC⁶ | ||||||||||
| Earnings per share⁷ (€) | 17.8 cents | -12.4 cents | FY23 | 30.2 cents | +7.4 cents | FY22 |
¹ Alternative Performance Measure (APM), defined as the number of stores in the estate as at the period end.
² APM, defined as profit on ordinary activities before depreciation, amortisation, rent, net finance costs and taxation. A reconciliation of underlying EBITDA to statutory measures is presented on note 27 in the financial statements.
³ APM, defined as profit on ordinary activities before depreciation, amortisation, net finance costs and taxation.
⁴ APM, defined as profit on ordinary activities before tax. A reconciliation of underlying PBT to statutory measures is presented on note 27 in the financial statements.
⁵ APM, defined as the Group’s pre-IFRS 16, long-term borrowings, net of cash and bank balances as at 30 September 2023.
⁶ APM, defined as NOPAT/IC, where IC (invested capital) = PP&E + intangibles (excl. goodwill) + NWC (current assets – current liabilities excluding IFRS 16 lease liabilities) and NOPAT = net underlying operating profit after tax.
⁷ EPS, defined as basic earnings per share from continuing operations.
See note 27 for definitions of APMs
1 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
We are a large-scale variety discount retailer operating across Europe. Through our retail brands – Pepco, Poundland and Dealz – we are proud to trade from over 4,600 stores in 21 countries across Europe, serving 57 million shoppers each month.
* Dealz and Pepco stores in Ireland are reported under the Pepco
| Poundland | Dealz | Pepco | |
|---|---|---|---|
| Stores | 823 | 283 | 3,523 |
| Countries | 2 | 20 | 19 |
| Employees | |||
| Customers (per month) |
2 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Pepco operates over 3,500 stores in 19 countries, and is widely recognised as one of Poland’s strongest retail brands. Pepco serves over 30 million customers a month, offering clothing for the whole family, and household goods at the lowest prices.
Since opening its first store in Burton-upon-Trent in 1990, Poundland has built a network of over 800 stores in the UK and the Republic of Ireland (where it operates under the Dealz Pepco formats). Poundland offers great quality own-brand and third-party products that provide customers with amazing value every day.
Dealz has been present on the Polish market since 2018, operating 283 locations in 203 towns and cities across Poland. Dealz offers a variety of over 3,000 FMCG products in 15 categories at the lowest prices.
PGS provides direct product sourcing, product development and technical services to our Pepco, Poundland and Dealz brands. PGS is a real point of difference as we bring value to customers using our vertically integrated supply operation.
Stores 3,523
Stores 823
Stores 283
Sourcing countries 9
Pepco Group has had to contend with high double-digit levels of inflation in its core Central and Eastern Europe (CEE) markets during 2023, which has suppressed consumer demand for our clothing and general merchandise products, with a focus on essentials instead. There are tentative signs of recovery as real wage growth started to return to positive at the end of 2023. Over the long term, the market dynamics across CEE remain structurally favourable with an expectation of growth in GDP, disposable income and offline retail sales.
Pepco Group is positioned in the most attractive segment of the sector – discount retail – offering quality clothing, general merchandise and FMCG products at low prices. The Group is one of the fastest growing pan-European retailers, opening 668 net new stores in FY23.
Pepco Group has sustained its market share in its core CEE markets over the last five years, despite a huge increase in competition during the same period. This has been validated by our customers who recognise Pepco’s leading position leading to superior NPS compared to our peers.
Pepco Group has a unique differentiated clothing and general merchandise offering supported by exclusive in-house sourcing office, PGS, which drives efficiencies and speed to market.
Pepco Group has strong brand equity and leading market share in its core markets, with ‘Pepco’ being a leading retail brand in Poland, and ‘Poundland’ having a strong brand presence in the UK. The Group will continue to leverage this position as we expand our offering in existing markets.# Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Our 2023 financial year can be characterised by a contrast of highs and lows. The business delivered a record financial performance, with our highest ever revenue and EBITDA outturn, alongside opening a record number of 668 net new stores across Europe. The ability of the team to ramp up to roll out over 340 stores in the fourth quarter alone highlights the capability and execution that our business has to open stores at scale and simultaneously across geographies.
However, our financial performance did not meet the targets we set ourselves at the start of the year. The Group faced an increasingly challenging consumer and macro-economic backdrop in the second half of the year with high inflation and interest rates across our core markets. Sales did not match the performance we enjoyed in the first half of the year, leading to a build-up of stock levels and higher costs that impacted profitability. Performance worsened further in the fourth quarter on the back of unseasonably warm weather in August and September, negatively impacting the launch of our Autumn and Winter ranges, resulting in unexpected negative like-for-like sales performance and a significant profit miss.
While we recognise these failings and are acting quickly to address them, the underlying strength of our business model remains intact and we will see improvements during 2024.
See our business model on page 8
Trevor Masters stood down from his role as CEO with immediate effect in September 2023, alongside the announcement of a weaker profit outturn for the year, and at the request of the Board I stepped into the role of Executive Chair, to manage the Group until a successor is selected. Since taking on this new role, I have taken decisive steps to reorientate the Group management structure and establish a new Group Executive Committee to focus on the delivery of key strategic initiatives and address costs in the near term. I am excited to be once again taking an active role in leading the Group, providing continuity for a business that I have enjoyed being involved with since 2012.
Along with the Board, I would like to thank Trevor for his leadership during his time at Pepco Group.
We have a clear, compelling and exciting future, but we need to do less to achieve more, re-earning the right to grow in a targeted way and transition into a single business.”
I outlined my key priorities at our recent Capital Markets Day that took place in Warsaw in October 2023. These measures include refocusing on customers in our core Central and Eastern Europe (CEE) business and implementing a more targeted growth plan in markets where we have a presence. This includes a renewed commitment to the UK as the Group’s largest market with an ambition to make it the most profitable market over time and accelerating the transition into a single business. In taking these actions, we aim to improve profitability in our core business, while enhancing cash generation with the delivery of more measured growth – doing less, to achieve more.
Crucially, our core strategy of optimising and expanding our store network, enhancing the customer offer, driving cost and operational efficiency, and investing in infrastructure and people to support targeted growth remains intact. Pepco Group will remain a growth company, given the opportunity we can clearly see for our offer with customers. However, we will spend 2024 addressing the areas where we have misfired, retuning the core profit engine of the Group in CEE, accelerating the delivery of a single leadership team and operating platform and refocusing store expansion to be more targeted in order to achieve our expected returns.
Read more in our strategy section on pages 10 to 13
We believe we have made progress in this regard during 2023 in a number of ways, including establishing a Group ESG Executive Committee – see further details on page 21.
Read more in our sustainability section on pages 16 to 37
I would like to recognise all my colleagues and our suppliers across the business and thank them for their hard work, commitment and support over the year. Our people are fundamental to the Group’s success – our strategy is predicated on a strong focus of employee retention, development and engagement. It is their relentless focus and their dedication to serving our customers that have enabled us to build the strong foundations we have in place today.
We remain focused on offering families on a budget great range, value and convenience; this is underpinned by the core values we share across our retail formats. This includes putting our customers first, respecting all colleagues, working as a team to deliver great service and providing an environment for colleagues to thrive and to be the best version of themselves.
In addition to the departure of the CEO as highlighted earlier, there have been a number of other management changes during the year. Barry Williams, the Managing Director of Poundland, replaced Anand Patel, who stepped down in September 2023, as the Managing Director of Pepco. Austin Cooke, the previous Chief Operating Officer (COO) of Poundland, assumed the role of Managing Director of Poundland.
We welcomed Neil Galloway into the role of Group CFO in April 2023. Neil joined from IWG plc, the leading global provider of flexible workspace in 120 countries, where he was Executive Vice-President. Neil is an experienced public company CFO who has worked in senior finance and commercial roles at multinationals over the last 15 years, including in cross-border retail. Neil has already made a strong contribution to the Group as we set out to improve processes and adopt best practices, along with helping to drive an acceleration towards a single business.
Finally, I would like to thank my predecessor Richard Burrows from whom I took over as Chair in February 2023. Richard helped guide the business from IPO through a period of significant change, giving the business the solid foundation in order to successfully grow. I appreciated the wisdom of his advice as he led the Board and wish him well for the future.
The Group delivered record revenues during the year, increasing by 18% on a constant-currency basis. Like-for-like revenues grew 6% across the year, reflecting an enhanced customer offer despite facing a challenging market backdrop. This highlights the importance, more than ever, of maintaining price leadership and offering the best possible value for money to our customers, helping us to sustain our market share advantage.
The trading environment deteriorated significantly in the last quarter across Pepco’s markets, notably in CEE, with weaker consumer demand for our key clothing and general merchandise categories, a lower than forecast gross margin and higher costs, resulting in a reduced level of profitability in our core markets. The underperformance in Pepco was partly offset by stronger than expected performance from Poundland, largely driven by the strength of its FMCG offer, as consumers prioritised spending on this category over clothing and general merchandise. Despite the weaker second half of the year, the business delivered our highest ever EBITDA outturn of €753m.
Notwithstanding the more challenging trading environment, in June 2023, we successfully executed the refinancing of a €300 million Term Loan A (due in 2024), with the issue of an inaugural five-year €375 million high-yield bond (due in 2028), which was heavily oversubscribed by a blue-chip investor base. Alongside this, we increased the size of our RCF (revolving credit facility) by €200 million to €390 million, which was supported by increased commitments from our bank group. This has further strengthened our balance sheet to support future growth opportunities and reflects the strong support we have from the investor community.
The Group saw like-for-like revenues decline by 3.1% in the eight weeks to 26 November 2023, against a strong trading period in the prior year, although we are seeing sequential improvements week-on-week. While we expect challenging trading conditions to continue in the near term, we are cautiously optimistic as we enter 2024. We are increasingly confident of the gross margin opportunity in FY24, evidenced by a 100 basis point improvement
Our proven profitable store model gives us confidence in the opportunity to continue building Europe’s leading variety discount retailer. Maintaining price leadership across our brands is a core part of our brand values in order to provide a compelling value proposition for our customers and grow market share. Pepco has retained clear entry price leadership, with clothing 30% on average cheaper than its competitors, and general merchandise 50% cheaper.
The Group has funded all of its growth over recent years from operating cash flow, without the need to raise external debt or equity capital. The Group maintains a strong balance sheet with access to over €400 million in liquidity (from cash and credit facilities).
The Group maintains a robust balance sheet with resilient operating cash flows, and access to over €400 million in liquidity (from cash and credit facilities). As a reminder, the Group has largely funded all of its growth over recent years from operating cash flow, without the need to raise external debt or equity capital. This strong financial foundation, alongside strong brand equity and leading market share in our core CEE markets, with a proven profitable store model, gives us confidence in the opportunity to continue building Europe’s leading variety discount retailer.# Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
seen year-to-date versus the quarterly exit rate achieved at the end of FY23.
We have an attractive and unique product offer that resonates with our core customer, supported by passionate colleagues and price leadership that enables us to maintain and grow market share through the structural advantages of our discount proposition.
The business has a significant white space opportunity to grow in our existing core markets, with over 400 net new store openings planned for FY24 – comfortably remaining one of the fastest growing retailers in Europe. We will leverage these opportunities in a more targeted and measured way, with an enhanced emphasis on capital, returns and free cash flow. We are confident we have the right strategy and leadership team to grow the business in line with our ambitious targets over the medium term.
I am pleased to note that we have continued to embed our ESG strategy within our overall Pepco Group strategy and
Andy Bond
Executive Chair
What is your history with Pepco Group?
I have been involved with the business for many years. Initially I acted as an advisor to the legacy Pepkor South Africa group in 2012, before jointly setting up Pepkor Europe as a founder-investor in 2015 and assuming the role of Chief Executive. In September 2019, the business rebranded from Pepkor Europe to Pepco Group, and I led the business through its public listing on the Warsaw Stock Exchange in May 2021. I stepped down as CEO of Pepco Group in March 2022 due to health reasons, before returning as Chair in February 2023 after making a full recovery. My continued enthusiasm for the business stems from the fact that I continue to believe we have a unique retail format backed by a strong in-house sourcing arm - PGS - enabling Pepco Group to offer exclusive products that cannot be found anywhere else. We offer amazing value to our customers across a variety of categories, providing great quality products that save money for our customers, serviced by our wonderful colleagues. There remains significant opportunity, both in market share and operating efficiency, to drive returns for all stakeholders going forward. I have many years of experience in the discount retail sector. Previously, I spent 16 years at Walmart, with several roles including Managing Director of George Clothing, Chief Operating Officer and then Chief Executive Officer of Asda between 2005 and 2010. I then took the role of Chair of Asda from 2010 for a year. The Group has a market-leading customer proposition, a strong balance sheet, and resilient operating cash flow to continue success across Europe.”
5
Are you interested in taking the CEO role permanently?
I have sat in the CEO role at Pepco Group previously and unfortunately had to leave the Group due to health issues. Whilst I am committed to the long-term future of the Group in the role of Chair, I have no intention of continuing as CEO again on a full-time basis. However, it is of paramount importance that we find a successor with the right credentials and cultural fit to take this business to the next stage of its growth. This is unlikely to be a quick search and I have given my commitment to the Board that I will lead the business for as long as it takes to find the right candidate.
What were the biggest challenges faced in 2023?
Notwithstanding a tough consumer environment in our core CEE markets, we tried to do too much too quickly, while juggling too many non-core projects. We simply lost focus. Our growth plan was too ambitious, overstretching our colleague and systems capability. Coupled with this was ill-discipline around project management and slower than required progress in our transformation plans towards one business.
We are addressing these issues with a focus on rebuilding the health of the core business and growing our gross margin and the core profit contribution from our stores, backed by better decision making through the use of data analytics. We believe we are well positioned for growth with our sustained focus on price leadership, in-house direct sourcing model through PGS, profitable and scalable store model, and strength of our brand equity in core markets. My immediate focus is on rebuilding the profitability of Pepco’s core business in CEE and accelerating the transformation to a single business and customer offer. We also need to adopt a more disciplined approach to growth and investment capex across the Group to deliver stronger cash generation. We will open fewer stores – targeting 400 net new stores across the Group in FY24 – while also placing the ‘New Look’ refit programme in CEE under review (see further detail on page 12). New store growth will be targeted in our existing countries, including growing scale in key Western European markets such as Italy and Spain. We are also committing to the UK as the Group’s largest region by revenue, with an ambition to make it the most profitable market over time.
1 See page 14 for APM definitions.
How do you plan to combat increased competition?
Our virtuous circle of “sell for less, buy for less and operate for less” becomes even more important when our customers need it most. Through the economies of scale we continue to achieve with suppliers as a result of our size and our vertically integrated sourcing model PGS, we can benefit the Group and, more importantly, our customers, by offering lower prices. We also invest in the stores to make them clean, bright, tidy and nice to shop in. Finally, we have well-trained staff who provide quality customer service. This is the formula for success: low prices, good quality products, served by people who love what they do. We pay our people well and they enjoy working with us. As a result, they serve the customers well.
Will you look at taking your Pepco business online to achieve growth in a competitive market?
We are already developing the online channel in our Poundland business, which is growing quickly from a small base (covered on page 12). For our Pepco business, we are currently firmly focused on our retail stores. We are of the view that in the near term we will get much better results by investing that money in our product offering and in keeping prices low. However, we will increasingly invest in a wider digital engagement with our customers.
What changes are being made to the Company strategy to put it back on track?
Andy Bond
Executive Chair
7
Building Europe’s leading discount variety retailer
Pepco Group offers price leadership and a differentiated product proposition. This is facilitated by increasing economies of scale and Group-level buying, made possible by our vertically integrated sourcing model. This is all underpinned by our core strategy of optimising and expanding our store network, enhancing the customer offer, driving cost and operational efficiency and investing in infrastructure and people to support growth.
Leveraging our scale and sourcing strategy, we offer a diverse range of clothing, homeware-led general merchandise (GM) and fast-moving consumer goods (FMCG), providing our core shopper, a “family on a budget”, with their regular shopping needs. Understanding customer preferences and focusing on quality is key to delivering customer satisfaction and growing market share.
Leading variety discount retailer in Central and Eastern Europe expanding into Western Europe
Local stores in convenient locations – Focus on price leadership with market leading entry prices
– Clothing for the whole family (with a particular strength in kids and babywear), home décor, toys and seasonal products
– 3,523 stores across 19 countries, which includes 523 stores in Western Europe.
Through our ability to share infrastructure across the Group, we achieve significant support. We continue to invest in the development of high-quality, scalable infrastructure, including information technology, automated warehouses and more efficient multi-point distribution.
As part of our growth strategy, we are transitioning at speed to one business, with a unified customer offer.
We own and operate a multi-format, Europe-wide variety discount retail business, with 4,629 neighbourhood stores located across 21 countries. By focusing on standardisation and repeatability across our store structures, we are able to expand our store footprint efficiently in line with our growth prospects.
– Integrated with PGS, our global sourcing office dealing with a supply network of 375+ vendors utilising 700+ factories globally. We continue to invest in the
Delivering amazing value in branded and resilient multi-point distribution.# PEPCO Group N.V. Annual Report and Consolidated Financial Statements 2023
Our proposition is built around providing quality, everyday essentials – FMCG-led offering with a price architecture anchored around a limited number of simple price points. We maximise buying scale and operating efficiencies, thereby lowering costs and improving margins. With the full product development chain for clothing and merchandise managed within the Group, the vertically integrated model also provides a high degree of visibility and control over our supply chain as well as flexibility in sourcing.
Talent retention and development is central to the success of our business, and we aim to maintain the right pipeline of skills across the Group to facilitate the long-term success of our growth strategy. We maintain a strong commitment to ethical and responsible business conduct, honesty and integrity, both within the Group and throughout our value chain.
We aim to use natural resources responsibly, minimise waste and increase our use of sustainable and recyclable packaging. We continue to introduce sustainable and ethically produced products in line with our ESG ambitions.
| Shareholders | Record growth in revenues | >57m customer transactions |
| +17.1% in FY23 | per month across 21 countries | |
| Customers | >4,350 colleague promotions | |
| across the Group during FY23; | ||
| Pepco was again recognised | ||
| as one of Poland’s best | ||
| employers in 2023 according | ||
| to Forbes | ||
| Colleagues | Supporting charitable | |
| activities across the Group, | ||
| including the Poundland | ||
| Foundation | ||
| Society | ||
| Supply chain | €1.4bn sell for less | |
| €1.4bn buy for less | ||
| Operate for less of shipment | ||
| value in FY23 | ||
| Price leadership | €1.4bn sourcing scale | |
| Standardised store format | ||
| Low-risk inventory | ||
| Significant economic contribution | ||
| to our operating countries | ||
| Volume leverage through our | ||
| role as both taxpayer and tax | ||
| collector, including payroll- | ||
| related taxes remitted in | ||
| >47,000 colleagues across the | ||
| Group | ||
| Buying model | Simple price architecture | |
| Discount mindset | ||
| Optimised markdown volume | ||
| Consolidated management |
Our core strategy is outlined by the key pillars below:
This strategy informs our ESG strategy, which can be found on page 16
I am confident we have the right strategy and leadership team to grow the business in line with our ambitious targets over the medium term.”
Andy Bond
Executive Chair
During FY23, we opened in two new regions in Western Europe – Greece and Portugal. Having launched our first stores in Greece in October 2022, we currently operate 22 stores in the region with a positive customer reception and performance to date. In May 2023, following the successful roll out in Spain, Pepco launched its first stores in Portugal, where we currently have 14 stores and plan to add sites selectively over the coming year.
Overall, our Western European presence currently spans Spain, Italy, Austria, Germany, Greece, and Portugal. Going forward, the majority of new Pepco stores in Western Europe will combine the best of the Group’s clothing, GM and FMCG ranges.
Poundland focused on our existing markets and an enhanced emphasis on capital returns and free cash flow. We plan to open at least 400 net new stores across the Group in FY24.
Using our proven, profitable and scalable model, we will look to strengthen the Group’s store profitability and customer positioning in key regions, with a particular focus on our core Central and Eastern European (CEE) business, as well as growing scale in Italy and Spain, our largest markets in Western Europe. We have also committed firmly to the UK as the Group’s largest market by revenue, with an ambition for it to become the most profitable country over the medium term.
The Group opened 556 net new Pepco stores during the 2023 financial year. This includes 294 net new stores in CEE and 262 net new stores in Western Europe, our fastest growing region. There remains a significant white space opportunity in our core CEE markets, where we have strong brand equity, particularly outside Poland, where we had 1,256 stores in operation at the period end. We launched the Pepco brand in Bosnia and Herzegovina in September 2023, with nine stores operating at the period end and a strong entry into the region. In March, Pepco opened its 100th store in Serbia, where the brand continues to strengthen its presence and further capitalises on the strong demand for its products in the country.
Western Europe remains an important area of growth for Pepco, with new store openings in the region approaching half of the total opened across the year. Italy and Spain are our largest and fastest-growing Western Europe territories, and we will focus new openings in these countries in FY24 building order to create greater scale efficiencies through network density. We had 205 stores in Spain at year end and 157 in Italy.
Revenue performance across the estate generally remains strong, particularly in our larger Pepco ‘Plus’ stores in Spain, which include FMCG categories, while we have work to do to improve the store contribution margins and investment returns. This will be a focus area in 2024.
Poundland opened 53 stores during FY23, while closing 51 underperforming stores as part of its long-term estate management plan. In September 2023, Poundland agreed to take over up to 71 Wilko store leases in the UK. By mid-December 2023, 64 former Wilko stores had already been reopened as Poundland stores, with 10 stores opening in the FY23 financial year and the balance at the start of FY24. The stores will trade through the important Christmas period of 2023, carrying the range of Pepco clothing, alongside the extensive FMCG and general merchandise ranges that Poundland is known for.
We will selectively continue our store development programme, where we can deliver target returns on investment. This includes upgrading both external and internal signage, improving lighting, fitting new flooring and enhancing colleague areas. We will also look to deliver incremental store space growth which allows us to extend our ranges and drive existing store profitability.
Following a strategic review of our operating brands, Dealz will now focus on developing its business in Poland over the next 12 months, with further expansion into Central and Eastern Europe contingent on delivering the appropriate level of profitability and returns.
Dealz Poland opened 115 net new stores during the period, reaching a landmark of 283 stores at the year end, with an expectation of reaching 300 stores by the end of the 2023 calendar year. The vision for Dealz is to become the largest value discounter in Poland, with a potential to operate 1,000 stores in Poland.
Our Dealz stores complement the Pepco business in Poland, offering unique international FMCG brands and general merchandise with 3,000 products across 15 sub categories. Brand awareness is growing quickly for our key target customers aged between 19 to 45 years old, with over 750,000 customers shopping at Dealz every week.
The Group delivered a record 668 net new store openings in 2023 (826 store openings and 158 store closures). It is clear that this pace of growth stretched the business and consequently, going forward, we will adopt a more measured approach to growth, with new store openings focused on our existing markets and an enhanced emphasis on capital returns and free cash flow. We plan to open at least 400 net new stores across the Group in FY24.
We see strong potential for the UK discount space over the coming years, as one of the largest markets in Europe, which is forecast to grow quicker than Germany and France.1 To take advantage of this, we will ensure that Poundland can leverage this growth by adapting our product ranges to utilise Pepco’s strength in clothing and GM over FY24. We will also accelerate the opening of new stores and selective refreshing of our existing estate for a better customer experience.
1 Source: Globaldata Five-Year Retail Market Forecast – August 2023.
Pepco ‘Plus’ (Western Europe) 53
Our Pepco ‘Plus’ format of stores that offer three categories (FMCG in addition to clothing and GM) continues to deliver the strongest revenue results of all store formats in the Group, alongside Poundland. Following the conversion of all Dealz stores in Spain to the Pepco format, the Group currently operates 53 Pepco ‘Plus’ stores, mostly located in Spain. Like-for-like (LFL) revenues for our Pepco ‘Plus’ stores during the year were up 5.7% compared to the same period last year.
The Group’s ambition remains to be Europe’s premier variety discount retailer. It will achieve this by continuing to offer excellent value and quality across a wide range of products.# Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Operating costs (IFRS 16, excl. rent) as % of sales: 26.8%
Internal employee promotions: >4,350
Transitioning at speed to one business, with a unified customer offer and a single sourcing strategy through PGS, will be central to the Group’s ability to drive cost and operational efficiency over the next 12 months, particularly in light of elevated inflationary pressures.
The business will continue to further leverage PGS – which we consider a key competitive advantage for the Group – as very few discount retailers have an integrated sourcing entity, instead relying on third-party agents. In addition, we are planning driving improvements in our cost of doing business; primarily through a focus on labour and end-to-end supply chain efficiencies.
PGS was fully integrated into the Pepco business during the year, which will help maximise and align the buying cycle, as well as help drive further operating efficiencies. In addition, PGS opened a near-shore sourcing operation in Poland, thereby increasing our sourcing flexibility out of countries such as Turkey, Poland and Romania. We are also continuing to diversify our Asian capabilities in countries such as Cambodia, Pakistan, and Indonesia.
Within our distribution and supply chain, the Group continued to deliver on process and technology efficiencies with warehouse management system (WMS) blueprinting now in place across all Pepco distribution centres, a second automated sorter live in our largest DC in Gyal, Hungary, and the commencement of an end-to-end supply chain review in Poundland. However, against these underlying improvements, fuel and labour inflation and higher levels of stock impacted the overall cost of operating our supply chain which was the primary driver of an increase in operating costs in the Pepco business.
Labour efficiencies are a focus area in both Pepco and Poundland, against a backdrop of a sustained high wage inflation environment in Central Europe. The businesses have delivered a reduction in labour hours in stores through a combination of investment in technology such as self-service tills and enablement of more management activity on the shop floor, as well as changes in processes to reduce the stock handling.
The Group’s work to offer a simpler business model continued with the most meaningful change during the period within Spain where we amalgamated two businesses (Dealz and Pepco) into one (Pepco). The integration creates a simpler operating model, with one brand, one range and one team. All Dealz stores in Spain have now been converted to Pepco stores, with a general focus on opening larger stores that incorporate an FMCG offer alongside clothing and general merchandise.
To enable us to meet our strategic objectives, we have clear plans to develop high-quality, enterprise-grade, scalable infrastructure. We also continue to invest in technology, both in new stores and in our refits, to make our customers and colleagues lives easier. Initiatives include the installation of self-scan tills, and the implementation of modern retail point-of-sale systems which improves the speed and quality of service to our customers and simplifies the work for our colleagues.
The roll out of a modern Oracle ERP (enterprise resource planning) IT platform across the Group is continuing; with Poundland successfully launching new modules during summer 2023. The Oracle solution gives Poundland a single, modern inventory management and finance solution, while introducing enhanced visibility and management of financial data, along with greater efficiency in managing accounts payable. Pepco is in the final stages of advanced planning and testing for an expected go live on the Oracle platform during 2024. These investments are fundamental to the future successful growth of the business, providing a robust system, while delivering operating efficiencies.
In addition to this, we have made good progress in our efforts to be part of a responsible and efficient supply chain in FY23, with the introduction of environmental guidelines which have been added to the existing social and ethical expectations.
See valued supply chain on page 31
We believe that the ability for colleagues to build rewarding careers enhances both the service we provide to our customers and our employment brand. We continue to invest in the capability of our people both in terms of developing our existing colleagues, and attracting new, high-calibre recruits into the business to continue to support and drive our growth agenda. Reflecting our commitment to the development of our colleagues, 81% of our store managers across the Group were internally promoted and we promoted over 4,350 colleagues during FY23, which we believe demonstrates our strong commitment to internal development especially against the general challenging backdrop the past year.
See employee section in ESG for further details on page 34
At the start of 2023, we commenced our Pepco “New Look” programme, where we were initially targeting to re-fit all 2,500 Pepco stores in CEE by the end of 2025. Initial trading in refitted stores had been promising with early LFL performance up over 10% against a control group of stores. However, as a result of a weaker macro and consumer environment in our core CEE markets, the programme has increasingly not been delivering the required level of incremental sales and returns to justify the capital spend. As a result, the programme is currently under review while we evaluate the direction of the programme and understand the reasons impacting better performance.
During FY23, we completed 715 conversions across Poland, Czechia, Romania, Slovakia and Hungary. As part of our commitments to our landlords, we expect a further 219 conversions to take place in the above regions during the first quarter of FY24. Future conversions will be determined on a case-by-case basis. To date, the LFL revenue growth performance of the stores converted so far is running at around three percentage points higher than the control group, with an increase in both volume of transactions and average basket size.
Poundland development this by offering quality clothing, general merchandise and FMCG products at the best Poundland prices, with stores conveniently located close to our customers, whether that it is in high streets, retail parks or shopping malls. Maintaining our price leadership is critical in order to provide a compelling value proposition for our customers and to grow market share.
As part of our focus on providing value to our customers, we want to address the myth that price is a barrier to sustainable and ethically produced products. One of the most impactful ways we can positively contribute to our customers and communities is through offering a larger range of affordable and sustainable products available in our stores.
Read more about our sustainable products on page 29
Poundland has also continued to explore the potential for its digital business. The online business has grown rapidly following the 2022 acquisition of Poundshop.com, with orders more than doubling under Poundland ownership. The operation has used a picking and fulfilment operations centre in Wednesbury, West Midlands, and is well progressed in the transition of operations to a digital distribution hub at Darton, which gives the business extra capacity to expand its online operations at pace. The business recently combined Poundshop.com with its principal Poundland.co.uk website as the natural next step in order to allow customers to shop an expanded Poundland range online for delivery to their homes. It is clear customers are using the online channel for a different shopping mission with a significantly higher average basket online versus in store.
The following key performance indicators (KPIs) include Alternative Performance Measures (APMs). The Directors use APMs1 as they believe these measures provide additional useful information on the Group’s performance.
The Group has clear environmental and social KPIs and targets which are shown on page 17
| FY23 | FY22 | |
|---|---|---|
| Store growth | ||
| Number of net new stores | +668 | +516 |
| Total Space | ||
| Retail trading space (‘000) | 2,146 | 1,799 |
| Revenue growth | ||
| Total and like-for-like sales growth (%) | +17% | +13% |
| FY23 LFL | 6.0 | |
| FY22 LFL | 5.2 |
Achieving profitable growth drives our ability to create value in the long term. Retail trading space of 2.1m square metres represents an increase of 19% year on year against the store growth of 17%, thereby accelerating revenues. Sales of €5.6bn represented an increase of 17% year on year underpinned by store growth and positive LFL sales growth. As we commit to taking a more disciplined# Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
and targeted approach to growth in FY24, we LFL revenue of +6.0% supported this growth, nonetheless delivered a record increase of 668 with Poundland benefitting from FMCG (17%) net new store openings in FY23, increasing performance and Pepco supported by a strong to 4,629 stores. performance in H1.
Definition and relevance: Net store numbers accounts for store closures Trading space is defined as retail trading space during the year. including tills, excluding back-of-house and changing rooms.
Definition and relevance: LFL revenue growth is defined as year-on- year revenue growth for stores open beyond their trading anniversary and is reported on a constant currency basis.
Definition and relevance: Disciplined and controlled store growth is fundamental to our Group strategy. Store space growth allows us to extend our ranges and drive profitability. LFL growth is fundamental to our Group strategy in delivering operating leverage.
New store numbers exclude the retirement of Dealz Spain banner and the 57 stores which have been converted to Pepco across FY22 and FY23.
FY22 excludes the closure of 59 Fultons stores.
Link to strategy
* Optimising and expanding our store network
* Enhancing the customer offer
* Driving cost and operational efficiency
* Investing in infrastructure and people to support growth
Read more in our strategy section on pages 10 to 13
| FY23 | FY23 | FY23 | FY22 | FY22 | FY22 | |
|---|---|---|---|---|---|---|
| Stock | -10% | 7.0 | 1,135 | 439 | 9.1 | |
| Underlying pre-IFRS 16 EBITDA (€m) | Underlying pre-IFRS 16 EBITDA Margin (%) | Stock holding (€m) | ||||
| Underlying EBITDA of €396m represents a challenging year, and a decline of 10% against FY22. | EBITDA margin is 2.1pp down year-on-year with slower than anticipated recovery on gross profit margin and operating cost leverage, whilst we have added over €800m (+17%) to the top line revenue in FY23 this has not flowed through to pre-IFRS 16 EBITDA. | Group stock holding has increased by 18% against FY22 as a result of both the growth of the business (+19% space growth YoY) and the sales headwinds across Q4. We see a significant opportunity to improve cash conversion cycle through more effective stock management. |
Definition and relevance: Underlying profit before tax, net finance costs, depreciation and amortisation. Prepared on an pre-IFRS 16 basis. The cost of stock underpins the profitability of sales and the linkage to sales expectations is key to ensuring optimal holding.
Definition and relevance: Underlying profit before tax, net finance costs, depreciation and amortisation, divided by sales excluding VAT. Prepared on an pre-IFRS 16 basis.
Definition and relevance: Stock at cost post NRV (net realisable value) provisions.
Link to strategy
* Growing our EBITDA margins is the key focus within our P&L.
* Pre-IFRS 16 EBITDA is the Group’s leading metric on profitability.
* Our vision to be Europe’s biggest and best discount variety business is underpinned by delivering profit growth.
| FY23 | FY23 | FY23 | FY22 | FY22 | FY22 | |
|---|---|---|---|---|---|---|
| Underlying IFRS 16 EBITDA (€m) | Underlying IFRS 16 EBITDA margin (%) | Net Cash From Operations (pre Capex) | ||||
| Underlying increase of 3% driven by revenue growth partially offset by margin and operating cost headwinds. | EBITDA margin is 1.8pp down year-on-year with slower than anticipated recovery on gross margin and operating cost headwinds. | The Group’s cash generation materially stepped up reflecting solid EBITDA generation in conjunction with working capital unwind against the prior year. |
Definition and relevance: Underlying profit before tax, net finance costs, depreciation and amortisation. Prepared on an IFRS 16 basis. IFRS 16 is the accounting requirement under which EBITDA is reported and a legacy approach that the Group historically led with.
Definition and relevance: Underlying profit before tax, net finance costs, depreciation and amortisation, divided by sales excluding VAT. Prepared on an IFRS 16 basis. IFRS 16 is the accounting requirement under which EBITDA is reported and a legacy approach that the Group historically led with.
Definition and relevance: Cash generated from operations, after lease costs and working capital movements but pre- capex, funding and investment.
Link to strategy
* Executing in a disciplined manner with a strong emphasis on efficient working capital and returns will deliver strong cash flows.
* Optimising and expanding our store network
* Enhancing the customer offer
* Driving cost and operational efficiency
* Investing in infrastructure and people to support growth
Read more in our strategy section on pages 10 to 13
The Group’s business strategy comprises the pillars: optimising and expanding our store network, enhancing the customer offer, driving cost and operational efficiency and investing in infrastructure and people to support growth. As shown below, these four pillars also form the foundation of our approach to ESG. Our focus is on providing value to our customers, driving sustainability into every price point and product offering. We believe in the democratisation of sustainability – so everyone can participate in protecting the planet, ensuring fair working conditions and being a good citizen – no matter the size of their budget.
| Exceptional environment | Greener employer | Strong society | Valued supply chain | |
|---|---|---|---|---|
| Better products | ||||
| Sustainability context | ||||
| 4,629 stores | 47,487 colleagues | 2,146,007 m2 store space | 102,421 people supported through our charitable work | 57m customer transactions a month |
Regulatory context
The Group is subject to a number of non-financial disclosure requirements We report on an annual basis and have continued to develop our approach which incorporate ESG-related reporting, including: to ESG reporting in FY23. This ESG report, which covers the 12 month
– the European Union (EU) Non-Financial Reporting Directive (NFRD) – in period from 1 October 2022 to 30 September 2023, has been prepared in accordance with the NFRD, our Annual Report includes information consideration of the GRI Standards, and draft CSRD ESRS standards were on the performance, position and impact of our activity relating to considered as part of the reporting process. As several EU regulations have
environmental, social and employee matters, respect for human rights, only recently been finalised, we believe we have made a positive start to the
and anti-bribery and corruption matters. This includes: process of complying.
– a description of our business model – see page 8;
– a description of the policies implemented in relation to those matters, including due diligence processes implemented and the Our ESG strategy is set at Group level and pulls together the ESG plans and actions of our operating companies. We share best practice and leverage outcomes of these policies. Our approach to environmental, social and governance matters is explained in the following sub-section, expertise through our internal working groups. For reporting purposes, data
“Our approach to ESG”, which includes an explanation of our ESG and target setting approaches are harmonised. Governance is managed through ensuring accountability and the effective operation of Committees management structures, our engagement with stakeholders and our strategy. Our approach to business ethics on pages 22-24 provides at both operating company and Group levels. an explanation of our approach to governance matters across the
We continue to further embed our ESG strategy within our overall Pepco Group, while the following sections on environmental (page 25) and Group strategy and believe we have made progress in this regard during social (page 31) matters provide further information regarding the FY23 in a number of ways, including establishing a Group ESG Executive policies, practices and initiatives we have undertaken in each of Committee. We recognise the importance of collaborating across the value
these areas; chain and with other industries and NGOs to create a more sustainable future – the principal risks related to those matters – ESG-related risks and a fair society. Therefore, Pepco Group has joined a number of external are included as a risk category within our overall risk framework organisations and sought accreditations which demonstrate our commitment to ESG. We have noted these in the relevant areas throughout this report. (see pages 38-44) for further explanation of our approach to risk management and ESG risk description;
In this ESG section of the report, we describe how we have further developed – non-financial key performance indicators relevant to the particular our governance processes and the progress we have made in completing a double materiality assessment in FY23.
We welcome stakeholder feedback on our ESG reporting – please contact [email protected].# Sustainability continued
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023 17
These are key steps in showing how business – our environmental and social goals and KPIs are presented below in this section; and we will meet future regulatory ESG requirements, allowing for our progress against our key performance indicators and in preparing for future ESG – the EU Green Taxonomy Regulation – we report in line with the EU’s Green disclosures and meeting stakeholder expectations. We are on a journey to Taxonomy classification system for environmentally sustainable activities becoming more mature in our ESG strategy and disclosures, aligning across – see page 26. the Group and building on the past achievements of Poundland and Pepco.
Whilst we track numerous KPIs across our operating companies, which also have their own respective local priority areas and targets, we consider the external disclosure of Group-level KPIs and goals to be an integral part of communicating the progress and development of our ESG strategy to stakeholders. We have also shown how our goals link to the United Nations Sustainable Development Goals (SDGs).
With 4,629 stores in 21 countries across Europe and over 47,000 colleagues serving 57m shoppers each month, we are a large, growing business, which brings employment opportunities and operational best practices to the geographically, economically and culturally diverse markets in which we operate. We are acutely aware of the impact we have on the environment and our communities and have a clear strategy described in this section to address this. Having established a set of Group-wide environmental and social goals, with corresponding KPIs in FY22, we have further expanded and developed these in FY23. As noted in our previous report, there are certain areas where we believe data-based KPI reporting is inapplicable. Governance and ethics are areas we believe to be best suited to qualitative discussion for demonstrating our focus on these vital areas of business and these are therefore not included below.
Stretching beyond Europe, our value chain encompasses products that are sourced from a wide variety of domestic and international suppliers and includes our vertically integrated sourcing operation, PGS, which works with over 385 suppliers, representing over 743 factories in Asia. For further detail on our supply chain, see page 31. Our business model on page 10 includes additional information on the commercial and operational benefits of our direct sourcing model.
| Goals Link to SDGs | KPIs | FY23 performance | FY22 performance |
|---|---|---|---|
| Reduce the carbon intensity of our operations | Scope 1 and 2 emission Absolute: 101,674 tCO2e (+7.2% YoY) Intensity: 22.0 tCO2e/€m turnover (-1.9 tCO2e/€m (-7.8%) YoY) | Absolute: 106,214 tCO2e (-4.3%) YoY Intensity: 18.0 tCO2e/€m turnover (-4.0 tCO2e/€m (-18.3%)YoY) | |
| Increase % of packaging that is recyclable | We have upgraded our packaging recyclable packaging policies and guidance. A KPI will be established for reporting purposes in FY24 | ||
| Reduce waste to landfill | % of waste diverted from landfill | Less than 1% of operational waste was sent to landfill in Poundland in FY23 | Less than 1% of operational waste was sent to landfill in Poundland in FY22 |
| Grow the range of affordable, sustainable product options | % of cotton fibres in clothing is BCI assured1 | 21% | |
| Perform annual audit of our factories | % of factories audited against our audit plan2 | 100% ethical audits completed | 100% |
| Engaged all colleagues regularly for feedback | % of colleagues surveyed | 78% response rate with 73% agreeing with the statement – ‘I am aware of what initiatives we are doing to be more sustainable and help the environment’3 | 79% participation score |
1 To be confirmed by the Better Cotton Initiative audit in January 2024. FY23 estimate includes both Pepco and Poundland sourced fibres. In FY22 we disclosed Poundland sourced fibres only.
2 Our factory audit KPI is defined as the percentage of social and ethical audits completed by our Group Sourcing Compliance team against the annual audit plan.
3 For Poundland only in FY23. Pepco carries out employee surveys every 2 years. FY22 data covers all Poundland and Pepco employees.
At Pepco Group, we aim to democratise sustainability for our customers by offering affordable choice and demonstrating that price is not a barrier to sustainable and ethically produced products. Driving efficiency improvements throughout the business is an integral element of the Group’s strategy and we believe there is an important link between increasing cost efficiencies and enhancing the long-term sustainability of our operations. As a large employer with over 47,000 employees, we bring employment and training opportunities to thousands of individuals in multiple countries. As a retailer with 57m customer transactions per month we develop engagement possibilities with a diverse range of communities and individuals across the world.
An example of this is our September 2023 UK store campaign together with the Energy Saving Trust and Smart Energy GB. It is designed to help our customers consider how they could reduce energy consumption and save money by thinking smartly about what products they buy and how they use them.
We apply a holistic approach in our assessment of risk and in the development of our ESG strategy, adapting our approach in response to the evolving regulatory landscape. In FY23, we continued to strengthen our ESG governance frameworks. The Group now has an ESG Executive Committee which includes all the key decision makers across the various parts of the business, from Group management to operating company leadership and into the relevant functions such as procurement and operations. Our governance and decision-making forums related to ESG are further described below.
We are mindful of stakeholder expectations for us to operate in a sustainable and responsible manner and regularly engage with our stakeholders to better understand their views.
We conducted our first double materiality assessment in FY23 to determine the most material environmental, social, governance and human rights topics for the Group. This is a key foundational step for reporting under both GRI Standards and the EU’s Corporate Sustainability Reporting Directive (CSRD). Undertaking a materiality assessment helps us to identify and gain insight into the issues that matter the most to our key stakeholder groups. It enables us to assess which issues will have the greatest impact on our business and also supports us in identifying areas of emerging importance.
The materiality assessment approach considers the impact of topics both outwardly on the economy, environment and society and inwardly on the Group (i.e. how sustainability issues might create financial risks for the Group or affect its ability to create value over the long term).
The three main steps of the materiality assessment undertaken were as follows:
The outcome of this work has resulted in a ‘short list’ of eight priority material topics which have been approved by the Board through the Audit Committee. Our material topics map to our existing ESG Strategic Framework and will inform reporting and strategic focus.
UK store campaign to raise awareness around energy consumption reduction and saving money amongst our customers.
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023 18
Our intention is to revisit material topics on an annual basis, with full reassessment every two years. The materiality assessment is part of demonstrating our strengthening commitment and governance maturity and will be used to inform and develop our ESG strategy.
Stakeholder engagement is fundamental in guiding our overall strategy and approach to ESG topics. We have identified the following key stakeholder groups and aim to engage with them on a regular basis and to ensure open and transparent lines of communication. We work with these key stakeholders at both Group and operating company level to develop our ESG approach and have included some examples of engagement below.
| Engagement in FY23 | Impact on our strategy and decision making |
|---|---|
| Customers | Engaged as part of the materiality assessment. Priority topics are mapped to our ESG strategy and will drive future strategic decisions and value. |
| Colleagues | Training opportunities, Pepco diversity and inclusion policy. Annual employee survey includes ESG questions. Colleague input is considered in our choice of charitable donation recipients. Priority topics are mapped to our ESG strategy and will drive future strategic decisions and value. |
| Suppliers | Issued Environmental Compliance Guidelines and held a Supplier Info Day for 25 key suppliers. To end FY23, 121 suppliers acknowledged the guidelines which is a key step in further developing a responsible and valued supply chain. |
| The Poundland Foundation published its first These actions are an important part of showing our annual report. value to our customers and communities and of being an exceptional employer. We will continue to consolidate Pepco Poland has joined the working group of the and highlight these actions. Polish Government’s Responsible Business Forum to develop a ‘Children’s Charter’. |
Engaged as part of the materiality assessment. Priority topics are mapped to our ESG strategy and will drive future strategic decisions and value.
A topic is considered by the Group to be material if it has a significant impact on the economy, environment and society and/or has the ability to affect the Group’s ability to create long-term value for stakeholders. Across our various stakeholder groups there was significant consistency in responses and priority allocated to the top material topics. Value for our customers and human rights/ethics topics were either first or second for all stakeholder groups. This indicates that we must continue to focus our efforts on leading value retail in demonstrating that sustainability is both achievable and good for business. Internal stakeholders ranked climate and emissions higher than external stakeholders, reflecting perhaps a greater awareness within the business of climate impacts and our opportunity to address them e.g. through energy or logistics efficiency programmes. Biodiversity and water topics ranked low for almost all stakeholders, however this does not mean that we will ignore these topics – instead we will look to address them through operational efficiency programmes, supplier environmental engagement or our participation in industry initiatives such as Better Cotton Initiative or the Zero Discharge Hazardous Chemicals (ZDHC) programme. Whilst the Group has always adopted comprehensive data and cyber security policies and frameworks, data protection and privacy was identified as a new material topic this year and will therefore have increased emphasis from a reporting perspective.
Our success in offering value to families on a budget is fundamental to our ability to attract and retain customers, enabling long-term sales growth. The Group’s contributions to local economies and communities influences our reputation with stakeholders and our ‘licence to operate’.
Strong business ethics and approach to human rights, with the appropriate accompanying policies can help to facilitate effective decision making, strong employee performance and retention and attraction of investment, as well as reducing exposure to reputational, regulatory and financial risks and fines.
We believe that ethical and sustainable supply chain practices can lead to improved operational performance, as well as protecting the Group’s reputation and supporting the business as an attractive investment proposition.
We believe that responsible employment practices, with high levels of employee engagement, can lead to improved efficiency and productivity, as well as talent attraction and retention, supporting and driving overall business success and long-term value.
Failure to adopt responsible business practices and meet increasingly stringent regulations and accepted practices could result in financial fines and damage reputation.
Good corporate governance helps the business to operate more efficiently as a result of effective decision making and appropriate risk and controls environment. This improves business performance, promotes long-term viability and reduces the risk of exposure to reputational risks and fines.
By taking a robust and responsible approach to data protection and privacy, the Group looks to comply with the applicable regulations and avoid any reputational risks and fines.
We recognise we have a key role to play, helping lead the value retail sector in the transition to a low-carbon economy. While any significant financial risks from climate change are yet to be felt day-to-day, versus some of the other risks we monitor, we recognise the need to start building a more environmentally resilient business. We will continue to build capability and enhance our governance and strategic priorities as we progress.
19 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023 Sustainability continued
| Material topic | Impact # Sustainability continued
With a strong commitment to ethical and responsible business conduct, honesty and integrity, both within the Group and throughout our value chain, Pepco maintains high standards of corporate governance underpinned by clear policies which set a culture of responsible and resilient business for all our operating companies, colleagues and suppliers.
As described at the start of this section, Pepco Group is a multinational group operating across a wide range of geographies and jurisdictions. Strong business ethics and accompanying policies help to encourage responsible practices, protect human rights across the Group and its value chain and maintain our reputation with our stakeholders. We are aware of the potential impact on the wellbeing and livelihoods of our employees as well as the people within our supply chain that any breach of ethical standards could have.
Business ethics and human rights; corporate governance, data protection and privacy
Pepco Group is committed to ethical conduct, honesty and integrity. The Audit Committee exercises oversight over the Group’s approach to ethical and responsible business practices and reports to the Board on topics as appropriate. The Group is committed to embedding ethical practices across its businesses.
We have made several key improvements in our processes and procedures in FY23:
progress and next steps for ESG across Pepco Group and its Group-wide ESG Internal Strategy Group (ISG) is made up of companies and functions. It is chaired by the Group CFO and its representatives from the Group’s operating companies and objectives are to: Group-level ESG team. The ISG meets regularly, providing a – create alignment and drive progress across the Group when it forum for cross-group decision making, information sharing and comes to ESG priorities, KPIs, goals, policies, resourcing, data discussion to drive forward our ESG strategy. systems and transparency/assurance; In PGS, the Group’s in-house sourcing business, we have – review progress across Group and operating predominantly Asia-based expert teams covering both ethical company KPIs/goals; and environmental supplier engagement and controls. We have expanded these teams in FY23 to further manage risks – manage ESG risks and agree/implement mitigation from supplier activities in our material environmental and social aspects, see more on pages 38-44 actions; and ESG risks are managed through the Group’s risk register which is – develop strategy and decisions to bring to the Group reviewed by the Group’s Audit Committee, further details can be ESG Executive Committee and the Board as appropriate. found in the risk management section of this report. The terms of reference and standing agenda of this Committee Each of the Group’s operating companies also has ESG management and decision-making structures, including dedicated sustainability personnel: Pepco: Pepco’s ESG strategy is managed by a dedicated Sustainability Manager, who provides regular ESG updates to the Pepco management team. Reflecting the increasing momentum of ESG strategy and initiatives within Pepco, a Sustainability Committee was established in FY23, with its primary goal being to develop Pepco’s decarbonisation strategy. The Committee is composed of senior business leaders across departments including operations, buying and commercial.
21 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Pepco Group has an Anti-Bribery and Corruption Policy which sets out the standards of conduct which we expect of our workforce and our business partners. The policy includes our procedure regarding hospitality and the giving and receiving of gifts and political donations, and the mechanisms through which our workforce can report concerns relating to misconduct, including confidential reporting. We will consider taking disciplinary action up to and including dismissal against anyone who fails to comply with the standards of behaviour set out in our Anti-Bribery and Corruption Policy.
To reinforce the policy and further enhance our overall programme we have engaged a solution provider and we are currently developing a centralised compliance training platform. This will enable us to train our colleagues on a variety of compliance topics such as anti-bribery and corruption, anti-money laundering and modern slavery and human rights at a level appropriately tailored for colleagues and their role within the business. In addition, we will be able to monitor the effectiveness of learning though qualitative and quantitative measures, and report on those topics when required.
There were no confirmed cases of bribery and corruption in FY23.
We recognise that whilst our business activities can contribute positively to the lives and livelihoods of our stakeholders, there is the potential for impacts on human rights and therefore we have a zero-tolerance approach toward any infringements or violations of human rights in our business or identified in our supply chain. All forms of modern slavery, including child labour, forced labour and human trafficking, are strictly forbidden by our Code of Conduct.
We have an Ethical Trading Code of Conduct for suppliers and compliance with this Code of Conduct is a key condition of doing business with us. The Code is closely based on the Core Conventions and the Fundamental Principles and Rights at Work of the International Labour Organization (ILO), a UN agency. We arrange regular training and meetings with our suppliers and employees to make sure they understand our Code of Conduct and that they respect it.
We continue to review and improve our whistleblowing procedures as they naturally embed over time. Our training programme on this subject will be further expanded in the coming months, providing colleagues with an increased knowledge and confidence, enabling them to recognise and speak up about misconduct.
Strong corporate governance, business resilience, transparency and accountability are essential in the effective management of our business, promoting long-term sustainability and value creation. Governance frameworks are required to ensure the effectiveness of the Board and to protect the interests of our shareholders and other stakeholders, also helping to build trust, without which we would not be able to operate.
Pepco Group is committed to high standards of corporate governance, transparency and accountability. The Group has clear corporate governance policies which set a culture of responsible business for all our operating companies and our colleagues, customers and suppliers. Key elements of the Group’s strategy drive towards a resilient business; our materiality assessment completed this year also highlights the importance of corporate governance and business ethics to our key stakeholders.
There were no confirmed cases of bribery and corruption in FY23.
We aim to build and maintain business resilience by embracing technology to improve infrastructure and operational performance, taking a responsible approach to data protection and privacy, and by implementing robust and responsible data protection and privacy measures to meet regulations and protect customer and supplier confidentiality and security of personal information.
We understand that the taxes we pay to governments in the countries in which we operate are central to fiscal policy and macroeconomic stability, being an important source of revenue in providing a stable infrastructure, social fabric, and economic environment for citizens of those countries who are also our colleagues and customers.
22 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023# Our approach to tax
We are committed to conducting our business in an honest and ethical manner, and our core tax principle is to manage our tax affairs responsibly, which means ensuring that we pay the right amount of tax at the right time in the countries in which we operate, in compliance with local and international law. We believe this sits comfortably alongside our business purpose to deliver growth and long-term value for our stakeholders whilst also maintaining high standards of ethics, honesty and integrity, managing our impact on the environment, developing our colleagues, and enhancing the communities across our supply chain. Our Board-approved tax strategy is reviewed and re-published annually and, whilst a requirement under UK law, is intended to summarise our overall tax strategy as a Group. Our tax strategy can be found on our website under “Our approach to tax”: www.pepcogroup.eu/about/how-we-operate/.
Ultimate responsibility for tax governance and management of tax risk sits with the Board and the CFO, supported by the Director of Treasury, Tax and Risk and the Head of Group Tax, who engage with the Group Audit Committee. Day-to-day management of tax risk for our operating companies is delegated to the relevant CFO or Finance Director. Regular communication channels ensure that the Group maintains oversight of key tax matters, and advice is sought from leading external professional advisors where considered appropriate (for example, where there is an element of uncertainty) given the complex and dynamic nature of tax law and practice.
We operate a system of tax risk assessment and controls as a component of the overall internal control framework applicable to our financial reporting system. We seek to reduce the level of tax risk arising from our operations as far as is reasonably practicable by ensuring that reasonable care is applied in relation to all processes which could materially affect compliance with our tax obligations. Known risks are monitored for business and legislative changes which may impact them and changes to processes or controls are made when required. As a multinational group operating in an increasingly complex and developing tax environment, some risk is unavoidable. Nevertheless, the level of risk which we are prepared to accept is consistent with our objective of achieving certainty with regard to our tax affairs.
When entering into commercial transactions we seek to utilise available tax incentives, reliefs, and exemptions in line with, and in the spirit of, applicable tax law and prevailing practice. We observe guidelines published by the Organisation for Economic Co-operation and Development (OECD) and endeavour to conduct intercompany transactions on an arm’s length basis. We do not undertake tax planning unrelated to commercial or strategic transactions, nor do we undertake tax planning that is contrived or artificial. We seek to foster positive relationships with tax authorities and to undertake all dealings with tax authorities in a professional, courteous, and timely manner. We aim to be clear and proactive in our interactions with tax authorities. Alongside our Corporate Criminal Offence Policy, our Speak Out Policy and whistleblowing hotline are available in the event that concerns are raised about our business conduct and integrity in relation to tax matters. No specific concerns were raised in this respect through these channels in FY23. We do not currently report on assurance metrics specifically related to tax matters however this is an area that we will consider for future development. Further description of the risk and its potential impact as well as the steps we take to mitigate the risk are set out in the Risk and Governance section of this report.
During our audit process, we rigorously check potential human affairs responsibly, which means ensuring that we pay the right rights and modern slavery risk indicators such as restriction and fair amount of tax at the right time in the countries in which on freedom of movement, forced labour, young/child labour, we operate, in compliance with local and international law. We employment fee (if any being charged), unauthorised deduction believe this sits comfortably alongside our business purpose from workers’ wages, no procedure to raise grievance for human to deliver growth and long-term value for our stakeholders right violation, withholding workers payment and any form of whilst also maintaining high standards of ethics, honesty and discrimination by employer. integrity, managing our impact on the environment, developing There were no confirmed incidents regarding human rights our colleagues, and enhancing the communities across our impacts in FY23. supply chain.
Pepco Group has a Speak Out Policy and provides colleagues across the Group various mechanisms by which to report inappropriate conduct, including an external independent reporting facility for whistleblowing. The Group selected SafeCall, a provider with significant experience in this space, which offers a safe and confidential reporting environment and multiple reporting channels. Underpinned by the ability to provide their service in a wide range of languages, this allows the reporter to explain their concerns in the dialect they are most comfortable with, resulting in higher quality reports which facilitate the investigation and resolution.
23 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Without core online operations, Pepco Group does not hold significant amounts of customer data. Nonetheless, strong data controls, which involve handling customer data with care and respect, are essential in protecting the information we do hold. Implementing robust and responsible data protection and privacy measures are essential to ensure that Pepco Group meets regulations and protects customer and supplier confidentiality and security of personal information. We demonstrate commitment to our customers by prioritising data protection.
Our operating companies have comprehensive data and cyber security policies in place, with dedicated cyber security specialists and Data Protection Officers, to protect data and information infrastructure. The Group is subject to significant data protection regulation (e.g. GDPR) and any breaches could result in significant customer reputational damage and fines/penalties as well as costs to rectify mistakes.
The Group is committed to having the right technical and operational controls in place and developing those further to ensure the security of the data we manage. This commitment is demonstrated by the various data protection committees and teams across the Group. Risk management controls are operational such as data protection impact assessments, a statutory requirement when embarking on projects involving the processing of personal data. Processes in respect of individual rights are also active. As we move towards a more centralised way of working in the coming months, we look to open lines of communication between the operating companies, further align teams, functional accountability, policies and frameworks and improve our overall efficiency.
No filings which meet the Supervisory Authorities’ threshold for severe breaches have been submitted in FY23.
Working across the Group and with our partners and stakeholders to drive efficiencies and minimise the environmental impacts of our business, our value chain and our products.
We recognise that the actual and potential environmental impacts of our operations, both as a Group and throughout our supply chain, are wide-reaching. These include energy and resource use, carbon emissions, water use, waste generation and biodiversity. However, as a result of our materiality assessment, we have prioritised the most material for the purposes of our reporting and therefore focus on climate and emissions and waste.
The Group’s activity generates greenhouse gas emissions through operations (stores, warehousing and shipping), products and product packaging. We are committed to minimising the environmental impact involved in the manufacturing, transportation, storage and consumption of the products we sell. The main direct sources of emissions within our value chain are electricity in our stores, warehouses and distribution centres (DCs) and fuels used in the transportation of goods.
By taking a responsible and appropriate approach to environmental management both within the Group and working with our partners and stakeholders, we can reduce environmental risks and negative impacts.
The Group’s principal source of water usage is embedded water – in our products, rather than water used in our store or distribution operations – therefore, whilst it is not included as a material topic, we have included an overview of our approach below. One way we can influence the environmental impacts throughout our value chain is through supplier training – see the supply chain section below for more detail.
24 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023# Sustainability continued
In FY23 we have further developed our approach to carbon reporting by standardising our data templates and improving our data collection processes. We have also brought in external advice to ensure consistency of approach and methodology between our operating companies. This is in preparation of data collation at Group level and setting consistent goals across the Group.
As one of our top materiality issues, we will step up our focus on addressing climate risks and carbon emissions in FY24.
Actions taken to manage climate and carbon emissions are as follows. Many of these environmental initiatives are equally impactful at Group strategy level in our efforts to optimise our operations.
Poundland has upgraded its whole refrigeration fleet with doors, increasing energy efficiency by 80%. We are also using messaging on the fridge doors to communicate to our customers about energy savings. Almost all of our stores are now using energy efficient LED lighting and all our new stores install LED lighting. In FY24, solar panels will be installed at two of our UK DCs.
Poundland sources 100% renewable electricity. The Pepco Energy Committee is developing renewable energy sourcing strategies across all 21 European markets. This is quite challenging as there is often a lack of renewable energy availability in some markets.
As part of our commitment to driving progress across our ESG initiatives and improving transparency and disclosure on an annual basis, we have continued reporting according to the EU Taxonomy and commenced reporting in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) in FY23.
EU Taxonomy is a cornerstone of the EU’s sustainable finance framework and an important market transparency tool. It helps direct investments to the economic activities most needed for the transition to a low-carbon economy, in line with the European Green Deal objectives. The Taxonomy is a classification system that defines criteria for economic activities that are aligned with a net zero trajectory by 2050 and the broader environmental goals other than climate. It is a key part of the EU Corporate Sustainable Reporting Directive (CSRD).
Under the Taxonomy, economic activities that qualify as environmentally sustainable are those that: (i) contribute substantially to any one of six environmental objectives using science-based criteria; (ii) cause no significant harm to any of the other environmental objectives; (iii) ensure compliance with minimum social safeguards and (iv) meet the technical eligibility screening criteria that have been set by the Commission.
Companies must disclose specific KPIs – turnover, capital expenditure (capex) and operating expenditure (opex) – which indicate the portion of their economic activities which are environmentally sustainable. In addition to these KPIs, this section also sets out our methodology and approach and additional explanatory information.
A summary of the KPIs required to be reported under the Taxonomy is set out in the following tables. For the period under review, economic activities which contribute to two of the six environmental objectives are in scope for reporting: (i) climate change mitigation; and (ii) climate change adaptation. We will report against the other four environmental objectives where appropriate next year.
In order to present the required KPI disclosures we have assessed our activities in terms of Taxonomy eligibility and Taxonomy alignment under the following methodology:
The percentage of eligible capex is calculated by dividing the Taxonomy eligible capex as described above, by total capex, as defined in International Financial Reporting Standards.
The energy management strategies in place at our retail operating companies increase the efficiency and sustainability of energy supply in our stores and distribution centres, thereby reducing the carbon intensity of our operations. Through the Sustainability and Energy Committees within our operating companies, energy efficiency projects are identified, implemented and monitored. The Committees meet regularly to review progress and report to management on achievements.
| FY23 | FY22 | YoY | |
|---|---|---|---|
| Absolute | 101,674 tCO2e | 106,214 tCO2e | -4.3% |
| 1,032 TJ | |||
| energy | |||
| consumption | |||
| Intensity | 18.0 tCO2e/€m | 22.0 tCO2e/€m | -18.3% |
| turnover | turnover | ||
| -4.0 tCO2e/€m |
We have seen a significant improvement in both absolute terms and the intensity of carbon emissions. This is due to moving our UK operations onto renewable energy for the majority of those sites. We will work in FY24 to transition more of our sites across Europe to renewable power.
In FY24, we will extend our emissions reporting to scope 3 for the whole Group and use the information to build a low-carbon strategy and Group-wide carbon emission goals and KPIs. In line with many companies, we expect the majority of our carbon emissions to reside in products, their packaging and transport to our stores and DCs. We will develop a net zero strategy covering scopes 1, 2 and 3 with an associated decarbonisation roadmap. The strategy and goals will be reviewed and agreed at the ESG Executive Committee and progress against the goals will be reported to the Executive Committee and the Board quarterly.
Projects contributing to the reduction of scope 1, 2 and 3 carbon emissions will be managed through the Sustainability and Energy Committees at the operating company level.
In-store refrigeration accounts for 5% of Poundland scope 1 and 2 carbon emissions. In FY23, we invested in doors for all our in-store refrigeration. This has increased energy efficiency on average, per store by 80%. We have also added stickers to the doors – using this as a way to engage our customers in our sustainability strategy.
Poundland has achieved its zero waste to landfill goal two years earlier than planned, this was achieved through initiatives including launching a waste management guide, and clear in-store signage to enable colleagues to better segregate waste. A revised food markdown policy was implemented, and a new unsold food policy introduced which is offered to colleagues at the end of the day.
We have a role in decarbonisation through being more efficient with our use of energy, switching to renewable forms of energy and reducing waste throughout our product lifetimes. We can influence our suppliers to reduce their carbon footprints and engage with our customers to help them participate in a lower carbon world.
Sustainability continued
Greener environment continued
Energy usage and carbon emissions data
In FY23 we have further developed our approach to carbon reporting by standardising our data templates and improving our data collection processes. We have also brought in external advice to ensure consistency of approach and methodology between our operating companies. This is in preparation of data collation at Group level and setting consistent goals across the Group.
As one of our top materiality issues, we will step up our focus on addressing climate risks and carbon emissions in FY24.
Actions taken to manage climate and carbon emissions are as follows. Many of these environmental initiatives are equally impactful at Group strategy level in our efforts to optimise our operations.
Energy efficient stores and DCs
Poundland has upgraded its whole refrigeration fleet with doors, increasing energy efficiency by 80%. We are also using messaging on the fridge doors to communicate to our customers about energy savings. Almost all of our stores are now using energy efficient LED lighting and all our new stores install LED lighting. In FY24, solar panels will be installed at two of our UK DCs.
Sustainable energy
Poundland sources 100% renewable electricity. The Pepco Energy Committee is developing renewable energy sourcing strategies across all 21 European markets. This is quite challenging as there is often a lack of renewable energy availability in some markets.
Efficient logistics: DC to store, employee commuting and fuel sourcing
As part of our commitment to driving progress across our ESG initiatives and improving transparency and disclosure on an annual basis, we have continued reporting according to the EU Taxonomy and commenced reporting in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) in FY23.
EU Taxonomy is a cornerstone of the EU’s sustainable finance framework and an important market transparency tool. It helps direct investments to the economic activities most needed for the transition to a low-carbon economy, in line with the European Green Deal objectives. The Taxonomy is a classification system that defines criteria for economic activities that are aligned with a net zero trajectory by 2050 and the broader environmental goals other than climate. It is a key part of the EU Corporate Sustainable Reporting Directive (CSRD).
Under the Taxonomy, economic activities that qualify as environmentally sustainable are those that: (i) contribute substantially to any one of six environmental objectives using science-based criteria; (ii) cause no significant harm to any of the other environmental objectives; (iii) ensure compliance with minimum social safeguards and (iv) meet the technical eligibility screening criteria that have been set by the Commission.
Companies must disclose specific KPIs – turnover, capital expenditure (capex) and operating expenditure (opex) – which indicate the portion of their economic activities which are environmentally sustainable. In addition to these KPIs, this section also sets out our methodology and approach and additional explanatory information.
A summary of the KPIs required to be reported under the Taxonomy is set out in the following tables. For the period under review, economic activities which contribute to two of the six environmental objectives are in scope for reporting: (i) climate change mitigation; and (ii) climate change adaptation. We will report against the other four environmental objectives where appropriate next year.
Approach
In order to present the required KPI disclosures we have assessed our activities in terms of Taxonomy eligibility and Taxonomy alignment under the following methodology:
The percentage of eligible capex is calculated by dividing the Taxonomy eligible capex as described above, by total capex, as defined in International Financial Reporting Standards.
Climate and emissions continued
The energy management strategies in place at our retail operating companies increase the efficiency and sustainability of energy supply in our stores and distribution centres, thereby reducing the carbon intensity of our operations. Through the Sustainability and Energy Committees within our operating companies, energy efficiency projects are identified, implemented and monitored. The Committees meet regularly to review progress and report to management on achievements.
| FY23 | FY22 | YoY | |
|---|---|---|---|
| Absolute | 101,674 tCO2e | 106,214 tCO2e | -4.3% |
| 1,032 TJ | |||
| energy | |||
| consumption | |||
| Intensity | 18.0 tCO2e/€m | 22.0 tCO2e/€m | -18.3% |
| turnover | turnover | ||
| -4.0 tCO2e/€m |
We have seen a significant improvement in both absolute terms and the intensity of carbon emissions. This is due to moving our UK operations onto renewable energy for the majority of those sites. We will work in FY24 to transition more of our sites across Europe to renewable power.
In FY24, we will extend our emissions reporting to scope 3 for the whole Group and use the information to build a low-carbon strategy and Group-wide carbon emission goals and KPIs. In line with many companies, we expect the majority of our carbon emissions to reside in products, their packaging and transport to our stores and DCs. We will develop a net zero strategy covering scopes 1, 2 and 3 with an associated decarbonisation roadmap. The strategy and goals will be reviewed and agreed at the ESG Executive Committee and progress against the goals will be reported to the Executive Committee and the Board quarterly.
Projects contributing to the reduction of scope 1, 2 and 3 carbon emissions will be managed through the Sustainability and Energy Committees at the operating company level.
In-store refrigeration
In-store refrigeration accounts for 5% of Poundland scope 1 and 2 carbon emissions. In FY23, we invested in doors for all our in-store refrigeration. This has increased energy efficiency on average, per store by 80%. We have also added stickers to the doors – using this as a way to engage our customers in our sustainability strategy.
Waste management
Poundland has achieved its zero waste to landfill goal two years earlier than planned, this was achieved through initiatives including launching a waste management guide, and clear in-store signage to enable colleagues to better segregate waste. A revised food markdown policy was implemented, and a new unsold food policy introduced which is offered to colleagues at the end of the day.
Our contribution to environmentally sustainable activities
We have concluded that our main activities (retail of FMCG, GM to buildings) – installation of electric vehicle charging points at our Poundland head office and warehouse sites; and
– 7.5 Installation, maintenance and repair of instruments and devices for measuring, regulation and controlling energy performance of buildings – installation of smart meters and other building and equipment management systems which improve energy efficiency.
| FY23 | Share of eligible activities | Share of non-eligible activities | |
|---|---|---|---|
| Turnover | 0% | 100% | |
| Capex | 4% | 96% | |
| Opex | 0% | 100% | |
| FY23 | Share of aligned activities | Share of non-aligned activities | |
| Turnover | 0% | 100% | |
| Capex | 0% | 100% | |
| Opex | 0% | 100% |
The EU Taxonomy for Sustainable Activities (the Taxonomy) is a classification system established to determine which economic activities can be considered environmentally sustainable. It sets out criteria for six environmental objectives:
To qualify as Taxonomy-eligible, an economic activity must substantially contribute to at least one of the six environmental objectives and meet the minimum safeguards and do no significant harm criteria.
The main revenue-generating activity of the Pepco Group – retail of FMCG, GM, and apparel goods – is not included in the activities listed in the Taxonomy. Activities that have been identified as complying with the Taxonomy are aligned to one of the two environmental objectives currently applicable: (i) climate change mitigation; or (ii) climate change adaptation – ensuring no double counting between objectives. With our current records and datasets, it has proven to be difficult to establish alignment with the technical criteria (i.e. we have installed low-energy LED lighting in many stores in FY23 however, our facilities records do not confirm if the bulbs meet the exact energy-rating requirements stated in the technical screening criteria). In FY24, we will ensure that future low-energy installations (air-conditioning and LED lighting) state their energy ratings in line with the screening criteria. In order to ensure compliance with Taxonomy reporting requirements in the future, we will continue to monitor updates to the existing regulation and inclusion of new economic activities, as well as review economic activities listed for the remaining four objectives. The “Transition to a circular economy” objective is expected to be particularly relevant to the Group. To prepare for the inclusion of additional economic activities and reporting against all six environmental objectives, we will continue to review the way in which information is classified and organised in our finance and IT systems. We will also identify opportunities for improvement in collecting and managing information to enable better reporting in the future.
Currently, our Taxonomy-eligible turnover is 0% and Taxonomy-eligible opex is 4%. However, we believe our commitment to conducting business in an environmentally sustainable way, as described in this section, enables the Group to make a broader contribution to the EU’s environmentally sustainable objectives. It should be noted that the Taxonomy is subject to periodic revisions, which in the future may define a separate category and specific technical qualification criteria for retail activities. For the time being, the Group has provided the appropriate disclosures in relation to its supporting activities that are included in the Taxonomy.
Following a review of activities listed in the Taxonomy, it was concluded that the main revenue-generating activity of the Pepco Group – retail of FMCG, GM, and apparel goods – is not included in the current regulation and therefore 0% eligible turnover is reported.
Capex spend on activities related to the purchase of output by Group companies from Taxonomy eligible economic activities that support our core activity was identified. It was determined that these activities should be allocated to the climate change mitigation objective, as the contribution to climate change adaptation objective is of lesser importance and the Taxonomy does not allow for double counting. This capex spend relates to the following categories:
27 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Sustainability continued
Greener environment continued
We know climate change is a growing future risk to people, communities and businesses, but it also provides opportunities for new products and services. We have provided climate-related financial disclosures in line with the UK Companies Act for Poundland; our UK business. A summary against the 4 key sections, aligned to the 11 recommendations is below. As a business that is not listed in the UK, we are reporting as a large company that exceeds the relevant disclosure threshold.
Poundland implemented a formal environmental sustainability strategy. The strategy was formally approved by the Poundland Board and a management level Sustainability Committee was created to oversee and drive progress. Next year, these processes will be further enhanced in alignment with TCFD recommendations.
In line with the recommendations of the TCFD, we undertook scenario analysis to identify a series of plausible potential future climate-related pathways. In this, our first TCFD report, we have balanced being overly complex with creating a tool that would be useful to our finance and risk teams. We followed three key steps in its development; firstly, we identified three credible potential temperature pathways. Secondly, we applied a timescale that is relevant to how we manage risk and strategy today and, thirdly, we reviewed the long list of transition and physical risks and opportunities to identify those most material to us.
Our current environmental sustainability strategy manages and mitigates any short-term climate-related risks. As such, our overall analysis is that these risks are not yet business critical today, although require continued mitigating actions as climate impacts become more material. This approach is intended to ensure that the business is well prepared for key future risks in the medium to long term. Key future risks are:
In our full report we have indicated a timescale, potential risks and mitigating actions for each of the key areas. In FY23, risk processes were centralised at Group level. We have a central risk register and process for all operating companies, supported by the Risk and Audit team in each business unit. From FY24, it is intended to continue to build on existing climate-related risks across all Group entities. The outcomes of our TCFD scenario planning, both physical and transitional risks, will help to inform this process.
We established a set of Group-wide environmental and social goals, with corresponding KPIs in FY22, as seen at the front of this section. These built on the metrics already developed by Poundland in 2020. We report on an annual basis and have continued to develop our approach to ESG reporting in FY23. We consider the external disclosure of Group-level KPIs and goals to be an integral part of communicating the progress and development of our ESG strategy to stakeholders.
The Group’s activity generates waste through both products and product packaging, in its supply chain, in store, distribution and head office operations and tertiary waste in customer households. Efficient and effective stock management is the most important tool the Group uses to minimise product waste in our stores and distribution lines and reduce our impact on the environment while ensuring commercially efficient operations. We are also conscious of the fact that wasteful packaging can contribute to pollution in a variety of ways and customers increasingly seek more sustainable packaging. Avoiding or minimising waste is a key element of our approach to sustainability and is covered in the Better Products section.
Pepco Group takes a responsible approach to waste management. This involves working with our suppliers to minimise packaging waste, reducing the use of plastic and reusing and recycling wherever possible – see ‘Product packaging’ below for further detail. However, it is also important to note that packaging can play an important role in minimising waste – particularly related to food. We work with our specialist waste management suppliers to ensure that waste is recycled correctly and, within our Poundland stores, we achieved our zero waste to landfill goal two years early and have now set a goal to reduce all waste by 50% by 2024, from a baseline set in 2019.
28 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
As our operating companies are present in different countries with different national recycling infrastructure and capabilities, we have several different recycling and waste management programmes across the 21 markets. In the UK, once again we hit our zero waste to landfill goal. In FY23, 21,327 tonnes of waste was generated, with 99.7% of this being diverted from landfill and 55 tonnes directed to disposal. Below we describe some of the activities we have undertaken to reduce waste and increase recycling. In FY24, we intend to set a Group-wide goal, sharing best practice and programmes across all operating companies and countries.
In March and April 2023, we organised a second clothing collection event in selected stores in Italy and Spain. This was the second edition of the campaign “#Old clothes, New stories” held in collaboration with our social partner Humana People to People. In total, we collected 1,316 kg of used clothing in over a month, of which as much as 70% will be reused. Reuse and recycling can have many positive environmental impacts which include avoiding CO2 emissions, water consumption and use of pesticides and fertilisers.
We want to increase the percentage of own-brand and private label products that we offer to customers as a way to contribute to their sustainable lifestyles. We currently define this as products with reduced packaging, those made from recycled or environmentally-preferable materials, or products that are externally accredited. In FY24, we will further refine this definition within product categories.# Sustainability continued
In FY23, we initiated a major IT project to improve our ability to collect and control product attribute data from our suppliers; this will enable us to closely monitor our progress and provides controls in our supply chain and procurement processes. We are committed to working with partners across our supply chain to monitor and improve environmentally responsible production methods.
While the Group’s direct operations have limited impact on global biodiversity and our own water use is not considered to be specifically material, the impacts of the Group’s supply chain and manufacturing of products carry greater potential for negative impacts. Biodiversity and water availability support life, our economies and enhance the wellbeing of human and animal populations across the globe. We look to manage these aspects through operational efficiency programmes, supplier environmental engagement or our participation in industry initiatives and accreditation processes.
In addition to our focus on environmental protection, Pepco Group attaches the highest importance to the quality and safety of our products. Our quality assurance processes ensure that our products comply with safety standards and current legislation. Our suppliers receive clear instructions on legal requirements and product specifications.
In order to verify whether the suppliers comply with our recommendations, we run a multi-stage testing system. In addition to product testing performed by suppliers, we conduct our own tests in external laboratories in Asia and Europe to check whether the supplier complies with all these standards and work with independent partners to increase the level of scrutiny.
A good example of this is the increasing number of products with certifications such as Recycled Claim Standard (RCS) or Global Recycled Standard (GRS) for recycled materials, Organic Content Standard (OCS) or Global Organic Textile Standard (GOTS) for cotton, Forest Stewardship Council for products from forestry, such as paper or wood, or Oeko-TEX for textiles.
In FY23, the Group became a proud member of the Better Cotton Initiative (BCI) – the largest sustainability programme in the world formed of over 2,500 multi-stakeholder members, which aims to support farming communities socially, environmentally and economically. In the 2022-2023 cotton season, the Better Cotton programme reached more than 2.8m cotton farmers in 22 countries and trained them to use water efficiently, care for soil health and natural habitats, reduce use of the most harmful chemicals and respect workers’ rights and wellbeing. Pepco is the first Poland-based company which is part of this initiative. By sourcing cotton through Better Cotton, Pepco contributes to raising the standards of cotton production, which translates into the wellbeing of farmers and the local environment. By 2025, our target is to source at least 25% of our cotton from sustainable crops.
In addition to responsibly sourced cotton, we provide our customers with a range of affordable, sustainable product options across our clothing, general merchandise and FMCG lines including Oeko- Tex and Forest Stewardship Council (FSC) eco-certified products, recycled polyester clothing and vegan and vegetarian ranges. We label those products accordingly, to help our customers clearly identify more sustainable choices and show our commitment to environmentally responsible production.
Some of our own-brand clothing has been a member of the Better Cotton Initiative (BCI) for a number of years. We have extended this further across the whole Group, with Pepco achieving membership in FY23 for all own-brand clothing and textiles. Through our retail partnerships with Better Cotton, the tonnage of cotton sourced under the BCI scheme is recorded via the BCI membership platform each calendar year, independently assessed and subsequently reported at Group level, providing an external membership validation of this data point. By extending the membership and reporting across more product lines, we have in effect re-baselined our goal. This does mean in FY23, our overall percentage of BCI- sourced fibres has reduced to (an estimated) 21% in FY23 from 40% in FY22 (21% now applies to the whole group-sourced cotton fibres. 40% applied to FY22 Poundland-sourced fibres). However, we believe that the more comprehensive goal and wider membership will enable us to offer more sustainable products to more customers. Our clothing range also includes organic cotton items sourced under the Global Organic Textile Standard (GOTS) and the Organic Content Standard (OCS).
Customer shopping bags are a highly visible indicator of waste and plastic use, so making sure they are recyclable and made of recycled material is an important first step. To further encourage customers to reuse, Poundland have begun to introduce their new 100% recycled and recyclable bag for life.
In the previous section, we described our focus on waste prevention and recycling activities. In addition to this, our revised packaging handbook is applied to all our suppliers through PGS and used by our buying teams across the Group.
Clear packaging materials labelling provides our customers with information on how they can better recycle packaging at home – in the UK we have adopted the OPRL guidelines and are rolling them out across our own-label products.
Pepco Group has three main aims when it comes to packaging:
We implemented a comprehensive packaging policy in FY23 in response to the need for collective action in limiting plastic pollution and driving towards a circular economy. The policy is aimed at identifying and eliminating all unnecessary or problematic packaging through design, innovations, and use of alternative resources. We also want to reduce weight and increase the recyclability of our packaging among other factors. In FY24, we will establish Group-wide goals against each of these aims. Additionally, in order to learn about the best industry standards, we joined the Polish Plastic Pact in February of 2023.
In FY23, we initiated a major IT project to improve our ability to – “Every footprint is better than a carbon one” is a campaign collect and control product attribute data from our suppliers; this organised by Pepco Croatia, the aim of which was to educate will enable us to closely monitor our progress and provides controls customers and young people about the importance of caring in our supply chain and procurement processes. We are committed for the environment. The event included: interactive workshops for working with partners across our supply chain to monitor and for students conveying the importance of forests in our lives improve environmentally responsible production methods. and voluntary action of reforestation, in which 3,000 trees were planted. While the Group’s direct operations have limited impact on global biodiversity and our own water use is not considered – “WE DO” was a one-day environmental clean-up campaign to be specifically material, the impacts of the Group’s supply organised by our colleagues from Pepco Lithuania. Its aim chain and manufacturing of products carry greater potential was to remove rubbish and waste from public areas on the for negative impacts. Biodiversity and water availability support negative impacts. Biodiversity and water availability support life, our economies and enhance the wellbeing of human and animal populations across the globe. We look to manage these aspects through operational efficiency programmes, supplier environmental engagement or our participation in industry initiatives and accreditation processes.
In addition to our focus on environmental protection, Pepco Group attaches the highest importance to the quality and safety of our products. Our quality assurance processes ensure that our products comply with safety standards and current legislation. Our suppliers receive clear instructions on legal requirements and product specifications.
In order to verify whether the suppliers comply with our recommendations, we run a multi-stage testing system. In addition to product testing performed by suppliers, we conduct our own tests in external laboratories in Asia and Europe to check whether the supplier complies with all these standards and work with independent partners to increase the level of scrutiny.
A good example of this is the increasing number of products with certifications such as Recycled Claim Standard (RCS) or Global Recycled Standard (GRS) for recycled materials, Organic Content Standard (OCS) or Global Organic Textile Standard (GOTS) for cotton, Forest Stewardship Council for products from forestry, such as paper or wood, or Oeko-TEX for textiles.
As part of our focus on providing value to our customers, we want to address the myth that price is a barrier to sustainable and ethically produced products. One of the most impactful ways we can positively contribute to our customers and communities is through offering a larger range of affordable and sustainable products available in our stores.
We know that, through the depletion of natural resources, apparel, general merchandise, food and beverage and personal care products carry potentially negative environmental impacts. The societies in which we sell our goods are becoming progressively more interested in product sustainability and, whilst affordability continues to be a key concern amongst our customers, customer research indicates an increasing focus on environmentally and ethically sound products and practices.
29 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Sustainability continued
Better products continued
Better Cotton Initiative
In FY23, the Group became a proud member of the Better Cotton Initiative (BCI) – the largest sustainability programme in the world formed of over 2,500 multi-stakeholder members, which aims to support farming communities socially, environmentally and economically. In the 2022-2023 cotton season, the Better Cotton programme reached more than 2.8m cotton farmers in 22 countries and trained them to use water efficiently, care for soil health and natural habitats, reduce use of the most harmful chemicals and respect workers’ rights and wellbeing. Pepco is the first Poland-based company which is part of this initiative. By sourcing cotton through Better Cotton, Pepco contributes to raising the standards of cotton production, which translates into the wellbeing of farmers and the local environment. By 2025, our target is to source at least 25% of our cotton from sustainable crops.
In addition to responsibly sourced cotton, we provide our customers with a range of affordable, sustainable product options across our clothing, general merchandise and FMCG lines including Oeko- Tex and Forest Stewardship Council (FSC) eco-certified products, recycled polyester clothing and vegan and vegetarian ranges. We label those products accordingly, to help our customers clearly identify more sustainable choices and show our commitment to environmentally responsible production.
Some of our own-brand clothing has been a member of the Better Cotton Initiative (BCI) for a number of years. We have extended this further across the whole Group, with Pepco achieving membership in FY23 for all own-brand clothing and textiles. Through our retail partnerships with Better Cotton, the tonnage of cotton sourced under the BCI scheme is recorded via the BCI membership platform each calendar year, independently assessed and subsequently reported at Group level, providing an external membership validation of this data point. By extending the membership and reporting across more product lines, we have in effect re-baselined our goal. This does mean in FY23, our overall percentage of BCI- sourced fibres has reduced to (an estimated) 21% in FY23 from 40% in FY22 (21% now applies to the whole group-sourced cotton fibres. 40% applied to FY22 Poundland-sourced fibres). However, we believe that the more comprehensive goal and wider membership will enable us to offer more sustainable products to more customers. Our clothing range also includes organic cotton items sourced under the Global Organic Textile Standard (GOTS) and the Organic Content Standard (OCS).
Customer shopping bags are a highly visible indicator of waste and plastic use, so making sure they are recyclable and made of recycled material is an important first step. To further encourage customers to reuse, Poundland have begun to introduce their new 100% recycled and recyclable bag for life.
30 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Serving our customers and communities. Valuing our people, contributing to a strong society and placing the Pepco Group at the heart of a responsible and efficient supply chain.
Our priority areas
Our sourcing business, PGS, manages a supply chain comprising 385 vendors using 743 factory production sites and is responsible for sourcing 88% of our own-label products. To simplify our sourcing operations, PGS was further integrated into the Pepco business in FY23, which will help maximise and align the buying cycle, as well as help drive further operating efficiencies. We work with our suppliers to develop sustainable product options which meet our customers’ preferences at an affordable price point, which is made possible through the commercial advantage provided by PGS.
Having a vertically integrated sourcing model provides the Group with enhanced visibility across the overall supply chain and optimises the level of control and coordination we have with our sourcing and buying teams, enabling better oversight and influence over the social, ethical and environmental management practices of our partners and improved risk mitigation.
Supplier performance in FY23 – 100% of new suppliers were screened using Ethical Trading Initiative-aligned criteria. In FY23, the Group developed a voluntary set of Pepco Group – 1,548 audits were performed at 1,154 factories. Ethical audits Environmental Guidelines For Suppliers which cover the following were undertaken either by our own compliance team or by key areas: third-party audit companies.
– environmental management system;
– We supported improvement in standards at 175 factories, successfully remediating critical issues and enhancing their risk
– environmental regulations; ratings from CAT 5 or CAT 4 to CAT 3 or above.
– recording and minimising greenhouse gases (GHGs);
– 97% of our factories categorised as no to medium risk – CAT 1, – waste management;
CAT 2 or CAT 3.
– increased water usage efficiency;
– Demonstrating the strength of our stance, contracts with 22 factories were terminated for repeated infringements of our – chemical management;
Code of Conduct and violating our Zero Tolerance Policy.
– safeguarding natural resources and biodiversity;
– New business placement was restricted in 137 factories with – sustainable packaging; and
high-risk violation e.g. CAT 4 or CAT 5 rating.
– sustainable raw material sourcing for products.
We work with our suppliers to develop sustainable product options which meet our customers’ preferences at an affordable price
Environmental due diligence and auditing point, which is made possible through the commercial advantage
We have introduced this environmental due diligence to our provided by PGS.
supplier selection process. We intend to audit new suppliers
See ‘Better products’ on page 29 for more information for compliance against the environmental guidelines, allowing us to
identify and address any current or potential negative environmental impacts within our supply chain, with any
Exceptional employer improvement areas provided in a CAP. This will further help us to mitigate environmental risks in our supply chain and drive towards
Investing in people to support growth is one of our four strategic our future Group-wide Net Zero strategies.
pillars. By striving to be an exceptional employer, we aim to support our colleagues and ensure that they thrive – we believe
Upon identification of current environmental impacts, our that, in order to serve our customers well, our employees should dedicated team creates a comprehensive CAP, which is love what they do.
meticulously designed to remediate issues and prevent their
recurrence in the future. Together, we strive to implement As a large retail organisation spanning multiple countries and
appropriate measures that prevent, mitigate, or remediate any employing more than 47,000 colleagues, we absolutely recognise
adverse effects. Through these proactive initiatives, we aim to set the vital role they play in supporting our growth and continued
a benchmark for environmental responsibility within our industry success. We feel a real responsibility to work with them in creating
and contribute to a sustainable future. We are fully committed an environment where they experience a sense of value and
to expanding our efforts in upskilling an even greater number support where they can truly be the best version of themselves.
of suppliers and factories, ensuring they possess the necessary Opportunities to progress internally are actively encouraged
knowledge and understanding of critical environmental practices and we work together to enable both personal fulfilment and
and principles. opportunities for progression.
In December 2022, we audited a ready-made knit garments manufacturer in the outskirts of Dhaka, Bangladesh. The factory failed our initial audit for these reasons:
Following our audit, the factory management started taking the necessary corrective action. We worked closely with the factory in the remediation process by reviewing their CAP progress report and guiding them to take appropriate corrective action. As a result, the following improvements were made:
Above: 2023-04-03: Photo of fire alarm control obtained from the local Government authority. panel of factory’s Addressable Smoke detection
In April 2023, on request of the supplier, we arranged an unannounced & fire alarm system. follow-up audit in the factory and the factory was assessed as CAT 3 by resolving all Zero Tolerance issues. Due to our audit process, living Below: 2022-12-13: No Addressable Smoke detection conditions of several workers were improved in the factory. or fire alarm system installed.
34 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Our Group gender pay gap was conducted across all Company entities and according to ESRS methodology¹, is 39%. While we acknowledge that the gender pay gap is a result of the natural distribution of our employees across different business areas, with a significant representation of women in our store staff, we recognise our responsibility to ensure that all colleagues are treated fairly and receive support in their career growth.
Our performance management process encourages career and development conversations, promoting employees’ ideas and thoughts regarding their career journeys while ensuring managerial support throughout the process. This has resulted in over 2,709 internal promotions in our Pepco operating company during FY23 among our staff, of which, over 91% are women.
The remuneration for store positions, which is our biggest group We have a combined commitment throughout the Group to of colleagues, is based on standardised rates, which are also ensure that we foster a great experience for all our colleagues,
published and available to our staff. For other positions, we regardless of their role and location. This includes, but is not limited rely on grading methodologies to ensure effective evaluation. to, fair and regularly reviewed competitive pay, providing career Additionally, we use market benchmark data to formulate progression opportunities, effective employee engagement, our Salary Policy and meticulously monitor our remuneration creating an inclusive environment with clear and supportive
practices. Comparing same level positions, we see no significant people policies. Furthermore, we place a strong focus on the role discrepancies. Although different methodologies may currently of culture and leadership in shaping our colleagues’ experience.
be used across the Group, our goal for the next year is to work That’s why we’re dedicated to fostering a collaborative culture
towards adopting a single methodology. This transition will enable based on our core values that drive the right behaviours.
us to analyse the gender pay gap in a more detailed manner.
We continue to invest time and resources in making sure that our
This year we also introduced a Diversity & Inclusion Policy and leaders are well trained, building further on our established internal
kicked off the education with workshops for our leaders and suite of development programmes. It is important that access
Executive groups through our Leaders Forum event. Next year we to learning via different options including e-learning, classroom
plan to work on the Diversity & Inclusion strategy for Pepco to align delivery and support guides is accessible and enables everyone
with our colleagues in Poundland, further work on the gender pay to be confident in their role and provide support and guidance to
gap and unconscious bias training for hiring managers. their respective teams. To also adapt to our colleagues’ evolving needs of exploring various opportunities, we actively provide
Employee engagement various internal and external development options and career
Our colleagues receive the latest information about the Company advancement opportunities.
via the Pepconet intranet platform. They access information through a dedicated online platform called “Pepcopedia”. The
Our culture Pepco distribution centres also have daily briefings with shift
We implemented the Pepcoolture Masters to embed our values managers. Pepco’s head office staff also benefit from these
within the organisation and strengthen a daily appreciation initiatives together with online meetings with senior managers.
culture. Colleagues nominate others, who represent our values in The most important initiatives and achievements are summarised
daily life as a role model. During the first phase, there were over in the quarterly Pepco Voice, available to all Pepco employees.
1,200 nominations. Poundland surveys employees every year, while Pepco operates a full colleague survey every two years.
Developing our colleagues In FY23, the Poundland employee survey included a new question
An average of 12 hours of training was provided to employees about sustainability. We achieved a 78% response rate with 73%
annually. We are investing into regional training centres and agreeing with the statement – ‘I am aware of what initiatives we
providing tablets in each store to give access to a broader range are doing to be more sustainable and help the environment’.
of online training covering longer term career development,
customer service and e-learning.# Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
We introduced a “Pepcoolture Masters” programme in FY23 to promote Company culture and recognise employees who embody Pepco values: Collective bargaining agreements Pepco consistently collaborates with trade unions, work growth, team spirit, simplicity, respect, and love of the customer. councils, and representative groups across Europe, adhering to During the programme’s implementation in 16 markets, we emphasised national CBAs where applicable. Given the notable variations in a fundamental belief that “being appreciated every day at employee organisations throughout Europe, our most extensive work matters”. cooperation occurs in Spain and in Poland. In these countries, Nearly 1,200 nominations came in from across all markets. These were we conduct regular meetings with trade union representatives. submitted by peers, who highlighted nominees whose values are genuinely reflected in their actions. These sessions involve discussions on pertinent organisational projects and changes, employee health and safety, the review of In collaboration with our local coordinators, we announced 99 local emerging challenges, and consensus-building on alterations to winners in each of the three quarterly editions. This group included six employment terms. global winners, one for each value and one for Pepco Management team’s special prize. In the UK, we continue to work with our union partner, Usdaw. Our relationship is supported by a collective bargaining agreement (2012). The agreement covers all retail, driving, warehouse and stock colleagues (hourly paid) for negotiations, consultation and collaboration on wages and other aspects of work. We have a good relationship with the National Officer and at local level with the area organisers and shop stewards. We hold bi-annual National Joint Consultative Committee meetings led by the National Officer, and quarterly Health and Safety Committees. The agreement requires us to be transparent with our plans and we are where possible.
We discuss our top talents employees to report possible violations with regard to the violation and plan succession for key roles in organisation during regular of Company values, unfair treatment, discrimination, harassment, meetings with each ExCo. We have started a strategic project on sexual harassment or mobbing. the recruitment, onboarding and succession planning for stores to ensure high effectiveness and positive candidate satisfaction and to manage retention within the first few months of hiring. We’ve refreshed the performance and development process so that it focuses on feedback and people development. The processes have been implemented in all our stores and DCs.
1 ESRS S1-16: the male-female pay gap, defined as the difference between average gross hourly earnings of male paid employees and of female paid employees expressed as a percentage of average gross hourly earnings of male paid employees.
We continue to focus on diversity, equality and inclusion and regularly review our colleague data in all aspects, from attracting a diverse talent pool to collating feedback via the annual “Your Voice” survey enabling us to create an environment where everyone feels they belong. To drive progression and change, we empower colleagues at all levels to become Champions, playing an active role in driving an inclusive culture. We have a specific Parental Leave Policy applying to employees with at least one Health and safety year of continuous service in the UK and Ireland; in other countries As a retail organisation, we pay special attention to health and across Europe, we follow the relevant rules for parental leave. safety. Our general approach is focused on the operations, each As an employer, we are responsible for making reasonable market organisation has a team to manage all relevant health and adjustments to support colleagues. As we evolve to become safety matters. In each country we implement advanced health more tech-enabled, we identified the need to be more digitally and safety standards and comply with legal obligations. inclusive, introducing resources that will help visually impaired and neurodivergent colleagues. At Poundland, this has included the In our daily work, we strive to maintain a high safety standards, minimise potential risks and raise employee awareness regarding launch of “Recite Me” in FY23 on our colleague portals. safe working culture:
Supporting the wellbeing of our colleagues is an important element of our approach to responsible employment. We recently launched a Wellbeing and Inclusion Committee and use various channels to raise awareness with new dedicated wellbeing and inclusion pages on our internal portal.
36 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
To date 4,840 beneficiaries at 600 sports clubs have been supported Serving our customers and communities through our Kits 4 Kids programme, helping kids keep active through sports. At the core of our business model is our aim to provide value to our customers, which is confirmed by our stakeholders through 211 Make-A-Wish® wishes have been granted for children who don’t our materiality assessment. For us this means providing our have the luxury of time on their side. customers with affordable, high-value products, from convenient stores, sourced in an ethical and sustainable way. Given the 5,277 Tommy’s families have been helped to keep their babies safe. current inflationary environment, we are committed to supporting 124 children and young people at Whizz-Kidz have received life- customers in meeting the challenges of the cost-of-living crisis and changing mobility equipment. contributing to the raising of living standards in society. Across all our UK stores, “Pennies”, a digital charity box roll-out has Through its operations, the Group provides employment, now been completed giving customers the opportunity to donate development and investment opportunities in the communities where it operates resulting in a “multiplier” effect into the local economy and the livelihoods of local people. As part of its In October 2022, we launched a charity partnership with operations the Group also supports community-based initiatives Barretstown in the Republic of Ireland. Barretstown runs residential and charity work. camps for children with a serious illness. During the first year, €250,000 was raised and donated. Our operating companies have multiple community partnerships across our markets. These predominantly focus on supporting In PGS, our Asia sourcing operations, if an unauthorised vulnerable or sick children and their families – from providing subcontract is identified at a supplier, we impose a financial terminally ill children with fun days out to supporting literacy and penalty. The financial penalty amount is donated to our charity access to sports. We track these activities through our Poundland organisations which focus on children’s education and wellbeing: Foundation and “Pepcolandia” donation management process.
In FY23, the Poundland Foundation issued its first public report according to UK Fundraising Commission guidelines. £1.3m in grants were made to UK charities – see here for more details https://poundlandfoundation.org.uk. The School of Hope in Bangladesh and India provides free Local communities and charitable support education and lunch to students, as well as awareness training In each of our European markets, the Group and its operating on social issues, thus improving conditions for garment workers companies support projects aimed at equalising educational living near those schools. The schools also offer skills and training opportunities for children and young people from disadvantaged programmes for students’ family members to enable them to backgrounds, strengthening their personal development, mental achieve financial independence. Heart to Heart is a Shanghai- health and empowerment. based charity which provides corrective surgery for children with Some of the many projects supported during the year are congenital heart disease. described below: We are proud of the work we do to support communities around Poland: 8 summer camps were provided for 360 children through the world that are connected to our value chain. the care of Society of Children’s Friends.Romania: through the Concordia Humanitarian Association, Pepco In summary, at Pepco Group, we aim to democratise supported additional classes for 154 children in underprivileged sustainability for our customers by offering affordable choice communities in Prahova. and demonstrating that price is not a barrier to sustainable Croatia: a reforestation programme aimed at educating our and ethically produced products. As a large employer, we bring customers and young people about the importance of forests and employment and training opportunities to thousands of individuals climate change, planted 3,000 trees. in multiple countries. As a retailer serving over 57m customers per month, we develop engagement possibilities with a diverse Slovenia: the Pepco Life Academy programme educates teens range of communities and individuals across the world. We about human and citizen rights through a series of workshops. source products from many suppliers, all over the world, giving Serbia: workshops for children and youth on building self-esteem us the opportunity to bring positive impacts to the people and and educating on modern addiction diseases (i.e. internet games, economies in which we operate. Our joint strategic focus on shopping, betting). environmental and social responsibility drives us to improve our impact on the planet while creating benefits for society, both Bulgaria: “My future with art” project in cooperation with Fusion directly and indirectly. We are committed to delivering growth and Foundation educates children in different types of visual arts: long-term value for our stakeholders whilst also maintaining high fine, applied and craft, and presents various opportunities for standards of ethics, honesty and integrity, managing our impact professions related to the visual arts. on the environment, developing our colleagues, and enhancing In the UK, our Poundland Foundation continues to go from the communities across our supply chain. We commit to continuing strength to strength, supporting more families than ever with the our journey to becoming more mature in our ESG strategy and Kits 4 Kids grants programme and helping back the vital work of disclosures, aligning across the Group and building on the past achievements of Poundland and Pepco. our charity partners Make-A-Wish®, Tommy’s and Whizz-Kidz. Since we launched in May 2021, over £1.8m in grants has been awarded, supporting over 10,000 families in our communities. The Foundation provides help in three key areas: our national charity partnerships, the provision of community grants and inspiring Poundland colleagues, customers and suppliers to support causes they care about in their communities. 37 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
The Group’s risk management framework is designed to identify and manage, rather than eliminate, the risk of failure to achieve business objectives, and to provide reasonable, but not absolute, assurance against material misstatement or loss. The framework is designed to be sufficiently agile to respond to changes in macroeconomic and geopolitical circumstances. Our approach to risk management remains consistent with previous year, and addresses these risks in a conscious manner that increases the likelihood of achieving our strategy and business objectives. This proactive approach ensures risk management is part of our management conversations and is embedded in our processes which benefits our decision making and is essential to creating and preserving long-term value.
The Group Audit Committee, under delegated authority from the Group Board, is accountable for overseeing the adequacy and effectiveness of the Group’s risk management processes and ensures the Group Board and management are appropriately discharging their risk responsibilities. The Group Risk Management Team is responsible for defining the risk management framework and driving consistent application across the Group. The team constructively challenges and supports businesses and functions in following the risk methodology outlined in the Group risk management framework.
External
Top-down reporting
Group-level risks – Review and approval – Consolidation of significant risks from underlying by the Board and Principal risks and risk registers Audit Committee uncertainties – Overlay of Group-level risks – Full disclosure of – Review and principal risks and approval by – Review and agreement of the principal risks by uncertainties the Board and the Executive Directors Audit Committee – Review and approval by the Audit Committee – Full disclosure of principal risks and uncertainties
Business and functional risk registers – Development and ongoing maintenance of risk registers, including consideration of emerging risks, by business owners and leadership teams – Review and challenge of risk content and Bottom-up the quality of mitigation plans by the Group – Group Risk team Risk teams – Business and – Monitoring of risks associated with our operating functional companies review and challenge of risks at leadership forums leadership teams – Policy and Emerging risks and issues process owners – Monitoring emerging areas of change or issues that may become significant at a Group level
38 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
To ensure risks are consistently identified and managed, the Group’s risk appetite takes into account its wide geographical spread, careful financial management and commitment to long term value creation and is an expression of the level and type of risk that the Group is willing and able to accept in pursuit of its strategic objectives.
Risks are taken consciously, assessing their impact on the Group’s objectives, and risk appetite is typically expressed as a statement of intent by risk category.
The Group has defined seven risk appetite categories, informed by the Group’s strategic objectives and Group-wide risks, ensuring alignment to strategic plans and risk language. The amount and type of risk that the Group is prepared to accept and tolerate, or be exposed to, have been considered for each of these.
The Board is committed to ensuring that key risks are managed on an ongoing basis and the Group’s activities are within the agreed Group risk appetite. Whilst the principal risks described below all have the potential to affect future performance, work is undertaken to mitigate and manage these risks such that they should not threaten the overall viability of the business.
The impact of each risk across a number of dimensions, including financial and reputational, as well as the likelihood of the risk occurring, is considered both before (inherent risk) and after (residual risk) the mitigating actions being progressed by the Group.
The principal risks outlined below represent, in the judgement of the Group Board, the most significant gross risks to the Group.
The macroeconomic environment, which can be characterised by inflationary pressures and low unemployment, is impacting on the risks being faced by the Group.
Business profitability could be affected by the increasing costs of doing business, including wage inflation in some of our countries of operation, if not properly controlled.
Consumer sentiment is affected by the inflationary environment.
The continued expansion of the Group’s operations across new geographies and the development of additional categories to serve our customers’ needs can increase our risk footprint, while decreasing the impact of any single risk to the business as a whole.
The Group’s risk management process is structured as follows:
This “bottom-up” identification of risks is overlaid by those risks highlighted from the “top-down” review and challenge process by the Group Risk Management Team and Group Board. These assessments are aggregated, together with the consideration of risks existing at the Group level, to compile an overall Group-wide view of risk.and the cost-of-living crisis within the countries and communities in which we operate, which negatively impacts customers’ spending habits, their disposable income, and the value of their purchases in our stores. The output from the above process is subject to periodic review and challenge by the Executive Directors and, subsequently, the principal risks and uncertainties are submitted to the Audit Committee ahead of final review and approval by the Group Board.
39 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
The Directors confirm that they have carried out a robust assessment of the principal risks and uncertainties facing the Group, including any emerging risks and those that would threaten its business model, future performance, solvency or liquidity.
The Group offers price leadership and a differentiated proposition. This is facilitated by increasing economies of scale and Group-level buying and operating cost synergies made possible by our vertically integrated sourcing model and underpinned by our strategy as described on page 10. The Group’s growth strategy has four core sources of revenue and earnings growth: the expansion of its physical store footprint; like-for-like growth driven by development of the customer proposition; earnings improvement through operating cost efficiencies, and ongoing investment in infrastructure. These growth opportunities are enabled by the Group’s constant investment to improve the capability, scalability and resilience of its infrastructure, and the synergies from activities increasingly being performed consistently or jointly across each of our retail brands. The principal risks and uncertainties that are faced by the Group, and their impact on the growth strategy of the Group, are summarised below.
| Description and potential impact | Risk mitigation |
|---|---|
| Long-term expansion strategy and business transformation Failure to implement the Group’s growth strategy: In FY23 we delivered a record number of 668 net new stores under our accelerated store expansion programme, including 171 new stores in the important Western European markets of Italy, Spain and Portugal. We are continuing our store expansion programme, but are adopting a more disciplined approach to growth, with new store openings focused on our existing markets. We are targeting opening at least 400 net new stores in FY24 across the Group. We continued to enhance our customer offer in FY23 through store and proposition renewals with 846 store renewals completed (715 Pepco brand, 131 Poundland). To support the growing number of stores and long-term strategy, we will drive efficiencies in the head office and distribution centre network. In flight business transformation projects include consolidating IT systems and creating centre of excellence from office functions across operating companies. |
– to strengthen market-leading proposition in existing markets and implement long-term expansion into new markets; and – to transform the business operations to support growth. Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023 Risk management continued The Directors confirm that they have carried out a robust assessment of the principal risks and uncertainties facing the Group, including any emerging risks and those that would threaten its business model, future performance, solvency or liquidity. Principal risks The Group offers price leadership and a differentiated proposition. This is facilitated by increasing economies of scale and Group-level buying and operating cost synergies made possible by our vertically integrated sourcing model and underpinned by our strategy as described on page 10. The Group’s growth strategy has four core sources of revenue and earnings growth: the expansion of its physical store footprint; like-for-like growth driven by development of the customer proposition; earnings improvement through operating cost efficiencies, and ongoing investment in infrastructure. These growth opportunities are enabled by the Group’s constant investment to improve the capability, scalability and resilience of its infrastructure, and the synergies from activities increasingly being performed consistently or jointly across each of our retail brands. The principal risks and uncertainties that are faced by the Group, and their impact on the growth strategy of the Group, are summarised below. Customer and markets Description and potential impact Risk mitigation Long-term expansion strategy and business transformation Failure to implement the Group’s growth strategy: In FY23 we delivered a record number of 668 net new stores under our accelerated store expansion programme, including 171 new stores in the important Western European markets of Italy, Spain and Portugal. We are continuing our store expansion programme, but are adopting a more disciplined approach to growth, with new store openings focused on our existing markets. We are targeting opening at least 400 net new stores in FY24 across the Group. We continued to enhance our customer offer in FY23 through store and proposition renewals with 846 store renewals completed (715 Pepco brand, 131 Poundland). To support the growing number of stores and long-term strategy, we will drive efficiencies in the head office and distribution centre network. In flight business transformation projects include consolidating IT systems and creating centre of excellence from office functions across operating companies. |
Link to strategy:
* New markets
* Transformation programmes are aligned to the Pepco Group business strategy and closely governed by senior management.
Risk movement:
* Increase
| Description and potential impact | Risk mitigation |
|---|---|
| Competition, consumer trends and behaviours Inability to predict changes to consumer trends and behaviours, anticipate and respond to competitive changes, and maintain our competitive advantage in a timely and cost-effective manner. Competition is highly fragmented in many markets, limiting impact. Pepco offers price leadership and a differentiated proposition. This is facilitated by increasing economies of scale and Group-level buying and operating cost synergies. We offer a diverse range of FMCG, homeware-led GM and apparel, providing our core shoppers, with their regular shopping replenishment needs. Our in-house sourcing function, PGS, maximises buying scale and operating efficiencies, thereby lowering costs and improving margins. We own and operate a multi-format, Europe- wide variety discount retail business, through local and therefore convenient stores, located across 21 countries. We continue to invest in the development of high-quality, scalable infrastructure, including information technology, automated warehouses and more efficient and resilient multi-point distribution. |
Pepco has very high brand awareness and customer satisfaction, with timely responses to customer feedback and insights. This includes the ability of the Group to monitor and adapt to changing behaviours amongst its consumer base. The Group’s business is subject to trading peaks and seasonality risk, together with changing consumer trends and behaviours. The Group’s success therefore depends, in part, on its ability to predict and respond to changing trends, and to translate those trends into appropriate levels of in-store inventory. This is relevant to the Group’s apparel, soft homeware and seasonal product categories. Failure to respond to these trends may result in weak sales during the Group’s peak trading period. The Group competes at national and local levels with a wide variety of general and specialist retailers of varying sizes and product offerings across all the geographic markets in which it operates, including with respect to price, product selection and quality, store location and design, inventory, customer service, advertising and marketing. The Group’s competitors include small scale, independent stores and organised chains of multi- price discount and non-discount general merchandise retailers, fixed-price discount general merchandise retailers, grocery-led convenience stores, and online retailers or specialty retailers in particular categories such as homeware. |
Link to strategy:
* Competition
* Risk movement: Unchanged
| Description and potential impact | Risk mitigation |
|---|---|
| Legal, regulatory and tax compliance Risk of significant breaches of legal, regulatory or tax compliance, resulting in fines and penalties and potentially a decline in customer visitation due to the reputation of any or all of the Group’s retail brands being severely damaged. The Group is subject to a wide range of laws and regulations (including those relating to health and safety, and intellectual property) across jurisdictions in which it operates, and compliance with these is an essential part of the Group’s business operations. Any failure to comply with applicable laws, rules and regulations may result in fines and penalties, and adverse publicity, and reflect poorly on the Group’s reputation or that of its retail brands. The Group, as most companies do, have a potential exposure to systems of fraudulent activities (including corruption, financial reporting and misappropriation of assets) that could result in non-compliance, reputational damage, or financial loss to the Group. The Group has an established and mature presence in a number of territories, however as we enter new markets and international tax law continues to evolve, unfamiliar tax environments or regulations present a risk. Furthermore, tax law is often complex and subjective, and tax authorities may not agree with determinations that are made by the Group with respect to the application of tax law. |
– We have clear corporate governance policies which set a culture of responsible business for all our operating companies and our colleagues, customers and suppliers. – A Modern Slavery Act Statement and Anti-Bribery and Corruption policy are in place. These policies are underpinned by training for our colleagues and our external independent reporting facility, which allows colleagues to report in a safe and confidential way. – The Group has legal teams at both Group and operating company levels, and has strong relationships with lawyers in all relevant jurisdictions to ensure access to professionally qualified legal advisors. – The Group operates in European markets with intellectual property protection in place and can rely on trademark and copyright laws and contractual arrangements. – We employ qualified colleagues who monitor proposed changes in legislation and tax law, assess the impact, and seek advice from leading external professional advisors as require, for example to determine country specific requirements where we do not have internal capability. – Our core tax principle is to manage our tax affairs responsibly in compliance with local and international law, as set out in our tax strategy which is approved by the Group Board and can be found on our website. – We seek to foster positive relationships with tax authorities and to undertake all dealings with tax authorities in a professional, courteous, and timely manner. |
Link to strategy:
* Legal and regulatory compliance
Risk movement:
* Unchanged
Read more about our strategy on page 10
41 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023# Annual Report and Consolidated Financial Statements 2023
| Description and potential impact | Risk mitigation |
|---|---|
| Failure to identify, develop or maintain relationships with a significant number of reputable suppliers, to source high-quality, low-cost, safe products, may impact the Group’s financial position or reputation. The loss of, or a substantial decrease in, the availability of products from the Group’s key suppliers could lead to lost sales and reduced saliency of the customer offer. Inadequate product quality or safety could negatively impact financial position and the brand reputation. |
The Group’s integrated in-house sourcing operation, – sourcing with PGS, sources in excess of 80% of own label goods across clothing and general merchandise through its operations in mainland China, Hong Kong, Bangladesh and India. We believe our in-house sourcing model makes us well placed to leverage the Group’s growth plan in order to negotiate scale benefit on pricing and agree long-term partnerships with strategic vendors. The Group continues to expand its sourcing footprint to reduce the risk of over-reliance on any single country and increase flexibility through near-shore sourcing in European countries and additional Asian countries. The Group sources the majority of its own-brand product directly from China, India and Bangladesh where the Group’s Supplier Code of Conduct can be significantly stricter than local practices. Strong policies are in place to protect the integrity of our supply chain, including a Group-wide Supplier Code of Conduct and ethical and social audit programme, managed by our Group Sourcing Compliance team (see page 32 for further details). The Group has an established Global Quality Assurance and Quality Control policy with strict quality control measures to bring low prices and value to our customers while protecting our brand integrity.
This significant business risk requires active management of both the Group’s employees and our suppliers to ensure compliance with our Code.
Link to strategy: Increase
Risk movement: Unchanged
| Description and potential impact | Risk mitigation |
|---|---|
This section discusses the Group's risk management strategies and the principal risks it faces, along with mitigation efforts.
Description and potential impact
Failure to identify, develop or maintain relationships with a significant number of reputable suppliers, to source high-quality, low-cost, safe products, may impact the Group’s financial position or reputation. The loss of, or a substantial decrease in, the availability of products from the Group’s key suppliers could lead to lost sales and reduced saliency of the customer offer. Inadequate product quality or safety could negatively impact financial position and the brand reputation.
Risk mitigation
The Group’s integrated in-house sourcing operation, sourcing with PGS, sources in excess of 80% of own label goods across clothing and general merchandise through its operations in mainland China, Hong Kong, Bangladesh and India. We believe our in-house sourcing model makes us well placed to leverage the Group’s growth plan in order to negotiate scale benefit on pricing and agree long-term partnerships with strategic vendors. The Group continues to expand its sourcing footprint to reduce the risk of over-reliance on any single country and increase flexibility through near-shore sourcing in European countries and additional Asian countries. The Group sources the majority of its own-brand product directly from China, India and Bangladesh where the Group’s Supplier Code of Conduct can be significantly stricter than local practices. Strong policies are in place to protect the integrity of our supply chain, including a Group-wide Supplier Code of Conduct and ethical and social audit programme, managed by our Group Sourcing Compliance team (see page 32 for further details). The Group has an established Global Quality Assurance and Quality Control policy with strict quality control measures to bring low prices and value to our customers while protecting our brand integrity.
This significant business risk requires active management of both the Group’s employees and our suppliers to ensure compliance with our Code.
Link to strategy: Increase
Risk movement: Unchanged
Description and potential impact
Disruption of the logistics and distribution network and inventory management resulting in inability to maintain sufficient inventory levels to meet growing customer demands without allowing levels to increase to an extent that causes excessive markdowns. As a multi-category discount retailer, efficient logistics and inventory management is a key component of the Group’s success and profitability. To be successful, the Group must assess a product’s lifecycle and maintain sufficient inventory levels both in Distribution Centres and in the stores to meet customers’ demands without allowing those levels to increase to such an extent that the Group may be forced to rely on additional promotional markdowns to dispose of excess or slow-moving inventory.
Risk mitigation
The Group have experienced buying and supply chain teams responsible for maintaining an effective and efficient supply chain. The Group has invested in an end-to-end supply chain redesign and improved efficiency of distribution centres as well as positive impact on optimised markdown management and expansion of retail selling space. The Pepco supply chain design is scalable and repeatable, with a standard blueprint for all elements of the supply chain which is being retrofitted to the existing supply chain and the future deployment models. Consistent levels of stock cover by product category are maintained and regularly reviewed.
Link to strategy: Increase
Risk movement: Unchanged
Description and potential impact
Dependence on key personnel and inability to attract or retain the required knowledge and skills. The Group is dependent on key personnel at both the Group and operating company level who have extensive experience and knowledge of the discount retail industry in the markets in which the Group operates. There is a risk that failure to recruit or retain individuals with the required knowledge and skills, a lack of succession planning for key roles, or failure to successfully adapt to the expectations of a post-pandemic labour market could impact the Group’s performance and achievement of its strategy.
Risk mitigation
Talent retention and development are central to our success, and we aim to maintain the right pipeline of skills within the Group to facilitate the long-term success of our growth strategy (see page 13). Across the Group there are Executive and senior management with significant experience and leadership in both retail and their own relevant functions. The Remuneration Committee develop performance based reward packages for Executive Directors and Senior Managers to appropriately incentivise key personnel. We work hard to facilitate access to professional and personal development opportunities across the Group, including learning and development opportunities, and supporting our colleagues to gain professional qualifications. We have many talented and committed colleagues across our workforce and where possible we seek to promote internally.
Strategy key: Increase Change key: Unchanged Decrease New Risk > Read more about our strategy on page 10
42 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
| Description and potential impact | Risk mitigation |
|---|---|
Description and potential impact
The Group is exposed to short-term political and economic factors which reduce disposable income or increase the cost of doing business in countries where the Group operates. The Group’s business is impacted by the prevailing political and economic climate in the countries in which it operates and globally including: political uncertainty; natural volatility in foreign exchange rates; rising interest rates, inflation rates, energy prices and availability; levels of employment; levels of disposable income; salaries and wage rates (including any increase as a result of payroll inflation or contributions to pension provisions); and lack of consumer confidence. Whilst inflation remains at recent historic highs, clothing and food remain resilient categories in the Central and Eastern European retail sector. The Group’s value-led proposition becomes even more relevant in these challenging times and continues to drive new customers to our stores, expanding our target market across Europe.
Risk mitigation
The Group’s operations are spread over 21 countries in Western, Central, and Eastern Europe, reducing an over exposure to any single market and providing cyclical protection. The diversified nature of the Group’s operations creates a portfolio of currency exposures, creating a natural hedge against currency fluctuations whilst the ongoing expansion into Western Europe increases the percentage of Group revenue in Euros. The Group has established foreign exchange hedging policies providing near-term protection on both the cost purchase of stock from Asia and the sale of goods in Europe. In relation to foreign exchange risk, the Group pays the majority of its overseas suppliers in US Dollars and Chinese Yuan and in certain countries in which the Group operates it is customary for a number of costs, including leases, to be denominated in a foreign currency (such as Euros) rather than the local currency. However, the Group’s customers pay for products in the local currency in each of the countries in which the Group operates.
Link to strategy: Increase
Risk movement: Unchanged
Description and potential impact
Inadequate cash generation or cost management could have an adverse impact on business performance and/or viability. Failure to meet obligations under credit facilities and/or inability to access further external financing in the future. Cash generation is fundamental to liquidity and downturns in sales or inability to produce desired margins may impact our ability to continue investing into future expansion. Operating costs related to both our store network and our head office and central operations could impact the profitability and viability of the business. Any failure to comply with the covenants or payment obligations contained in the Group’s financing arrangements could result in a default thereunder. If the Group is unable to refinance in a timely fashion or acceptable terms in the longer term, would have a material adverse effect on the Group’s financial position.
Risk mitigation
The Group remains cash generative including the largely self-funding of the new store openings and new country expansion. Transformation programmes are in place to drive operating leverage and efficiencies through becoming ‘one business’. The Group has significant headroom within the covenants of the existing Senior Facility Agreement. During the year, the Group refinanced a EUR300m Term Loan A, that was due to mature in April 2024, with a EUR375m publicly listed 5 Year Bond. The revolving credit facility was increased during FY23 from EUR190M to EUR390M, which provides additional committed headroom. Linked to its debut bond issuance, Pepco Group obtained its first standalone Credit Ratings (solid BBs on from 3 major Credit Rating Agencies). The Term Loan B of EUR250m, that matures in April 2026, remains with a syndicate of strong and supportive relationship banks at competitive interest rates. The Group’s and operating companies’ currency deposits are maintained across a number of financial institutions to minimise counterparty risk.
Strategy key: Increase Change key: Unchanged Decrease New Risk > Read more about our strategy on page 10
43 Pepco Group N.V.# Annual Report and Consolidated Financial Statements 2023
| Description and potential impact | Risk mitigation |
|---|---|
| Environmental, social and governance (ESG) expectations in addressing ESG impacts can lead to public scrutiny and significant reputational damage to our Group and its brands. | The Group has a Group-wide ESG Strategic Framework and goals to set a vision for our ESG strategy (see our ESG section for further details). The Group CFO is responsible for setting the Group’s ESG Strategic Framework and has overall responsibility for execution. In FY23 we have established an ESG Executive Committee; the purpose of which is to determine, align and review progress and next steps for ESG across Pepco Group (see our ESG section for further details of our ESG strategy and goals). It is chaired by the Group CFO and its objectives are to create alignment and drive progress across group in ESG. The terms of reference and standing agenda of this Committee cover all the priority material topics as identified in the recent double materiality assessment. Updates on ESG progress are made for approval and review to the Audit Committee of the Group Board each quarter. |
| The Group recognises the impact that its rapidly growing business may have on the social and natural environment and has a clear strategy to address this (see our ESG section for further details of our ESG strategy and goals). There is a risk of failure to address the growing needs and expectations from society if the Group does not meet its ESG goals, resulting in reputational damage and reduced customer demand for our products and brand. | We believe that our business model, including both the vertical integration of our sourcing operations through PGS and the work of our in-house Group Sourcing Compliance team, provides us with a high degree of visibility over our supply chain and constructive working relationships with our supply partners. |
| ESG risk also arises from any immediate to long-term physical impact of climate change on the resilience of the Group’s business model and operations. This includes the potential for climate change-related disruption to the supply chain or an increase in raw material costs. Climate change also increases the risk of extreme weather events, for example increased severity of flooding. While an extreme weather-related event could severely impact our distribution operations, given the location of our warehouses in Western and Central Eastern Europe, we consider this risk to be low currently. | At Pepco Group, our goal is to democratise sustainability for our customers by offering affordable choice and demonstrating that price is not a barrier to sustainable and ethically produced products. Driving efficiency improvements throughout the business is an integral element of the Group’s strategy and we believe there is an important link between increasing cost efficiencies and enhancing the long-term sustainability of our operations. |
| Description and potential impact | Risk mitigation |
|---|---|
| Disruption/failure of the Group’s IT systems, including failure to adequately prevent or respond to a data breach or cyber-attack, could adversely impact our reputation, result in legal exposure or business disruption. | The Group has information security and data protection policies in place with dedicated cyber security specialists and Data Protection Officers. |
| The Group depends on its IT systems and infrastructure for the efficient functioning of its business. A failure or disruption in information technology systems (e.g. due to a deliberate or targeted cyber-attack) may result in a loss of business-critical data, compromise data integrity, fraudulent activity or result in an inability to manage operations, in turn leading to financial and regulatory penalties and reputational damage. | Link to strategy: Information security and data protection awareness and training programmes are in place across the Group. |
| The Group is also subject to data protection regulations regarding the collection, retention, use and processing of personal information. Failure to operate effective controls to protect confidentiality and security of personal information could potentially lead to regulatory censure, fines, and reputational and financial costs. | A Group-wide ERP consolidation and improvement programme is ongoing, to replace legacy IT infrastructure with one ERP system. |
| This includes the risk of unsuccessful or delayed go-live in the delivery/implementation of the Group’s new ERP system. | There is a strong IT project management across the Group for all change management projects, with change freeze periods implemented during the key trading months. |
| There is an ongoing improvement programme for Tier 1 applications in specialist functions that are not covered by the ERP system. | |
| The Group’s current limited transactional e-commerce reduces its recording of and exposure to customer data. | |
| There is a disaster recovery plan in place at both Pepco and Poundland. |
Strategy key: Increase
Change key: Unchanged
Risk: New Risk
Read more about our strategy on page 10
The FY23 consolidated financial statements have been prepared on the basis that the Group will continue as a going concern for at least 12 months subsequent to the authorisation of the consolidated financial statements for the period under review. The Group has continued to show resilience in FY23 despite the challenging economic conditions. Underlying EBITDA growth of 3% to €753m illustrates the strong continued profit delivery. In addition the Group has continued to execute its growth strategy through the opening of 668 net new stores through largely self-funded investment. Whilst cash is lower year-on-year at €330m (FY22: €344m) this is a function of the Group continuing to expand the estate as evidenced by capital expenditure of €390m. The Group’s net debt to underlying EBITDA ratio of 2.3x on an IFRS 16 basis (1.0x pre-IFRS 16 basis) remains low, and well within the targeted range. The Group also remains well financed with expiry of term loans not until at least April 2026 and retains significant liquidity headroom, and covenant headroom, should any further unforeseen volatility arise. Based on the Group’s cash flow forecasts and financial projections, alongside assessment of a robust set of plausible but aggressive downside stress test scenarios, the Directors are satisfied that the Group will be able to operate within the levels of its facilities and resources for the foreseeable future and deem it appropriate to adopt the going concern basis in preparing the financial statements.
A weaker consumer environment caused by inflationary challenges increasingly impacted performance during the second half of the year. Despite the challenging economic backdrop the business delivered record store openings, record sales and EBITDA, while further strengthening its balance sheet.”
The Group has opened a record number of new stores and delivered strong double-digit revenue growth in FY23, resulting in record revenues and the delivery of our highest ever underlying EBITDA outturn of €753m. The Group has also achieved a significant milestone in the year with the issuance of a €375m five-year debut high-yield bond, following a comprehensive Neil Galloway rating process, which has refinanced shorter-term debt, further Chief Financial Officer diversified our debt sources and extended our maturity profile. In addition to the 72% increase in stores we have achieved over the last five years, we have grown space by 77%, with larger average store size accelerating revenues. In FY23 specifically, store numbers grew by 17% with space growing by 19%.
Underlying EBITDA YoY +3%
| Net Cash from Operations (pre-Capex) |
|---|
| €266m |
However, Group performance has been mixed against a challenging market backdrop and our core customer remains under pressure given the continued inflationary headwinds that have persisted following the Covid-19 period and the subsequent Ukraine conflict. This, coupled with increasing competition in core Net Cash from Operations (pre-Capex) markets, slower than anticipated recovery on gross margin – €266m compounded by weaker H2 sales – and inconsistent execution of over ambitious growth plans has led to profitability being lower than expected for the year.
From a financial perspective, as an international discount variety Pepco has retained clear entry price leadership in clothing and retailer, we have four key operating levers at our disposal to drive profitability and cash generation across our business. These levers home categories, putting the Group in a strong position to support are covered throughout the financial review to demonstrate how our customers in this period of high inflation. Whilst the impact of we are addressing the challenges we face. These are: Covid-19, which has been a significant feature across FY20 to FY22, has now passed, high inflation has remained across FY23 which has increasingly impacted customer spend and consumption,
propositions to attract and retain our customers;
– Gross margin influenced by category mix and our ability to buy better including external factors such as freight and commodities, balanced with maintaining price leadership;
– Operating costs relating to both our store network and our head office and central operations, where we expect to drive greater operating leverage and efficiencies through becoming ‘one business’; and
– Cash generation which is fundamental to the success of the business, requiring execution of our trading plans coupled with tight management of stock, optimisation of our supplier payment relationships and discipline with regards to capital expenditure.
The underlying strength of the business remains intact as evidenced by the health of our store network. We continue to offer price leadership to our customers through a growing store network which has driven record sales and underlying EBITDA. However, we need to address the challenges we have faced particularly across H2, ensuring sales growth translates to a better profit growth. This requires a refocus on our core business, stopping non-core projects which are a distraction to our strategic objectives. We will refocus on improving our 4-wall cash EBITDA to bring it back to pre-Covid levels, whilst implementing a more targeted growth plan in markets where we have a presence, and accelerating the transition into a single business. These objectives will be coupled with a more disciplined approach to operating costs, where we must drive operational leverage, and capex where we must generate appropriate returns, being selective and challenging our investment decisions. By doing so, we aim to improve profitability and cash generation in our established business and deliver more measured growth.
Importantly, we have confidence in our ability to achieve gross margin recovery when taking account of the Group’s strategic direction, coupled with the normalisation of commodity and freight rates and foreign exchange headwinds which are showing positive signs of recovery as we transition into the new financial year.
Having successfully completed our inaugural €375m bond issuance in June 2023, with credit ratings in line with key competitors from all three major ratings agencies (Moody’s Ba3, Fitch BB, S&P BB-), the Group maintains a robust balance sheet with strong operating cashflows, and access to over €400 million in liquidity (from cash and credit facilities) as at 30 September 2023. This foundation, alongside strong brand equity and strong market share in our core CEE market together with a proven profitable store model, gives us continuing confidence in our path to building Europe’s leading variety discount retailer.
47 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
The Group’s and Pepco’s LFL performance over recent and prior periods helps to illustrate these factors, particularly the performance drop off in H2 FY23 following a strong H1. As can be seen from the charts below, volumes in the CEE clothing market declined during the summer, correlating strongly with the LFL challenges we experienced in Pepco across H2, where LFL deteriorated to -1.8%. The magnitude and speed of decline in category performance affected Pepco’s results and was compounded by (i) increasing levels of organised competition within the markets in which Pepco operates; and (ii) a prolonged period of warm weather across Europe that delayed the transition into the Autumnal seasonal products, materially impacting performance across the final few weeks of the financial year.
Clearly encouraging, however, are the tentative signs of market recovery as real wage growth in our core Pepco markets returns to positive territory as illustrated in the chart below.
Key macroeconomic indicators: July 2022 – September 2023
% YoY
| Indicator | Jul-22 | Aug-22 | Sep-22 | Oct-22 | Nov-22 | Dec-22 | Jan-23 | Feb-23 | Mar-23 | Apr-23 | May-23 | Jun-23 | Jul-23 | Aug-23 | Sep-23 |
| :------------------ | :----: | :----: | :----: | :----: | :----: | :----: | :----: | :----: | :----: | :----: | :----: | :----: | :----: | :----: | :----: |
| Monthly CPI | 26% | 24% | 22% | 20% | 18% | 18% | 17% | 17% | 18% | 17% | 16% | 15% | 14% | 13% | 12% |
| Hungary | 12% | 11% | 10% | 10% | 8% | 8% | 8% | 7% | 7% | 6% | 6% | 5% | 4% | 4% | 4% |
| Core CEE1,2 | 18% | 18% | 17% | 17% | 16% | 15% | 14% | 13% | 12% | 12% | 11% | 10% | 10% | 9% | 9% |
| Poland | 17% | 17% | 16% | 15% | 14% | 13% | 12% | 12% | 11% | 11% | 10% | 10% | 9% | 9% | 9% |
| Romania | 18% | 18% | 17% | 17% | 16% | 15% | 14% | 13% | 12% | 12% | 11% | 10% | 10% | 9% | 9% |
| Czechia | 18% | 18% | 17% | 17% | 16% | 15% | 14% | 13% | 12% | 12% | 11% | 10% | 10% | 9% | 9% |
| Weighted by quarterly normal GDP. |
| Core CEE includes Poland, Romania, Czechia and Hungary. |
| Source: INSSE, KSH, CZSO, GUS, Statistical Office SR, OC&C analysis. |
Quarterly real household consumption expenditure per capita growth
| Period | Growth (%) |
| :----- | :--------: |
| FY19 | 2.6% |
| FY20 | 6.1% |
| FY21 | -5.2% |
| FY22 | -7.1% |
| FY23 | 6.5% |
Drivers of market growth – Volume: October 2022 to July 2023
3-month rolling YoY % growth
| Category | Oct-22 - Dec-22 | Jan-23 - Mar-23 | Apr-23 - Jun-23 | Jul-23 - Sep-23 |
| :------- | :-------------: | :-------------: | :-------------: | :-------------: |
| Clothing | 25% | 15% | 11% | 2% |
LFL% Evolution
| Period | LFL (%) |
| :------- | :-----: |
| FY19 | 2.6% |
| FY20 | 6.1% |
| FY21 | -5.2% |
| FY22 | -7.1% |
| FY23 | 6.5% |
| FY23 H1 | 15.8% |
| FY23 H2 | -1.8% |
| Country/Region | 5Yr CAGR (%) |
|---|---|
| Poland | 5.2% |
| Core CEE1,2 | 6.0% |
| Romania | 1.4% |
| Hungary | -1.8% |
| Pepco Group | 2.9% |
|---|---|
| Pepco | 4.3% |
| 1 Weighted by quarterly normal GDP. |
| 2 Core CEE includes Poland, Romania and Hungary. |
| Source: Institutul National de Statisticá (INSSE), Central Statistical Office (GUS), Hungarian Central Statistics Office, Czech Statistics Office, OC&C analysis. |
Pepco Group
Pepco Quarterly average real wage growth: January 2022 – 2025F
YoY % growth
| Country/Region | Jan-22 - Mar-22 | Apr-22 - Jun-22 | Jul-22 - Sep-22 | Oct-22 - Dec-22 | Jan-23 - Mar-23 | Apr-23 - Jun-23 | Jul-23 - Sep-23 | Oct-23 - Dec-23 (F) | Jan-24 - Mar-24 (F) | Apr-24 - Jun-24 (F) | Jul-24 - Sep-24 (F) | Oct-24 - Dec-24 (F) |
| :--- | :---: | :---: | :---: | :---: | :---: | :---: | :---: | :---: | :---: | :---: | :---: | :---: |
| Hungary | 12% | 10% | 8% | 3.9% | 1.7% | 1.7% | 0.4% | 3.7% | 5.8% | 7.8% | 8.8% | 9.0% |
| Czechia | 6% | 4% | 2% | -0.9% | -1.4% | -2.8% | -3.2% | -2.8% | -1.8% | -0.8% | 0.2% | 1.0% |
| Romania | 4% | 3.7% | 2.0% | 1.7% | 1.7% | 1.7% | 1.7% | 2.7% | 3.7% | 4.7% | 5.7% | 6.7% |
| Core CEE1,2 | 10% | 8% | 6% | 1.4% | 0.2% | -0.8% | -1.2% | 1.1% | 2.3% | 3.5% | 4.3% | 4.7% |
| Poland | 10% | 10% | 9% | 6.3% | 5.2% | 4.2% | 2.6% | 4.6% | 6.6% | 8.6% | 9.6% | 9.8% |
| 1 Forecasts weighted by quarterly normal GDP of each country as of Q2 2023. |
| 2 Core CEE includes Poland, Romania Czechia and Hungary. |
| Source: INSSE, KSH, CZSO, GUS, minieterstwo Finansow, The Central Bank of Hungary (MNB), Oxford Economics, OC&C analysis. |
48 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
In the UK market where Poundland operates, high inflation has also remained a material factor across the year illustrated in the chart below, although has reduced from a high of 11.1% in October 2022 to 6.7% in September 2023. This inflationary trading environment has resulted in a significant squeeze on our customers’ disposable income and has necessitated a shift in spending habits, re-focusing on the more essential items such as heating and food, versus discretionary items of clothing and homewares. With its high category mix of FMCG products, Poundland has benefitted from this macro trend across FY23, with FMCG LFL performance of 12.0% underpinning a strong LFL growth of 5.6% year for the business.
On the supply side, we have seen solid improvements in conditions with cotton prices and container costs returning to well below their peak. Given the buying cycle of the Pepco Group (which is roughly 10 months to market for clothing and GM), coupled with weaker sales in the latter stages of H2, the benefits of these supply side conditions are yet to fully manifest in terms of a full recovery of gross margins, but we remain confident that this will come through in the short to medium term and are already seeing an improvement in the early stages of FY24 as we start to sell through our higher margin Autumn and Winter ranges. We have taken measures to optimise buying processes which include the integration of PGS into Pepco to maximise and align the buying cycle and drive efficiencies, as well as introducing some near-shore sourcing operations in Poland alongside increasing Asian capabilities.
Container costs have recovered from Covid-19 highs of $10k per container, to c. $1.5k with shipping backlogs cleared costs are expected to remain stable going forwards. This further supports our anticipated margin recovery.
Global container freight rate index costs ($)
| Period | Q1 | Q2 | Q3 | Q4 |
| :----- | :---- | :---- | :---- | :---- |
| FY20 | 4,060 | 3,143 | 2,246 | 2,247 |
| FY21 | 1,785 | 1,481 | 1,446 | 1,400 |
| FY22 | 10,517| 9,293 | 9,430 | 6,753 |
| FY23 | 6,577 | 4,367 | 4,060 | 3,143 |
Cotton prices (USD cents per pound) – long term view
| Year | Price (cents/lb) |
| :--- | :--------------: |
| 2020 | 64.7 |
| 2021 | 83.5 |
| 2022 | 93.2 |
| 2023 | 108.4 |
UK Consumer Price Index FY22 and FY23 (YoY % Change)
| Period | Percentage Change (%) |
| :----- | :-------------------: |
| FY22 | 10% |
| FY23 | 7% |
| Source: ONS gov.uk |
49 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Highlights
| Pepco Group (€m) | FY23 | FY22 | YoY (reported) | YoY (constant) |
| :--------------------------- | :---- | :---- | :------------: | :------------: |
| Revenue | 5,649 | 4,823 | 17.1% | 17.7% |
| Like-for-like revenue (%) | | | +6.0% | +5.2% |
| Gross profit | 2,268 | 1,968 | 15.3% | 15.6% |
| Gross profit margin (%) | 40.1% | 40.8% | (0.7)pp | (0.7)pp |
| Operating costs (IFRS 16) | (1,514)| (1,237)| 22.4% | 23.0% |
| Operating costs (IFRS 16) (%)| 26.8% | 25.6% | (1.2)pp | (1.2)pp |
| Underlying (IFRS 16) EBITDA | 753 | 731 | 3.1% | 3.1% |
| Underlying (IFRS 16) EBITDA margin (%) | 13.3% | 15.2% | (1.8)pp | (1.9)pp |
| Depreciation and amortisation| (470) | (378) | -24.3% | -24.4% |
| Net financial expense | (82) | (52) | -57.8% | -60.2% |
| Underlying PBT | 202 | 300 | -32.7% | -33.7% |
| Non-underlying items | (55) | (75) | 26.3% | 27.3% |
| Reported PBT | 147 | 226 | -34.9% | -35.8% |
| (€m) | FY23 | FY22 | YoY (reported) | YoY (constant) |
|---|---|---|---|---|
| Underlying (pre-IFRS 16) EBITDA | 396 | 439 | -9.9% | -10.0% |
| Underlying (pre-IFRS 16) EBITDA (%) | 7.0% | 9.1% | (2.1)pp | (2.1)pp |
| Net debt (pre-IFRS 16) | 411 | 275 | 49.4% | n/a |
| Leverage (pre-IFRS 16) | 1.0x | 0.6x | 0.4x | n/a |
| Net debt (IFRS 16) | 1,704 | 1,404 | 300 | n/a |
| Leverage (IFRS 16) | 2.3x | 1.9x | 0.4x | n/a |
| 1 All foreign currency revenues and costs are translated at the average rate for the month in which they are made. |
50 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Group revenue of €5.6bn has grown materially in the year, up 17.1% on a reported basis driven by the continued delivery of our store expansion strategy where we opened a record 668 net new stores in the year. proportion of stores were opened late in the year so, whilst costs were incurred, the corresponding sales and profit contribution from the stores reaching maturity has not yet been delivered.# LFL revenue of +6.0% is also contributing FX to the revenue growth with Poundland benefitting from strong FY23 saw the appreciation of our main selling currencies of Polish FMCG performance and Pepco supported by a very good first Zloty, British Pound and Euro against the main buying currencies half sales performance. of US Dollars and Chinese Yuan. However, the group’s hedging Gross profit margin was challenge having declined 0.7pp year- policy builds up cover over the duration of the buying season to on-year to 40.1% impacting profitability within the year. As a result of our relatively long buying cycle for clothing and GM ranges, from the buying prices of the GM and Apparel purchases from Asia, and we carried those weaker 2022 hedging rates into FY23, products sold across FY23 still had the high freight and commodity predominantly in the second half of the year. prices embedded as they were purchased several months The adverse transactional FX on buying was partially offset by prior when input costs were at their historic peaks. In addition, the unfavourable year-on-year hedge rates have only partially been offset by pricing. This was due to a strategic decision to ensure we retained our price leadership on entry price point items across The Group is also exposed to translational FX, which is not hedged. Pepco – something that our customers recognise during these However, in FY23 translational exposure between EUR/PLN challenging times. and EUR/GBP broadly offset such that our underlying EBITDA of €753m grew at 3.1% year-on-year on both a reported and The weaker second half in Pepco also included a slower gross margin constant currency recovery as weaker sales in August/September – when weather remained warm – meant that sales run-rates on higher margin Non-underlying items Autumn/Winter ‘23/24 season product was lower than anticipated. The Group manages performance on an underlying basis after adjusting for non-underlying items. In FY23 non-underlying items Nonetheless, the gross profit margin in Pepco has improved totalled €55m (FY22: €75m) and were: materially across the year which supports management’s positive outlook for margin as we see these freight and foreign exchange – €43.5m relating to ERP Software-as-a-Service (SaaS) costs headwinds subside. Pepco’s H2 gross margin was 1.2pps higher than H1, rising to over 43% in Q4 FY23, giving further confidence on which are considered to be unusual and material costs by recovery as we head into FY24. nature. – €13.5m associated with restructure costs relating mainly to the retirement of the Dealz brand in Spain and conversion to Pepco Plus stores, and closure of Fultons branded stores; – €(1.9)m of credit relating to the Value Creation Plan (VCP) scheme which relates to adjustments to reflect leavers in the scheme, offset by charges for a new grant.
| Period | Poundland | Pepco | Pepco Group Total |
|---|---|---|---|
| H1 | 41.2% | 37.3% | 40.1% |
| H2 | 42.4% | 36.4% | 40.2% |
| Full Year | 41.8% | 36.9% | 40.1% |
A large proportion of the 23.0% increase in IFRS 16 operating costs year-on-year has been driven by the continued store expansion of the Group. However, with weaker than anticipated trade across Q4, particularly in August and September, the Group’s operating leverage was degraded. Given that we saw this weaker trading towards the end of the financial year and that we have a relatively high fixed cost base, we were unable materially to adjust the cost base downwards to reflect lower sales run-rate. This, compounded with non-core projects have added cost to the business, resulting in operating cost percentage of 26.8%, an increase of 1.2pps on a constant currency basis versus the prior year. Recognising these issues, we will take a more disciplined approach to both operating costs and capital investment as we go forward and look to increase the flexibility in the cost base. Our first priority was halting peripheral projects. As a consequence of the above challenges on gross profit margin and operating cost leverage, whilst we have added over €800m (+17%) to top line revenue in FY23, only a small portion has flowed through to profit with underlying (IFRS 16) EBITDA of €753m being +3.1% higher than the prior year on both an actual and constant basis. Group level underlying (IFRS16) EBITDA margin reduced 1.9pps to 13.3% (FY22 15.2%) largely operating costs driven. This clearly resets the focus going forward as we look to rationalise our efforts and refocus on driving the core business, delivering gross margin recovery and being more disciplined on cost.
Underlying (pre-IFRS 16) EBITDA of €396m (7.0% of sales) represents a decline of 10.0% year-on-year as a result of increased rent costs. Whilst on an absolute level rent costs have increased further 23%, on a % of sales basis they have increased 0.3pps to 6.3%. This was as a result of inflation-driven indexation and because a large portion of the rent is fixed.
Where appropriate the financial information has been quoted on an “underlying” basis, removing the impact of “non-underlying” items, defined as material and unusual in nature, in order to help the reader better understand the Group underlying drivers of business performance. Please refer to note 27 of the financial statements for detail on use of APMs for further information.
Below we have summarised some of our key trading metrics into the appropriate geographic segmental split.
| Year to 30 September 2023 | Year to 30 September 2022 | Reported % YoY | Constant currency % YoY |
|---|---|---|---|
| UK & ROI | 2,001 | 1,890 | 5.9 % |
| Poland | 1,414 | 1,192 | 18.6% |
| Rest of Europe | 2,234 | 1,741 | 28.3% |
| Total Group | 5,649 | 4,823 | 17.1% |
| Year to 30 September 2023 | Year to 30 September 2022 | YoY change (pps) |
|---|---|---|
| UK & ROI | +5.5% | +2.1% |
| Poland | +4.9% | +4.2% |
| Rest of Europe | +7.4% | +10.3% |
| Total Group | +6.0% | +5.2% |
| Geographic Location | Revenue Mix |
|---|---|
| UK & Ireland | 32% |
| Poland | 24% |
| Rest of Europe | 51% |
| Total | 100% |
| Store Number: Year to 30 September 2023 | Store Number: Year to 30 September 2022 | YoY |
|---|---|---|
| UK & ROI | 823 | 821 |
| Poland | 1,539 | 1,335 |
| Rest of Europe | 2,267 | 1,805 |
| Total | 4,629 | 3,961 |
As we evolve as a business, our geographic footprint is changing. The UK and Polish markets remain significant although recent expansion into Western Europe sees this segment becoming increasingly material. Below we have summarised our revenue to illustrate the growing significance of Western Europe.
For reporting and operating purposes, the Group reports performance across two operating segments, Pepco and Poundland Group. The Pepco segment represents 60% (FY22: 56%) of total revenue and 73% (FY22: 71%) of underlying (IFRS 16) EBITDA with the Poundland Group segment contributing 40% (FY22: 44%) and 27% (FY22: 29%) respectively.
| Total revenue | Underlying (IFRS 16) EBITDA | |
|---|---|---|
| Pepco | 60% | 73% |
| Poundland Group | 40% | 27% |
| Constant Currency % YoY | Reported % YoY | |
|---|---|---|
| Revenue FY23 | ||
| Pepco (€m) | 3,416 | 2,714 |
| Like-for-like revenue (%) | +6.3% | +7.4% |
| Poundland Group (€m) | 2,233 | 2,109 |
| Like-for-like revenue (%) | +5.6% | +2.6% |
| Total Group (€m) | 5,649 | 4,823 |
| Like-for-like revenue (%) | 6.0% | 5.2% |
| Variance | Constant Currency % YoY | Reported % YoY | |
|---|---|---|---|
| Gross profit margin % FY23 | |||
| Pepco | (0.5)pp | (0.5)pp | (0.5)pp |
| Poundland Group | (0.7)pp | (0.7)pp | (0.7)pp |
| Total Group | (0.7)pp | (0.7)pp | (0.7)pp |
| Variance | Constant Currency % YoY | Reported % YoY | |
|---|---|---|---|
| Operating costs (IFRS 16) % FY23 | |||
| Pepco | 2.5pp | 2.5pp | 2.5pp |
| Poundland Group | 0.2pp | 0.1pp | 0.1pp |
| Total Group | 1.2pp | 1.2pp | 1.2pp |
| Variance | Constant Currency % YoY | Reported % YoY | |
|---|---|---|---|
| Underlying (IFRS 16) EBITDA FY23 | |||
| Pepco (€m) | 552 | 519 | 6.3% |
| Poundland Group (€m) | 204 | 214 | (4.5%) |
| Other (€m) | (3) | (3) | (11.8%) |
| Total Group (€m) | 753 | 731 | 3.1% |
| Variance | Constant Currency % YoY | Reported % YoY | |
|---|---|---|---|
| Underlying (IFRS 16) EBITDA margin % FY23 | |||
| Pepco | (3.0)pp | (3.0)pp | (3.0)pp |
| Poundland Group | (1.0)pp | (1.0)pp | (1.0)pp |
| Total Group | (1.8)pp | (1.9)pp | (1.9)pp |
| Variance | Constant Currency % YoY | Reported % YoY | |
|---|---|---|---|
| Underlying (pre-IRFS 16) EBITDA FY23 | |||
| Pepco (€m) | 330 | 348 | (5.2%) |
| Poundland Group (€m) | 69 | 94 | (26.3%) |
| Other (€m) | (4) | (4) | (17.4%) |
| Total Group (£m) | 396 | 439 | (9.9%) |
| Variance | Constant Currency % YoY | Reported % YoY | |
|---|---|---|---|
| Underlying (pre-IFRS 16) EBITDA margin % FY23 | |||
| Pepco | (3.2)pps | (3.2)pps | (3.2)pps |
| Poundland Group | (1.4)pps | (1.4)pps | (1.4)pps |
| Total Group | (2.1)pps | (2.1)pps | (2.1)pps |
As we move into FY24, we are seeing some early signs of recovery as real wage growth in our core Pepco markets returns to positive.
| LFL | Gross profit margin | |
|---|---|---|
| Revenue growth in FY23 | +24.8% | +6.3% |
| Pepco in FY23 fell 0.5pps year-on-year to 41.8% |
This reflects the continuing drag from high freight and commodity costs and unfavourable FX, as a consequence of our relatively long buying cycle.# Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
FY23 was an important and very successful year for the business in terms of financing. Triggered by the upcoming maturity in April 2024 of a €300m Term Loan external bank facility, the Group undertook a process to replace and diversify this debt with a debut Euro bond issuance.
The process began with obtaining a public credit rating where in June 2023 all three major ratings agencies recognised the success of Pepco Group’s compelling strategy and business model and issued positive ratings. Fitch issued a ‘BB’, Moody’s a ‘Ba3’ and S&P Global issued a ‘BB-‘ rating. This places Pepco Group in line with peers.
Following the ratings process, the Group received significant interest in the debut bond. Due to over-subscription, the quantum of the bond was increased from €300m initially sought, to €375m, taking the opportunity to increase liquidity.
In parallel with the successful debut bond process, we increased the size of the revolving credit facility (RCF) from €190m to €390m to provide additional liquidity given the ongoing growth and expanding scale of the business.
As at 30 September 2023 the Group’s total (IFRS16) gross debt of €741m is made up of:
| Description | Amount |
|---|---|
| €375m 7.25% bond due 2028 | €375m |
| €250m Term Loan B due 2026 | €250m |
| €120m drawn RCF (total RCF facility of €390m) | €120m |
| €11m finance leases and depreciation | €11m |
| Less €15m of debt issuance costs which have been capitalised | (€15m) |
Whilst the refinancing activity in FY23 has been very positive, the global macro-economic factors have resulted in a significant increase in interest rates. Net external finance expenses have increased from €54.9m in FY22 to €91.7m in FY23. Of this non-lease related interest costs increased by €24.2m to €35.7m, an effective interest rate of 3.75%.
In FY23 the Group’s tax charge was €44.7m (FY22: €51.9m), reflecting an effective tax rate of 30.4% (FY22: 23.0%). The increase in our effective tax rate is principally driven by the profile of Group performance in each operating territory. In FY24 we expect the Group’s effective tax rate to more closely reflect the blended rate of tax in the countries in which we operate. In our principal operating markets of the UK and Poland, the tax rate is currently 25% and 19% respectively.
Read more about our approach to tax on page 23
Group statutory profit before tax of €147m was down 35.8% (FY22: €226m). Whilst IFRS 16 EBITDA is marginally higher than the prior year, inflation and store expansion driven rent costs (23% YoY) growth, coupled with the increase in external borrowing costs, have more than offset this.
At an underlying level, FY23 underlying PBT of €202m (FY22: €300m) represents a decline of 33.7% on constant currency basis, driven by the rent, depreciation and amortisation and external interest factors summarised above.
Increases in average unit prices have only partially offset the FX and freight costs, a conscious decision to ensure we (FY22: +28.7%) (FY22: +7.4%) maintained our price leadership against competition, something we see as more important now than ever. Weak sales in Q4, Underlying (IFRS16) EBITDA YoY Pre-IRFS 16 EBITDA YoY have also hampered margin recovery as the challenging August +5.4% -5.9% and September highlighted above have resulted in lower than expected sales on higher margin Autumn/Winter season product. As these macro headwinds begin to subside, we are already (FY22: +16.9%) (FY22: 4.9%) starting to realise a positive outlook on margin recovery, highlighted by the fact that Pepco’s Q4 margin exited at 43%, Pepco sales performance in FY23 has once again grown at giving us heightened confidence going into FY24. an impressive +24.8% with the majority of this driven by the annualisation of store openings in FY22 along with the in-year Underlying (IFRS 16) operating costs in Pepco have increased impact of the opening of 5561 net new stores in FY23 taking the by almost 40% year on year in absolute terms in FY23. A large total number of Pepco stores to 3,523. portion of this relates to the strategic expansion of the estate, with increases in costs being experienced due to inflation, greater As we continue to expand our range and customer proposition, store numbers, higher costs of expanding into Western Europe, Pepco space growth of 22% is ahead of new store openings growth the addition of a new warehouse in Romania and a higher spend of 19% due to the opening of larger format Pepco “Plus” stores on IT infrastructure. Inflationary pressures have been a key feature which also include an FMCG offer alongside the Clothing and of FY23 with core wage inflation of 13% putting pressure on the General Merchandise offer of a standard Pepco store. operating costs across the business. This along with the drop Within our Pepco store opening programme, we entered new within our Pepco store opening programme, we entered new markets of Greece (22 stores), Portugal (14 stores) and Bosia and Herzegovina (9 stores) in the year. In addition, we successfully completed our conversion of Dealz Spain stores to Pepco Plus stores, a programme which began in FY22 with 15 conversions followed by 42 conversions in FY23. This complemented our expansion in Western Europe where we have added 257 net new stores in the year and now operate from 523 stores across Western Europe, building our scale and customer reach. Pepco’s underlying (IFRS 16) EBITDA of €552m (FY22: €519m) increased by 5.4% versus FY22, with the underlying EBITDA margin of 16.2% declining 3.0pps year on year, driven by the operating cost growth, but the shape of delivery highlighted the trading headwinds and lack of recovery on gross margin. At an underlying EBITDA level, €330m in FY23 represents a decline of 5.9% versus FY22 driven by inflationary lease indexation challenges and the significant expansion of the Pepco estate.
| H1 LFL sales growth | H2 LFL sales growth | |
|---|---|---|
| Pepco | 19.7% | -2.7% |
| Poundland Group | 10.7% | -2.4% |
Revenue growth LFL +8.4% (FY22: +5.0%) +5.6% (FY22: +2.6%) -1.2% (FY22: 6.9%) -25.2% (FY22: +25.6%)
In the face of inflationary pressures, the Poundland Group performance delivered a solid performance in FY23 increasing revenue by 8.4% (constant currency) through a mixture of new store roll-out largely in Dealz Poland and through strong FMCG driven LFL performance in Poundland.
Poundland saw a significant customer switch to FMCG products in the year as squeeze on incomes resulted in our consumers choosing ‘essential’ items over more discretionary items. This was illustrated by Poundland’s FMCG LFL sales tracking very strongly at +12.0% in FY23, materially higher than clothing which was broadly flat and general merchandise which was negative.
In Dealz Poland, LFL growth of +11.3% along with roll-out of another 115 net new stores took the total year end store count to 283 and helped support the overall 6% revenue growth in this segment. As highlighted in the October 2023 capital markets day presentations, the focus on Dealz in the short term will be centred around Poland only as we look to refine the strategic positioning of the Dealz brand in CEE.
In Poundland Group gross margin is marginally down year-on-year at 36.9% with the mix impact of the strong performance of the lower margin FMCG category partially offset by some recover of freight costs relative to prior year peaks.
From an operating costs perspective, IFRS 16 operating costs as a % of sales have increased marginally by 0.1pps to 27.7%. This is due to provision releases in FY22 compounded by inflationary pressures across FY23 with energy cost increases a key driver. These cost downsides were partially offset by Covid-driven holdover leases taking the opportunity to increase liquidity.
At an IFRS 16 level, Poundland Group EBITDA of €204m is marginally down on the prior year of €214m. Pre-IFRS 16 EBITDA of €69m in FY23 has declined by 25.2% versus the prior year driven by provision movements and year-on-year inflationary cost increases as described above.
| Underlying (IFRS16) EBITDA YoY | Pre-IFRS 16 EBITDA YoY | |
|---|---|---|
| FY23 | -2.7% | -25.2% |
| FY22 | 6.9% | 25.6% |
Pepco sales performance in FY23 has once again grown at an impressive +24.8% with the majority of this driven by the annualisation of store openings in FY22 along with the impact of the opening of 5561 net new stores in FY23 taking the total number of Pepco stores to 3,523.
As we continue to expand our range and customer proposition, Pepco space growth of 22% is ahead of new store openings growth of 19% due to the opening of larger format Pepco “Plus” stores which also include an FMCG offer alongside the Clothing and General Merchandise offer of a standard Pepco store.
Within our Pepco store opening programme, we entered new markets of Greece (22 stores), Portugal (14 stores) and Bosia and Herzegovina (9 stores) in the year. In addition, we successfully completed our conversion of Dealz Spain stores to Pepco Plus stores, a programme which began in FY22 with 15 conversions followed by 42 conversions in FY23. This complemented our expansion in Western Europe where we have added 257 net new stores in the year and now operate from 523 stores across Western Europe, building our scale and customer reach.
Pepco’s underlying (IFRS 16) EBITDA of €552m (FY22: €519m) increased by 5.4% versus FY22, with the underlying EBITDA margin of 16.2% declining 3.0pps year on year, driven by the operating cost growth, but the shape of delivery highlighted the trading headwinds and lack of recovery on gross margin. At an underlying EBITDA level, €330m in FY23 represents a decline of 5.9% versus FY22 driven by inflationary lease indexation challenges and the significant expansion of the Pepco estate.
The H2 LFL sales growth progressively weakened and despite some selected upsides from events like our excellent “Barbie” collaboration, the second half trading period delivered negative like-for-like. In particular, the final weeks of August and into September weakened significantly driven by a mixture of the impact of prolonged inflation and lagging wage growth really impacting the customer’s spending decisions, weaker than anticipated ‘Back-to-School’, high levels of promotional activity from competition and the prolonged warm weather across Europe negatively impacting on Autumn transitional stock. To put this into context, Pepco’s LFL sales in the month of September were -10.7%, with some weeks in September down closer to -20%.
Underlying (IFRS 16) operating costs in Pepco have increased by almost 40% year on year in absolute terms in FY23. A large portion of this relates to the strategic expansion of the estate, with increases in costs being experienced due to inflation, greater store numbers, higher costs of expanding into Western Europe, the addition of a new warehouse in Romania and a higher spend on IT infrastructure. Inflationary pressures have been a key feature of FY23 with core wage inflation of 13% putting pressure on the operating costs across the business. This along with the drop off in sales in H2 Pepco has driven a step back in operational leverage meaning underlying (IFRS 16) operating costs as a % of sales are 25.6%, 2.5pps higher year-on-year. Going forward, costs will be a key focus in FY24. We will look to increase the flexibility of the cost base to ensure it can be more easily adjusted to sales performance. We have already cut any low value peripheral expansion projects that add material cost to the Company.
Pepco "Plus" stores also include an FMCG offer alongside the Clothing and General Merchandise offer of a standard Pepco store.
| FY23 | FY22 | |
|---|---|---|
| Pepco | +5.4% | +16.9% |
| P.land | -2.7% | 6.9% |
| FY23 | FY22 | |
|---|---|---|
| Pepco | -5.9% | 4.9% |
| P.land | -25.2% | 25.6% |
Across FY23, we continued to invest in expansion and infrastructure to support our vision of becoming Europe’s biggest and best discount variety business. Capital investment in the year (reported) accelerated from 4.7% of sales in FY22 (€225m) to 6.9% of sales in FY23 (€390m), with investment in new stores and the refit programme in Pepco the biggest driver of the increase. Additions to property, plant and equipment, and intangible assets in FY23 of €390m were €165m higher than the previous year (FY22: €225m).
The key drivers of our capital investment in FY23 include:
In September 2023, Poundland announced a deal to acquire up to 71 Wilko store leases following the well-publicised liquidation of the Wilko business, a rival UK discount retailer. The first store opened on 30 September 2023 and by early December 64 former Wilko stores had been opened, having received a light touch refit and re-branding under the Poundland banner. The integration of Wilko stores into the Poundland brand provides the Group with an exciting opportunity to accelerate the new store pipeline in the UK, with no additional central cost base increase. It also offers the ability to bring our Poundland proposition to new regions and customers, and provide job opportunities to some of the people who were unfortunately impacted by the Wilko collapse.
| Pepco Group (€m) | FY23 | FY22 | YoY |
|---|---|---|---|
| Cash generated by Operations (reported) | 728 | 425 | 303 |
| Lease payments (IFRS 16) (Payments and Interest) | (387) | (292) | (95) |
| Tax Paid | (75) | (61) | (14) |
| Net Cash from Operations (pre-Capex) | 266 | 72 | 194 |
| Capex | (390) | (225) | (164) |
| Net Cash from Operations (post-Capex) | (124) | (154) | 30 |
| Funding and investment activities | 102 | (7) | 108 |
| Net cash flow | (22) | (161) | 138 |
| Effect of exchange rate fluctuations | 9 | (3) | 12 |
| Cash and cash equivalents at the beginning of the period | 344 | 508 | (164) |
| Cash and cash equivalents at the end of the period | 330 | 344 | (14) |
| Net debt (pre-IFRS 16) | 411 | 275 | 136 |
| Net debt: underlying EBITDA (leverage) (pre-IFRS 16) multiple | 1.0x | 0.6x | 0.4x |
| Current ratio | 0.9x | 1.1x | (0.2) |
Cash generated by operations of €728m, which has grown €303m year-on-year, reflects solid IFRS16 EBITDA generation of €753m in the year less a small cash outflow from net working capital (where an improved year on year payables position is offset by a higher inventory position). Whilst inventory has naturally increased due to the growth of the business, the sales headwinds across Q4 have led to a higher stock build than originally planned with inventory days trending higher than the prior year. Going forward we will closely target stock days as a measure with a view to reduce it to more optimal levels.
| Group stock holding (€m) | FY22 | FY23 |
|---|---|---|
| Pepco | 129 | 126 |
| Poundland | 124 | 127 |
| Group Inventory Days | 118 | 113 |
| # Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023 |
We have a strong, experienced Board of Directors, with a diverse range of professional backgrounds, skills, and perspectives. The collective experience of the Directors and the diverse skills and experience they possess, supported by independent thought and constructive debate, enable the Board to reach decisions in a focused and balanced way, which is crucial to ensuring the continued long-term success of the Company.
| Name | Role | Nationality | Gender | Age | Appointment Details # Board of Directors
The Directors supervise the strategy of the Company. In supervising the strategy of the Company, the Directors also take into account the following matters:
The tasks, responsibilities and internal procedure matters for the Board are addressed in the Articles of Association and Board Rules.
The Executive Directors are responsible for the day-to-day management of the Company. The Non-Executive Directors are responsible for supervising and advising the Executive Directors.
The positions of the Chair and CEO are two distinct positions, each with their own areas of responsibility, conferred by and accountable to the Board as a whole. This distinction is explained below, and further details are set out in the Articles of Association and the Board Rules of Procedure available on the Company’s website.
The Chair of the Board is a Non-Executive Director and responsible for leading the Board and ensuring its effectiveness, setting its agenda and maintaining high standards of corporate governance. The Chair facilitates the effective contribution of the Non-Executive Directors and constructive relations between them and the Executive Directors.
The Chief Executive Officer is responsible for the day-to-day management of the Group and implementation of the strategy and other Board decisions.
Separate individuals have occupied the positions of the Chair and the CEO until the resignation of the CEO on 11 September 2023. With effect from 12 September 2023, Andy Bond, the Chair of the Board, stepped into the role of Executive Chair to temporarily lead the Executive team and overall management of the Company until a successor CEO is appointed. Whilst both roles are now being performed by the Executive Chair, this does not amend the respective roles and responsibilities of the Chair and CEO. Given Andy’s wealth of experience within the retail sector and within the Pepco Group, the Board believes that he is well placed to lead the business as Executive Chair whilst the search for a new CEO is in progress.
Neil Galloway was appointed Executive member of the Board in the role of Chief Financial Officer on 1 April 2023. Andy Bond was appointed Chair of the Board, replacing Richard Burrows, who stepped down as Non-Executive Director and Chair of the Board following the conclusion of the AGM.
Prior to this reporting period and in accordance with Article 15.5 of the Company’s Articles of Association, the Board appointed Neil Brown as Vice Chair of the Board.
On 11 September 2023, Trevor Masters resigned as CEO. Andy Bond was appointed as Executive Chair with effect from 12 September.
As at the end of the reporting period, four of the Non-Executive Directors – Brendan Connolly, María Fernanda Mejía, Pierre Bouchut, and Grazyna Piotrowska Oliwa – are considered to be independent in accordance with best practice provisions of the Warsaw Code and the Dutch Code. The remaining four Non-Executive Directors – Andy Bond, Neil Brown, Helen Lee Bouygues and Paul Soldatos – are not considered to be independent within the best practice provisions of the applicable Codes. Andy Bond as former CEO and Executive Director of the Company does not qualify as independent. Neil Brown, Helen Lee Bouygues, and Paul Soldatos are not independent due to their position as directors of the Company’s principal shareholder.
The general meeting appointed Trevor Masters and Neil Galloway as Executive Directors and Andy Bond as Non-Executive Director and Chair of the Board at the Company’s AGM in February 2023. Following the resignation of Trevor Masters, at the end of the reporting period the Board comprised of eight members.
Following the end of the reporting period, Helen Lee Bouygues resigned as Non-Executive Director.
All other members of the Board were appointed during the 2021 reporting period and are serving their initial terms. Board members are appointed for an initial period of three years and may then be reappointed for two subsequent three-year terms.
All Directors are subject to formal appointment by shareholders at the AGM and to re-appointment after a three-year term in office, following a binding nomination of the Board and in accordance with the Articles of Association of the Company. The general meeting of shareholders may reject a binding nomination of the Board by a resolution passed by two-thirds of the votes cast representing more than half of the Company’s issued share capital.
The general meeting of shareholders can dismiss and suspend members of the Board other than on the proposal of the Board upon a majority of two-thirds of the votes cast representing more than half of the Company’s issued share capital. If the proposal is made by the Board, a simple majority of the votes cast is sufficient.
The Chair of the Board and the Board itself are supported by the Company Secretary, who is appointed by the Board and available for advice and assistance to all Board members. The Company Secretary is responsible for ensuring that proper procedures are followed and that the Board acts in accordance with its statutory obligations as well as its obligations under the Articles of Association.
Where Board members have external appointments, the Board is satisfied that such appointments do not impact on the individual Board member’s ability to devote adequate time and sufficient attention to the concerns of the Company.
The Board operates the following principal Committees: the Audit Committee, the Remuneration Committee, and the Nomination Committee. The function of these Committees is to prepare the decision making of the Board.
Each Committee of the Board has established terms of reference which prescribe the role and responsibility of the relevant Committee, its composition, and the process through which the Committee discharges its duties. These terms of reference are available on the Company’s website: www.pepcogroup.eu.
During the reporting period, more than half of the members of the Audit Committee (including its Chair) and the Remuneration Committee were independent within the meaning of the applicable best practice provisions of the Warsaw Code and Dutch Code with due observance to the Dutch Decree on Implementation Audit Committee.
The Board attended a strategic risk workshop in July 2023 with the support of its external advisors. The workshop objectives were split into short-term and long-term outcomes:
Short-term
Long-term
The Board feedback included a requirement to increase visibility, executive accountability, specific detail, and the speed of risk reporting; all of which has been incorporated into a new Group Risk Register and improvements to the Enterprise Risk Management Roadmap.
When appointed to the Board, Directors are provided with induction training and information about the Group, the role of the Board and the matters reserved for its decision, the terms of reference and membership of the Board Committees and the latest financial information about the Group. This is supplemented by meetings with the Company’s professional advisors, and, where appropriate, visits to key locations and meetings with certain senior executives to develop the Directors’ understanding of the business.
Throughout their period of office, Non-Executive Directors are continually updated on our business, markets and other changes affecting the Group and industry in which we operate, including changes to the legal and governance environment and the obligations on themselves as Directors. Specific updates this year included an externally facilitated Board Risk Workshop.
Our Board Diversity Policy has been in place since December 2021, and addresses the legal and regulatory requirements to set appropriate and ambitious targets to achieve a more balanced ratio between men and women. Our Board Diversity Policy commits to at least 30% representation of men and women on the Board for both the Executive Directors and the Non-Executive Directors. As at year end, the Board comprised eight Non-Executive Directors and one Executive Director, among whom six are male (66.6%) and three are female (33.3%). The policy is considered in the operation of the Nomination Committee and has continued to be met throughout the financial year.
When considering nominations of new Board members, the Board takes account of the following diversity aspects: nationality, work background, gender, age, and qualifications (including educational and expertise).# Annual Report and Consolidated Financial Statements 2023
The Board focused on the below areas during the reporting period.
All Directors are expected to attend each Board meeting and each Committee meeting for which they are members, unless there are exceptional circumstances preventing them from participating. Attendance at Board and Committee meetings was as follows:
| Directors | Board (16) | Audit Committee (10) | Remuneration Committee (7) | Nomination Committee (3) |
|---|---|---|---|---|
| Andy Bond (Executive Chair)¹ | 6 | n/a | n/a | n/a |
| Neil Brown (Vice Chair) | 15 | 10 | 7 | n/a |
| Helen Lee | 12 | 8 | n/a | 2 |
| Paul Soldatos | 15 | n/a | 7 | n/a |
| Pierre Bouchut | 16 | 10 | 7 | n/a |
| Brendan Connolly | 13 | 6 | 7 | n/a |
| María Fernanda Mejía | 15 | 10 | n/a | 3 |
| Grazyna Piotrowska-Oliwa | 15 | n/a | 7 | n/a |
| Trevor Masters² | 3 | n/a | n/a | n/a |
| Neil Galloway³ | 5 | n/a | n/a | n/a |
| Richard Burrows (Chair)⁴ | 10 | n/a | n/a | 2 |
According to the Board Rules, the Board meets in principle once every two months and at least once each financial quarter. Each Director is entitled to cast one vote. In the event of a tie, the Chair has the casting vote. During FY23, meetings of the Board were held both in person and virtually via Microsoft Teams, as permitted by Article 16.6 of the Articles of Association.
Most decisions of the Board require a simple majority of the votes cast. For Board decisions on matters which cannot be resolved upon by the Non-Executive Directors due to a direct or indirect conflict of interest and for Board decisions to approve a related party transaction, such decisions require the majority of the votes cast to include at least a majority of the votes of the independent Non-Executive Directors. When determining how many votes are cast by members of the Board, no account shall be taken of Board members who are not permitted to take part in the discussions or decision making due to a conflict of interest.
Decisions of the Board may be taken in writing, provided that all Board members (in respect of whom no conflict exists) have consented in writing.
In line with the Remuneration Policy of the Company, the remuneration of the Executive members of the Board is determined by the Non-Executive members of the Board, upon recommendation of the Remuneration Committee. The Non-Executive Directors appointed via the Relationship Agreement (being Neil Brown, Helen Lee Bouygues, and Paul Soldatos) do not receive remuneration from the Company or its affiliated enterprises. The remuneration of the Non-Executive members of the Board is determined by the Non-Executive members of the Board in accordance with the Remuneration Policy applicable to the Non-Executive Directors, including the Chair of the Board. The Remuneration Policy and the elements of the remuneration of Board members are set out in the Remuneration report and note 8 to the financial statements.
The Articles of Association and Board Rules prescribe how conflicts of interest between the Company and Board members must be managed. Transactions between the Company and a Board member who has a conflict of interest must be entered into on arm’s length terms. A Board member who has a conflict of interest cannot participate in deliberations and decision making relating to the subject matter of the conflict of interest.
In FY23, payments totalling £47,100 were made to Woodcliffe Associates Limited, a company that Andy Bond has a related party interest in. These costs relate to consultancy services provided by Andy Bond prior to his appointment as Chair in February 2023.
Any decision to enter into a transaction under which a member of the Board has a conflict of interest that is of material significance to the Company and/or the relevant Board member requires the approval of the Board.
There were no material transactions which gave rise to conflicts of interest with any Board members reported during the reporting period. Reference is made to note 25 (Related party transactions) of the consolidated financial statements for a description of any related party transactions.
The Board has the overall responsibility for ensuring that the Group maintains a strong system of internal controls. The system of internal controls is designed to identify, manage and evaluate, rather than eliminate, the risk of failing to achieve business objectives.
The key elements of the Group’s system of internal controls are as follows:
> Information on the key risks and uncertainties of the Group is set out on pages 38 to 44
The Articles require that the AGM be held in the Netherlands within six months of the end of the financial year. Additional general meetings may be convened at other times by the Board as necessary. The Company’s FY22 AGM was held at the Hilton Amsterdam Airport Schiphol on 2 February 2023. Shareholders were invited to attend the AGM in person, and the AGM was broadcast via the Company’s website. The right to vote at the AGM could be exercised by an electronic voting proxy with voting instructions to a civil-law notary or submitting the voting instructions by means of a proxy form via the Company’s website. Shareholders were entitled to submit questions about agenda items prior to the AGM.
The FY23 AGM will be held prior to 31 March 2024. The Articles provide that the agenda for the AGM shall at least be as follows:# Corporate governance statement continued
Pursuant to the Financial Supervision Act (Wet op het financieel toezicht) and the Dutch Decree on Disclosure of Major Holdings and Capital Interests in Issuing Institutions, the Company has been notified of the following substantial shareholdings regarding the Company as at 30 September 2023:
| Shares | Percentage |
|---|---|
| Total free float on WSE, of which: | |
| Non-substantial shareholdings | 155,419,470 |
| Andy Bond* | 3,745,301 |
| Independent Non-Executive Directors** | 240,613 |
| IBEX Retail Investments (Europe) Limited | 415,594,616 |
| Pepco Group Employee Benefit Trust*** | 1,027,342 |
| Total | 576,027,342 |
72.15% of the Company’s issued share capital is ultimately owned by IBEX Topco B.V. (ITBV), with 0.04% owned by the Independent Non-Executive Directors, 0.65% owned by Andy Bond, Executive Chair, and the remaining 26.98% traded on the WSE. Of the shares traded on the WSE, no shareholder owns more than 5%.
At the time of the Company’s initial listing on the WSE, the Company entered into a relationship agreement with Steinhoff International Holdings N.V. and certain of its affiliate enterprises. Following the implementation of the Steinhoff reorganisation, the rights of Steinhoff International Holdings N.V. were transferred to the ITBV, resulting in an amended and restated agreement between the ITBV and certain of its affiliate enterprises (the ITBV Affiliates) to regulate the relationship between the Company and the IBEX group of companies (the Relationship Agreement). The terms of the Relationship Agreement comply with the requirements of principle 2.7.5 of the Dutch Code. The Relationship Agreement provides that:
a) for so long as the ITBV Affiliates hold, in aggregate, more than 30% of the voting rights of the Company, the ITBV Affiliates will jointly be entitled to nominate three Non-Executive Directors to the Board. This nomination right is reduced to two Non-Executive Directors when the ITBV Affiliates hold, in aggregate, less than 30% of the voting rights of the Company. This nomination right is further reduced when the ITBV Affiliates hold, in aggregate, less than 20% of the voting rights of the Company. If the ITBV Affiliates hold, in aggregate, less than 10% of the voting rights of the Company, they will no longer have the entitlement to nominate any members of the Board;
b) subject to compliance with applicable laws and regulations, including the Market Abuse Regulation, the Company will:
i. provide certain information to the ITBV Affiliates to enable the ITBV group of companies to fulfil its regulatory and legal obligations and to facilitate the preparation of the accounts of the ITBV Affiliates and connected enterprises for so long as and when such provision is reasonably required by generally applicable accounting principles; and
ii. provide reasonable assistance and access to Company management in connection with any planned disposal of shares in the Company that are held by the ITBV Affiliates;
c) transactions and arrangements between the ITBV group of companies and the Pepco Group will be conducted at arm’s length and on normal commercial terms; and
d) no member of the ITBV group of companies will propose or procure the proposal of a member resolution which would prevent the Company from complying with its legal and regulatory obligations.
The Articles of Association provide that the general meeting may issue shares (or delegate that authority to the Board). Any delegation to the Board to issue shares must specify the maximum number of shares that can be issued under the delegation and the duration of the delegation cannot exceed five years. The designation can be extended for periods not exceeding five years.
A resolution by the general meeting to issue shares or to designate such authority to the Board can only be taken at the proposal of the Board.
The authorised share capital of the Company is €17,250,000.00 and is divided into 1,725,000,000 shares with a nominal value of €0.01 each. The issued share capital is €5,760,273.42 divided into 576,027,342 shares. Each share carries one vote. The shares are listed on the Warsaw Stock Exchange (WSE). All shares carry equal rights and are freely transferable.
Shareholders who hold shares on a statutory record date (i.e. the 28th day prior to the AGM) are entitled to attend and vote at the AGM. Shareholders may exercise their rights if they are the shareholders of the Company on the record date and they or their proxy have notified the Company of their intention to attend the AGM in writing or by any other electronic means that can be reproduced on paper ultimately at a date set for that purpose by the Board of Directors, which may not be earlier than the seventh day prior to the AGM.
Each share in the issued share capital of the Company confers right to cast one vote at the AGM.
Subject to certain exceptions provided by Dutch law or the Articles of Association, resolutions of the AGM are adopted by a simple majority of the votes cast at the meeting. Shareholder votes can be cast either in writing or electronically.
The Articles of Association can be amended by resolution of the AGM. A resolution to amend the Articles of Association can only be adopted at the proposal of the Board.
The Company has a one-tier system of management that means that managing and supervisory duties are joined in the Board of Directors. Appointment and/or dismissal and/or suspension of the members of the Board of Directors is the prerogative power of the general meeting of the shareholders. Each Executive Director may also, at any time, be suspended by the Board. Pursuant to the Articles of Association, the number of Directors shall be determined by the Board. Following a binding nomination by the Board, with due observation of the provisions under the Articles of Association, the Directors are appointed by the general meeting. If and when selecting and nominating candidates for the Board, the Diversity Policy is taken into consideration.
Andy Bond, Mark Elliott, and Sean Cardinaal (the Management Selling Shareholders) hold or previously held management positions within the Group and held founder shares that were converted into shares of the Company in May 2021. Each of the Management Selling Shareholders agreed that from 5 May 2021 until 1 January 2024, they will not, without the prior written consent of the Company directly or indirectly, offer, issue, lend, mortgage, assign, charge, pledge, sell or contract to sell, issue options in respect of, or otherwise dispose of, directly or indirectly, or announce an offering or issue of, any shares held by them immediately following the IPO (Locked-up Shares) (or any interest therein or in respect thereof) or any other securities exchangeable for or convertible into, or substantially similar to, the Locked-up Shares or enter into any transaction with the same economic effect as, or agree to do, any of the foregoing, such lock-up restrictions being subject to certain customary exceptions.
The lock-up undertaking described above has, on 1 January 2023, ceased to apply in respect of two-thirds of the Locked-up Shares.
The AGM is convened by publication of a notice on the Company’s website at least 42 days prior to the AGM. Shareholders are entitled to propose items for the agenda of the AGM provided that, alone or jointly, they hold at least 3% of the issued share capital of the Company. Proposals for agenda items must be submitted at least 60 days prior to the date of the meeting. A request of a shareholder for an item to be included on the agenda of the AGM must be explained in writing. The principles of reasonableness and fairness may permit the Board to refuse the request.
Shareholder votes can be cast either in writing or electronically.
The following votes are to be cast at the AGM:
* advisory vote in respect of the Remuneration report;
* discussion of the Annual Report;
* discussion and adoption of the annual accounts;
* discharge of the Board members from their liability;
* (if put on the agenda) designation of the Board as competent to issue shares;
* (if put on the agenda) appointment of external auditors;
* (if required) authorisation of the Board to permit the Company to acquire its own shares.
The Board is satisfied that the key risks to the business and relevant mitigating actions are acceptable for a business of the type, size and complexity as that operated by the Group.
65 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
In FY23 internal audit activities were consolidated into one Group internal audit function to provide assurance over key risks in all operating companies. Internal audit activities were performed using a combination of in-house staff based in the UK and Poland as well as co-sourced with EY to leverage industry best practice and subject matter expertise. A Group risk management framework is in place and updates to risk registers are presented to the Group Audit Committee.# Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
held by a Management Selling Shareholder at such date, and from The Articles of Association permit the general meeting to restrict 1 January 2023 applied to one-third of the remaining Locked-up or exclude the pre-emption rights of shareholders at the proposal Shares held at such date until 1 January 2024 (unless waived with of the Board. A resolution to exclude shareholders’ pre-emption the prior written consent of the Company). During the October 2021 rights requires a majority vote of at least two-thirds of votes cast Board meeting, the Company agreed to allow Sean Cardinaal to if less than half of the Company’s issued and outstanding share sell up to one-third of his Locked-up Shares from 1 January 2022, capital is present at the general meeting. and his remaining Locked-up Shares from 1 January 2023. The Company waived the remaining lock up provisions relating to Mark Under the Articles of Association, the Company may acquire its Elliott on 7 June 2023. own shares if the general meeting authorises the Board to do so. An authorisation for the Board to acquire shares in the Company Independent Non-Executive Director lock-up is limited to 18 months. Such authorisation was obtained at the In respect of work undertaken by them in relation to and in general meeting in February 2023, and will be requested at the preparation for roles as Board members, in the period prior to the general meeting in March 2024. Company’s listing on the WSE one-off fees were paid to Richard Burrows, Brendan Connolly, María Fernanda Mejía, Grazyna No authorisation of the general meeting is required for the Piotrowska-Oliwa, and Pierre Bouchut which were used by these Company to acquire its own shares for the purpose of transferring individuals to subscribe for shares in the Company on admission to such shares to employees of the Pepco Group under an applicable the WSE (at the admission offer price). share plan. Shares acquired by these Board members on admission must be held until the later of: (i) 26 May 2024; or (ii) the first anniversary of the date on which the relevant Board member ceases his or her directorship of the Company. Richard Burrows stepped down as Non-Executive Director and Chair of the Board following the conclusion of the AGM on 2 February 2023.
67 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Dear Shareholders,
Introduction
I am pleased to present the report of the Audit Committee for the year ended 30 September 2023, setting out the ongoing responsibilities and objectives of the Committee and the work that has been conducted during this year.
Committee composition
As at year end, the Committee comprised of five members, each of whom is a Non-Executive Director of the Company (with three members constituting a quorum). María Fernanda Mejía, Brendan Connolly and I are considered to be independent Non-Executive Directors within the meaning of the Dutch Code and Warsaw Code; Helen Lee Bouygues (who resigned from the Board with effect from 2 October 2023) and Neil Brown are not considered to be independent. The Committee must have at least one member with recent and relevant financial experience and with competence in accounting and/or auditing. The Chair of the Board may not be a member of the Committee. The Company Secretary acts as secretary to the Committee. The Group CFO, Senior Internal Auditor, and external auditors attend all meetings and other individuals including the Group General Counsel, the Group Finance Director, and the Group Director of Treasury, Tax and Risk may also attend and are available to meet on a one-to-one basis as and when required to support me in fulfilling my role as Chair.
Audit Committee Chair
The Audit Committee meets as often as is required for its proper functioning and the timing of meetings is agreed in advance and set to accommodate the dates of release of financial information. In addition to scheduled meetings, I regularly liaise with the Group CFO. The Committee has a schedule of regular, structured meetings and consults with external auditors, advisors and Company management where appropriate. We also hold regular meetings with the external auditors without management being present. The governance structure of the internal audit function was reviewed in FY23. To increase the independence of the function, the Senior Internal Auditor reports organisationally to the Group CFO and functionally to me as the Chair of the Audit Committee. The new Group Head of Internal Audit was appointed in October 2023.
68 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
The responsibilities of the Audit Committee, as delegated by the Board, are set out in its terms of reference and include the following:
I am pleased with the progress we have made across all areas of our ESG agenda, and I am encouraged by the level of engagement across the Group. The Committee structure allows for greater depth of engagement and clear focus in driving forward our ESG agenda. The provision of a quarterly report to the Committee on ESG initiatives and deliverables by the Director of Group Treasury, Tax and Risk and Group Head of Risk and ESG Reporting, provides a clear reporting line on all ESG matters to me. We also continue to prepare the Group to comply with ESG regulatory reporting requirements. During the year, the Group recruited a Head of Group Sustainability to strengthen its ESG governance.
For further information on the Group's approach to ESG, please see our report at page 16
More detail on the role and duties of the Committee can be found in the terms of reference on the Company’s website.
The Committee has an extensive agenda concerning the Group’s financial reporting cycle, with a focus on the Group audit assurance and risk processes. The Committee oversees these matters, working in conjunction with senior management, the external auditor, the internal audit function and the financial reporting team. Additional activities during the year included:
69 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
The Board has overall responsibility for ensuring that the Group maintains a sound system of internal control. There are inherent limitations in any system of internal control and no system can provide absolute assurance against material misstatements, loss, or failure. Equally, no system can guarantee elimination of the risk of failure to meet the objectives of the business.# Audit Committee report
The Audit Committee (the “Committee”) supports the Board of Directors (the “Board”) in fulfilling its oversight responsibilities with respect to the integrity of the Group’s financial reporting, internal controls and risk management processes. The Committee’s primary responsibilities are to:
The Committee is composed of three members, all of whom are Non-Executive Directors. Two members constitute a quorum. The Committee is chaired by Pierre Bouchut. The other members are Ilias Georgiadis and Frank van Zanten. The Company Secretary acts as secretary to the Committee.
The Committee met six times during FY23. The attendance of each member at these meetings is set out in the table below:
| Member | Attendance |
|---|---|
| Pierre Bouchut | 6/6 |
| Ilias Georgiadis | 6/6 |
| Frank van Zanten | 6/6 |
In accordance with its terms of reference, the Committee undertook the following activities during FY23:
In completing its review, the Committee concluded that the terms of reference remained appropriate and reflected the manner in which the Committee was discharging its duties.
In considering the accounting matters referred to above, the Committee was provided with papers and reports prepared by the Group’s finance department and the external auditors and the explanations and disclosures made in the Group’s financial statements. The Committee also considered the significance of these accounting matters in the context of the Group’s financial statements and their impact on the Group statement of comprehensive income and statement of financial position.
The Group operates within an increasingly regulated marketplace and is challenged by regulatory requirements across the board, including those controlling bribery and corruption, the importation of goods, data protection, and health and safety. This creates risk to the organisation as non-compliance can lead to financial penalties and reputational damage in respect of customers, colleagues, suppliers, investors, and other stakeholders.
The Group has policies and processes in place for whistleblowing and the Committee is satisfied that colleagues have the opportunity to raise concerns about possible fraudulent activity and any other concerns that arise within the organisation. The Committee is also satisfied that arrangements are in place for proportionate investigation of such matters, including appropriate follow-up action.
Prior to publication, the Committee reviewed this Annual Report, Consolidated Financial Statements, Company financial statements, and the Independent audit opinion. In particular, it considered the following:
The Committee has helped the Board maintain an approach to risk management which incorporates a framework within which risk is managed and the responsibilities pertaining to the application of that framework. In FY23, this has been further strengthened through the appointment of a dedicated Group Head of Internal Audit.
The Group is proactive in ensuring that Group and operational risks are consistently identified and managed within each operating company. In addition, the Group risk appetite and risk register are maintained which detail:
A description of the key risks are set out on pages 38 to 44. The Board has confirmed that it has conducted an assessment of the principal risks facing the Group, including those which threaten its business model, future performance, solvency or liquidity. The Board considers that the processes undertaken by the Committee are appropriately robust and effective.
During the year, the Board has not been advised by the Committee of, nor has it identified itself, any failings, fraud, or weaknesses in internal control which it has determined to be of material in the context of the financial statements. The Committee continues to believe that appropriate controls are in place throughout the Group and that the Group has a well-defined organisational structure with clear lines of responsibility and a comprehensive financial reporting system including internal audit reporting to the Audit Committee.
The Committee reviewed the appropriateness of adopting the going concern basis of accounting in preparing the Annual Report and Consolidated Financial Statements. The assessment included a review of the liquidity impact of a severe, but plausible, management downside scenario and a series of reverse stress tests.
At the request of the Board, the Committee considered whether the financial statements and the elements of the Annual Report that are relevant to the financial statements, as a whole, are fair, balanced and understandable and whether they provide the necessary information to shareholders to assess the Group’s position, performance, business model and strategy. The Committee considered the Company management’s assessment of items included in the financial statements and the prominence given to them. The Committee and subsequently the Board were satisfied that, taken as a whole, the Annual Report and Consolidated Financial Statements are fair, balanced, and understandable.
Mazars Accountants NV were appointed as the independent auditors of the Company and its subsidiaries for the financial year ended 30 September 2023. The partner responsible for the Group audit opinion is Nathalie Habers.
Auditor independence is maintained by reviewing Mazars’ confirmation of their independence and monitoring the nature and value of non-audit services performed. The Group’s policy prevents the external auditors providing any services designated as prohibited within the Dutch Code or the Warsaw Code and requires Audit Committee approval for the provision of any other services regardless of their magnitude. Any non-audit services will be subject to tender processes, with the allocation of work made on the basis of competence, cost effectiveness, regulatory requirements, potential conflicts of interest, and knowledge of the Group’s business. The level of non-audit fees is monitored to ensure it does not exceed 70% of the average annual statutory audit fees payable over the last three years. Payments were made to Mazars in the financial year ended 30 September 2023 for non-audit services in respect of a review of the bond prospectus and agreed upon procedures provided to PGS, both totalling €132,000 as detailed within note 4 to the financial statements.
I would like to thank the management team and all Committee members for their valuable contribution and support during the year.
Pierre Bouchut
Audit Committee Chair
22 December 2023
Shaping Board excellence
Dear Shareholders,
The Nomination Committee’s report for the year ended September 2023 is set out below.
The Committee comprises three members, each of whom is a Non-Executive Director of the Company. Two members constitutes a quorum. Following the departure of Richard Burrows after the conclusion of the AGM in February 2023, I adopted the role of Chair of the Nomination Committee until 2 October 2023 (following the close of the reporting period) when the Board appointed María Fernanda Mejía as the new Chair. María Fernanda Mejía and Helen Lee Bouygues both served as members of the Committee during the year, having been appointed in FY21. María Fernanda Mejía is an independent Non-Executive Director within the meaning of the Dutch Code and Warsaw Code. Helen Lee Bouygues and I are Non-Executive Directors who are not considered to be independent. The Company Secretary acts as secretary to the Committee.
Following the end of the reporting period, Helen Lee Bouygues resigned as a Director and Committee member on 2 October 2023. Neil Brown, Paul Soldatos and Brendan Connolly were appointed as members of the Committee on 13 November 2023.
The timings of Committee meetings are agreed in advance and the Committee makes recommendations to the Board which it deems to be appropriate on any area within its remit where action or improvement is needed.
Andy Bond
Nomination Committee Chair
The Committee meets at least twice each year and its main duties are:
More detail on the role and duties of the Committee can be found in the terms of reference on the Company’s website.# Annual Report and Consolidated Financial Statements 2023
The Committee considered the following matters during the year:
– recommended to the Board the appointment of Neil Galloway as the new Group CFO and his nomination as Executive Director of the Company at the 2023 AGM;
– recommended to the Board the nomination of Andy Bond (i) as Non-Executive member of the Board and designate Chair of the Board for approval at the 2023 AGM; and (ii) in September 2023, as Executive Chair; and
– considered the composition of the Board Committees.
The Board has prepared a profile of its size and composition, taking into account the nature of the business, relevant activities, and the preferred expertise and background of Board members. The combined experience, expertise, background and independence of the Board members enables the Board to effectively carry out its duties and responsibilities in relation to the Company and its stakeholders.
The appointments of Pierre Bouchut, Brendan Connolly, María Fernanda Mejía, and Grazyna Piotrowska-Oliwa ensure that the composition of the Board complies with the independence requirements of the Dutch Code and the Warsaw Code, and the appointments of Neil Brown, Helen Lee Bouygues, and Paul Soldatos to the Board ensure that the composition of the Board complies with the terms of the Relationship Agreement.
The Company has a Board Diversity Policy, which underscores our commitment to promoting equality, diversity and inclusion in the boardroom. Please see our Corporate Governance section on page 63 for more information on Board diversity.
from 2 October 2023. I am delighted to have been appointed as the Chair of the Nomination Committee and would like to thank Andy for his leadership of the Committee in FY23.
Since the close of the previous reporting period, the Committee has reviewed areas of strategic priority:
– Succession planning;
– Diversity & Inclusion policy;
– Board profile;
– Directors Retirement Schedule;
– Nomination Committee Terms of Reference; and
– Adopted the Nomination Committee report of the former Chair.
Within FY24, the Committee intends to conduct an externally led evaluation of Nomination Committee Chair our Board, review the Group’s succession plans and, of course, forge ahead with our search for a new CEO. I look forward to working with the Committee to ensure Board leadership through this next phase of growth for the business.
73
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Dear Shareholders,
I would like to thank our shareholders for their continued support in 2023, during which time we have faced many changes as a business. We amended our Remuneration Policy at the AGM in February 2023 to align with our strategy and have continued to operate within this for the year. As a Dutch company listed on the WSE we have various reporting requirements and, as we did last year, we have chosen to supplement these with additional information in the interests of transparency. This letter and the Remuneration report on pages 77 to 81 will also be presented for an advisory vote at our next AGM. We would like to thank our shareholders for supporting our Remuneration report at our AGM in February 2023.
The Remuneration Committee’s purpose is to develop a reward package for Executive Directors and senior managers that supports the Company’s vision and strategy, and to ensure that rewards are performance based, encourage long-term shareholder value creation and take into account the remuneration of the whole workforce. More detail on the role and duties of the Committee can be found in the terms of reference on the Company’s website.
The Committee comprises five members, each of whom is a Non-Executive Director of the Company. Three members constitutes a quorum. Pierre Bouchut, Grazyna Piotrowska-Oliwa and I are members of the Committee who are independent Non-Executive Directors within the meaning of the Dutch Code and Warsaw Code. Paul Soldatos and Neil Brown are not considered to be independent. The Chair of the Board may not be a member of the Remuneration Committee. The Company Secretary acts as secretary to the Committee. Other individuals, including senior Executives and external professional advisors to the Committee, may be invited to attend when appropriate and necessary. No individual will be present when their own remuneration is discussed.
The Remuneration Committee meets at least three times each year and is responsible for preparing the decision making of the Board on the remuneration of members of the Board and selected senior Executives. The Committee is also responsible for reporting to the Board on the implementation of the Remuneration Policy in each year in the context of the achievement of the Company’s long-term strategy and objectives.
74
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
The main duties of the Remuneration Committee are as follows:
– to recommend to the Board the Remuneration Policy of the Company;
– to advise on and recommend to the Board the remuneration framework for the Executive Directors and selected senior Executives and to advise the AGM on the remuneration of the Non-Executive Directors;
– to advise on the structure of and target setting for performance-based incentive plans of the Company, including monitoring performance against any targets;
– to review all share incentive plans for approval by the Board and shareholders; and
– to prepare the Remuneration Report.
During the reporting period, the Board focused on the areas set out below:
– reviewed remuneration for the Executive Directors and selected senior Executives;
– reviewed the revised terms of the Company’s Value Creation Plan including alternative financial measurement;
– reviewed and approved the remuneration packages for our Executive Chair, and outgoing remuneration for both our previous Chair and previous CEO;
– reviewed performance against FY23 bonus targets for the Executive Directors;
– reviewed the FY23 Short-Term Incentive Plan (STIP) targets and salary levels for Executive Directors;
– considered the Executive remuneration market update;
– reviewed the terms of reference to ensure alignment with the Dutch Code and Warsaw Code;
– considered appropriate metrics for the Group LTIP;
– reviewed Non-Executive Director fees for 2024;
– reviewed Executive Directors’ shareholdings against shareholding requirements;
– reviewed and approved the annual cap for VCP participants;
– reviewed the 2023 AGM feedback and issues raised by proxy voting agencies;
– considered alignment of Executive pay with Company culture;
– reviewed the Remuneration Report; and
– considered the mechanism to be used to calculate the value of participation rates for 2023 under the VCP.
During the year, Richard Burrows stepped down as Non-Executive Director and Chair of the Board. Following the recommendation of the Board and the approval of the shareholders at the AGM on 2 February 2023, Andy Bond was appointed as Chair of the Board with effect from the close of the meeting.
Trevor Masters stepped down from the Board and as CEO on 11 September 2023. In the interim period, Andy Bond has stepped up as Executive Chair whilst we search for an appropriate CEO candidate. On appointment as Executive Chair, Andy received a salary of £835,000 and will receive a bonus of up to 150% of his annual base salary. This salary is reflective of the increased time commitment involved. Andy will maintain his previous VCP participation percentage of 1.0%.
Trevor will receive a payment equal to his salary and benefits over the remainder of his notice period until 11 March 2024, a statutory severance payment of £11,000 (in accordance with Polish law), severance pay as described in the Remuneration Report. He will also remain eligible to receive 334,482 shares by reason of his nil-cost options granted in 2022, subject to reaching the vesting target at the end of financial years 2023 and 2024.
Neil Galloway was appointed as CFO and as an Executive member of the Board at the 2023 AGM. On appointment to the Board, Neil’s salary was set at £600,000 with a pension allowance of 13% of his salary. Neil is eligible for a maximum bonus of 150% of salary and, upon appointment, had a VCP participation percentage of 0.6%. Neil was awarded nil-cost options over 156,888 shares to compensate for the loss of an award in his previous role, which will vest on 1 April 2026, subject to conditions. In October 2023, the Committee agreed with Neil that his VCP participation percentage would be replaced with the Group LTIP, at a level of 250% of salary, together with the grant of 125% salary in restricted stock units (RSUs) in exchange for the loss of VCP participation.
75
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Andy Bond and Neil Galloway did not receive salary increases as their salaries were set upon appointment during the year.
At the AGM held in January 2022 we received your support for the introduction of a new LTIP. Until the VCP concludes, the new LTIP is intended to be used alongside the VCP for senior Executives.# Remuneration report
The following section provides details of how Board members were paid during the financial year to 30 September 2023. The Remuneration Committee members, activities and meetings during the year are set out on pages 64 and 75, along with the Committee’s purpose, roles and responsibilities, and are thereby included in this part of the report by reference. The Remuneration Committee took scenario analyses into account when initially setting the Remuneration Policy, and continues to take them into account when operating the Remuneration Policy. None of the Directors received any remuneration from entities within the Group other than as disclosed in this report. The Remuneration Committee did not deviate from the Remuneration Policy in the year. No concerns or issues were raised with respect to the advisory vote of the AGM approving the 2022 Remuneration Report.
Korn Ferry is a signatory to the UK Remuneration Consultants Group Code of Conduct (the Code of Conduct) and was appointed by the Remuneration Committee in 2021 having submitted a proposal which demonstrated its skills and experience in executive remuneration both in the UK and across Europe. Korn Ferry provides advice to the Committee on matters relating to Executive remuneration. The Committee was satisfied that the advice provided by Korn Ferry remains objective and independent, having noted its commitment to the Code of Conduct.
| Salary/ fees € | Taxable benefits € | Pension € | Bonus € | LTIP € | Other € | Total remuneration € |
|---|---|---|---|---|---|---|
| FY23 | FY22 | FY23 | FY22 | FY23 | FY22 | FY23 |
| Executive Directors | ||||||
| Trevor Masters | 731,423 | 319,638 | 48,148 | 7,562 | 133,869 | — |
| Neil Galloway | 344,610 | — | 8,937 | — | 44,799 | — |
| Andy Bond* | 327,335 | 241,941 | 9,659 | 17,475 | — | — |
| Nick Wharton | — | 345,774 | — | 11,522 | — | — |
| Executive Directors (Post-Retirement) | ||||||
| Andy Bond* | — | 283,248 | — | — | — | — |
| Nick Wharton | — | 246,981 | — | — | — | — |
| Non-Executive Directors | ||||||
| Richard Burrows | 164,838 | 472,080 | — | — | — | — |
| Pierre Bouchut* | 89,024 | 88,515 | — | — | — | — |
| Helen Lee Bouygues | — | — | — | — | — | — |
| Neil Brown | — | — | — | — | — | — |
| Brendan Connolly* | 89,024 | 88,515 | — | — | — | — |
| María Fernanda Mejía | 71,219 | 70,812 | — | — | — | — |
| Grazyna Piotrowska- Oliwa | 71,219 | 70,812 | — | — | — | — |
| Paul Soldatos | — | — | — | — | — | — |
As discussed in the Remuneration Committee report, 80% of the maximum payout is conditional upon the delivery of the Group’s EBITDA target and 20% is conditional upon strategic KPIs. The Committee exercised its discretion to award Neil Galloway a bonus of 100% salary, following an assessment of his personal contribution during the year. Trevor Masters resigned prior to the end of the reporting period, and therefore no bonus under the scheme was paid.
The Executive Directors receive a pension allowance of 13% of salary. Chair and Non-Executive Director fees As mentioned above, Andy has agreed to take on the role of During the year, Trevor Masters and Neil Galloway received a Executive Chair until we have a permanent CEO in place; therefore, pension allowance of 13% of salary. Andy Bond does not receive a Andy’s current base salary of £835,000 will be inclusive of his pension allowance. Chair’s fee. He will retain his 1.0% participation right in the VCP Bonus plan which is subject to an annual cap of €14m. It should be noted that The bonus plan for FY23 for the Executive Directors consisted a review of Non-Executive fees will take place during FY24. of a financial goal of €869.7m of the Group's underlying EBITDA Alignment to Group strategy delivery on an IFRS 16 basis, representing 80% of the annual bonus opportunity, with the balance based on achieving certain personal Growth is the main strategic driver and is well aligned to the and strategic goals. remuneration structure where both value creation (through the VCP) and delivering yearly and longer-term targets are Neil Galloway was awarded a cash bonus of £600,000 paid in incorporated into the annual bonus plan and LTIP respectively. October 2023, following an assessment by the Committee of his personal contribution during the year as the formal bonus objectives were not deemed to be suitable. Conclusion In FY23 we have moved the Company towards a more As explained in last year’s report, bonus opportunities for standardised and recognisable structure of STIPs and LTIPs and Executive Directors increased from 100% of salary to 150% of salary, agreed a move away from the VCP, as well as dealing with the following a change in the Policy. The bonus plan has a financial personnel changes as highlighted. element (Group underlying EBITDA on an IFRS 16 basis) of 80% and a strategic/personal element of 20%. After due consideration and debate, we believe the remuneration outcomes to be fair in terms of alignment to the stakeholder For FY24, the maximum bonus opportunity for the CFO will remain experience and, other than setting appropriate packages in at 150% of salary, with the Executive Chair receiving a maximum relation to appointment and first year performance, no discretion bonus opportunity of 150% of base salary (pro-rated for the time was applied. I would like to thank the Committee for its work, he is fulfilling the role of Executive Chair). debate, and input during the year and look forward to interacting The bonus opportunity will be divided into 80% for underlying with our stakeholders during 2024. Group EBITDA on an IAS 17 basis and 20% for strategic goals. This financial performance metric is aligned with senior management’s bonus plan. Brendan Connolly Remuneration Committee Chair
Trevor Masters received an additional grant of participation rights in the VCP of 1.15%, taking his aggregate participation in the VCP to a holding of 2.0%. During the year we have continued to review the effectiveness of the VCP. Upon the recommendation of the Committee, the Board exercised its discretion to apply an EBITDA target as an alternative measurement criteria in respect of the nil-cost options granted on 14 February 2022 to specific VCP participants. Further, the annual caps for Trevor Masters, Andy Bond, and any other Executive Director (including Neil Galloway) were set at €20m, €14m and €10m respectively. Last year we decided that with a new CEO and CFO, and the development of a new strategy, the Remuneration Committee should review the VCP terms. Following shareholder approval, we made changes to the operation of the VCP to permit the Chair to participate, to rebase the valuation from which participants could benefit, extend the period of the plan and introduce additional caps. However, moving forward, we will transition into the use of the LTIP for any new CEO appointment and for our CFO. In summary, the Committee has discussed the operation of the VCP, and has decided to move towards closure of the VCP in favour of the new Group LTIP.
Remuneration report
76Save for Andy Bond, Non-Executive Directors are not eligible for bonuses.
The table below details outstanding share awards previously granted to the Executive Chair, the previous CEO, and the current CFO. Save for Andy Bond, no share awards have been granted to the Non-Executive Directors.
| Share awards held at 30 Sept 2022 | Share awards Awarded during the year | Share awards Vested during the year | Share awards lapsed during the year | Total share awards held at 30 Sept 2023 | Share price used Exercise price (PLN) | Vesting date | Exercise date | Total share value at award (EUR) |
|---|---|---|---|---|---|---|---|---|
| Andy Bond | ||||||||
| VCP | 14/2/22 | Nil | 46.3510 | 2,389,162 | — | — | Nil | 2,389,162 |
| See notes | 2/3/32 | 24,119,000 | ||||||
| Trevor Masters | ||||||||
| VCP | 14/2/22 | Nil | 46.3510 | 668,965 | — | 334,483 | Nil | 668,965 |
| See notes | 2/3/32 | 6,753,000 | ||||||
| Neil Galloway | ||||||||
| Buy-Out | 12/10/23 | Nil | 30 | — | — | — | — | 156,888 |
| See notes | 1/4/26 | 738,598 | ||||||
| Neil Galloway | ||||||||
| VCP | 30/09/23 | Nil | 22.42 | — | — | — | — | 181,600 |
| See notes | 30/9/25 | 861,523 |
In the financial year to 30 September 2023, Trevor Masters received an additional grant of participation rights in the VCP of 1.15%, taking his aggregate participation in the VCP to a holding of 2.0%, with effect from the date of his appointment as CEO. Upon appointment to the role of Chair, Andy Bond was granted a participation of 1.0%, and upon appointment to the role of CFO, Neil Galloway was granted a participation of 0.6%. There have been no nil-cost options granted in the financial year under the VCP as the performance threshold was not met. No new awards have been granted under the Equity Award Plan (EAP) during the financial year. Nick Wharton, who retired as a good leaver, held 359,209 nil-cost options under the EAP which vested in full on 2 February 2023. The Board exercised its discretion to waive the two-year holding period attaching to the EAP nil-cost options to recognise the retirement of Nick Wharton. Following receipt of a valid notice of exercise under the EAP and in accordance with the terms of the EAP, the Board exercised its discretion to settle the EAP in cash. Accordingly, on 6 March 2023, £2,952,881 was paid to Nick Wharton in full and final settlement of his nil-cost options under the EAP.
Following appointment, in acknowledgement of the forfeited short term incentives from Neil’s past employment, Neil was granted nil-cost options equivalent to 150% of his annual base salary.
| Date of grant | Number of share options | Vesting date | Performance conditions |
|---|---|---|---|
| 12 October 2023 | 156,888 | 1 April 2026 | Continued employment |
The share price used to calculate the award was 30 PLN as approved by the Remuneration Committee, and the Polish National Bank GBP/PLN exchange rate of 5.2296 was applied.
During the year, the Remuneration Committee approved a move to transition participants from the VCP to the new Group LTIP. Prior to the end of the reporting period, Neil Galloway was granted: (i) a 250% of salary participation in the new Group LTIP; and (ii) a one-time grant of 125% of salary in RSUs with performance measures applied in compensation for the removal of his VCP participation. The RSUs vest after two years, subject to performance measures, and have a one-year holding period. In the event that Neil leaves the Group before 1 April 2024, the RSUs will lapse. Any subsequent departure would result in a pro-rated calculation.
78 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Under the share ownership guidelines set out in the Remuneration Policy, the CEO and CFO are encouraged to build and maintain a shareholding equivalent to at least 300% and 200% of their base salaries respectively. The 300% level will also apply to the Executive Chair whilst in role. Shares are valued using the Company’s closing middle market share price on 29 September 2023 of 20.24 PLN, the PLN/EUR exchange rate of 0.216, and the GBP/EUR exchange rate of 1.1487. The following table shows how each Executive Director complies with the shareholding guidelines and the current holdings by Non- Executive Directors as at 30 September 2023:
| Shares held at 30 September 2023 | Shares held by connected persons | Shareholding subject to a service and performance requirement | Current shareholding requirement | Shareholding % of salary met | |
|---|---|---|---|---|---|
| Executive Directors | |||||
| Andy Bond | 3,745,301 | — | 2,389,162 | 300% of salary | 1,712% |
| Neil Galloway | — | — | 338,488 | 200% of salary | 0% |
| Trevor Masters | — | — | 668,965 | N/A | 0% |
| Non-Executive Directors | |||||
| María Fernanda Mejía | 18,067 | ||||
| Grazyna Piotrowska-Oliwa | 20,651 | ||||
| Pierre Bouchut | 37,497 | ||||
| Brendan Connolly | 25,700 | ||||
| Neil Brown | — | ||||
| Paul Soldatos | — |
The information below is in respect of the financial year ended 30 September 2023 against the prior year comparison.
| Total remuneration 2023 € | Total remuneration 2022 € | |
|---|---|---|
| Executive Directors | ||
| Andy Bond (Executive Chair and previously NED Chair) | 336,994 | 739,740 |
| Trevor Masters (previously CEO) | 4,653,857 | 646,838 |
| Neil Galloway (CFO) | 1,087,566 | — |
| Non-Executive Directors | ||
| Richard Burrows (Chair) | 402,894 | 472,080 |
| María Fernanda Mejía (NED) | 71,219 | 70,812 |
| Grazyna Piotrowska-Oliwa (NED) | 71,219 | 70,812 |
| Pierre Bouchut (Committee Chair) | 89,024 | 88,515 |
| Brendan Connolly (Committee Chair) | 89,024 | 88,515 |
| Neil Brown (NED) | — | — |
| Helen Lee Bouygues (NED) | — | — |
| Paul Soldatos (NED) | — | — |
Andy Bond’s total remuneration for FY22 is based on his role as a CEO and for FY23 is based on his role as Chair from 2 February 2023 until 12 September 2023 when he became the Executive Chair. Richard Burrows stepped down as Chair from 2 February 2023.
79 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
The following table outlines the percentage change from one year to the next for Director and employee remuneration, reported in line with the regulations.
The Dutch Civil Code requires the executive pay ratio and the trend to be disclosed in the annual Remuneration Report. The basis of the pay ratio comparison uses the Dutch methodology of average employee remuneration. The chart below summarises the five-year history of total remuneration for the Executive Directors, being the Group CEO and Group CFO, alongside the average remuneration per FTE (excluding Executive Directors). Also shown is the remuneration ratio of the CEO versus the average employee remuneration. Note, that whilst the table has been shown in Euros to reflect the reporting currency of the Group, the Executive Directors were paid in GBP. In FY23, Neil Galloway received a salary of £600,000 per annum and Trevor Masters received a salary of £650,000 per annum, which have been pro-rated in the table below to reflect the portion of the year in which they were in the role.# FY23 Remuneration Report
The table below shows the remuneration of our CEO and CFO for the financial years 2019 to 2023.
| FY19 | FY20 | FY21 | FY22 | FY23 | |
|---|---|---|---|---|---|
| CEO¹, ⁴, ⁶ total remuneration (A) | 775,484 | 584,918 | 801,970 | 1,103,330 | 4,079,370 |
| YoY % | 38% | (25%) | 37% | 38% | 270% |
| CFO¹, ³ total remuneration | 388,767 | 697,906 | 964,442 | 710,005 | 1,087,566 |
| YoY % | n/a | 80% | 38% | (26%) | 53% |
| Average employee (FTE) total remuneration costs² (B) | 18,094 | 17,986 | 20,640 | 21,309 | 21,395 |
| YoY % | (7%) | (1%) | 15% | 3% | 0% |
| Ratio (A) versus ratio (B) | 43:1 | 33:1 | 39:1 | 52:1 | 191:1 |
The table below shows the Company’s expenditure on employee pay compared to distributions to shareholders between 1 October 2022 and 30 September 2023.
| FY23 | FY22 | |
|---|---|---|
| €m | €m | |
| Distributions to shareholders | — | — |
| Total employee pay | 724.5 | 678.3 |
| £ | |
|---|---|
| Nick Wharton¹ (previous CFO) | 2,952,881 |
The financial arrangements in relation to the departure from office of Trevor Masters were in line with the Directors’ Remuneration Policy. Trevor received an amount equal to the value of his salary and benefits for the six-month notice period in his contract. He retains the nil-cost options which he was granted as a result of the VCP.
80 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
| Policy element | Andy Bond (Executive Chair) | Neil Galloway (CFO) |
|---|---|---|
| Base salary | £835,000 | £600,000 |
| Benefits | Pension of 13% of base salary, private medical insurance, life assurance, income protection, and car allowance | Annual bonus (payable in cash following completion of the annual audit) |
| Maximum entitlement of £1,252,500 (150% of salary) | Maximum entitlement of £900,000 (150% of salary) | |
| VCP | Participation percentage is 1%. For FY24 VCP participation has been replaced with the LTIP | No participation |
| LTIP Grant of performance share awards with a three-year performance period and additional two-year holding period (see below) | Annual grant of 250% of salary of performance share awards | |
| Malus and clawback | Provisions apply | Provisions apply |
| Shareholding requirement (whilst employed) | 300% of salary (noting that Andy Bond has not formally been appointed as an Executive Director, but this requirement is included to reflect the Executive nature of his Chair role) | 200% of salary |
Awards granted to the CFO in FY24 will be subject to the following performance conditions which will be assessed by the Remuneration Committee following the end of the 30 September 2026 financial year. The performance conditions comprise of 30% EBIT growth measure, 60% IAS17 EBITDA measure, and 10% environmental measures.
This Remuneration Policy is available on our website and remains unchanged from the Policy adopted by the Board at the 2023 AGM. The Committee’s intention is that this Policy will operate for the three-year period to the AGM for the financial year ending on 30 September 2025, unless approval for a new Policy is sought sooner. When drafted and approved, the Policy did not envisage the appointment of an Executive Chair. That role is however, covered by the way the Policy is to operate for an “Executive Director”. The Remuneration Policy permits deviation from the policy in the event that it is required for long-term interests and stability of the Company or for its profitability. Due to the changes in Board and Board Committee composition over this reporting period, it has been necessary to adjust the remuneration of the Chair, utilising the scope of the CEO remuneration, to recognise his role as Executive Chair. As part of the agreement to discontinue the operation of the VCP for the CFO, it was agreed that an RSU award would be granted to the value of 125% of his salary. These two decisions were taken for the long-term interests of the Company. There have been no other deviations from the Remuneration Policy (or the malus and clawback provisions contained within it) to report for the period ending 30 September 2023.
To support the Policy’s objectives to deliver long-term sustainable success of the Company, the remuneration package of our Executive Directors includes a mix of fixed and variable remuneration. The proportion for FY23 is approximately 27% for fixed pay and 73% for variable remuneration on a target basis. For Andy Bond the fixed element of pay is 100% and for Neil is 37% fixed, 63% variable.
Brendan Connolly
Remuneration Committee Chair
On behalf of the Board
81 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
As the Company is listed on the WSE and incorporated under the laws of the Netherlands, the Company applies the Code of Best Practice for WSE Listed Companies (the Warsaw Code) and complies with the Dutch Corporate Governance Code (the Dutch Code) by applying principles and best practice provisions that are applicable or explaining why the Company deviates from them. As the principles set out in the Warsaw Code are similar to the principles of the Dutch Code, the Company complies with a majority of the principles and best practice provisions of the Dutch Code. The Company currently does not apply the following provisions of the Dutch Code:
The Company operates a one-tier Board which complies with principle 2.1.7(i). At the AGM held on 2 February 2023, Andy Bond was appointed Non-Executive member of the Board. Consequently, the Company does not meet the criteria under best practice provision 2.1.7(ii). At the same AGM, Trevor Masters was appointed Executive member of the Board and Neil Galloway was confirmed as Executive member of the Board from the date of his commencement in the role of CFO on 1 April 2023. Following the three new appointments, the Board consists of four independent Non-Executive Directors, three Non-Executive Directors, and one Executive Director. With regard to principle 2.1.7(iii), two Non-Executive Directors are appointed to the Board pursuant to arrangements between the Company’s majority shareholder (which holds more than 10% of the shares of the Company) and certain of its creditors. This arrangement was entered into before the Company listed on the WSE. The conditions of appointment of the shareholder-nominated Non-Executive Directors are set out in a Relationship Agreement between the Company and certain affiliates of the Company’s majority shareholder. A summary of the key terms of the Relationship Agreement is available on the Company’s website. Given the nature of the Relationship Agreement, the independence of the supervisory board is not expected to change in the short term.
Andy Bond was formerly CEO and Executive Director of the Company. Therefore, Andy Bond is the chairman of the non-independent Chair of the Board. With effect from 12 September 2023, he is Executive Chair.
Members of the Board are appointed for a period of three years and may then be reappointed twice for three-year periods. These appointment arrangements are common in the UK, and permitted under the Warsaw Code to which the Company is subject to. For these reasons, the status of compliance with 2.2.2 is not expected to change.
All members of the Board, save those mentioned in 2.1.7. above, were appointed during 2021. The term of appointment for the creditor-appointed Non-Executive Directors is determined by the Relationship Agreement, and the independent Non-Executive Directors have been appointed for a term of three years, capable of extension for a further two three-year terms. A retirement schedule is in place and has been published on the Company's website.
The Company does not currently have a Group-wide Code of Conduct. Most of the subject matter which is traditionally included in a Code of Conduct is included in established policies and procedures in place across the Group. However, the Company intends to consider the introduction of a group-wide Code of Conduct in the new fiscal year.
The Company does not currently have a Group-wide Code of Conduct. Most of the subject regarding culture matter which is traditionally included in a Code of Conduct is included in established policies and procedures in place across the Group. However, the Company intends to consider the introduction of a group-wide Code of Conduct in the new fiscal year.# Directors’ report
The Board presents its report, together with the audited consolidated financial statements, for the year ended 30 September 2023.
The Board is committed to ensuring that all employees, customers and suppliers act in an ethical manner. The Group has policies in place relating to anti-bribery and corruption, anti-money laundering, insider trading, and sanctions.
The Company indemnifies all Directors within its Articles of Association. In addition, the Company holds: (i) Directors’ and Officers’ liability insurance, which provides cover for liabilities incurred by Directors in the performance of their duties or powers; and (ii) Public Offering of Securities Insurance, to ring-fence any exposure arising from the initial public offering in May 2021. No payments were made as a result of the indemnity or by the insurer during the reporting period.
Group-wide processes are in place to review potential conflicts of interest held by senior management, including the Board. Conflicts are routinely raised at Board meetings and recorded as appropriate.
The Board confirms that: (i) to its knowledge there is no relevant audit information of which the auditors are unaware; and (ii) the Board has taken all reasonable steps to ascertain any relevant audit information and ensure that the auditors are aware of such information.
The Company’s Articles of Association may only be amended by a resolution of the general meeting.
The Rules of Procedure provide for an internal division of tasks, procedures, and decision-making of the Board of Directors of the Company. In performing their duties, the Directors shall comply with these rules.
On 11 September 2023, Trevor Masters stepped down as CEO of the Company. On 12 September, Andy Bond was appointed Executive Chair with the responsibility for leading the Executive team and the overall management of the Company until a successor CEO is appointed. This is a deviation from the Rules of Procedure, in particular the responsibilities of the Chair and CEO. This statement is made in accordance with clause 20 of the Rules of Procedure.
Details of the Group’s objectives and policies on financial risk management and of the financial instruments currently in use are set out in note 17 to the consolidated financial statements which form part of the report.
The Group designs products for sale in stores and has set arrangements with suppliers for the development of goods. Further, the Group has invested in the use of more sustainable products and packaging (see ESG section on pages 16 to 37 for further details).
The Company is fully committed to the elimination of unlawful and unfair discrimination and values the difference that a diverse workforce brings to the Company. The Company has policies applicable to all colleagues in furtherance of these commitments and will continue to focus on developing these in the next financial year.
The Group seeks to ensure that disabled people, whether applying for a vacancy or already in employment, receive equal opportunities in respect of job vacancies that they are able to fulfil. They are not discriminated against on the grounds of their disability and are given full and fair consideration of applications, continuing training while employed, and equal opportunity for career development and promotion. Where an existing colleague suffers a disability, it is our policy to retain them in the workforce where that is practicable.
The Senior Facilities Agreement provides that if the Company is delisted or otherwise removed from the Warsaw Stock Exchange, or all or substantially all of the assets of the Group are sold in a single transaction or a series of transactions, the Company is required to notify the finance agent. Following a negotiation period, lenders have a right to cancel their commitments upon giving 30 days’ notice.
The Board is satisfied that the Group will be able to operate within the levels of its facilities and resources for the foreseeable future and deems it appropriate to adopt the going concern basis in preparing the financial statements. This is outlined in more detail in the Going concern statement on page 45.
No political donations were made and no political expenditure was incurred during the year (FY22: £Nil). The Company has an established policy of not making donations to any political party.
No dividends were recommended or paid.
There are no post-balance sheet events to report for FY23.
The Board is responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
In respect of work undertaken by them in relation to and in preparation for roles as Board members, in the period prior to the Company’s listing on the WSE, one-off fees were paid to Richard Burrows, Brendan Connolly, María Fernanda Mejía, Grazyna Piotrowska-Oliwa, and Pierre Bouchut which were used by these individuals to subscribe for shares in the Company on admission to the WSE (at the admission offer price). Shares acquired by these Board members on admission must be held until the later of: (i) 26 May 2024; or (ii) the first anniversary of the date on which the relevant Board member ceases his or her directorship of the Company.
Andy Bond was formerly CEO and Executive Director of the Company. Therefore, Andy Bond does not qualify as independent within the meaning of best practice provision 2.1.8.
The Company currently does not apply the following provisions of the Warsaw Code:
The Company’s businesses are empowered to partner with local charities to provide direct support to their local communities. The expenses have been reported for the first time this year, and will be developed during the next financial year to include information on rationality.
* 2.11.5 The supervisory board prepares a report to the Annual General Meeting once per year to include an assessment of the rationality of expenses referred to in principle 1.5
The Company’s businesses are empowered to partner with local charities to provide direct support to their local communities. The expenses have been reported for the first time this year, and will be developed during the next financial year to include information on rationality.
Risk and compliance are managed by the Group General Counsel and the Senior Internal Auditor. The remuneration of these individuals is primarily dependent on the performance of delegated risk tasks. However, consistent with all employees of the Company, a proportion of these individuals’ respective annual bonuses is dependent on the Company achieving specific financial targets for the relevant financial year. The financial targets for the Company’s annual bonus scheme are set by the Company’s Remuneration Committee.
The remuneration of employees who work in risk and compliance roles and internal audit roles across the Group comprises a salary and eligibility to receive an annual bonus. A proportion of the annual bonus is dependent on the Company achieving specific financial targets. The financial targets for the relevant company’s annual bonus scheme are set by the relevant company’s remuneration committee and are aligned with the financial targets set by the Company’s Remuneration Committee. The risk, compliance and internal audit functions of businesses within the Group report organisationally to the CFO. Managers within the risk, compliance and internal audit functions of the Group’s businesses attend the meetings of the local board’s audit committee.
The Company established an incentive scheme (the Value Creation Plan) for senior management of the Group in March 2020, which was 12 months prior to the Company’s admission to the WSE. The Value Creation Plan incentive scheme complies with the majority of the requirements of principle 6.3 except that the incentive scheme does not include non-financial targets and share options will be issued to participants at nil cost.
Information contained in the Strategic report
The Strategic report on pages 1 to 57 contains certain information required to be included within this Directors’ report. This relates to employee matters, future developments, risk management, and how the Board considers the views of stakeholders.
To the extent that the reports contain forward-looking statements, these are made by the Board in good faith based on the information available at the time of the Annual Report. This statement is made in accordance with clause 20 of the Rules of Procedure.
The Board of Directors hereby represents, to the best of its knowledge, that the statutory financial statements of the Company and its consolidated subsidiaries for the year ended 30 September 2023 are prepared in accordance with the applicable accounting standards and that they give a true and fair view of the assets, liabilities, financial position, and results of the Company and its consolidated subsidiaries, and that the report of the Board of Directors for the year ended 30 September 2023 gives a true and fair view of the position of the Company and its consolidated subsidiaries as at 30 September 2023 and of the development and the performance of the Company and its consolidated subsidiaries during the year ended 30 September 2023, including a description of the key risks that the Company is confronted with.
The Board confirms that:
i. the report provides sufficient insights into any failings in the effectiveness of the internal risk management and control systems;
ii. the aforementioned systems provide reasonable assurance that the financial reporting does not contain any material inaccuracies;
iii. based on the current state of affairs, it is justified that the financial reporting is prepared on a going concern basis; and
iv. the report states those material risks and uncertainties that are relevant to the expectation of the Company’s continuity for the period of 12 months after the preparation of the report.
Andy Bond
Executive Chair
22 December 2023
Neil Galloway
Chief Financial Officer
22 December 2023
Other information
Financial statements
| Year to 30 September 2023 | Year to 30 September 2022 | |
|---|---|---|
| €000 | €000 | |
| Continuing operations | ||
| Revenue | 5,648,885 | 4,822,819 |
| Cost of sales | (3,381,068) | (2,855,221) |
| Gross profit | 2,267,817 | 1,967,598 |
| Administrative expenses | (2,039,332) | (1,689,485) |
| Other operating income | — | 116 |
| Operating profit from continuing operations | 228,485 | 278,229 |
| Financial income | 10,220 | 2,242 |
| Financial expense | (91,728) | (54,856) |
| Profit before taxation from continuing operations for the year | 146,977 | 225,615 |
| Taxation | (44,733) | (51,900) |
| Profit from continuing operations for the year | 102,244 | 173,715 |
| Loss on discontinued operations | — | (110) |
| Profit for the year | 102,244 | 173,605 |
| Earnings per share | ||
| Basic earnings per share from continuing operations | 17.8c | 30.2c |
| Basic earnings per share from discontinued operations | -c | -c |
| Basic earnings per share | 17.8c | 30.2c |
| Diluted earnings per share from continuing operations | 17.7c | 30.0c |
| Diluted earnings per share from discontinued operations | -c | -c |
| Diluted earnings per share | 17.7c | 30.0c |
The notes on pages 93 to 127 form part of these financial statements.
| Year to 30 September 2023 | Year to 30 September 2022 | |
|---|---|---|
| €000 | €000 | |
| Profit for the year | 102,244 | 173,605 |
| Other comprehensive income | ||
| Items that are or may be reclassified subsequently to profit or loss: | ||
| Foreign currency translation differences – foreign operations | 44,532 | (55,513) |
| Effective portion of changes in fair value of cash flow hedges | (38,060) | 23,783 |
| Net change in fair value of cash flow hedges reclassified to profit or loss | 41,425 | (128,442) |
| Deferred tax on items that are or may be reclassified subsequently to profit or loss | 34,924 | (13,430) |
| Other comprehensive loss for the year, net of income tax | (87,046) | (3,735) |
| Total comprehensive income for the year | 15,198 | 169,870 |
The notes on pages 93 to 127 form part of these financial statements.
| 30 September 2023 | 30 September 2022 | |
|---|---|---|
| €000 | €000 | |
| Non-current assets | ||
| Property, plant and equipment | 746,437 | 524,550 |
| Right-of-use asset | 1,225,683 | 1,018,240 |
| Goodwill and other intangible assets | 847,477 | 814,238 |
| Trade and other receivables | 46 | 2,422 |
| Derivative financial instruments | 6,232 | 5,186 |
| Deferred tax asset | 113,414 | 91,296 |
| 2,939,289 | 2,455,932 | |
| Current assets | ||
| Inventories | 1,134,618 | 959,094 |
| Tax receivable | 865 | 3,735 |
| Trade and other receivables | 143,522 | 71,418 |
| Derivative financial instruments | 42,106 | 165,216 |
| Cash and cash equivalents | 330,417 | 343,933 |
| 1,651,528 | 1,543,396 | |
| Total assets | 4,590,817 | 3,999,328 |
| Current liabilities | ||
| Trade and other payables | 1,266,195 | 927,884 |
| Current tax liabilities | — | 47,944 |
| Lease liabilities | 304,794 | 310,484 |
| Borrowings | 118,794 | 68,339 |
| Derivative financial instruments | 91,045 | 37,040 |
| Provisions | 2,254 | 16,749 |
| 1,783,082 | 1,408,440 | |
| Non-current liabilities | ||
| Trade and other payables | 21,894 | 37,733 |
| Lease liabilities | 988,377 | 823,060 |
| Borrowings | 610,270 | 546,203 |
| Derivative financial instruments | 1,730 | 8,122 |
| Provisions | 28,319 | 31,016 |
| 1,650,590 | 1,446,134 | |
| Total liabilities | 3,433,672 | 2,854,574 |
| Net assets | 1,157,145 | 1,144,754 |
| Equity attributable to equity holders of the parent | ||
| Share capital | 5,760 | 5,750 |
| Share premium reserve | 13 | 13 |
| Cash flow hedge reserve | (32,391) | 99,187 |
| Merger reserve | (751) | (751) |
| Translation reserve | (25,784) | (70,316) |
| Share-based payment reserve | 33,013 | 35,830 |
| Retained earnings | 1,177,285 | 1,075,041 |
| Total shareholders’ equity | 1,157,145 | 1,144,754 |
The notes on pages 93 to 127 form part of these financial statements.
| Share capital | Share premium | Cash flow hedge reserve¹ | Translation reserve² | Merger reserve³ | Share-based payment reserve⁴ | Retained earnings | Total equity | |
|---|---|---|---|---|---|---|---|---|
| €000 | €000 | €000 | €000 | €000 | €000 | €000 | €000 | |
| Balance at 1 October 2022 | 5,750 | 13 | 99,187 | (70,316) | (751) | 35,830 | 1,075,041 | 1,144,754 |
| Total comprehensive income for the period | ||||||||
| Profit for the year | — | — | — | — | — | — | 102,244 | 102,244 |
| Other comprehensive income for the period | — | — | (131,578) | 44,532 | — | — | — | (87,046) |
| Total comprehensive income for the period | — | — | (131,578) | 44,532 | — | — | 102,244 | 15,198 |
| Transactions with owners, recorded directly in equity | ||||||||
| Issue of share capital | 10 | — | — | — | — | — | — | 10 |
| Equity-settled share-based payments (see note 21) | — | — | — | — | — | (2,817) | — | (2,817) |
| Total contributions by and distributions to owners | 10 | — | — | — | — | (2,817) | — | (2,807) |
| Balance at 30 September 2023 | 5,760 | 13 | (32,391) | (25,784) | (751) | 33,013 | 1,177,285 | 1,157,145 |
¹ The cash flow hedge reserve represents the cumulative effect of fair value gains and losses on cash flow hedges in the Group.
² The translation reserve represents the cumulative foreign exchange differences on the translation of the net assets of the Group’s foreign operations from their functional currency to the presentation currency of the parent.
³ The merger reserve represents the difference between the cost of the Company’s investment in its subsidiaries acquired using the principles of merger accounting and the aggregate carrying value of assets and liabilities of the subsidiaries acquired.
⁴ The Group implemented a Value Creation Plan (VCP) for its Executive Directors; see note 21.
The notes on pages 93 to 127 form part of these financial statements.
| Share capital | Share premium | Cash flow hedge reserve¹ | Translation reserve² | Merger reserve³ | Share-based payment reserve⁴ | Retained earnings | Total equity | |
|---|---|---|---|---|---|---|---|---|
| €000 | €000 | €000 | €000 | €000 | €000 | €000 | €000 | |
| Balance at 1 October 2021 | 5,750 | 13 | 47,409 | (14,803) | (751) | 23,809 | 901,436 | 962,863 |
| Total comprehensive income for the period | ||||||||
| Profit for the year | — | — | — | — | — | — | 173,605 | 173,605 |
| Other comprehensive income for the period | — | — | 51,778 | (55,513) | — | — | — | (3,735) |
| Total comprehensive income for the period | — | — | 51,778 | (55,513) | — | — | 173,605 | 169,870 |
| Transactions with owners, recorded directly in equity | ||||||||
| Issue of share capital | — | — | — | — | — | — | — | — |
| Equity-settled share-based payments (see note 21) | — | — | — | — | — | 12,021 | — | 12,021 |
| Total contributions by and distributions to owners | — | — | — | — | — | 12,021 | — | 12,021 |
| Balance at 30 September 2022 | 5,750 | 13 | 99,187 | (70,316) | (751) | 35,830 | 1,075,041 | 1,144,754 |
¹ The cash flow hedge reserve represents the cumulative effect of fair value gains and losses on cash flow hedges in the Group.
² The translation reserve represents the cumulative foreign exchange differences on the translation of the net assets of the Group’s foreign operations from their functional currency to the presentation currency of the parent.
³ The merger reserve represents the difference between the cost of the Company’s investment in its subsidiaries acquired using the principles of merger accounting and the aggregate carrying value of assets and liabilities of the subsidiaries acquired.
⁴ The Group implemented a Value Creation Plan (VCP) for its Executive Directors; see note 21.
The notes on pages 93 to 127 form part of these financial statements.# Annual Report and Consolidated Financial Statements 2023
| 30 September 2023 | 30 September 2022 | |
|---|---|---|
| Note | €000 | €000 |
| Cash flows from operating activities | ||
| Profit/(loss) for the period: | ||
| Continuing operations | 102,244 | 173,715 |
| Discontinued operations | — | (110) |
| Adjustments for: | ||
| Depreciation, amortisation and impairment | 10,11 | 164,509 |
| Right-of-use asset depreciation | 12 | 309,000 |
| Financial income | 6 | (10,220) |
| Financial expense | 7 | 91,728 |
| Profit on sale of property, plant and equipment | (477) | |
| Equity-settled share-based payment expenses | 21 | (2,817) |
| Taxation | 9 | 44,733 |
| 698,700 | 678,793 | |
| Increase in trade and other receivables | (62,238) | (19,730) |
| Increase in inventories | (175,524) | (384,052) |
| Increase in trade and other payables | 322,472 | 184,090 |
| Decrease in provisions and employee benefits | (17,192) | (21,841) |
| Settlement of derivatives | (38,099) | (12,566) |
| Cash generated by operations | 728,119 | 424,694 |
| Tax paid | (75,424) | (61,387) |
| Net cash inflow from operating activities | 652,695 | 363,307 |
| Cash flows used in investing activities | ||
| Proceeds from sale of property, plant and equipment | 1,445 | 626 |
| Interest received | 2,897 | — |
| Acquisition of a subsidiary net of cash acquired | — | — |
| Additions to property, plant and equipment | 10 | (363,823) |
| Additions to other intangible assets | 11 | (25,815) |
| Net cash outflow used in investing activities | (385,296) | (224,355) |
| Cash flows from financing activities | ||
| Proceeds from the issue of share capital | 10 | — |
| Proceeds from borrowings net of fees incurred | 431,215 | 45,000 |
| Repayment of borrowings | (315,000) | (43,193) |
| Interest paid | (18,809) | (9,642) |
| Payment of interest on lease liabilities | 12 | (61,367) |
| Repayment of lease liabilities | 12 | (325,594) |
| Net cash outflow from financing activities | (289,545) | (299,485) |
| Net (decrease)/increase in cash and cash equivalents | (22,146) | (160,533) |
| Cash and cash equivalents at beginning of period | 343,933 | 507,702 |
| Effect of exchange rate fluctuations on cash held | 8,630 | (3,236) |
| Cash and cash equivalents at end of period | 330,417 | 343,933 |
The notes on pages 93 to 127 form part of these financial statements.
Pepco Group N.V. (the Company) is a public limited liability company incorporated in the Netherlands (registration number 81928491) and domiciled in the United Kingdom. The Company has a primary listing in on the Warsaw Stock Exchange. The registered address is 14th Floor, Capital House, 25 Chapel Street, London, NW1 5DH, United Kingdom.
The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the Group). The parent company financial statements present information about the Company as a separate entity and not about its Group.
The Group financial statements have been prepared in accordance with International Financial Reporting Standards, as adopted by the EU (Adopted IFRSs), and also comply with the statutory provisions of part 9 of Book 2 of the Dutch Civil Code. The parent company financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as endorsed by the EU and with part 9 of Book 2 of the Dutch Civil Code; these are presented on pages 127 to 137.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all years presented in these Group financial statements.
The financial statements have been prepared on the historical cost basis except for derivatives which are measured at fair value. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share- based payment transactions that are within the scope of IFRS 2 and measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 or value in use in IAS 36.
In determining the appropriate basis of preparation of the 2023 consolidated financial statements, the Board of Directors are required to consider whether the Group and the Company can continue in operational existence for the foreseeable future. At the time of signing the consolidated financial statements, the Directors have a reasonable expectation that the Group has sufficient resources to continue in operation for the foreseeable future, which is not less than 12 months from signing these financial statements.
The Group undergoes a rigorous and comprehensive annual budgeting and long-term planning process which is reviewed and challenged by various stakeholders across management and the Board. This financial plan, which is ultimately approved by the Board, is then utilised to measure business performance and it also forms the ‘base case’ upon which the going concern analysis has been based. In assessing going concern, the Group has considered a 2-year period to the end of FY25, beyond the minimum requirement of 12 months form the date of signing the financial statements. The Directors have considered a severe but plausible downside sensitivity and a reverse stress test. The analysis suggested that despite the harsh scenario assumptions, which the management judge to be very unlikely, the Group still retains sufficient headroom across the assessment period and is able to meet all the requirements of its lending covenants. It should also be noted that historically the Group continued to meet its convent obligations and maintain significant liquidity headroom throughout the extreme circumstances presented during the Covid-19 pandemic restrictions in 2020 and 2021.
In addition, in June 2023 the Group has further strengthened its financial position through the completion of a €375m debut bond issuance, refinancing an existing €300m term loan, due to expire in April 2024 which would have fallen within the period under review for going concern. The Group also increased its Revolving Credit Facility from €190m to €390m to provide additional liquidity if required.
Further information regarding the Group’s business activities, together with the factors likely to affect its future development, performance and position including the ongoing store expansion strategy and the response to the current challenges faced by the tough macroeconomic environment and inflationary pressures, is set out in the Executive Chair's and CFO’s reports.
Since the going concern assessment uses a base case which has been built on the financial plan, careful consideration has been given to the current macroeconomic environment and the future implications and impacts it may have. Given the above, the Directors have deemed the application of the going concern basis for the preparation of these consolidation financial statements to be appropriate.
Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the Group takes into consideration potential voting rights. The acquisition date is the date on which control is transferred to the acquirer. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
In accounting for Group reorganisation as a business combination under common control, the following principles have been adopted:
– Where investments are acquired in exchange for consideration and the transactions have economic substance the Group has chosen to account for these transactions at fair value by applying acquisition accounting in accordance with the principles of IFRS 3 as discussed in the accounting policy for business combinations.
– Where businesses are acquired in exchange for the issue of shares, the Group has chosen to account for these transactions using the transferor’s book values (pooling of interest method) with the difference between the value of the net assets acquired and nominal value of the shares issued being recognised within a merger reserve in equity.
Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. Where the Group loses control of a subsidiary, the assets and liabilities are derecognised along with any related non-controlling interest and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost.
Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated.# Notes to the consolidated financial statements continued
Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Unless otherwise indicated, the consolidated and parent company financial statements are prepared on the accruals basis in thousands of Euro (€000). The Euro is the Group’s presentation currency and the Company’s functional currency.
Group reorganisation
The Group undertook a Group reorganisation exercise during 2021. As part of this process, Pepco Group N.V. (formerly Pepco Group B.V.) was inserted above Pepco Group Limited in the Group’s structure. On 13 May 2021, Pepco Group N.V. (the Company) acquired the entire shareholding of Pepco Group Limited and its related subsidiaries, by a way of a share for share exchange with Flow Newco Limited, becoming the Group’s immediate parent company. The insertion of the Company on top of the existing Pepco Group Limited does not constitute a business combination under IFRS 3 “Business Combinations” and instead has been accounted for as a Group reorganisation. Merger accounting has been used to account for this transaction.
Transactions in foreign currencies are translated to the Group’s presentation currency at the monthly average foreign exchange rate. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are retranslated to the functional currency at foreign exchange rates ruling at the dates the fair value was determined. Foreign exchange differences arising on translation are recognised in the income statement except for differences arising on the retranslation of qualifying cash flow hedges, which are recognised in other comprehensive income. The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated to the Group’s presentation currency, the Euro, at foreign exchange rates ruling at the statement of financial position date. The revenues and expenses of foreign operations are translated at the average rate during the month in which they were incurred. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in the translation reserve.
Financial instruments issued by the Group are treated as equity only to the extent that they meet the following two conditions:
a) they include no contractual obligations upon the Group to deliver cash or other financial assets or to exchange financial assets or financial liabilities with another party under conditions that are potentially unfavourable to the Group; and
b) where the instrument will or may be settled in the Group’s own equity instruments, it is either a non-derivative that includes no obligation to deliver a variable number of the Group’s own equity instruments or is a derivative that will be settled by the Group exchanging a fixed amount of cash or other financial assets for a fixed number of its own equity instruments.
To the extent that this definition is not met, the proceeds of issue are classified as a financial liability. Where the instrument so classified takes the legal form of the Group’s own shares, the amounts presented in this consolidated historical financial information for share capital exclude amounts in relation to those shares.
Non-derivative financial instruments comprise trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables.
Financial assets – classification, subsequent measurement and gains and losses
On initial recognition, a financial asset is classified as measured at: amortised cost; fair value through other comprehensive income (FVOCI) – debt investment; FVOCI – equity investment; or fair value through profit or loss (FVTPL). The Group makes an assessment of the objective of the business model in which a financial asset is held because this best reflects the way the business is managed and information is provided to management. Financial assets are not reclassified subsequent to their initial recognition unless the Group changes its business model for managing financial assets, in which case all affected financial assets are reclassified on the first day of the first reporting period following the change in the business model.
A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL:
– it is held within a business model whose objective is to hold assets to collect contractual cash flows; and
– its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
The Group does not have any financial assets accounted for at FVOCI. All financial assets not classified as measured at amortised cost or FVOCI as described above are measured at FVTPL. This includes all derivative financial assets which are accounted for in accordance with the accounting policy (note 1.7) for derivative financial instruments and hedge accounting.
Financial liabilities – classification, subsequent measurement and gains and losses
Financial liabilities are classified as measured at amortised cost or FVTPL. A financial liability is classified as at FVTPL if it is classified as held for trading, it is a derivative or it is designated as such on initial recognition. Financial liabilities at FVTPL are measured at fair value and net gains and losses, including any interest expense, are recognised in profit or loss. Other financial liabilities are subsequently measured at amortised cost using the effective interest method. Interest expense and foreign exchange gains and losses are recognised in the income statement. See the accounting policy 1.7 regarding derivative financial instruments and hedge accounting for further information.
Derecognition
Financial assets
The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which either substantially all of the risks and rewards of ownership of the financial asset are transferred, or the Group neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset. On derecognition of a financial asset, the difference between the carrying amount derecognised and the consideration received is recognised in the income statement.
Financial liabilities
The Group derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire. The Group also derecognises a financial liability when its terms are modified and the cash flows of the modified liability are substantially different, in which case a new financial liability based on the modified terms is recognised at fair value. On derecognition of a financial liability, the difference between the carrying amount extinguished and the consideration paid (including any non-cash assets transferred or liabilities assumed) is recognised in the income statement.
Derivative financial instruments (comprising foreign currency forward contracts and commodity hedges) are used to manage risks arising from changes in foreign currency exchange rates (primarily relating to the purchase of overseas sourced products) and fuel price fluctuations. The Group does not hold or issue derivative financial instruments for speculative trading purposes.
The Group uses the derivatives to hedge highly probable forecast transactions and, therefore, the instruments are mostly designated as cash flow hedges. Derivatives are recognised at fair value on the date a contract is entered into and are subsequently remeasured at their fair value. The effective element of any gain or loss from remeasuring the derivative instrument is recognised directly in the cash flow hedge reserve. The associated cumulative gain or loss is reclassified from the cash flow hedge reserve in equity and recognised in the income statement in the same period or periods during which the hedged transaction affects the income statement. Any element of the remeasurement of the derivative instrument which does not meet the criteria for an effective hedge is recognised immediately in the income statement within financial income or financial expenses.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in other comprehensive income at that time remains in other comprehensive income and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss which was reported in other comprehensive income is recognised immediately in the income statement.
The full fair value of a hedging derivative is classified as a non-current asset or liability if the remaining maturity of the hedged item is more than 12 months or as a current asset or liability if the remaining maturity of the hedged item is less than 12 months from the reporting date.# 1.8 Property, plant and equipment
Property, plant and equipment are stated at purchase cost (together with incidental costs of acquisition) less accumulated depreciation and accumulated impairment losses. Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives are as follows:
Depreciation methods, useful lives and residual values are reviewed at each reporting date.
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023 95
When the consideration transferred by the Group in a business combination includes an asset or liability resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the “measurement period” (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date.
Goodwill arises on the acquisition of subsidiaries and represents the excess of the consideration transferred over the fair value of the identifiable net assets acquired. Goodwill is initially measured at cost, being the excess of the acquisition cost over the Group’s interest in the assets and liabilities recognised. Goodwill is not amortised, but is tested for impairment annually or whenever there is an indication of impairment. For the purposes of impairment testing, goodwill acquired is allocated to the cash-generating unit (CGU) that is expected to benefit from the synergies of the combination. The carrying value of the CGU containing the goodwill is compared to the recoverable amount, which is the higher of value in use and the fair value less costs of disposal. Any impairment is recognised immediately as an expense and is not subsequently reversed.
Brand is stated at cost less any accumulated amortisation and accumulated impairment losses. Brand is amortised over 40 years on a straight-line basis from 1 October 2018.
Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and accumulated impairment losses.
Capitalised software costs include both external direct costs of goods and services, and internal payroll-related costs for employees who are directly associated with the software project. Development costs are recognised as intangible assets when the following criteria are met:
Capitalised software development costs are amortised on a straight-line basis over their expected economic lives. Computer software under development is held at cost less any recognised impairment loss. Any impairment in value is recognised within the income statement.
Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such lives are indefinite. Intangible assets with an indefinite useful life and goodwill are systematically tested for impairment at each reporting date. Other intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows:
Inventories are stated at the lower of cost and net realisable value after making due allowance for obsolete and slow-moving inventory. Cost is calculated on a weighted average basis. The Group estimates a slow-moving inventory provision based on prior stock performance and current market conditions. The Group also provides for obsolete inventory. Inventory cost includes all direct costs and an appropriate proportion of fixed and variable overheads.
Notes to the consolidated financial statements continued 96 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
The Group is not exposed to large amounts of credit risk due to the nature of its operations as a direct to customer retailer; however, the Group recognises an allowance for expected credit losses for all financial assets measured at amortised costs. These losses are calculated with reference to the difference between contractual cash flows and cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate.
The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill, and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the cash-generating unit (CGU)). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to CGUs. Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. An impairment loss is recognised if the carrying amount of an asset or its CGU exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior years are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised.
Cash and cash equivalents comprise cash and short-term bank deposits with an original maturity of three months or less.
A defined contribution plan is a post-employment benefit plan under which the Group pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement in the periods during which services are rendered by employees.
The grant date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity for equity-settled schemes or liabilities for cash-settled schemes, over the period in which the employees become unconditionally entitled to the awards. The fair value of the awards granted is measured using an option valuation model where appropriate, taking into account the terms and conditions upon which the awards were granted. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service and non-market performance vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting and/or market performance conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes.# Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
A provision is recognised in the statement of financial position when the Group has a present legal or constructive obligation as a result of a past event that can be reliably measured and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects risks specific to the liability and current market assessment of the time value of money.
Revenue comprises the consideration paid for products by external customers at the point of sale in stores, net of value added tax and promotional discounts. Revenue is recognised on the sale of goods when the product is sold to the customer. It is the Group’s policy to sell its products to customers with a right of return. The Group uses the expected value method to estimate the value of goods that will be returned, because this method best predicts the amounts of variable consideration to which the Group will be entitled. However, the level of returns is not considered material; therefore, no right of return asset or refund liability is recognised. On the basis of materiality revenue is therefore recognised at the full value of the consideration received. This is assessed on an ongoing basis. The Group does not operate any loyalty programmes or sell gift cards.
Cost of sales consist of costs related to purchase price of consumer products sold to customers and inbound shipping charges to distribution centres. Shipping charges to receive products from suppliers are included in inventory and recognised as cost of sales upon sale of products to customers. In addition, warehouse reception and storage costs are not incorporated into inventory valuation on the balance sheet but directly expensed through the income statement as distribution costs. Supplier rebates and contributions to common marketing or advertising campaigns are measured based on contracts signed with suppliers and are considered as a reduction of the prices paid for the products and, therefore, recorded as a reduction of the inventory cost.
Distribution costs consist of costs incurred in operating and staffing distribution centres and stores and transporting inventory from distribution centres to stores. They consist of warehousing and store employee salaries and wages, store expenses, advertising costs and other selling expenses.
Administrative expenses consist of support office employees’ salaries and wages, impairment losses and reversals, gains and losses on the sale of non-current assets and disposal groups held for sale, restructuring costs and other general and administrative expenses.
The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low-value assets (such as personal computers, small items of office furniture and telephones). For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date. The lease payments are discounted at the Group’s incremental borrowing rate. Lease payments included in the measurement of the lease liability comprise:
Variable rents that do not depend on an index or rate are not included in the measurement of the lease liability and the right-of-use asset. The related payments are recognised as an expense in the period in which the event or condition that triggers those payments occurs.
As a practical expedient, IFRS 16 permits a lessee not to separate non-lease components, and instead account for any lease and associated non-lease components as a single arrangement. The Group has not used this practical expedient.
The lease liability is presented as a separate line in the Consolidated statement of financial position, split between current and non- current liabilities.
The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.
The lease liability is remeasured where:
When the lease liability is remeasured, an equivalent adjustment is made to the right-of-use asset unless its carrying amount is reduced to zero, in which case any remaining amount is recognised in profit or loss.
The right-of-use asset comprises the initial measurement of the corresponding lease liability, lease payments made at or before the commencement date and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses. Where the Group has an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognised and measured under IAS 37. The costs are included in the related right-of-use asset, unless those costs are incurred to produce inventories. The right-of-use asset is presented as a separate line in the balance sheet.
Right-of-use assets are amortised over the shorter of the lease term and useful life of the underlying asset.
The Group applies IAS 36 to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss as described in the “Impairment – non-financial assets” policy.
Tax on the profit or loss for the year comprises current and deferred tax recognised and measured in accordance with IAS 12. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity or other comprehensive income, in which case it is recognised directly in equity or other comprehensive income.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future.
The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the reporting date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilised.
The Group has adopted International Tax Reform – Pillar Two Model Rules (Amendments to IAS 12) upon their release on 23 May 2023. The amendments provide a temporary mandatory exception from deferred tax accounting for the top-up tax, which is effective immediately, and require new disclosures about the Pillar Two exposure for accounting periods beginning on or after 1 January 2023. The mandatory exception applies retrospectively.# 1. Significant accounting policies continued
However, because no new legislation to implement the top-up tax was enacted or substantively enacted at 30 September 2022 in any jurisdiction in which the Group operates and no related deferred tax was recognised at that date, the retrospective application has no impact on the Group’s consolidated financial statements.
Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker. The Chief Operating Decision Maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board that makes strategic decisions.
Grants are recognised only when there is reasonable assurance that the Group will comply with the conditions attached to them and that the grants will be received.
The consolidated financial statements are adjusted to reflect events that occurred provided they give evidence of conditions that existed at the balance sheet date. Events that are indicative of conditions that arose after the balance sheet date are disclosed where significant, but do not result in an adjustment of the consolidated financial statements themselves.
Rebate income consists of income generated from volume-related rebate agreements and other supplier funding received on an ad hoc basis for in-store promotional activity. The income received is recognised as a credit against cost of sales. Volume-related income is recognised based on the expected entitlement at the reporting date based on agreed and documented contractual terms. Where the contractual period is not yet complete, the Group will estimate expected purchase volumes taking into account current performance levels to assess the probability of achieving contractual target volumes. Other supplier funding is recognised as invoiced to the suppliers, subject to satisfaction of any related performance conditions. To minimise the risk arising from estimate, supplier confirmations are obtained at the reporting date prior to amounts being invoiced.
Promotional pricing income relates to income received from suppliers to invest in the customer offer. It is recognised as a credit against cost of sales. Timing of invoicing of amounts due is agreed on an individual basis with each supplier.
Uncollected supplier income at the reporting date is presented within the financial statements as follows:
– Where there is no practice of netting commercial income from amounts owed to the supplier, the Group will present amounts due within trade receivables.
– Where commercial income is earned but not invoiced to the supplier at the reporting date, the amount due is included within prepayments and accrued income.
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99
Financial expenses comprise interest payable and the ineffective portion of change in the fair value of cash flow hedges that are recognised in the income statement. Financial income comprises interest receivable on funds invested and the ineffective portion of changes in the fair value of cash flow hedges. Interest income and interest expense are recognised in the income statement as they accrue, using the effective interest method.
Called-up share capital represents the nominal value of shares that have been issued. Share premium represents the difference between the issue price and the nominal value of the shares issued. Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares are shown in equity as a deduction, net of tax from the proceeds.
The cash flow hedge reserve represents the effective portion of cash flow hedges where the contract has not yet expired. The reserve is stated net of the associated tax. The effective portion is recycled to the income statement upon expiry of the contract or when the hedged future cashflows affect profit or loss.
The translation reserve represents the cumulative translation differences for foreign operations.
The merger reserve arose on consolidation as a result of the acquisition of the Pepco Group companies and Pepkor Import BV on 4 May 2016 and also the acquisition of Fully Sun China Limited and its subsidiaries on 18 January 2018 and the share for share exchange transaction that took place on 13 May 2021. It represents the difference between the cost of the Company’s investment in its subsidiaries acquired using the principles of merger accounting and the aggregate carrying value of assets and liabilities of the subsidiaries acquired.
A number of new and revised standards, including the following, are effective for annual periods beginning on or after 1 January 2022:
– Amendment to IFRS 1 First-time Adoption of International Financial Reporting Standards, IFRS 9 Financial Instruments, IAS 41 Agriculture – Annual Improvements to IFRS Standards 2018–2020 (effective 1 January 2022)
– Amendments to IFRS 3 Business Combinations – Reference to the Conceptual Framework (effective 1 January 2022)
– Amendments to IAS 16 Property, Plant and Equipment – Proceeds before Intended Use (effective 1 January 2022)
– Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets – Onerous Contracts – Cost of Fulfilling a Contract (effective 1 January 2022)
Adoption of these standards has not had an impact on the Group’s financial statements.
The following standards and interpretations to existing standards have been published that are mandatory for the Group’s accounting periods beginning on or after 1 October 2023 or later periods but which the Group has not early adopted:
– IFRS 17 Insurance Contracts, including amendments Initial Application of IFRS 17 and IFRS 9 – Comparative Information (effective 1 January 2023)
– Amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors – Definition of Accounting Estimates (effective 1 January 2023)
– Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2 Making Materiality Judgements – Disclosure Initiative: Accounting Policies (effective 1 January 2023)
– Amendments to IAS 12 Income Taxes – Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction (effective 1 January 2023)
– Amendments to IFRS 16 Leases – Lease Liability in a Sale and Leaseback (effective 1 January 2024)
– Amendments to IAS 1 Presentation of Financial Statements – Non-current Liabilities with Covenants, Classification of liabilities as current or non-current (effective 1 January 2024)
– Amendments to IAS 7 and IFRS 7 regarding supplier finance arrangements (effective 1 January 2024)
– Amendments to IAS 21 to clarify the accounting when there is a lack of exchangeability (effective 1 January 2025)
No other new standards, new interpretations or amendments to standards or interpretations have been published which are expected to have a significant impact on the Group’s financial statements. In relation to the published standards and interpretations above, the Group is continuing to assess the impact on the financial statements for future periods and expects there to be no significant material impact.
Notes to the consolidated financial statements continued
100
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
The preparation of these financial statements requires the exercise of judgement, estimates and assumptions that affect the application of policies and reported amount of assets and liabilities, income and expenses. Estimates and judgements are continually evaluated and are based on historical experience and various other factors, including expectations of the future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future period impacted. The Group makes estimates and assumptions concerning the future. By definition, the resulting accounting estimates will seldom equal the related actual results. The Directors continually evaluate the estimates, assumptions and judgements based on available information and experience.
The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are discussed below.
The Group assesses whether there are any indicators of impairment as at the reporting date for all intangible assets and right-of-use assets. Goodwill is tested for impairment annually and at other times when such indicators exist. Other intangible assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable. When value in use calculations are undertaken, the Directors must estimate the expected future cash flows from the cash-generating unit and choose a suitable discount rate in order to calculate the present value of those cash flows. The key sources of estimation uncertainty are the future business performance over the forecast period (five years), projected long-term growth rates and the discount rates applied. See note 11 for detailed disclosures.# Life of brand asset
The useful life is considered to be 40 years which represents management’s best estimate of the period over which the brand will be utilised based on the trading history of the business, future financial projections and ongoing investment in the business, along with the retail segment occupied by Poundland and the active proposition development happening within the business. The brand is amortised on a straight-line basis. See note 11 for detailed disclosures.
The judgements that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are discussed below.
Where a rate implicit to the lease is not available, the selection of a discount rate for a lease is based upon the marginal cost of borrowing to the business in relation to the funding for a similar asset. Management calculates appropriate discount rates based upon the marginal cost of borrowing currently available to the business as adjusted for several factors including the term of the lease, the location and type of asset and how often payments are made. Management considers that these are the key details in determining the appropriate marginal cost of borrowing for each of these assets. See note 1.20 for detailed disclosures.
Management exercises judgement in determining the lease term on its lease contracts. Within its lease contracts, particularly those in respect of its retail business, break options are included to provide operational and financial security should store performance be different to expectations. At inception of a lease, management will typically assess the lease term as being the full lease term as such break options are not typically considered reasonably certain to be exercised. As stated in the accounting policies, the discount rate used to calculate the lease liability is based on the incremental borrowing rate. Incremental borrowing rates are determined quarterly and depend on the lease term, currency and start date of the lease. The incremental borrowing rate is determined based on a series of inputs including the risk-free rate based on government bond rates, country specific risk and entity specific risk. See note 12 for detailed disclosures.
Management exercises judgement in determining the adjustments to apply to IFRS measurements. Management believes these measures provide additional useful information to illustrate the underlying trends, performance and position of the Group. Non-underlying adjustments constitute material, exceptional, unusual and other items. In determining whether events or transactions are treated as non-underlying items, management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence. Examples of charges or credits meeting the above definition and which have been presented as non-underlying items in the current and/or prior years include:
– IFRS 2 charges in respect of management Value Creation Plan;
– cost relating to implementation of Software-as-a-Service IT solutions and expensing significant ERP programme costs incurred; and
– business restructuring programmes.
In the event that other items meet the criteria, which are applied consistently from year to year, they are also treated as non-underlying items. Further information about the determination of non-underlying and other items in financial year 2023 is included in note 4. The non-underlying items are not defined by IFRS.
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023 101
Management exercises judgement in determining the adjustments to apply to IFRS measurements in order to derive suitable APMs. As set out in note 27, APMs are used as management believes these measures provide additional useful information on the underlying trends, performance and position of the Group. These measures are used for performance analysis. The APMs are not defined by IFRS and therefore may not be directly comparable with other companies’ APMs. These measures are not intended to be a substitute for, or superior to, IFRS measurements.
Operating segments are defined as components of the Group about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (CODM), or decision-making group, in deciding how to allocate resources and in assessing performance. The Group has identified two significant revenue-generating operating segments. One being businesses trading under the Pepco banner and the second being business trading under the Poundland and Dealz banners. A third “other” operating segment includes the Group’s sourcing operations, Group functions and other activities that do not meet the threshold requirements for individual reporting. EBITDA is the primary profit metric reviewed by the CODM and has been presented by operating segment with a reconciliation to operating profit. EBITDA is defined as operating profit before depreciation, amortisation, impairment, profit/loss on disposal of tangible and intangible assets and other expenses. Tax and interest are not reviewed by the CODM on an operating segment basis. Segment assets and liabilities are measured in the same way as in the consolidated financial statements. These assets and liabilities are allocated based on the operations of the segment and the physical location of the asset. Investments in subsidiaries within the Group, along with relevant consolidation adjustments and eliminations are allocated to the relevant segment. Assets and liabilities included within the “other” segment relate to balances held by the Group’s sourcing operations
| Year to Year to 30 September | 30 September 2023 | 30 September 2022 |
|---|---|---|
| €000 | €000 | €000 |
| External revenue | ||
| Pepco | 3,415,598 | 2,714,003 |
| Poundland Group | 2,233,287 | 2,108,816 |
| Group external revenue | 5,648,885 | 4,822,819 |
| Underlying EBITDA | ||
| Pepco | 552,037 | 519,382 |
| Poundland Group | 204,406 | 214,121 |
| Other | (3,090) | (2,765) |
| Group underlying EBITDA | 753,353 | 730,738 |
| Reported EBITDA | ||
| Pepco | 528,657 | 501,843 |
| Poundland Group | 171,196 | 180,805 |
| Other | 1,899 | (17,716) |
| Group EBITDA | 701,752 | 664,932 |
| Less reconciling items to operating profit | ||
| Depreciation of right-of-use asset | (309,000) | (260,284) |
| Depreciation of property, plant and equipment | (151,807) | (108,740) |
| Impairment of property, plant and equipment | (3,130) | (8,401) |
| Amortisation of other intangibles | (9,572) | (9,261) |
| Profit on disposal of property, plant and equipment | 477 | 227 |
| Other expenses | (235) | (244) |
| Group operating profit from continuing operations | 228,485 | 278,229 |
All income statement disclosures are for the continuing business only. The total asset, total liability and capital expenditure disclosures are for the entire Group.
Notes to the consolidated financial statements continued
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Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
| Year to Year to 30 September | 30 September 2023 | 30 September 2022 |
|---|---|---|
| €000 | €000 | €000 |
| Depreciation and amortisation | ||
| Pepco | 294,322 | 226,486 |
| Poundland Group | 174,582 | 150,461 |
| Other | 1,475 | 1,338 |
| Group depreciation and amortisation | 470,379 | 378,285 |
| Impairment of property, plant and equipment and intangible assets | ||
| Pepco | 3,130 | (238) |
| Poundland Group | — | 8,639 |
| Group impairment of property, plant and equipment and intangible assets | 3,130 | 8,401 |
| Total assets | ||
| Pepco | 2,607,113 | 2,307,013 |
| Poundland Group | 1,928,644 | 1,478,781 |
| Other | 55,060 | 213,534 |
| Group total assets | 4,590,817 | 3,999,328 |
| Total liabilities | ||
| Pepco | 1,788,940 | 1,377,556 |
| Poundland Group | 883,163 | 1,131,319 |
| Other | 761,569 | 345,699 |
| Group total liabilities | 3,433,672 | 2,854,574 |
| Additions to non-current assets | ||
| Pepco | 561,587 | 376,369 |
| Poundland Group | 267,101 | 188,219 |
| Other | 946 | 7,905 |
| Group additions to non-current assets | 829,634 | 572,493 |
Revenue comprises the consideration paid for products by external customers at the point of sale in stores, net of value added tax and promotional sales discounts. The Group’s disaggregated revenue recognised relates to the following geographical segments:
| Year to Year to 30 September | 30 September 2023 | 30 September 2022 |
|---|---|---|
| €000 | €000 | €000 |
| UK and Republic of Ireland | 2,000,633 | 1,889,610 |
| Poland | 1,413,973 | 1,191,826 |
| Rest of Europe | 2,234,279 | 1,741,383 |
| 5,648,885 | 4,822,819 |
The Group’s disaggregated non-current assets recognised relates to the following geographical segments:
| Year to Year to 30 September | 30 September 2023 | 30 September 2022 |
|---|---|---|
| €000 | €000 | €000 |
| UK and Republic of Ireland | 1,334,269 | 1,268,687 |
| Poland | 404,019 | 336,326 |
| Rest of Europe | 1,081,354 | 754,436 |
| 2,819,642 | 2,359,449 |
Please note that the figures above exclude deferred tax assets and derivative assets.
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023 103
The Group believes underlying profit, an alternative profit measure, is a valuable way in which to present business performance as it provides the users of the accounts with a clear and more representative view of ongoing business performance. Non-underlying items, which are removed from the reported IFRS measures, are defined as material, exceptional, unusual and other items. Underlying performance measures should be considered in addition to IFRS measures and are not intended to be a substitute for them. The Group also uses underlying financial performance to improve the comparability of information between reporting periods and geographical units and to aid users in understanding the Group’s performance. Consequently, the Group uses underlying financial performance for performance analysis, planning, reporting and incentive setting.# Notes to the consolidated financial statements
| Year to 30 September 2023 €000 | Year to 30 September 2022 €000 |
|---|---|
| Operating profit for the period has been arrived at after charging: | |
| Expense relating to short-term, low-value and variable leases | 53,704 |
| Depreciation of tangible fixed assets and other items: Owned | 151,807 |
| Depreciation of right-of-use assets | 309,000 |
| Impairment of property, plant and equipment | 3,130 |
| Amortisation of other intangibles | 9,572 |
| Impairment of other intangible assets | — |
| Cost of inventories recognised as an expense | 3,300,689 |
| Write downs of inventories recognised as an expense | 67,385 |
| Year to 30 September 2023 €000 | Year to 30 September 2022 €000 |
|---|---|
| Auditors’ remuneration | |
| Fees payable to the Company’s auditors and their associates for the audit of the Company’s annual accounts¹ | 540 |
| Fees payable to the Company’s auditors and their associates for the audit of the Company’s subsidiaries¹ | 960 |
| Fees payable to other auditors and their associates for the audit of the Company’s subsidiaries | 867 |
| Fees payable to other auditors and their associates in the current year in relation to prior year audit | 244 |
| Total audit fees | 2,611 |
| Audit related services | 147 |
| Other services | 132 |
| Total auditors’ remuneration | 2,890 |
¹ Audit fees are payable to Mazars Accountants N.V. the auditors of the Company.
| Year to 30 September 2023 €000 | Year to 30 September 2022 €000 |
|---|---|
| Bank interest income | 2,897 |
| Foreign exchange gains | 7,323 |
| 10,220 |
| Year to 30 September 2023 €000 | Year to 30 September 2022 €000 |
|---|---|
| Interest on bank loans and amortisation of capitalised finance costs | 35,684 |
| Interest on lease liabilities | 61,367 |
| On amounts owed to Group undertakings | — |
| Ineffective element of hedging | 1,918 |
| Unrealised foreign currency losses on borrowings | (7,241) |
| 91,728 | |
| Non-underlying financial expenses¹ | — |
| 91,728 |
¹ Non-underlying financial expenses relate to lease liability expensed in relation to stores closed as part of the restructure.
The average number of persons employed by the Group (including Directors) during each year was as follows:
| Year to 30 September 2023 | Year to 30 September 2022 |
|---|---|
| Administration | 2,458 |
| Selling and distribution | 43,871 |
| 46,329 |
The Group does not have any staff employed in the Netherlands.
The aggregate payroll costs of these persons were as follows:
| Year to 30 September 2023 €000 | Year to 30 September 2022 €000 |
|---|---|
| Wages and salaries | 701,527 |
| Social security costs | 91,991 |
| Other pension costs (note 24) | 23,607 |
| Share-based payments expense (note 21) | 1,093 |
| 818,218 |
The amounts for remuneration include the following in respect of the key management personnel:
| Other short-term remuneration €000 | Basic annual bonus €000 | Other Post- employment contributions €000 | Company pension €000 | LTIP¹ €000 | Total €000 | |
|---|---|---|---|---|---|---|
| 2023 | 3,367 | 689 | 85 | 227 | 5,499 | 9,867 |
| 2022 | 3,948 | 1,676 | 54 | 24 | 7,883 | 13,585 |
¹ Long Term Incentive Plan; this includes VCP-related IFRS 2 charges. See note 21 for more details and see Remuneration report (on pages 77 to 81) for Directors’ remuneration in detail.
| Year to 30 September 2023 €000 | Year to 30 September 2022 €000 |
|---|---|
| Current tax (charge)/credit | |
| Current tax on profits for the year | (37,451) |
| Adjustments in respect of prior periods | 2,502 |
| Total current tax | (34,949) |
| Deferred tax (charge)/credit | |
| Origination and reversal of temporary differences | (7,842) |
| Adjustments in respect of prior periods | (1,942) |
| Total deferred tax | (9,784) |
| Total tax charge for the year | (44,733) |
The tax charge for the year differs from the standard rate of corporation tax in the UK of 22.0% (2022: 19.0%). The differences are explained below.
| Year to 30 September 2023 €000 | Year to 30 September 2022 €000 |
|---|---|
| Profit before tax – continuing operations | 146,977 |
| Loss before tax – discontinued operations | — |
| 146,977 | |
| Expected tax (charge)/credit at the UK statutory rate of 22.0% (2022: 19.0%)* | (32,335) |
| Effects of: | |
| Movement in unrecognised temporary differences | (9,592) |
| Expenses not deductible for tax purposes | (12,658) |
| Overseas tax rate differences | 8,277 |
| Adjustments in respect of prior periods | 560 |
| Difference in tax rates | 1,015 |
| Total tax charge for the year | (44,733) |
| Year to 30 September 2023 €000 | Year to 30 September 2022 €000 |
|---|---|
| Deferred tax (charge)/credit | |
| Fair value movements on derivative financial instruments | 34,924 |
| Total tax charge recognised in other comprehensive income | 34,924 |
An increase in the UK corporation rate from 19% to 25% (effective 1 April 2023) was substantively enacted on 24 May 2021. This will increase the Group’s future UK current tax charge accordingly. The deferred tax asset relating to the UK at 30 September 2023 has been calculated at 25% (FY22: 25%). Deferred tax assets and liabilities relating to other jurisdictions have been calculated based on the relevant tax rate under domestic law.
To address concerns about uneven profit distribution and tax contributions of large multinational corporations, various agreements have been reached at the global level, including an agreement in October 2021 by over 135 jurisdictions to introduce a global minimum tax rate of 15% (Pillar Two). In December 2021, the Organisation for Economic Co-operation and Development (OECD) released a draft legislative framework, and since then domestic legislation has followed in some countries in which the Group operates including the UK (substantively enacted on 20 June 2023). However, since the newly enacted tax legislation in the UK is only effective for accounting periods commencing on or after 31 December 2023 there is no current tax impact for the financial year ended 30 September 2023. The Group has applied a temporary mandatory relief from deferred tax accounting for the impacts of the top-up tax and accounts for it as a current tax when it is incurred. The Group continues to monitor the progress of the legislative process in each jurisdiction the Group operates in and will be required to include new disclosures about the top-up tax in its next accounting period beginning on 1 October 2023.# Annual Report and Consolidated Financial Statements 2023
| Leasehold Land and property | Fixtures and improvements | equipment | Total | |
|---|---|---|---|---|
| Cost | €000 | €000 | €000 | €000 |
| Balance at 1 October 2021 | 60,969 | 282,569 | 412,754 | 756,292 |
| Additions | — | 95,156 | 123,061 | 218,217 |
| Disposals | — | (9,397) | (17,994) | (27,391) |
| Impairment | — | (8,873) | 472 | (8,401) |
| Differences on translation | — | (16,840) | (450) | (17,290) |
| Balance at 30 September 2022 | 60,969 | 342,615 | 517,843 | 921,427 |
| Balance at 1 October 2022 | 60,969 | 342,615 | 517,843 | 921,427 |
| Additions | 176 | 178,908 | 184,739 | 363,823 |
| Disposals | — | (6,029) | (31,032) | (37,061) |
| Impairment | — | - | (3,130) | (3,130) |
| Differences on translation | 1 | 11,107 | 11,816 | 22,924 |
| Balance at 30 September 2023 | 61,146 | 526,601 | 680,236 | 1,267,983 |
| Depreciation | ||||
| Balance at 1 October 2020 | 863 | 99,545 | 216,378 | 316,786 |
| Charge for the period | 607 | 38,715 | 69,418 | 108,740 |
| Disposals | — | (8,045) | (18,379) | (26,424) |
| Reclassifications¹ | — | — | 2,042 | 2,042 |
| Differences on translation | (41) | (9,193) | 4,967 | (4,267) |
| Balance at 30 September 2022 | 1,429 | 121,022 | 274,426 | 396,877 |
| Balance at 1 October 2022 | 1,429 | 121,022 | 274,426 | 396,877 |
| Charge for the period | 572 | 59,505 | 91,730 | 151,807 |
| Disposals | — | (6,073) | (29,544) | (35,617) |
| Differences on translation | 4 | 1,035 | 7,440 | 8,479 |
| Balance at 30 September 2023 | 2,005 | 175,489 | 344,052 | 521,546 |
| Net book value | ||||
| Balance at 30 September 2023 | 59,141 | 351,112 | 336,184 | 746,437 |
| Balance at 30 September 2022 | 59,540 | 221,593 | 243,417 | 524,550 |
¹ The reclassifications during the prior year primarily relate to Finance leases within fixtures and fittings being reclassified to right of use assets. An impairment was recognised in the year of €3.1m (2022: €8.4m) as a result of the closure and rebranding of certain stores.
| Software and trademarks | Goodwill¹ | Brand¹ | Total | |
|---|---|---|---|---|
| Cost | €000 | €000 | €000 | €000 |
| Balance at 1 October 2021 | 821,823 | 127,672 | 41,026 | 990,521 |
| Additions | 1,557 | — | 6,764 | 8,321 |
| Disposals | — | — | (714) | (714) |
| Differences on translation | (20,211) | (3,249) | 933 | (22,527) |
| Balance at 30 September 2022 | 803,169 | 124,423 | 48,009 | 975,601 |
| Balance at 1 October 2022 | 803,169 | 124,423 | 48,009 | 975,601 |
| Additions | — | — | 25,815 | 25,815 |
| Disposals | — | — | (6,853) | (6,853) |
| Differences on translation | 17,112 | 2,646 | 1,942 | 21,700 |
| Balance at 30 September 2023 | 820,281 | 127,069 | 68,913 | 1,016,263 |
| Amortisation | ||||
| Balance at 1 October 2021 | 117,170 | 9,577 | 29,259 | 156,006 |
| Amortisation for the period | — | 3,271 | 5,990 | 9,261 |
| Impairments | — | — | (2,042) | (2,042) |
| Differences on translation | (2,982) | (404) | 1,524 | (1,862) |
| Balance at 30 September 2022 | 114,188 | 12,444 | 34,731 | 161,363 |
| Balance at 1 October 2022 | 114,188 | 12,444 | 34,731 | 161,363 |
| Amortisation for the period | — | 3,284 | 6,288 | 9,572 |
| Disposals | — | — | (5,742) | (5,742) |
| Differences on translation | 2,433 | 288 | 872 | 3,593 |
| Balance at 30 September 2023 | 116,621 | 16,016 | 36,149 | 168,786 |
| Net book value | ||||
| Balance at 30 September 2023 | 703,660 | 111,053 | 32,764 | 847,477 |
| Balance at 30 September 2022 | 688,981 | 111,979 | 13,278 | 814,238 |
¹ Brand and goodwill relate to the acquisition of the Poundland Group, Fultons Group and Poundshop.com. For details on additions to goodwill during the prior year, please refer to note 22.
Under IAS 36 “Impairment of Assets”, the Group is required to:
– review its intangible assets in the event of a significant change in circumstances that would indicate potential impairment; and
– review and test its goodwill and indefinite-life intangible assets annually or in the event of a significant change in circumstances.
As part of the annual impairment review, the carrying value of the assets or, if they do not generate independent cash flows individually, the carrying value of the cash-generating unit (CGU) that they belong to is compared to their recoverable amount. CGUs represent the smallest identifiable group of assets that generate cash flows that are largely independent of cash flows from other groups of assets. In accordance with internal management structures, the group of CGUs against which goodwill is monitored comprises the Poundland Group, which is aligned with the level at which the Directors monitor that goodwill. The recoverable amount represents the higher of the CGU’s fair value less the cost to sell and value in use. The recoverable amount has been determined based on value in use. Where the recoverable amount is less than the carrying value, an impairment results.
Goodwill acquired in a business combination is allocated to groups of CGUs according to the level at which the Directors monitor that goodwill. During the year, all goodwill was tested for impairment and no impairment was booked to goodwill (2022: €Nil). The key assumptions on which the value in use calculations are based relate to future business performance over the forecast period (five years), projected long-term growth rates and the discount rates applied. The forecast cash flows include the Directors’ latest estimates on future revenue, pricing and other operating costs, which underlie EBITDA. Management has reviewed and approved the assumptions inherent in the model as part of the annual budget process using historical experience and considering economic and business risks facing the Group. In assessing Poundland Group’s value in use a pre-tax discount rate of 10.6% (2022: 10.9%) was used. In assessing future EBITDA growth the Group has modelled the underlying movements in the constituents of EBITDA and has used a growth rate of the constituent elements ranging from 0.4% to 4.0% (2022: 1.0% to 10.8%) in the first five years which has resulted in an average growth rate of 2.5% (2022: 6.4%) in the first five years and a terminal-term growth rate of 2% (2022: 1.2%).
Management has considered reasonable possible changes in the key assumptions underpinning EBITDA growth and the pre-tax discount rate and has identified the following instances that could cause changes in available headroom of €201m (2022: €214m). Sensitivity analysis has not been prepared based on changing any one element of the constituents of EBITDA because it is considered that this is not meaningful information as it does not consider the interrelationship of the cash flows of the business. A 10% reduction in EBITDA in the terminal year will result in a headroom reduction of €194m; if the post-tax discount rate applied to the cash flow projections of Poundland had been 0.5% higher than management’s estimates the goodwill headroom would reduce to €127m. Should the projected long-term growth rate applied to the cash flow projections of Poundland reduce to 1.5%, the headroom would reduce to €148m. A reduction in EBITDA in the terminal year of 10.5%, an increase in the post-tax discount rate of 1.5% or a reduction in the long-term growth rate to -0.2% will reduce the recoverable amount to €Nil.
Cash EBITDA is significantly impacted by product mix, shrinkage rates and future rent reductions.
– Product mix: The roll-out of the Pepco clothing range in Poundland stores and product mix improvements in general merchandise together with further buying efficiencies from increased intergroup trading are driving improvements in margin.
– ERP: The Poundland Group has now implemented an ERP system which is expected improve shrinkage rates and also improve inventory management. The business plan included a reduction in the shrinkage rate and working capital improvements as a result of this.
– Rent reduction rate: There is an opportunity to renegotiate lease costs to current market-related rentals upon expiry of existing leases.
| Right-of-use assets Buildings | Right-of-use assets Equipment | Right-of-use assets Vehicles | Total | |
|---|---|---|---|---|
| Cost | €000 | €000 | €000 | €000 |
| Balance at 1 October 2021 | 1,352,095 | 27,141 | 19,593 | 1,398,829 |
| Additions | 341,468 | 1,735 | 2,752 | 345,956 |
| Disposals | (5,685) | (317) | — | (6,002) |
| Differences on translation | (35,490) | (830) | 773 | (35,547) |
| Balance at 30 September 2022 | 1,652,389 | 27,729 | 23,118 | 1,703,236 |
| Balance at 1 October 2022 | 1,652,389 | 27,729 | 23,118 | 1,703,236 |
| Additions | 417,880 | 17,424 | 4,692 | 439,996 |
| Disposals | (95) | — | — | (95) |
| Differences on translation | 83,688 | 443 | 689 | 84,820 |
| Balance at 30 September 2023 | 2,153,862 | 45,596 | 28,499 | 2,227,957 |
| Depreciation | ||||
| Balance at 1 October 2021 | 417,536 | 16,189 | 7,761 | 441,486 |
| Depreciation for the period | 247,604 | 3,843 | 8,837 | 260,284 |
| Disposals | (3,102) | (188) | (3,740) | (7,030) |
| Differences on translation | (10,973) | 1,228 | — | (9,745) |
| Balance at 30 September 2022 | 651,065 | 21,072 | 12,858 | 684,995 |
| Balance at 1 October 2022 | 651,065 | 21,072 | 12,858 | 684,995 |
| Depreciation for the period | 302,194 | 4,267 | 2,539 | 309,000 |
| Disposals | (104) | — | — | (104) |
| Differences on translation | 7,370 | 771 | 242 | 8,383 |
| Balance at 30 September 2023 | 960,525 | 26,110 | 15,639 | 1,002,274 |
| Net book value | ||||
| Balance at 30 September 2023 | 1,193,337 | 19,486 | 12,860 | 1,225,683 |
| Balance at 30 September 2022 | 1,001,324 | 6,657 | 10,260 | 1,018,241 |
Lease liabilities
| Year to 30 September 2023 | Year to 30 September 2022 |
|---|---|
| €000 | €000 |
| At beginning of period | 1,133,544 |
| Additions | 469,203 |
| Interest on lease liability | 61,367 |
| Repayment of lease liability | (386,961) |
| Disposal | — |
| Differences on translation | 16,018 |
| At end of period | 1,293,171 |
| Current | 304,794 |
| Non-current | 988,377 |
| 1,293,171 |
Amounts recognised in the income statement
| Year to 30 September 2023 | Year to 30 September 2022 |
|---|---|
| €000 | €000 |
| Interest expenses (included in finance cost) | 61,367 |
| Expense relating to short-term leases (included in cost of goods sold and administrative expenses) | 603 |
| Expense relating to leases of low-value assets that are not shown above as short-term leases (included in administrative expenses) | 2,153 |
| Expense relating to variable lease payments not included in lease liabilities (included in administrative expenses) | 50,948 |
Amounts recognised in the statement of cash flows
| Year to 30 September 2023 | Year to 30 September 2022 |
|---|---|
| €000 | €000 |
| Total cash outflow for leases | 386,961 |
The Group leases various retail stores, offices and vehicles under non-cancellable operating leases. The leases have varying terms, escalating clauses and renewal rights. On renewal, the terms of the leases are renegotiated. The Group has recognised right-of-use assets for these leases, except for short-term and low-value leases. Some property leases contain variable payment terms that are linked to sales generated from a store. Variable payment terms’ percentages range from 1.5% to 7.5% of sales. Variable payment terms are used for a variety of reasons, including minimising the fixed cost base for newly established stores. Variable lease payments that depend on sales are recognised in profit or loss in the period in which the condition that triggers those payments occurs. Extension and termination options are included in a number of property and equipment leases across the Group. These are used to maximise operational flexibility in terms of managing the assets used in the Group’s operations. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor.
| 30 September 2023 | 30 September 2022 |
|---|---|
| €000 | €000 |
| Goods purchased for resale | 739,893 |
| Goods in transit | 394,725 |
| 1,134,618 |
Inventories have been reduced by €70,543k (2022: €33,630k) as a result of the write-down to net realisable value.
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023 111
| 30 September 2023 | 30 September 2022 |
|---|---|
| €000 | €000 |
| Non-current trade and other receivables | |
| Other receivables | 46 |
| 46 | |
| Current trade and other receivables | |
| Trade receivables | 2,624 |
| Other receivables | 30,454 |
| Prepayments | 110,444 |
| 143,522 |
As the principal business of the Group is retail sales made in cash or with major credit cards, the Group’s trade receivables are small and therefore credit risk primarily consists of accrued income and cash and cash equivalents. Accordingly, the Group does not systematically report outstanding receivables analysed by credit quality, in particular with respect to the credit quality of financial assets that are neither past due nor impaired. There is no significant concentration of credit risk with respect to trade receivables, as the Group has a large number of customers that are widely dispersed. As such, any further detailed analysis of the credit risk of the Group’s financial assets by category is not considered meaningful. The carrying amount of trade and other receivables recorded in the financial statements represents the Group’s maximum exposure to credit risk and any associated impairments are immaterial.
| 30 September 2023 | 30 September 2022 |
|---|---|
| €000 | €000 |
| Current | |
| Trade payables¹ | 767,424 |
| Other taxation and social security | 64,923 |
| Other payables | 139,833 |
| Accruals | 294,015 |
| 1,266,195 | |
| Non-current | |
| Accruals and deferred income | 21,894 |
| Amounts owed to Group undertakings | — |
| 21,894 |
¹ Trade payables includes €212m (FY22: €130m) payable to suppliers utilising the Supply Chain Financing Programme implemented by the Group. Amounts owed to Group undertakings are repayable on demand and are non-interest bearing at 30 September 2022.
| 30 September 2023 | 30 September 2022 |
|---|---|
| €000 | €000 |
| Current | |
| Borrowings from credit institutions | 118,794 |
| Non-current | |
| Borrowings from credit institutions | 610,270 |
Included within non-current liabilities are loans from credit institutions of €250m (2022: €550m) and a secured bond of €375m (2022:nil). Costs incurred in obtaining the loans from credit institutions and the secured bond have been capitalised and are allocated to the Consolidated income statement over the life of the debt facility. At 30 September 2023 borrowings are stated net of unamortised issue costs of €14.7m (2022: €6.1m). Interest is being charged on borrowings from credit institutions at an effective rate of 3.75%. These loans contains financial covenants which are typical for this type of facility and include minimum leverage and interest cover. The Group remained compliant with these covenants for the year ended 30 September 2023. The loans from credit institutions are secured over the shares of material overseas subsidiaries and debentures over other assets of the Group. The secured bond issuance matures in June 2028 and has a fixed interest rate of 7.25%.
Notes to the consolidated financial statements continued
112 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
The Directors have overall responsibility for the oversight of the Group’s risk management framework. A formal process for reviewing and managing risk in the business has been developed. A register of strategic and operational risk is maintained and reviewed by the Directors, who also monitor the status of agreed actions to mitigate key risks.
Credit risk is the risk of financial loss to the Group if a counterparty to a financial instrument fails to meet its contractual obligation. This risk arises from the Group’s foreign exchange and commodity hedging agreements. As the principal business of the Group is cash sales the Group’s trade receivables are small. The carrying amount of financial assets recorded in the financial statements represents the Group’s maximum exposure to credit risk and any associated impairments are minimal.
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group ensures that it has sufficient cash or loan facilities to meet all its commitments when they fall due by ensuring that there is sufficient cash or working capital facilities to meet the cash requirements of the Group for the current business plan. The risk is measured by review of forecast liquidity each month to determine whether there are sufficient credit facilities to meet forecast requirements and by monitoring covenants on a regular basis. Cash flow forecasts are submitted monthly to the Directors. These continue to demonstrate the cash-generating ability of the business and its ability to operate within existing agreed facilities.
Market risk is the risk that changes in the market prices will affect the Group’s income. The Group’s exposure to market risk predominantly relates to interest and currency risk.
The Group’s external borrowings comprise loans which incur variable interest rate charges linked to Euribor which are added to the loan. Interest rate risk is measured by sensitivity analysis. The Group’s policy aims to manage the interest cost of the Group within the business plan. The Group does not utilise interest rate swaps to hedge interest rate risks. The table below shows the interest rate risk profile for the Group’s financial instruments:
| 2023 | 2022 | |
|---|---|---|
| €000 | €000 | |
| Cash and cash equivalents | 330,417 | 343,933 |
| Borrowings | (729,064) | (614,542) |
| Finance lease liabilities | (1,293,171) | (1,133,544) |
| Total | (1,691,818) | (1,404,153) |
The table below shows the Group’s sensitivity to interest rates on floating rate borrowings (i.e. cash and cash equivalents and bank borrowings which attract interest at floating rates) if interest rates were to change by +/-1%. The following assumptions were made in calculating the sensitivity analysis:
| 2023 (decrease)/ Increase in income | 2022 (decrease)/ Increase in income | 2023 (decrease)/ Increase in equity | 2022 (decrease)/ Increase in equity | |
|---|---|---|---|---|
| €000 | €000 | €000 | €000 | |
| +1% movement in interest rates | (3,304) | (3,439) | (3,671) | (6,145) |
| -1% movement in interest rates | 3,304 | 3,439 | 3,671 | 6,145 |
The Group has a significant transaction exposure to directly sourced purchases from its suppliers in the Far East, with most of the trade being in US Dollars and Chinese Yuan. The Group’s policy allows these exposures to be hedged for up to 18 months forward in order to fix the cost in Polish Zloty and Sterling. Hedging is performed through the use of foreign currency bank accounts and forward foreign exchange contracts. See below for further details on FX hedge accounting. The Group does not hedge either economic exposure or the translation exposure arising from the profits, assets and liabilities of its businesses.
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023 113
17.17. Financial instruments and related disclosures continued
Foreign currency risk continued
The carrying amount of the Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date is as follows:
| 30 September 2023 | 30 September 2022 | |||||||
|---|---|---|---|---|---|---|---|---|
| GBP | EUR | PLN | Others | GBP | EUR | PLN | Others | |
| €000 | €000 | €000 | €000 | €000 | €000 | €000 | €000 | |
| Cash and Cash equivalents | 21,251 | 127,634 | 18,580 | 162,952 | 49,439 | 31,792 | 243,136 | 19,566 |
| Trade and other receivables | 101,658 | 25,777 | 23,415 | (7,282) | 4,597 | 2,876 | 6,256 | 403 |
| Borrowings | — | (729,064) | — | — | — | (614,542) | — | — |
| Trade and other payables | (274,613) | (98,088) | (707,177) | (208,211) | (312,481) | (10,685) | (559,674) | (82,777) |
| Provisions | (12,501) | (4,314) | (12,284) | (1,474) | (12,500) | — | (35,264) | — |
| Finance Lease liabilities | (286,749) | (225,796) | (738,329) | (42,297) | (458,757) | (541,094) | (102,267) | (31,425) |
| (450,954) | (903,851) | (1,415,795) | (96,312) | (729,703) | (1,131,653) | (447,815) | (94,234) |
Significant exchange rates used
| Year to 30 September 2023 | Year to 30 September 2022 | |
|---|---|---|
| Average rate for the year | ||
| Polish Zloty | 4.62 | 4.66 |
| Pound Sterling | 0.87 | 0.85 |
| Statement of financial position rates | ||
| Polish Zloty | 4.63 | 4.85 |
| Pound Sterling | 0.86 | 0.88 |
Pension liability risk
The Group has no association with any defined benefit pension scheme and therefore carries no deferred, current or future liabilities in respect of such a scheme. The Group operates a number of Group personal pension plans for its employees.
Capital risk management
The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern in order to optimise returns to its shareholders. The Board’s policy is to retain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future growth. The Board regularly monitors the level of capital in the Group to ensure that this can be achieved. Refer to note 16 for loan covenant requirements. The Group monitors capital using net debt. This is because the Group believes this measure provides an indicator of the overall strength of its balance sheet and can be used to assess its earnings as compared to its indebtedness as defined by the Group’s financing agreements. Please refer to note 27 where the calculation of net debt is disclosed.
Fair value disclosures
The fair value of each class of financial assets and liabilities approximates the carrying amount, based on the following assumptions:
Trade receivables, trade payables, short-term The fair value approximates to the carrying value because of the short maturity of deposits and borrowings these instruments.
Long-term borrowings The fair value of bank loans and other loans approximates to the carrying value reported in the statement of financial position.
Fair value hierarchy
Financial instruments carried at fair value should be measured with reference to the following levels:
– Level 1: quoted prices in active markets for identical assets or liabilities;
– Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
– Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
All financial instruments carried at fair value have been measured using a Level 2 valuation method.
Notes to the consolidated financial statements continued
114
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Fair value hierarchy continued
The fair value of financial assets and liabilities are as follows:
| Year to 30 September 2023 | Year to 30 September 2022 | |
|---|---|---|
| €000 | €000 | |
| Financial assets measured at fair value | ||
| Derivative contracts used for hedging (assets) | 48,338 | 170,402 |
| Financial assets not measured at fair value | ||
| Cash and cash equivalents | 330,417 | 343,933 |
| Trade and other receivables | 33,124 | 14,132 |
| Total financial assets | 411,879 | 526,467 |
| Financial liabilities measured at fair value | ||
| Derivative contracts used for hedging (liabilities) | 92,775 | 45,161 |
| Financial liabilities not measured at fair value | ||
| Trade and other payables | 1,288,089 | 965,617 |
| Borrowings at amortised cost | 729,064 | 614,542 |
| Finance lease liabilities | 1,293,171 | 1,133,544 |
| Total financial liabilities | 3,403,099 | 2,758,865 |
Financial instrument sensitivity analysis
In managing interest rate and currency risks the Group aims to reduce the impact of short-term fluctuations on its earnings. At the end of each reporting period, the effects of hypothetical changes in interest and currency rates are as follows:
Foreign exchange rate sensitivity analysis
The table below shows the Group’s sensitivity to foreign exchange rates for its Polish Zloty and Pound Sterling financial instruments, the major currencies in which the Group’s assets and liabilities are denominated:
| 2023 increase/ (decrease) in equity | 2022 increase/ (decrease) in equity | |
|---|---|---|
| €000 | €000 | |
| 10% appreciation of the Euro against the Polish Zloty | 157,311 | 44,781 |
| 10% depreciation of the Euro against the Polish Zloty | (157,311) | (44,781) |
| 10% appreciation of the Euro against Pound Sterling | 50,106 | 72,970 |
| 10% depreciation of the Euro against Pound Sterling | (50,106) | (72,970) |
A strengthening/weakening of the Euro, as indicated, against the Polish Zloty at each year end would have increased/(decreased) the equity by the amounts shown above. This analysis is based on foreign currency exchange rate variances that the Group considered to be reasonably possible at the end of the reporting period. The analysis assumes that all other variables, in particular interest rates, remain constant. A strengthening/weakening of the Euro, as indicated, against Pound Sterling at each year end would have increased/(decreased) the equity by the amounts shown above. This analysis is based on foreign currency exchange rate variances that the Group considered to be reasonably possible at the end of the reporting period. The analysis assumes that all other variables, in particular interest rates, remain constant.
Contractual cash flows
The contractual maturity of bank borrowings including interest payments and trade payables, excluding the impact of netting agreements, is shown below:
| 30 September 2023 | Total | |||
|---|---|---|---|---|
| Expiring less than one year | Due in between one to five years | Expiring after five years | €000 | |
| €000 | €000 | €000 | €000 | |
| Borrowings | 155,804 | 732,893 | — | 888,697 |
| Trade and other payables | 1,266,195 | 21,894 | — | 1,288,089 |
| Lease liabilities | 377,379 | 823,170 | 347,267 | 1,547,816 |
| 1,799,378 | 1,577,957 | 347,267 | 3,724,602 |
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
115
Contractual cash flows continued
| 30 September 2022 | Total | |||
|---|---|---|---|---|
| Expiring less than one year | Due in between one to five years | Expiring after five years | €000 | |
| €000 | €000 | €000 | €000 | |
| Borrowings | 68,339 | 570,691 | — | 639,030 |
| Trade and other payables | 927,884 | 37,733 | — | 965,617 |
| Finance lease liabilities | 310,484 | 744,377 | 78,683 | 1,133,544 |
| 1,306,707 | 1,352,801 | 78,683 | 2,738,191 |
Derivatives and hedge accounting
The Group uses foreign currency forward contracts and commodity hedges to manage risks arising from changes in foreign currency exchange rates (relating to the purchase of overseas sourced products) and fuel price fluctuations. These have been designated as cash flow hedges with the respective underlying risks identified in accordance with the hedging strategy discussed as part of the financial risk management. Hedge effectiveness is determined at the inception of the hedge relationship and through periodic prospective effectiveness assessments to ensure that an economic relationship exists between the hedged item and hedging instrument. Hedge ineffectiveness may occur due to: a) the fair value of the hedging instrument on the hedge relationship designation date if the fair value is not €Nil; b) changes in the contractual terms or timing of the payments on the hedged item; and c) a change in the credit risk of the Group or the counterparty with the hedging instrument. The following table represents the net carrying values and nominal amounts of derivatives in a continued hedge relationship as at 30 September:
| 30 September 2023 | 30 September 2022 | |
|---|---|---|
| €000 | €000 | |
| Derivative financial assets at beginning of period | 125,240 | 62,376 |
| Recognised in the income statement¹ | (1,427) | 8,491 |
| Recognised in other comprehensive income | (166,502) | 65,208 |
| Translation differences | (1,748) | (10,835) |
| Derivative financial (liabilities)/assets at end of period | (44,437) | 125,240 |
¹ Amounts recognised in the income statement are included within cost of sales. The below table illustrates the notional value of the hedged exposure.
| 30 September 2023 | Total | ||||
|---|---|---|---|---|---|
| EUR | USD | CNY | Other | €000 | |
| €000 | €000 | €000 | €000 | ||
| Maturing in less than one year | (677,764) | 683,834 | 601,071 | (367,786) | 239,355 |
| Maturing in greater than one year | (47,000) | 92,505 | 65,027 | (43,370) | 67,162 |
| Total | (724,764) | 776,339 | 666,098 | (411,156) | 306,517 |
| 30 September 2022 | Total | ||||
|---|---|---|---|---|---|
| EUR | USD | CNY | Other | €000 | |
| €000 | €000 | €000 | €000 | ||
| Maturing in less than one year | 109,264 | 959,165 | 878,647 | (528,088) | 1,418,988 |
| Maturing in greater than one year | 30,000 | 64,629 | — | 3,094 | 97,723 |
| Total | 139,264 | 1,023,794 | 878,647 | (524,944) | 1,516,711 |
Notes to the consolidated financial statements continued
116
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
17.## 17. Financial instruments and related disclosures continued
The following tables provide an analysis of the anticipated contractual cash flows for the Group’s derivative contracts:
EUR
| 30 September 2023 | 30 September 2022 | |
|---|---|---|
| Payable €000 | Receivable €000 | |
| Due in less than one year | (10,850) | 14,371 |
| Expiring between one and two years | (1,014) | (1,637) |
| Contractual cash flows | (11,864) | 12,734 |
| Fair value | (11,864) | 12,734 |
USD
| 30 September 2023 | 30 September 2022 | |
|---|---|---|
| Payable €000 | Receivable €000 | |
| Due in less than one year | (20,911) | 10,165 |
| Expiring between one and two years | — | 3,258 |
| Contractual cash flows | (20,911) | 13,423 |
| Fair value | (20,911) | 13,423 |
CNY
| 30 September 2023 | 30 September 2022 | |
|---|---|---|
| Payable €000 | Receivable €000 | |
| Due in less than one year | (55,652) | 7,707 |
| Expiring between one and two years | — | 2,982 |
| Contractual cash flows | (55,652) | 10,689 |
| Fair value | (55,652) | 10,689 |
Other
| 30 September 2023 | 30 September 2022 | |
|---|---|---|
| Payable €000 | Receivable €000 | |
| Due in less than one year | (3,632) | 9,863 |
| Expiring between one and two years | (716) | 1,629 |
| Contractual cash flows | (4,348) | 11,492 |
| Fair value | (4,348) | 11,492 |
Total
| 30 September 2023 | 30 September 2022 | |
|---|---|---|
| Payable €000 | Receivable €000 | |
| Due in less than one year | (91,045) | 42,106 |
| Expiring between one and two years | (1,730) | 6,232 |
| Contractual cash flows | (92,775) | 48,338 |
| Fair value | (92,775) | 48,338 |
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023 117
The table below details changes in the Group’s liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group’s Consolidated cash flow statement as cash flows from financing activities.
| Total liabilities from credit institutions €000 | Borrowings from financing activities €000 | Lease liabilities €000 | |
|---|---|---|---|
| At 30 September 2022 | (1,133,544) | (614,542) | (1,748,086) |
| Financing cash flows¹ | 325,594 | (116,215) | 209,379 |
| Interest cash flows¹ | 61,367 | 18,809 | 80,176 |
| Other changes² | (530,570) | (17,116) | (547,686) |
| Foreign exchange | (16,018) | — | (16,018) |
| At 30 September 2023 | (1,293,171) | (729,064) | (2,022,235) |
| Total liabilities from credit institutions €000 | Borrowings from financing activities €000 | Lease liabilities €000 | |
|---|---|---|---|
| At 30 September 2021 | (1,099,318) | (610,792) | (1,710,110) |
| Financing cash flows¹ | 245,598 | (1,807) | 243,791 |
| Interest cash flows¹ | 46,075 | 9,642 | 55,694 |
| Other changes² | (261,003) | (11,585) | (272,588) |
| Foreign exchange | (64,873) | — | (64,873) |
| At 30 September 2022 | (1,133,544) | (614,542) | (1,748,086) |
¹ The financing cash flows from borrowings from credit institutions make up the net amount of proceeds from borrowings and repayments of borrowings and are presented in the cash flow statement on a gross basis. Interest cash flows for these liabilities are presented separately.
² Other changes include interest accruals and additions.
| Fair value through income statement | Amortised cost | Fair value through OCI | Total | |
|---|---|---|---|---|
| Non-current financial assets | ||||
| Derivative financial instruments¹ | — | 6,232 | — | 6,232 |
| Trade and other receivables | 46 | — | — | 46 |
| Current financial assets | ||||
| Trade and other receivables | 33,078 | — | — | 33,078 |
| Derivative financial instruments¹ | — | 42,106 | — | 42,106 |
| Cash and cash equivalents | 330,417 | — | — | 330,417 |
| 363,495 | 42,106 | — | 405,435 | |
| Non-current financial liabilities | ||||
| Interest-bearing long-term borrowings | 610,270 | — | — | 610,270 |
| Lease liabilities | 988,377 | — | — | 988,377 |
| Derivative financial instruments¹ | — | 1,730 | — | 1,730 |
| Trade and other payables | 21,894 | — | — | 21,894 |
| 1,620,541 | 1,730 | — | 1,622,271 | |
| Current financial liabilities | ||||
| Current portion of long-term borrowings | 118,794 | — | — | 118,794 |
| Lease liabilities | 304,794 | — | — | 304,794 |
| Derivative financial instruments¹ | — | 91,045 | — | 91,045 |
| Trade and other payables | 1,266,195 | — | — | 1,266,195 |
| 1,689,783 | 91,045 | — | 1,780,833 |
¹ Derivative financial instruments relate to cash flow hedge.
Notes to the consolidated financial statements continued
118 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
| Fair value through income statement | Amortised cost | Fair value through OCI | Total | |
|---|---|---|---|---|
| Non-current financial assets | ||||
| Derivative financial instruments¹ | — | 5,186 | — | 5,186 |
| Trade and other receivables | 2,422 | — | — | 2,422 |
| Current financial assets | ||||
| Trade and other receivables | 11,710 | — | — | 11,710 |
| Derivative financial instruments¹ | — | 165,216 | — | 165,216 |
| Cash and cash equivalents | 343,933 | — | — | 343,933 |
| 355,643 | 165,216 | — | 520,859 | |
| Non-current financial liabilities | ||||
| Interest-bearing long-term borrowings | 546,203 | — | — | 546,203 |
| Lease liabilities | 823,060 | — | — | 823,060 |
| Derivative financial instruments¹ | — | 8,121 | — | 8,121 |
| Trade and other payables | 37,733 | — | — | 37,733 |
| 1,406,996 | 8,121 | — | 1,415,117 | |
| Current financial liabilities | ||||
| Current portion of long-term borrowings | 68,339 | — | — | 68,339 |
| Lease liabilities | 310,484 | — | — | 310,484 |
| Derivative financial instruments¹ | — | 37,040 | — | 37,040 |
| Trade and other payables | 927,884 | — | — | 927,884 |
| 1,306,707 | 37,040 | — | 1,343,747 |
¹ Derivative financial instruments relate to cash flow hedge.
Deferred tax assets and (liabilities) are attributable to the following:
| 30 September 2023 €000 | 30 September 2022 €000 | |
|---|---|---|
| Net deferred tax assets at beginning of period | 91,296 | 68,559 |
| Recognised in the income statement (note 9) | (9,784) | 38,937 |
| Recognised in other comprehensive income (note 9) | 34,924 | (13,430) |
| Exchange differences | (3,022) | (2,770) |
| Net deferred tax assets at end of period | 113,414 | 91,296 |
| Deferred tax assets 2023 €000 | Deferred tax assets 2022 €000 | Deferred tax liabilities 2023 €000 | Deferred tax liabilities 2022 €000 | Net 2023 €000 | Net 2022 €000 | |
|---|---|---|---|---|---|---|
| Property, plant and equipment | 37,443 | 35,949 | (1,763) | (2,155) | 35,680 | 33,794 |
| Intangible assets | — | — | (28,167) | (27,985) | (28,167) | (27,985) |
| Provisions | 21,418 | 41,417 | — | — | 21,418 | 41,417 |
| Financial assets | 14,105 | 4,946 | (1,054) | (25,126) | 13,051 | (20,180) |
| Tax losses and other temporary differences | 71,432 | 64,250 | — | — | 71,432 | 64,250 |
| 144,398 | 146,562 | (30,984) | (55,266) | 113,414 | 91,296 |
The deferred tax asset is available for offset against future taxable profits, which are expected to be sufficient to recover the asset’s value.
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023 119
| 1 October 2022 €000 | Recognised in income statement €000 | Recognised in other comprehensive income €000 | Exchange differences €000 | 30 September 2023 €000 | |
|---|---|---|---|---|---|
| Property, plant and equipment | 33,794 | 8,645 | — | (6,759) | 35,680 |
| Intangible assets | (27,985) | 411 | — | (593) | (28,167) |
| Provisions | 41,417 | (20,807) | — | 808 | 21,418 |
| Financial assets | (20,180) | (1,397) | 34,924 | (296) | 13,051 |
| Tax losses and other temporary differences | 64,250 | 3,364 | — | 3,818 | 71,432 |
| 91,296 | (9,784) | 34,924 | (3,022) | 113,414 |
| 1 October 2021 €000 | Recognised in income statement €000 | Recognised in other comprehensive income €000 | Exchange differences €000 | 30 September 2022 €000 | |
|---|---|---|---|---|---|
| Property, plant and equipment | 32,989 | 1,855 | — | (1,050) | 33,794 |
| Intangible assets | (29,235) | 506 | — | 744 | (27,985) |
| Provisions | 22,847 | 20,487 | — | (1,917) | 41,417 |
| Financial assets | (10,978) | 3,154 | (13,430) | 1,074 | (20,180) |
| Tax losses and other temporary differences | 52,936 | 12,935 | — | (1,621) | 64,250 |
| 68,559 | 38,937 | (13,430) | (2,770) | 91,296 |
Deferred tax not recognised
Deferred tax assets have not been recognised in respect of gross temporary differences of €478.8m (2022: €218.5m). These temporary differences relate to tax losses, and disallowed interest amounts under the Corporate Interest Restriction rules in the UK, which do not have an expiry date and recoverability of which is uncertain.
| Property provisions 2023 €000 | Property provisions 2022 €000 | Other provisions 2023 €000 | Other provisions 2022 €000 | Total 2023 €000 | Total 2022 €000 | |
|---|---|---|---|---|---|---|
| At beginning of period | 12,502 | 25,944 | 35,263 | 64,013 | 47,765 | 89,957 |
| Provisions made during the period | 56 | (189) | 523 | 21,468 | 579 | 21,279 |
| Arising from acquisition | — | — | — | — | — | — |
| Provisions utilised during the period | — | (12,512) | (6,039) | (29,316) | (6,039) | (41,828) |
| Provisions reversed during the period | (3,576) | (34) | (14,930) | (19,766) | (18,506) | (19,800) |
| Translation differences | 3,818 | (707) | 2,956 | (1,136) | 6,774 | (1,843) |
| 12,800 | 12,502 | 17,773 | 35,263 | 30,573 | 47,765 | |
| Current | 1,352 | 7,429 | 902 | 9,320 | 2,254 | 16,749 |
| Non-current | 11,448 | 5,073 | 16,871 | 25,943 | 28,319 | 31,016 |
| 12,800 | 12,502 | 17,773 | 35,263 | 30,573 | 47,765 |
Provision is made for the exit costs of properties no longer occupied by the Group. The average remaining lease term for these properties is 1.2 years (2022: 3.1 years). Other provisions include long-term employee benefits where cash settlement is based on the Directors’ best estimate of future cash flows of the Pepco business. The utilisation is expected within the following five years.
Notes to the consolidated financial statements continued
120 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
| 30 September 2023 €000 | 30 September 2022 €000 | |
|---|---|---|
| Ordinary share capital | ||
| Allotted, Issued, and fully paid | 576,027,342 (2022: 575,000,000) | |
| A ordinary shares of €0.01 each | 5,760 | 5,750 |
| Nominal value € | Shares (‘000) | Share capital €000 | Share premium €000 | Merger reserve €000 | |
|---|---|---|---|---|---|
| At 30 September 2022 | €0.01 | 575,000 | 5,750 | 13 | (751) |
| At 30 September 2023 | €0.01 | 576,027 | 5,760 | 13 | (751) |
The Value Creation Plan (VCP) was adopted on 3 March 2020 (the Grant Date). The VCP aligns the remuneration of Executive Directors with the value generated for shareholders.The VCP was originally granted by Pepco Group Limited, which was acquired by Pepco Group N.V. on 13 May 2021. On acquisition the VCP was novated from Pepco Group Limited to Pepco Group N.V.; the novation also included the VCP charge recognised in Pepco Group Limited for 2021 (€11.8m). Following approval at our AGM on 2 February 2023 a number of amendments were made to the VCP. These amendments apply to any Conditional Award or nil-cost options granted under the VCP on or after 18 April 2023. These amendments included: – extension of the VCP by a further two years to 30 September 2026 (originally scheduled to end on 30 September 2024); – re-basing the Initial Price to 1 October 2022 (previously the Initial Price was based on 1 October 2019); – introducing a series of caps to the amounts that can be granted in total in relation to any year and that participants individually can earn from the VCP in any year; and – permitting the Chair of the Board to be eligible to participate in the VCP at the discretion of the Board. In order to facilitate the above, the VCP rules were amended and restated with effect from 18 April 2023 and each holder of a Conditional Award which had not already lapsed received a new Conditional Award to replace any existing Conditional Award. Any nil-cost options granted as a result of a Conditional Award held prior to 18 April 2023 remain subject to the previous VCP rules.
Under the VCP, participants are granted a Conditional Award giving the potential right to earn nil-cost options based on the absolute Total Shareholder Return (TSR) generated above a hurdle (the Threshold TSR) at the end of each plan year (the Measurement Date) over a 7 (2022: 5) year period. At each Measurement Date, up to 6.5% (2022: 6.9%) of the value created above the hurdle may be “banked” in the form of nil-cost options. For any Measurement Date on or after 18 April 2023 the maximum value of nil-cost options which may be granted for each performance period is €52m (based on a full 6.5% Conditional Award allocation). The Initial Price for the VCP is based on a proxy for the average valuation for the Group on 1 October 2022 (2022: 1 October 2019). Participants may receive a grant of nil-cost options at the end of each year of the performance period with a value representing a proportion of the Company’s TSR above the Threshold TSR at the relevant Measurement Date. The Threshold TSR or hurdle which has to be exceeded before share awards can be earned by participants is the higher of:
– the highest previous measurement of TSR (for any Measurement Date on or after 18 April 2023 the reference point is not earlier than 1 October 2022); and
– the Initial Price compounded by 10% p.a. (re-based with effect from 1 October 2022).
If the value created at the end of a given plan year does not exceed the Threshold TSR, no nil-cost options will be granted on the Measurement Date following that year under the VCP. The next Measurement Date will be in January 2024, 30 days after publication of the 2023 full year results.
Under the VCP, nil-cost options may vest in three tranches of 50%, 50%, and 100% (in each case, with the percentage applying to the unvested nil-cost options held. During the year, upon the recommendation of the Remuneration Committee, the Board exercised its discretion to apply an EBITDA target as an alternative measurement criteria in respect of the nil-cost options granted on 14 February 2022 to specific VCP participants.
The vesting schedule provides that 50% of the cumulative number of nil-cost options may vest following the third Measurement Date, 50% following the fourth Measurement Date, and 100% following the fifth Measurement Date. At each vesting date, vesting of awards is subject to:
a. a minimum Threshold TSR of 10% CAGR on the Initial Price being maintained:
– where the TSR has been achieved at the third Measurement Date, 50% of the cumulative balance of nil-cost options will vest. If the TSR has not been achieved no nil- cost options will vest at this point but they will not lapse;
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023 121
21. Share-based payments continued
Vesting of nil-cost options continued
– where the TSR has been achieved at the fourth Measurement Date, 50% of the cumulative balance of nil-cost options will vest. If the TSR has not been achieved no nil-cost options will vest at this point but they will not lapse; and
– where the TSR has been achieved at the fifth Measurement Date, 100% of the cumulative balance of nil-cost options will vest. If the TSR has not been achieved no nil-cost options will vest at this point and the remaining cumulative balance will lapse;
b. shares allocated as a result of the vesting of nil-cost options are subject to a two year post-vesting holding period from the first vesting date; and
c. a personal annual cap on vesting of €20m for the CEO and a proportionate limit for other participants:
– in the event that in any year vesting as described above would exceed the personal annual cap, any nil-cost options above the cap will be designated as deferred nil-cost options and will be rolled forward and allowed to vest in subsequent years provided the cap is not exceeded in those years, until the VCP is fully paid out or after five years after the fifth Measurement Date when any deferred nil- cost options will vest. Such deferred nil-cost options are not subject to further underpins, performance conditions or service conditions.
The vesting schedule provides that 50% of the cumulative number of nil-cost options may vest following the fifth Measurement Date, 50% following the sixth Measurement Date, and 100% following the seventh Measurement Date. At each vesting date, vesting of awards is subject to:
b. a minimum Threshold TSR of 10% CAGR on the Initial Price being maintained:
– where the TSR has been achieved at the fifth Measurement Date, 50% of the cumulative balance of nil-cost options will vest. If the TSR has not been achieved no nil- cost options will vest at this point but they will not lapse;
– where the TSR has been achieved at the sixth Measurement Date, 50% of the cumulative balance of nil-cost options will vest. If the TSR has not been achieved no nil-cost options will vest at this point but they will not lapse; and
– where the TSR has been achieved at the seventh Measurement Date, 100% of the cumulative balance of nil-cost options will vest. If the TSR has not been achieved no nil-cost options will vest at this point and the remaining cumulative balance will lapse;
b. shares allocated as a result of the vesting of nil-cost options are subject to a two year post-vesting holding period from the first vesting date;
c. a personal annual cap on vesting of €20m, €14m, and €10m respectively for Trevor Masters, Andy Bond, and any other Executive Director (including Neil Galloway):
– in the event that in any year vesting as described above would exceed the personal annual cap, any nil-cost options above the cap will be designated as deferred nil-cost options and will be rolled forward and allowed to vest in subsequent years provided the cap is not exceeded in those years, until the VCP is fully paid out or after two years after the seventh Measurement Date when any deferred nil-cost options will vest. Such deferred nil-cost options are not subject to further underpins, performance conditions or service conditions; and
d. no nil-cost options may be exercised until 1 October 2025.
The fair value of awards granted under the VCP was initially calculated at €45.3m and employer social security liability of €9.7m spread over the initial five-year period. An expense of €1.1m was recognised during the period (2022: €14.0m). The expense recognised consisted of a credit of €11.5m (2022: €-m) in relation to the reversal of charges relating to leavers and unallocated amounts in the VCP. In addition, fair value charges of €6.2m (2022: €12.0m) were recognised in relation to the spreading of the initial award granted. Furthermore, due to a modification and new grants in the year, additional fair value charges of €5.8m were recognised whilst other movements including foreign exchange totalled €0.6m. In determining the fair value of the VCP awards granted during the period, a Monte Carlo model was used. Note that during the year, €3.4m was paid to a participant in the EAP scheme as a cash award which was previously treated as an equity settled award. As a result, this amount was reclassified from the share based payment reserve and settled during the year. The combination of this, offset by the €1.1m charge in the year reflects the movement in the share based payment reserve as disclosed in the statement of changes of equity. The movement in the reserve is further explained by removing the impact of €0.6m of other movements highlighted above.
Within the remuneration report, two further grants have been disclosed that were approved by the Remuneration Committee at the end of FY23. The first relates to a one off share based payment award to provide the CFO with nil cost options upon joining the Group. The award was approved by the Board in November 2022 but was not formally documented until after the end of the financial year. The award is based on a 3-year vesting period. An accrual was made for potential charges in the P&L in relation to this award totalling approximately €0.3m. Secondly, additional awards were approved on 30 September 2023, to replace awards granted under the VCP for a restricted stock unitaward (‘RSU’). This award was expressly approved by the Remuneration Committee on 30 September 2023. The terms of this award arethe new LTIP/RSU rules approved by the Board on 7 December 2023.## Notes to the consolidated financial statements continued
On 25 February 2022 Poundland Limited executed a Share Purchase Agreement for the purchase of the entire issued share capital of Online Poundshop Limited (“Poundshop") for total consideration of £1. Poundshop is an online discount retailer using the brand name Poundshop.com. The principal reason for the acquisition was to provide Poundland Limited with improved e-commerce.
Details of the fair value of identifiable assets and liabilities acquired, purchase consideration and goodwill for this business combination was as follows:
| 30 September 2022 | ||
|---|---|---|
| Poundshop.com | ||
| Book value | Adjustments | |
| €000 | €000 | |
| Property, plant and equipment | 140 | — |
| Intangible assets | 229 | — |
| Trade and other receivables | 60 | — |
| Cash and cash equivalents | 162 | — |
| Inventories | 120 | (1) |
| Prepayments and accrued income | (140) | — |
| Trade and other payables | (1,163) | 170 |
| Provisions | — | — |
| Borrowings | (1,673) | 539 |
| (2,264) | 708 |
The fair value of inventory has been assessed based on the lower of cost and net realisable value.
| 30 September 2022 | |
|---|---|
| Poundshop | |
| €000 | |
| Cash consideration paid on acquisition | — |
| Settlement of existing borrowings | — |
| Deferred cash consideration payable | — |
| Total consideration | — |
Goodwill 1,557
The effect of discounting the deferred consideration payable is not material. No material acquisition costs were incurred as a result of the transaction. In relation to the acquisition of Poundshop.com, goodwill has been recognised due to the benefit of accessing e-commerce facilities. The goodwill recognised will not be deductible for tax purposes.
Capital commitments for which no provision has been made in the financial statements of the Group were as follows:
| 30 September 2023 | 30 September 2022 | |
|---|---|---|
| €000 | €000 | |
| Acquisition of property, plant and equipment and intangible assets | 77,746 | 75,344 |
The Group operates a defined contribution pension scheme. The pension cost charge for the year represents contributions payable by the Group to the scheme and amounted to €23.6m (2022: €17.9m). Contributions amounting to €1.1m (30 September 2022: €3.3m) were payable to the scheme at the year end and are included in accruals.
The following is a summary of trading transactions and balances outstanding at year end in relation to transactions with IBEX group companies. IBEX group refers to the ultimate parent company, IBEX Topco B.V., and its subsidiaries, excluding companies within the Pepco Group.
| 30 September 2023 | 30 September 2022 | |
|---|---|---|
| €000 | €000 | |
| Financial expense | — | — |
| Revenue received | — | 215 |
| Receivables outstanding | — | — |
| Payables outstanding | — | (433) |
Revenue from IBEX companies relates to product sourcing services provided to members of the IBEX group which ended in the prior year. Please refer to note 8 for remuneration paid to key management.
On 31 March 2019 the Group announced its intention to exit the business in France and initiated an active programme to unwind its activities in France. This process is still ongoing.
| Financial performance and cash flow information | Year to 30 September 2023 | Year to 30 September 2022 |
|---|---|---|
| €000 | €000 | |
| Revenue | — | — |
| Expenses | — | (110) |
| Income tax | — | — |
| Loss from discontinued operation | — | (110) |
| Net cash outflow from operating activities | — | (110) |
| Net cash outflow from investing activities | — | — |
| Net cash outflow from financing activities | — | — |
| Net decrease in cash generated by discontinued operation | — | (110) |
The Directors assess the performance of the Group using a variety of performance measures; some are IFRS and some are adjusted and therefore termed ‘‘non-GAAP’’ measures or “Alternative Performance Measures” (APMs). The rationale for using adjusted measures is explained below. The Directors principally discuss the Group’s results on an ‘‘underlying’’ basis. Results on an underlying basis are presented before non-underlying items (large and unusual items). The APMs used in this Annual Report are underlying EBITDA, underlying profit before tax, like-for-like revenue growth and net debt. A reconciliation from these non-GAAP measures to the nearest measure prepared in accordance with IFRS is presented below. The APMs we use may not be directly comparable with similarly titled measures used by other companies.
The Directors believe that presentation of the Group’s results on an underlying basis provides a useful alternative analysis of the Group’s financial performance, as non-underlying and other items are identified by virtue of their size, nature or incidence. This presentation is consistent with the way that financial performance is measured by management and reported to the Board and assists in providing a relevant analysis of the trading results of the Group. In determining whether events or transactions are treated as non-underlying and other items, management considers quantitative as well as qualitative factors such as the frequency or predictability of occurrence. The following charges and credits have been included within non-underlying and other items for the year ended 30 September 2023; see note 4 for more details:
In the opinion of the Directors, like-for-like revenue growth is a measure which seeks to reflect the underlying performance of the Group’s stores. The measure is defined as year-on-year revenue growth for stores open beyond their trading anniversary, with stores relocated in a catchment and/or upsized included within LFL provided the enlarged store footprint is less than 50% bigger than the existing store.
| Year to 30 September 2023 | Year to 30 September 2022 | |
|---|---|---|
| Reported revenue growth | 17.1% | 17.0% |
| Like-for-like revenue growth | 6.0% | 5.2% |
Underlying EBITDA (IFRS 16) is defined as reported EBITDA excluding the impact of non-underlying items. Prior year underlying EBITDA (IFRS16) also excluded the impact of the discontinued operations.
| Year to 30 September 2023 | Year to 30 September 2022 | |
|---|---|---|
| €000 | €000 | |
| Reported EBITDA | 701,752 | 644,932 |
| Non-underlying items | 51,601 | 65,805 |
| Underlying EBITDA | 753,353 | 730,737 |
Underlying profit before tax is defined as reported profit before tax excluding the impact of non-underlying items. Prior year underlying profit before tax also excludes the impact of the discontinued operations.
| Year to 30 September 2023 | Year to 30 September 2022 | |
|---|---|---|
| €000 | €000 | |
| Reported profit before tax | 146,977 | 225,615 |
| Other non-underlying items | 55,061 | 74,683 |
| Underlying profit before tax | 202,038 | 300,298 |
Cash generated by operations is defined as net cash from operating activities excluding tax.
| Year to 30 September 2023 | Year to 30 September 2022 | |
|---|---|---|
| €000 | €000 | |
| Net cash from operating activities | 652,695 | 363,307 |
| Tax paid | 75,424 | 61,387 |
| Cash generated by operations | 728,119 | 424,694 |
Gross margin represents gross profit divided by revenue. The Group uses gross margin in its business operations, among other things, as a means of comparing the underlying profitability of the Group from period to period and the performance of its sourcing model. The Group uses gross margin as a useful metric to understand business performance and its ability to “sell for less” by “buying for less”. Gross margin is expressed as a percentage.
| Year to 30 September 2023 | Year to 30 September 2022 | |
|---|---|---|
| €000 | €000 | |
| Gross profit | 2,267,817 | 1,967,598 |
| Revenue | 5,648,885 | 4,822,819 |
| Gross margin % | 40.1% | 40.8% |
The Group uses net debt because the Group believes this measure provides an indicator of the overall strength of its balance sheet and can be used to assess its earnings as compared to its indebtedness as defined by the Group’s financing agreements.
| 30 September 2023 | 30 September 2022 | |
|---|---|---|
| €000 | €000 | |
| Borrowings from credit institutions | 729,064 | 614,542 |
| Obligations under finance leases | 11,884 | 4,246 |
| Gross debt (excluding IFRS 16 lease liabilities) | 740,948 | 618,788 |
| Closing cash balance | (330,417) | (343,845) |
| Net debt (excluding IFRS 16 lease liabilities) | 410,531 | 274,855 |
¹ IFRS 16 lease liability is excluded from the gross debt definition under the Group’s financing agreement.
The Group’s performance is also analysed excluding the impact of IFRS 16, which provides greater comparability to prior performance.
Underlying EBITDA (pre-IFRS 16) is defined as reported EBITDA excluding the impact of non-underlying items and the impact of IFRS 16. Prioryear underlying EBITDA (pre-IFRS 16) also excluded the impact of the discontinued operations.## 30. Earnings per share
Year to Year to
30 September 30 September
2023 2022
¢ ¢
Basic earnings per share
Earnings per share from continuing operations 17.8 30.2
Earnings per share from discontinued operations — —
Earnings per share 17.8 30.2
Earnings per share from continuing operations adjusted for non-underlying items 25.9 42.0
Diluted earnings per share
Diluted earnings per share from continuing operations 17.7 30.0
Diluted earnings per share from discontinued operations — —
Diluted earnings per share 17.7 30.0
Diluted earnings per share from continuing operations adjusted for non-underlying items 25.7 41.7
Basic earnings per share is based on the profit for the year attributable to equity holders of the Company divided by the number of shares ranking for dividend. Diluted earnings per share is calculated by adjusting the weighted average number of shares used for the calculation of basic earnings per share as increased by the dilutive effect of potential ordinary shares. The only potentially dilutive instrument in issue is share awards under the VCP scheme. Please see note 21 for further details of this scheme.
The following table reflects the profit data used in the basic and diluted earnings per share calculations:
Year to Year to
30 September 30 September
2023 2022
€000 €000
Profit/(loss) from continuing operations attributable to the ordinary equity holders of the Company 102,244 173,715
Add back non-underlying items: 55,061 74,587
Add back tax on non-underlying items (8,319) (6,792)
Adjusted profit attributable to the ordinary equity holders of the company 148,986 241,510
The following table reflects the share data used in the basic and diluted earnings per share calculations:
Year to Year to
30 September 30 September
2023 2022
‘000 ‘000
Weighted average number of shares
Weighted average number of ordinary shares in issue 575,167 575,000
Weighted average number of shares for basic earnings per share 575,167 575,000
Weighted average of dilutive potential shares 4,113 4,113
Weighted average number of shares for diluted earnings per share 579,280 579,113
No dividends were declared by Pepco Group N.V. for the 2023 reporting period.
London (United Kingdom), 22 December 2023
Management
Andy Bond, Chief Executive Officer
Neil Galloway, Chief Financial Officer
Non-Executive Directors
Pierre Bouchut, Independent Non-Executive Director
Maria Fernanda Mejia, Independent Non-Executive Director
Brendan Connolly, Independent Non-Executive Director
Grazyna Piotrowska-Oliwa, Independent Non-Executive Director
Neil Brown, Non-Executive Director
Paul Soldatos, Non-Executive Director
| Period to 30 September 2023 | Period to 30 September 2022 | |
|---|---|---|
| Note | €000 | €000 |
| Administrative expenses | (630) | (675) |
| Operating loss for the year | (630) | (675) |
| Financial income | 2 | 20 |
| Financial expense | (8) | — |
| Loss before taxation for the year | (636) | (655) |
| Taxation | 310 | — |
| Loss for the year | (326) | (655) |
The above results were derived from continuing operations. There was no other comprehensive income for the period. The notes on pages 132 to 138 form part of these financial statements.
| 30 September 2023 | 30 September 2022 | |
|---|---|---|
| Note | €000 | €000 |
| Non-current assets | ||
| Investment in subsidiary companies | 6 | 702,304 |
| 702,304 | ||
| Current assets | ||
| Trade and other receivables | 7 | 762 |
| Cash and cash equivalents | 13 | 2 |
| 775 | ||
| Total assets | 703,132 | |
| Equity and liabilities | ||
| Capital and reserves | ||
| Share capital | 9 | 5,760 |
| Share premium reserve | 663,599 | |
| Share-based payment reserve | 33,013 | |
| Accumulated losses | (1,266) | |
| Total shareholders' equity | 701,106 | |
| Current liabilities | ||
| Trade and other payables | 8 | 2,026 |
| Total equity and liabilities | 703,132 |
The notes on pages 132 to 138 form part of these financial statements.
| Share capital €000 | Share premium reserve €000 | Share-based payment reserve €000 | Accumulated losses €000 | Total equity €000 | |
|---|---|---|---|---|---|
| Balance at 1 October 2021 | 5,750 | 663,599 | 23,809 | (284) | 692,874 |
| Total comprehensive income for the year | |||||
| Loss for the year | — | — | — | (655) | (655) |
| Total comprehensive income for the year | — | — | — | (655) | (655) |
| Transactions with owners, recorded directly in equity | |||||
| Equity-settled share-based payments | — | — | 12,021 | — | 12,021 |
| Total contributions by and distributions to owners | — | — | 12,021 | — | 12,021 |
| Balance at 30 September 2022 | 5,750 | 663,599 | 35,830 | (939) | 704,240 |
| Balance at 1 October 2022 | 5,750 | 663,599 | 35,830 | (939) | 704,240 |
| Total comprehensive income for the year | |||||
| Loss for the year | — | — | — | (326) | (326) |
| Total comprehensive income for the year | — | — | — | (326) | (326) |
| Transactions with owners, recorded directly in equity | |||||
| Equity-settled share-based payments | — | — | (2,817) | — | (2,817) |
| New shares issued | 10 | — | — | — | 10 |
| Total contributions by and distributions to owners | — | — | (2,817) | — | (2,807) |
| Balance at 30 September 2023 | 5,760 | 663,599 | 33,013 | (1,266) | 701,106 |
Refer to note 9 for a description of each reserve held within equity and details of movements in the period. The notes on pages 132 to 138 form part of these financial statements.
| 30 September 2023 | 30 September 2022 | |
|---|---|---|
| Note | €000 | €000 |
| Cash flows from operating activities | ||
| Cash utilised by operations | 10 | (8) |
| Net cash outflow from operating activities | (8) | (3) |
| Cash flows from investing activities | ||
| Interest received | 2 | 2 |
| Net cash inflow from investing activities | 2 | 2 |
| Cash flows from financing activities | ||
| Proceeds from the issue of share capital | 10 | — |
| Net cash outflow from financing activities | 10 | — |
| Effect of exchange rate fluctuations on cash held | (9) | — |
| Cash and cash equivalents at beginning of period | 2 | 1 |
| Net (decrease)/increase in cash and cash equivalents | 11 | (1) |
| Cash and cash equivalents at end of period | 13 | 2 |
The notes on pages 132 to 138 form part of these financial statements.
Pepco Group N.V. is a public limited company which is listed on the Warsaw Stock Exchange and was incorporated on 17 February 2021 and became a UK tax resident entity on 8 March 2021. As part of a Group reorganisation undertaken prior to the IPO, the Company acquired the entire shareholding of Pepco Group Limited from Flow Newco Limited on 13 May 2021 (the acquisition date), in a share for share exchange by issuing its ordinary shares. Consequently the Company became the immediate holding company of Pepco Group Limited. The Group reorganisation has been accounted for as a common control transaction whereby the cost of investment in Pepco Group Limited has been determined based on its net asset value on the acquisition date. Please see note 6 for details of the Group reorganisation.
These separate financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as endorsed by the EU and with part 9 of Book 2 of the Dutch Civil Code and are presented in addition to the consolidated financial statements of Pepco Group N.V. Unless otherwise stated, the accounting policies applied are the same as those in the consolidated financial statements.
The financial statements have been prepared on the historical cost basis. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.# Notes to the separate financial statements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date.
The separate financial statements have been prepared on a going concern basis. In the 2023 reporting period, the Company’s current liabilities exceed the current assets. Refer to the Going Concern section of the consolidated financial statements for a detailed going concern assessment of the Group, including the Company.
Investments in subsidiaries are carried at cost less impairment provisions. Investments in subsidiaries are impaired to their recoverable amount. Where a common control transaction takes place, an investment is recognised at a value equivalent to the net assets of the acquired entity on the acquisition date. Please see note 6 for more details surrounding the common control acquisition made during 2021.
The reserves are recognised in accordance with the Dutch Civil Code.
Refer to note 1 of the consolidated financial statements for disclosures regarding new accounting standards adopted by the Company and the Group.
The preparation of these financial statements requires the exercise of judgement, estimates and assumptions that affect the application of policies and reported amount of assets and liabilities, income and expenses. Estimates and judgements are continually evaluated and are based on historical experience and various other factors, including expectations of the future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future period impacted. The Company makes estimates and assumptions concerning the future. By definition, the resulting accounting estimates will seldom equal the related actual results. The Directors continually evaluate the estimates, assumptions and judgements based on available information and experience.
The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are discussed below.
Impairment of investments
The Company assesses whether there are any indicators of impairment as at the reporting date for all investments in subsidiaries. Investments are tested for impairment when there are indicators that the carrying amounts may not be recoverable. When value in use calculations are undertaken, the Directors must estimate the expected future cash flows from the cash-generating unit and choose a suitable discount rate in order to calculate the present value of those cash flows. The key sources of estimation uncertainty are the future business performance over the forecast period (five years), projected long-term growth rates and the discount rates applied. Refer to note 1 of the consolidated financial statements for detailed disclosures.
There are no key judgements made in preparation of these financial statements.
For a list of new standards issued but not yet effective, please refer to note 1.28 of the consolidated financial statements.
The Company does not have any employees. Details of Directors’ remuneration can be found in note 8 of the consolidated financial statements. The Company does not receive a charge for these costs as these are borne by another Group entity. Auditors’ remuneration is borne by another Group entity. Please refer to note 5 of the consolidated financial statements for details of total Group auditors’ remuneration.
| Year to 30 September 2023 €000 | Year to 30 September 2022 €000 |
|---|---|
| Interest income on loans to Group undertakings | 2 |
| Other financial income | — |
| Total | 2 |
| Year to 30 September 2023 €000 | Year to 30 September 2022 €000 |
|---|---|
| Foreign exchange losses | 8 |
| Total | 8 |
Analysis of tax (charge)/credit for the year recognised in the income statement
| Year to 30 September 2023 €000 | Year to 30 September 2022 €000 |
|---|---|
| Current tax (charge)/credit | |
| Current tax on loss for the year | 139 |
| Adjustments in respect of prior periods | 171 |
| Total current tax credit | 310 |
| Deferred tax (charge)/credit | |
| Origination and reversal of temporary differences | — |
| Adjustments in respect of prior periods | — |
| Total deferred tax credit | — |
| Total tax credit for the year | 310 |
The current tax credit is recoverable via group relief.
Factors affecting the tax (charge)/credit for the year recognised in the income statement
The tax credit for the year differs from the standard rate of corporation tax in the UK of 22.0% (2022: 19.0%). The differences are explained below.
| Year to 30 September 2023 €000 | Year to 30 September 2022 €000 |
|---|---|
| Loss before tax | (636) |
| Expected tax credit at the UK statutory rate of 22.0% (2022: 19.0%)* | 140 |
| Effects of: | |
| Movements in unrecognised temporary differences | — |
| Adjustments in respect of prior periods | 171 |
| Expenses not deductible | (1) |
| Total tax credit for the year | 310 |
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023 133
5. Taxation continued
Factors that may affect future current and total tax charges
An increase in the UK corporation rate from 19% to 25% (effective 1 April 2023) was substantively enacted on 24 May 2021. This will increase the Company’s future UK current tax charge accordingly.
Deferred tax not recognised
The Company has no temporary differences (2022: €0.9m) on which no deferred tax assets have been recognised. The prior year temporary differences relate to tax losses which do not have an expiry date and recoveriability was considered uncertain.
| Total carrying Issued Shareholding value Country of incorporation share capital % €000 |
|---|
| Pepco Group Limited United Kingdom £1,801 100 669,291 |
On 13 May 2021 the Company acquired the entire share capital of Pepco Group Limited in exchange for issuing its own shares. As a common control transaction, the deemed cost of the investment was the net asset value of Pepco Group Limited on the acquisition date of €669,291,000.
| 30 September 2023 €000 | 30 September 2022 €000 |
|---|---|
| Historical cost | 669,291 |
| Contributions to subsidiaries | |
| Group share-based payments¹ | 33,013 |
| Total | 702,304 |
¹ The Company’s subsidiaries recognise the amounts relating to awards to their employees as a share-based payment expense in their financial statements. As Pepco Group N.V. will settle the share awards, this is recognised as an increase in the investment in relevant subsidiaries in accordance with IFRS 2 “Share-based Payment”. For details of the share-based payments which have increased the Company’s investments, see note 21 to the consolidated financial statements.
| 30 September 2023 €000 | 30 September 2022 €000 |
|---|---|
| Non-current trade and other receivables | |
| Loans to Group undertakings | 53 |
| Current trade and other receivables | |
| Interest due from Group undertakings | 5 |
| Amounts due from Group undertakings | 384 |
| Prepayments | 373 |
| Total | 762 |
| 30 September 2023 €000 | 30 September 2022 €000 |
|---|---|
| Current trade and other payables | |
| Amounts due to Group undertakings | 1,863 |
| Trade payables | 163 |
| Total | 2,026 |
Notes to the separate financial statements continued
134 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
| 30 September 2023 €000 | 30 September 2022 €000 |
|---|---|
| Authorised share capital | |
| 1,725,000,000 ordinary shares of €0.01 each | 17,250 |
| Issued share capital | |
| 576,027,342 (2022: 575,000,000) ordinary shares of €0.01 each | 5,760 |
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at the meetings of the Company.
Share premium reserve
The closing share premium reserve on 30 September 2023 was €663,599,000.
Share-based payment reserve
This reserve comprises the cumulative value of shares to be issued as a result of the Group equity-settled share-based payment scheme. Upon the issue of any shares resulting from the scheme, a transfer will be made out of the share-based payment reserve to share capital and share premium as applicable. Please see note 21 of the consolidated financial statements for details about the share-based payment scheme.
Cash utilised in operations
| 30 September 2023 €000 | 30 September 2022 €000 |
|---|---|
| Loss before tax | (636) |
| Adjusted for: | |
| Net foreign exchange gains | — |
| Financial income | (2) |
| Financial expense | 8 |
| Cash generated from operations before changes in working capital | (630) |
| Changes in working capital: | |
| Increase in trade and other receivables | (181) |
| Increase in trade and other payables | 509 |
| Impact of group relief not yet received | 310 |
| Net changes in working capital | 638 |
| Cash generated from operations | 8 |
Net debt reconciliation
| 30 September 2023 €000 | 30 September 2022 €000 |
|---|---|
| Cash and cash equivalents | 13 |
| Loans receivable from Group undertakings | 53 |
| Total | 66 |
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023 135
The Management Board and Executive team are responsible for implementing the risk management strategy to ensure that an appropriate risk management framework is operating effectively within the Company. The Company does not speculate in the trading of derivative or other financial instruments.
| 30 September 2023 | 30 September 2022 | |
|---|---|---|
| €000 | €000 | |
| Related party loans receivable | 53 | 54 |
| Non-current financial assets | 53 | 54 |
| Related party loans receivable | 5 | 3 |
| Prepayments | 373 | 557 |
| Amounts due from Group undertakings | 384 | 13 |
| Cash and cash equivalents | 1 | 2 |
| Current financial assets | 775 | 582 |
| Amounts owed to Group undertakings | (1,863) | (1,357) |
| Trade payables | (163) | (160) |
| Current financial liabilities | (2,026) | (1,517) |
No items were classified as “at fair value through profit or loss” or “at fair value through other comprehensive income” during the 2023 reporting period. The carrying amount of financial assets and liabilities approximates its fair value. The fair value calculation of the financial assets and liabilities was performed at the reporting date. Between the reporting date and the date of this report, the fair values reported may have fluctuated with changing market conditions and therefore the fair values are not necessarily indicative of the amounts the Company could realise in the normal course of business subsequent to the reporting date.
The financial assets and liabilities of the Company are denominated in the functional currency except for the following British Pound denominated related party loans receivable, cash and cash equivalents and amounts owed to Group undertakings.
| 30 September 2023 | 30 September 2022 | |
|---|---|---|
| €000 | €000 | |
| Related party loans receivable | 60 | 57 |
| Cash and cash equivalents | 1 | 1 |
| Amounts owed to Group undertakings | (364) | (356) |
| Trade payables | (100) | — |
| (403) | (298) |
The following significant exchange rates applied during the period and were used in calculating sensitivities:
| Forecast rate | Spot rate | |
|---|---|---|
| Euro:British Pound | 1.16 | 1.13 |
The table below indicates the Company's sensitivity at the reporting date to the movements in the British Pound that the Company are exposed to on its financial instruments. The percentage given below represents a weighting of foreign currency rates forecasted by the major banks that the Company transacts with regularly. This analysis assumes that all other variables, in particular interest rates, remain constant. The impact on the reported numbers, using the forecast rates as opposed to the reporting date spot rates, is set out below.
| 30 September 2023 | 30 September 2022 | |
|---|---|---|
| €000 | €000 | |
| Through profit/(loss) | ||
| British Pound strengthening by 10% against the Euro | (40) | (30) |
| British Pound weakening by 10% against the Euro | 40 | 30 |
If the foreign currencies were to weaken/strengthen against the Euro, by the same percentages as set out in the table above, it would have an equal, but opposite, effect on profit or loss.
At the reporting date the interest rate profile of the Company's financial instruments was:
| 30 September 2023 | 30 September 2022 | |||||
|---|---|---|---|---|---|---|
| Variable bearing | Non- | Total | Variable bearing | Non- | Total | |
| €000 | interest | €000 | €000 | interest | €000 | |
| bearing | bearing | |||||
| Non-current financial assets | 53 | — | 53 | 54 | — | 54 |
| Current financial assets | — | 18 | 18 | — | 5 | 5 |
| Current financial liabilities | — | — | — | — | — | — |
| 53 | 18 | 71 | 54 | 5 | 59 |
The Directors do not consider the Company to be sensitive to movements in interest rates. A reasonably foreseeable movement in interest rates would not have a material effect on the profit of the Company or the carrying value of the Company’s financial instruments.
Potential concentration of credit risk consists principally of related party loans receivable. At 30 September 2023, the Company did not consider there to be any significant concentration of credit risk which had not been adequately provided for. The carrying amounts of financial assets represent the maximum credit exposure. The maximum remaining exposure to credit risk at the reporting date, without taking account of the value of any collateral obtained, was €71,000. All exposure to credit risk is within the United Kingdom.
Liquidity risk is the risk that an entity will encounter difficulty in meeting its obligations associated with financial liabilities. Liquidity risk arises because of the possibility that the entity could be required to pay its liabilities earlier than expected. The Company is not exposed to significant liquidity risk on the basis that its only financial liabilities are owed to other Group companies.
| 30 September 2023 | 30 September 2022 | |
|---|---|---|
| Net profit | Net profit | |
| €000 | €000 | |
| Total equity | Total equity | |
| for the period | for the period | |
| €000 | €000 | |
| Shareholders’ equity and net profit for the period according to separate income statement | 701,106 | (326) |
| Share of subsidiaries’ consolidated profit for the period | 102,570 | 102,570 |
| Share of subsidiaries’ consolidated other comprehensive income for the period | (87,046) | — |
| Prior period share of subsidiaries’ consolidated total comprehensive income for the period and other reserve movements | 440,515 | — |
| Group equity and profit after tax for the period according to Consolidated income statement | 1,157,145 | 102,244 |
There are no reportable subsequent events.
The statutory list of all subsidiaries and affiliated companies in included on pages 147 to 148.
The Company is a direct subsidiary undertaking of IBEX Retail Investments (Europe) Limited, which is registered in England. IBEX Retail Investments (Europe) Limited’s registered address is The Space (Floor 3), 120 Regent Street, London, W1B 5FE. At the reporting date, the Company’s ultimate parent company was IBEX Topco B.V., an entity registered in the Netherlands.
London (United Kingdom), 22 December 2023
Management
Andy Bond, Executive Chair
Neil Galloway, Chief Financial Officer
Non-Executive Directors
María Fernanda Mejía, Independent Non-Executive Director
Brendan Connolly, Independent Non-Executive Director
Pierre Bouchut, Independent Non-Executive Director
Grazyna Piotrowska-Oliwa, Independent Non-Executive Director
Paul Soldatos, Non-Executive Director
Neil Brown, Non-Executive Director
To the shareholders and Board of Directors of Pepco Group N.V.
Report on the audit of the financial statements for the year ended 30 September 2023 included in the annual report
Our qualified opinion
We have audited the accompanying financial statements for the year ended 30 September 2023 (hereafter “financial statements”) of Pepco Group N.V. (hereafter “Company” refer to the legal entity, and “Group” refers to the consolidated level), based in London, United Kingdom. The Company is at the head of a group of entities (“components”). The financial information of this Group is included in the 2023 Consolidated Financial Statements of the Group. The financial statements include the 2023 Consolidated Financial statements and the 2023 Separate Financial Statements. In our opinion, except for the possible effects on the corresponding figures of the matter described in the ‘Basis for our Qualified Opinion paragraph’:
– The accompanying Consolidated Financial statements give a true and fair view of the financial position of the Group as at 30 September 2023 and of its result and its cash flows for the year ended 30 September 2023 in accordance with International Financial Reporting Standards as adopted by the European Union (EU-IFRS) and with Part 9 of Book 2 of the Dutch Civil Code.
– The accompanying 2023 Separate Financial statements give a true and fair view of the financial position of the Company as at 30 September 2023 and of its results for the year ended 30 September 2023 in accordance with International Financial Reporting Standards as adopted by the EU and with Part 9 of Book 2 of the Dutch Civil Code.
The 2023 Consolidated Financial Statements comprise:
– the consolidated statement of financial position as at 30 September 2023;
– the following statements for the year ended 30 September 2023: the consolidated income statement the consolidated statement of other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows; and
– the notes comprising a summary of the significant accounting policies and other explanatory information.# The 2023 Company Financial Statements comprise:
– the separate statement of financial position as at 30 September 2023;
– the following statements for the year ended 30 September 2023: the separate income statement, the separate statement of changes in equity and the separate statement of cash flows; and
– the notes comprising a summary of the significant accounting policies and other explanatory information.
We were unable to obtain sufficient and appropriate audit evidence on the existence and completeness of part of the inventory opening balance as at 1 October 2022 due to an unexplained net difference of € 7 million between physical inventory held in warehouses of Pepco Sp.z.o.o. (€ 163.4 million) and the related inventory recognised in the Consolidated Financial Statements (€ 170.1 million). This unexplained difference could have resulted from physical inventory that could not be traced to accounting records and /or recognised inventory not directly traceable to physical inventory. As a result, we were unable to determine whether any corrections arising from this difference were necessary with regard to the inventory position as at 1 October 2022. We note that the aforementioned only refers to the inventory opening balances and the related effect in the results of 2023, as we were able to obtain sufficient and appropriate audit evidence on the existence and completeness of the inventory closing balance as at 30 September 2023.
We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. Our responsibilities under those standards are further described in the 'Our responsibilities for the audit of the financial statements' section of our report. We are independent of the Group and the Company in accordance with the EU Regulation on specific requirements regarding statutory audit of public-interest entities, the Wet toezicht accountantsorganisaties (Wta, Audit firms supervision act), the Verordening inzake de onafhankelijkheid van accountants bij assurance-opdrachten (ViO, Code of Ethics for Professional Accountants, a regulation with respect to independence) and other relevant independence regulations in the Netherlands. Furthermore we have complied with the Verordening gedrags- en beroepsregels accountants (VGBA, Dutch Code of Ethics). We believe the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified opinion.
We designed our audit procedures in the context of our audit of the financial statements as a whole and in forming our opinion thereon. The following information in support of our opinion was addressed in this context, and we do not provide a separate opinion or conclusion on these matters.
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate, to the financial statements as a whole. Based on our professional judgement we determined the materiality for the financial statements as a whole at €11.7 million. The materiality is based on 7.5% of profit before tax from continuing operations. We have also taken into account misstatements and/or possible misstatements that in our opinion are material for the users of the financial statements for qualitative reasons. Audits of group entities (components) were performed using materiality levels determined by the judgement of the group audit team, based on the materiality of the Consolidated Financial Statements. We communicated with the Audit Committee that misstatements in excess of €352 Keur, which are identified during the audit, would be reported to them, as well as smaller misstatements that in our view must be reported on qualitative grounds.
139
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Independent auditor’s report continued
To the shareholders and Board of Directors of Pepco Group N.V.
The Company is at the head of group of entities (“components”). The financial information of this Group is included in the 2023 Consolidated Financial Statements of the Group. We tailored the scope of our audit to ensure that we performed sufficient work to be able to give an opinion on the financial statements as a whole. We used the outputs of a risk assessment, our understanding of the Group, its environment, controls and critical process, to consider qualitative factors in order to ensure that we obtained sufficient audit coverage across all financial statement line items. As part of designing our audit, we assessed the risk of material misstatement in the financial statements whether due to fraud or error, and then designed and performed audit procedures responsive to those risks. In particular, we looked at where management made subjective judgements such as making assumptions on significant accounting estimates. Because we are ultimately responsible for the opinion, we are also responsible for directing, supervising and performing the group audit. In this respect we have determined the nature and extent of the audit procedures to be carried out on the entities. Our group audit is mainly focused on financially large entities in terms of size and financial interest or where significant risks or complex activities were present, leading to full audits performed for 2 sub groups in scope, Pepco Group CEE and Poundland. We performed audit procedures at group level on areas such as consolidation and financial statement disclosures. Specialists were involved amongst others in the areas of information technology, treasury and valuation. We also involved component auditors from the Mazars Network and other audit firms, who are familiar with local laws and regulations. For these component auditors, the group audit team provided detailed written instructions, which include the requirements for component audit teams, the audit approach for significant audit areas, other information obtained centrally and the need for awareness for fraud risks. Our oversight procedures also included a combination of remote and on-site reviews of working papers of the auditors of the significant components in Poland and United Kingdom, (virtual) meetings with component auditors and management of the components, and reviewing deliverables supplied by the component auditors to gain sufficient understanding of the work performed. We varied the nature, timing and extent of these procedures based on both quantitative and qualitative considerations. For smaller components, we have performed review procedures or specified audit procedures. By performing the procedures mentioned above we have been able to obtain sufficient and appropriate audit evidence about the consolidated and separate company financial information and to provide an opinion on the 2023 Financial Statements as a whole.
We refer to section ‘Risk management’ of the Management Board Report for management’s fraud risk assessment. As part of our process of identifying fraud risks, we evaluated fraud risk factors with respect to financial reporting fraud, misappropriation of assets and corruption. We identified the following fraud risks and performed the following specific procedures:
| Our audit work performed | Management override of controls |
|---|---|
| Amongst others we have performed the following audit procedures: | Management is ordinarily in a unique position to adjust the financial statements by overriding controls that otherwise appear to be operating effectively. |
| – an assessment of the internal control framework, including management integrity, and evaluation of the design and implementation of the relevant controls in the financial closing process; | In this context, we paid attention to: |
| – enquiries of individuals with different levels of responsibility involved in the financial reporting process about inappropriate or unusual activity relating to the processing of journal entries and other adjustments; | – The appropriateness of journal entries and other adjustments made in the preparation of the financial statements, such as consolidation journals. |
| – a selection of journal entries and other adjustments made during the year, at the end of the reporting period and post-closing entries; | – Potential biases in estimates, such as impairment of intangible assets (goodwill and other intangible assets) and right-of-use assets, leases and derivatives. |
| – testing of the appropriateness for these journal entries and other adjustments with the underlying audit documentation. | – Significant transactions, if any, outside the normal course of business. |
| – an evaluation of judgements and decisions for bias by management for key accounting estimates with respect to goodwill and other intangible assets, leases and derivatives, including retrospective reviews of judgements and assumptions related to significant accounting estimates of the prior and current year. | |
| – a test of related party transactions and transactions outside the regular course of business. |
140
Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Audit response to the risks of fraud continued
| Our audit work performed |
|---|
| – We assessed the internal control framework and evaluated the design and implementation of the relevant controls in the financial closing process and other processes. |
| – We assessed the IT environment and relevant systems. |
| Revenue recognition – The disclosure on the accounting principles in relation to revenue recognition is set out in Note 3 of the consolidated financial statements. |
Our response to the risk of non-compliance of laws and regulations
We have obtained an understanding of the relevant laws and regulations. We have identified the following laws and regulations that have an indirect effect on the financial statements: anti-bribery and corruption laws & regulations, competition and data privacy laws, and human rights laws and regulations. We held enquiries with management and the audit committee if the entity is compliant with laws and regulations which directly or indirectly have a material impact on the financial statements. We also inspected relevant correspondence with regulatory and supervisory authorities. We also inspected lawyers’ letters and remained alert to indications of (suspected) non-compliance throughout the audit, held enquiries with legal counsel, and obtained a written representation from management that all known instances of (suspected) non-compliance with laws and regulations were disclosed to us.
Observations
The aforementioned audit procedures have been performed in the context of the audit of the financial statements. Consequently they are not planned and performed as a specific investigation regarding fraud and non-compliance with laws and regulations. Our audit procedures have not led to any findings.
Our audit response related to going concern
Our responsibilities, as well as the responsibilities of the Board of Directors, related to going concern under the prevailing standards are outlined in the “Description of responsibilities regarding the financial statements” section below. In fulfilling our responsibilities, we performed procedures including evaluating management’s assessment of the Company’s ability to continue as a going concern and considering the impact of financial, operational, and other conditions. Based on these procedures, we did not identify any reportable findings related to the entity’s ability to continue as going concern.
Our key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements. We have communicated the key audit matters to the Board of Directors. The key audit matters are not a comprehensive reflection of all matters discussed. These matters were addressed in the context of the audit of the financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
141 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
Independent auditor’s report continued
To the shareholders and Board of Directors of Pepco Group N.V.
Our key audit matters continued
| Key Audit Matter | How our scope addressed this matter # Independent Auditor's Report
Based on the following procedures performed, we conclude that the other information:
– is consistent with the financial statements and does not contain material misstatements; and
– contains all the information regarding the management report and the other information as required by Part 9 of Book 2 of the Dutch Civil Code.
We have read the other information. Based on our knowledge and understanding obtained through our audit of the financial statements or otherwise, we have considered whether the other information contains material misstatements. By performing these procedures, we comply with the requirements of Part 9 of Book 2 of the Dutch Civil Code and the Dutch Standard 720. The scope of the procedures performed is substantially less than the scope of those performed in our audit of the financial statements.
Management is responsible for the preparation of the other information, including the Board of Directors report in accordance with Part 9 of Book 2 of the Dutch Civil Code and other information as required by Part 9 of Book 2 of the Dutch Civil Code.
We were engaged by the Board of Directors as auditor of the Company on December 8, 2021 for the audit for the year ended 30 September 2021 and have operated as statutory auditor ever since that financial year.
We have not provided prohibited non-audit services as referred to in Article 5(1) of the EU Regulation on specific requirements regarding statutory audit of public-interest entities.
The Company has prepared its Annual Report in ESEF. The requirements for this are set out in the Delegated Regulation (EU) 2019/815 with regard to regulatory technical standards on the specification of a single electronic reporting format (hereinafter: the RTS on ESEF).
In our opinion, the Annual Report prepared in XHTML-format, including the partly marked-up Consolidated Financial Statements as included in the reporting package by the Group, complies in all material respects with the RTS on ESEF.
The Board of Directors is responsible for preparing the Annual Report including the financial statements in accordance with the RTS on ESEF, whereby management combines the various components into one single reporting package.
Our responsibility is to obtain reasonable assurance for our opinion whether the Annual Report in this reporting package complies with the RTS on ESEF. We performed our examination in accordance with Dutch law, including Dutch Standard 3950N ‘Assurance engagement relating to compliance with criteria for digital reporting’ (assurance-opdrachten inzake het voldoen aan de criteria voor het opstellen van een digital verantwoordingsdocument). Our examination included amongst others:
143 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
To the shareholders and Board of Directors of Pepco Group N.V.
The Board of Directors is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS-EU and with Part 9 of Book 2 of the Dutch Civil Code. Furthermore, the Board of Directors is responsible for such internal control as the Board of Directors determine is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error.
As part of the preparation of the financial statements, the Board of Directors is responsible for assessing the Group’s and the Company’s ability to continue as a going concern. Based on the financial reporting frameworks mentioned, the Board of Directors should prepare the financial statements using the going concern basis of accounting, unless the Board of Directors either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. The Board of Directors should disclose events and circumstances that may impact the Group’s and the Company’s ability to continue as a going concern in the financial statements.
The Audit Committee is responsible for overseeing the company's financial reporting process.
Our objective is to plan and perform the audit engagement in a manner that allows us to obtain sufficient and appropriate audit evidence for our opinion. Our audit has been performed with a high, but not absolute, level of assurance, which means we may not detect all material errors and fraud during our audit. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. The materiality affects the nature, timing and extent of our audit procedures and the evaluation of the effect of identified misstatements on our opinion.
We have exercised professional judgement and have maintained professional scepticism throughout the audit, in accordance with Dutch Standards on Auditing, ethical requirements and independence requirements.
Our audit consisted of, among other things, the following:
We communicate with the Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant findings in internal control that we identify during our audit. In this respect we also submit an additional report to the audit committee in accordance with Article 11 of the EU Regulation on specific requirements regarding statutory audit of public-interest entities. The information included in this additional report is consistent with our audit opinion in this auditor's report. We provide the Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Audit Committee, we determine the key audit matters: those matters that were of most significance in the audit of the financial statements. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, not communicating the matter is in the public interest.
Amsterdam, 22 December 2023
Mazars Accountants N.V.
Original was signed by
drs. N.E. Habers-Boerema RA
144 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
The holders of ordinary shares are entitled to one vote per share and to participate in the distribution of dividends and liquidation proceeds.Pursuant to Article 26 of the Articles of Association, a dividend may be declared provided that the Company's equity exceeds the amount of the paid-up and called-up part of the issued capital, increased by the reserves which must be kept by virtue of the law. The Board shall determine the amount of profits to be reserved. The general meeting is authorised to, in whole or in part, distribute the profits remaining thereafter and to declare a distribution in kind. The Board is authorised to declare interim distributions of profits or on account of a freely distributable reserve.
145 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
The table below lists all branches of the Company as well as all subsidiaries whose results were consolidated during the reporting period.
| Branch | Place of branch | Country of branch | Register of branch | Origin entity | Country of origin entity |
|---|---|---|---|---|---|
| Fully Sun China Limited | Bangladesh | Bangladesh | TIN- 4404-3933-6667 | Fully Sun China Limited | Bangladesh |
| Poundland Limited | Isle of Man | Isle of Man | Tax reference no: C145894-73 | Poundland Limited | UK |
| Poundland Limited | Republic of Ireland | Republic of Ireland | Tax reference no: 9798866A | Poundland Limited | UK |
146 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
This list forms part of the notes to the 2023 separate financial statements and has been referenced therein.
| Entity name | Country of incorporation | Registered no. | Shareholding | Principal place of business |
|---|---|---|---|---|
| Pepco Group Limited | UK | 09127609 | 100% | 14th Floor, Capital House, 25 Chapel Street, London, United Kingdom NW1 5DH |
| Peu (Fin) Plc | UK | 11808114 | 100% | 14th Floor, Capital House, 25 Chapel Street, London, United Kingdom NW1 5DH |
| Peu (Tre) Limited | UK | 11808312 | 100% | 14th Floor, Capital House, 25 Chapel Street, London, United Kingdom NW1 5DH |
| Pepco Group Services Limited | UK | 10972213 | 100% | 14th Floor, Capital House, 25 Chapel Street, London, United Kingdom NW1 5DH |
| Poundland Limited | UK | 09127615 | 100% | Poundland Csc, Midland Road, Walsall, United Kingdom WS1 3TX |
| Dealz Retailing (Ireland) Limited | Republic of Ireland | 541977 | 100% | Unit 3 Westend Retail Park, Blanchardstown, Dublin 15 |
| Poundland International Limited | UK | 03484379 | 100% | Poundland Csc, Midland Road, Walsall, United Kingdom WS1 3TX |
| Vaucluse Diffusion S.A.S. | France | RCS 306 487 075 | 100% | 19 Rue du Musée 13001 Marseille, France |
| Dealz España SL | Spain | B86867512 | 100% | C/Bravo Murillo 192, Madrid, Spain |
| Dealz Poland Sp z.o.o | Poland | KRS 0000692949 | 100% | Ul. Jasielska 16A, 60-476 Poznan, Wielkopolskie |
| Poundland Limited | UK | 02495645 | 100% | Poundland Csc, Midland Road, Walsall, United Kingdom WS1 3TX |
| Pepkor Europe Limited | UK | 09015100 | 100% | Poundland Csc, Midland Road, Walsall, United Kingdom WS1 3TX |
| Pepkor UK Retail Limited | UK | 09288913 | 100% | Poundland Csc, Midland Road, Walsall, United Kingdom WS1 3TX |
| Viewtone Trading Group Limited | UK | 07398652 | 100% | Poundland Csc, Midland Road, Walsall, United Kingdom WS1 3TX |
| Viewtone Limited | UK | 03271182 | 100% | Poundland Csc, Midland Road, Walsall, United Kingdom WS1 3TX |
| Frozen Value Limited | UK | 01003192 | 100% | Poundland Csc, Midland Road, Walsall, United Kingdom WS1 3TX |
| Jack Fulton Limited | UK | 02317009 | 100% | Poundland Csc, Midland Road, Walsall, United Kingdom WS1 3TX |
| Viewtone Trustees Limited | UK | 04560070 | 100% | Poundland Csc, Midland Road, Walsall, United Kingdom WS1 3TX |
| Minaldi Limited | UK | 09151610 | 100% | Poundland Csc, Midland Road, Walsall, United Kingdom WS1 3TX |
| Pepkor Import B.V. | Netherlands | KvK 61649112 | 100% | Noord Brabantlaan 265, 5652LD Eindhoven |
| Pepkor France S.A.S. | France | RCS 805 402 104 | 100% | 1 Place Boieldieu, 75002, Paris, France |
| Pepco Retail España SL | Spain | B86283751 | 100% | Avda. Baix Llobregat 1-3, Módulo A, Planta Baja Par No., Esc. P, El Prat de Llobregat |
| Fully Sun China Limited | China (Hong Kong) | CR 1075298 | 100% | Rm 1006-8, 10/F, Sun House, 181 Des Voeux Road Central Sheung Wan, Hong Kong |
| Shanghai Pepco Group Sourcing Company | China | 913100007914 | 100% | 8th Floor, H Zone (East), 666 Beijing East Road, Huangpu District, Shanghai |
| PGS Partner India Private Limited | India | U74999HR2018 | 100% | Unit No-128, Suncity Success Tower Sector, 65, Gold Course Extn Road, Gurugram, Gurgaon HR, 122005 |
| Pepco Holdings Sp z.o.o. | Poland | 0000791461 | 100% | ul. Strzeszyńska 73A, 60-479 Poznań |
| Pepco Germany GmbH | Germany | HRB 224064 | 100% | c/o WeWork, Kemperplatz 1, DE-10785, Berlin |
147 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
| Entity name | Country of incorporation | Registered no. | Shareholding | Principal place of business |
|---|---|---|---|---|
| Pepco Italy S.r.l | Italy | MI-2568153 | 100% | Via Michelangelo Buonarroti 39, 20145 Milano (MI), Italy |
| Pepco Properties Sp z.o.o. | Poland | KRS 0000356422 | 100% | ul. Strzeszyńska 73A, 60-479 Poznań |
| Pepco Austria GmbH | Austria | FN 534293a | 100% | Gertrude-Fröhlich-Sandner-Straße, 2-4/Turm 9/7. Stock 1100 Wien |
| Pepco Poland Sp z.o.o. | Poland | KRS 0000111962 | 100% | ul. Strzeszyńska 73A, 60-479 Poznań |
| Konopacka Holdings B.V. | Netherlands | KvK 58864504 | 100% | Noord Brabantlaan 265, 5652LD Eindhoven |
| Rawksa Holdings B.V. | Netherlands | KvK 58864385 | 100% | Noord Brabantlaan 265, 5652LD Eindhoven |
| Cardina Investments Sp z.o.o. | Poland | KRS 0000424893 | 100% | ul. Strzeszyńska 73B lok. 4, 60-479 Poznań |
| Evarts Investments Sp z.o.o. | Poland | KRS 0000471011 | 100% | ul. Strzeszyńska 73B lok. 4, 60-479 Poznań |
| Pepco Ingatlan Kft | Hungary | Cg. 01-09-300734 | 100% | H-1138 Budapest, Váci út 187 |
| Pepkor Europe GmbH | Switzerland | CHE-194.732.602 | 100% | c/o Kanzlei Pilatushof, Hirschmattstrasse 15, 6003 Luzern |
| Pepco Hungary Kft | Hungary | Cg. 01-09-192750 | 100% | H-1138 Budapest, Váci út 187 |
| Pepco Czech Republic s.r.o. | Czechia | 24294420 | 100% | Prague 4 – Nusle, Hvězdova 1716/2b, PSČ 14078 |
| Pepco Retail SRL | Romania | J40/4655/2013 | 100% | 17 Ceasornicului street, 3rd floor, District 1, Bucharest, Romania |
| Pepco Slovakia s.r.o. | Slovakia | 46 868 674 | 100% | Nevädzova 6, Ružinov, Bratislava, 821 01, Slovakia |
| Pepco Croatia d.o.o. | Croatia | MBS 081038164 | 100% | Zagreb (Grad Zagreb), Damira Tomljanovića Gavrana 11 |
| Pepco Lithuania UAB | Lithuania | 304488450 | 100% | Viršuliškių skg. 34-1, Vilniaus, 05132, Lithuania |
| Pepco Latvia SIA | Latvia | 40203062113 | 100% | Strelnieku iela 9 – 7, Riga, LV-1010, Latvia |
| Pepco d.o.o. | Slovenia | 7176457000 | 100% | Tržaška cesta 515, Brezovica pri Ljubljani, 1351, Slovenia |
| Pepco Estonia OU | Estonia | 14249111 | 100% | Sõpruse Pst 145, Kristiine District, Tallinn, 13417, Estonia |
| Pepco Bulgaria EOOD | Bulgaria | 205119149 | 100% | Nikola Tesla №5 str., fl. 4, Building BSR 2, Sofia 1574, Bulgaria |
| Pepco d.o.o. Beograd-Novi | Serbia | 21457345 | 100% | Bulevar Mihaila Pupina 10L, 11000 Novi Beograd, Beograd Serbia |
| Pepco Group International Limited | UK | 14772767 | 100% | 14th Floor Capital House, 25 Chapel Street, London, United Kingdom, NW1 5DH |
| Poundland Elgin Limited | UK | 12111238 | 100% | Poundland Csc, Midland Road, Walsall, United Kingdom, England, WS1 3TX |
| Online Poundshop Limited | UK | 08870575 | 100% | Poundland Csc, Midland Road, Walsall, United Kingdom, WS1 3TX |
| Pepco Greece IKE | Greece | 162515401000 | 100% | Municipality of Nikaia – Agios Ioannis Renti, at Petrou Ralli Street No 97, PC 18233 |
| Pepco Portugal Unipessoal LDA | Portugal | 3453-7748-7417 | 100% | Rua Hermano Neves 18, piso 3, E7, 1600-477 Lisbon (Portugal) |
| Pepco B-H d.o.o. | Bosnia and Herzegovina | 4203144510006 | 100% | Sarajevo, street Skenderpašina no. 1, Municipality Centar Sarajevo, 71 000 Sarajevo, Bosnia |
| Pepco Logistics S.L | Spain | 773439 | 100% | C/Bravo Murillo 192, Madrid, Spain |
| Pepco Distribution Sp. z o.o. | Poland | 0001042265 | 100% | ul. Strzeszyńska 75, 60 – 479 Poznań |
148 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
| Term | Definition |
|---|---|
| AGM | Annual General Meeting of shareholders |
| APM | Alternative Performance Measure |
| Annual Report | Management report (bestuursverslag) as referred to in Section 2:391 of the Dutch Civil Code |
| Articles | Articles of Association of the Company, as amended from time to time |
| BCI | Better Cotton Initiative |
| Board | Directors of the Company |
| Board Rules | Board of Directors’ Rules of Procedure |
| CAP | Corrective action plan |
| CEE | Central and Eastern Europe |
| CEO | Chief Executive Officer of the Company |
| CFO | Chief Financial Officer of the Company |
| CGU | Cash-generating unit |
| CODB | Cost of doing business |
| CODM | Chief Operating Decision Maker |
| Company/PGNV | Pepco Group N.V. |
| Company Secretary | Company secretary of the Company |
| Covid-19 | The pandemic of coronavirus disease 2019 (Covid-19) caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The pandemic has led to severe global socioeconomic disruption, the closure of a number of businesses and wide-spread shortages of supplies |
| DC | Distribution centre |
| Dutch Code | Dutch Corporate Governance Code |
| Dealz | FMCG-led price-anchored retailer (non-UK) |
| EAP | Equity Award Plan |
| EBITDA | Operating profit or loss before depreciation and amortisation adjusted for capital and reclassification items |
| EPS | Earnings per share |
| ERP | Enterprise resource planning |
| ESG | Environmental, social and governance |
| EU | European Union |
| External auditors | Mazars Accountants N.V |
| FMCG | Fast-moving consumer goods |
| Fultons/Fultons Foods | Viewtone Trading Group Limited and its subsidiaries |
| FVOCI | Fair value through other comprehensive income |
| FVTPL | Fair value through profit and loss |
| FY19 | 1 October 2018 to 30 September 2019 |
| FY20 | 1 October 2019 to 30 September 2020 |
| FY21 | 1 October 2020 to 30 September 2021 |
| FY22 | 1 October 2021 to 30 September 2022 |
| FY23 | 1 October 2022 to 30 September 2023 |
| FY24 | 1 October 2023 to 30 September 2024 |
| GM | General merchandise |
| GOTS | Global Organic Textile Standard |
| Group/Pepco Group | The Company and its subsidiaries |
149 Pepco Group N.V. Annual Report and Consolidated Financial Statements 2023
| Term | Definition |
|---|---|
| IAS | International Accounting Standards |
| IBEX/ITBV | IBEX Topco B.V. |
| # IFRS International Financial Reporting Standards | |
| # ISG Internal Strategy Group | |
| # IPO Initial Public Offering – on 26 May 2021 the Company was admitted for listing on the Warsaw Stock Exchange | |
| # LFL Like for like | |
| # LTIP Long Term Incentive Plan | |
| # Mazars Mazars Accountants N.V., the Company’s external auditors | |
| # NED Non-Executive Director | |
| # NOPAT Net underlying operating profit after tax | |
| # NPS Net promoter score | |
| # PBT Profit before tax | |
| # Pepco Apparel-led multi-price retailer | |
| # PGS Pepco Global Sourcing | |
| # Poundland FMCG-led price-anchored retailer (UK) | |
| # Poundland Group Poundland and Dealz | |
| # RCF Revolving credit facility | |
| # Relationship Agreement Agreement between affiliates of ITBV and the Company | |
| # ROIC Return on invested capital | |
| # SaaS Software-as-a-Service | |
| # Share A share in the capital of the Company | |
| # Shareholder Holder of one or more shares | |
| # Subsidiary Subsidiary of the Company as referred to in Section 2:24a of the Dutch Civil Code | |
| # VCP Value Creation Plan | |
| # WE Western Europe | |
| # WSE Warsaw Stock Exchange (Giełda Papierów Wartościowych w Warszawie) | |
| # Warsaw Code Code of Best Practice for GPW Listed Companies 2021 | |
| # YoY Year on year |
The Board values the insight gained from shareholder engagement and places significant importance on maintaining close relationships with shareholders, taking account of and responding to their views. The Group’s Executive Chair, CFO and investor relations team communicate on a regular basis with shareholders and analysts and endeavour to facilitate open engagement. In FY23, frequent investor meetings were held alongside a focused Capital Markets Day post year end. The Group has an investor relations website at www.pepcogroup.eu/investors/ where all regulatory news as well as other information on the Pepco Group is available. We aim to maintain strong dialogue with our shareholders and regularly collect feedback. Please contact [email protected].
The Company’s Annual General Meeting will be held prior to 31 March 2024.
Pepco's commitment to environmental issues is reflected in this Annual Report, which has been printed on UPM Finesse Silk, an FSC® certified material. This document was printed by Opal X using its environmental print technology, which minimises the impact of printing on the environment, with 99% of dry waste diverted from landfill. Both the printer and the paper mill are registered to ISO 14001.
14th Floor, Capital House
25 Chapel Street
London
NW1 5DH
United Kingdom
0203 735 9210
[email protected]
CBP022364
14th Floor, Capital House
25 Chapel Street
London
NW1 5DH
United Kingdom
0203 735 9210
[email protected]
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