Press releases

• Chairman The Office of Competition and Consumer Protection granted unconditional approval for the acquisition by the Eurocash Group of 100% of the shares in the Cypriot company Domelius Limited controlling Mila S.A. — owner of a chain of 187 supermarkets located mainly in central Poland.
• After the completion of the transaction, the Cypriot company will eventually be dissolved, and Mila S.A. will be directly owned by Eurocash — a company with its registered office in Komorniki near Poznań, listed on the Warsaw Stock Exchange.
• The transaction is another step towards strengthening the market position of thousands of independent entrepreneurs operating retail stores in Poland. Innovative solutions and experiences of the acquired network, classified as a so-called modern market, will eventually be made available to all customers of the Eurocash Group.
• The strategic goal of the Eurocash Group is to improve the competitiveness of Polish independent retail stores, which are the Group's main customers.

The positive decision of the President of UOKiK brings the Eurocash Group closer to the completion of the transaction, as a result of which the national leader of distribution, supporting tens of thousands of entrepreneurs in the country, will become the owner of a chain of 187 Mila supermarkets, located mainly in central Poland. Total sales realized by this network in 2017 amounted to approximately PLN 1.48 billion. Thanks to the investment of the Eurocash Group, the Mila network will acquire a strong strategic partner with the know-how and resources necessary for further development.

The transaction value of the acquisition of the Mila network was set at PLN 350 million.

— Our goal is always to develop and improve the competitiveness of retail stores run by independent entrepreneurs in Poland. A large part of our customers are already coping well with the growing competition. In order for them to continue to effectively counter discounters in the future, we want to provide them with the tools, scale and solutions that allow them to compete much stronger. Thanks to our own facilities, we can improve efficiency in the area of logistics, marketing or in obtaining for our customers purchase conditions similar to those received by discounts today — said Jacek Owczarek, Member of the Management Board and Chief Financial Officer of the Eurocash Group.

The support of a strong industry partner, Eurocash, will significantly support the Mila network, which will have a beneficial effect on the results and attractiveness of the offer.

— After the transaction, the Mila chain will enlist the support of a stable and experienced partner, with whom we will be able to modernize supermarkets and develop the network. We are and will continue to be close to customers who appreciate the pleasant service in the store and high quality, especially fresh products. The transaction means that our Customers can be sure that they will still be able to enjoy attractive promotions while shopping in a relaxed atmosphere. Exchange of experience with Eurocash will positively affect the competitiveness of the offer of all stores in the Group — said Artur Góralczyk, President of the Management Board of Mila S.A.

The completion of the transaction for the acquisition of the Mila chain of stores by the Eurocash Group is expected in the coming weeks.

Eurocash Group is the largest Polish company engaged in wholesale distribution of food products and marketing support for independent Polish entrepreneurs conducting retail activities. Franchise and partner networks supported by Eurocash bring together more than 14 thousand independent stores operating under brands such as abc, Groszek, Delikatesy Centrum, Lewiatan, Euro Sklep and Gama.

• The Eurocash Group's sales, calculated according to the IFRS 15 standard applicable since this year, amounted to PLN 5 billion in the first quarter of this year, which represents an increase of 7.5% compared to the same period in 2017.
• Eurocash Group sales are supported by very good results in the wholesale segment, which recorded an increase of 7.2% y/y, as well as in the retail segment, which, taking into account the distribution of fresh products, recorded an increase of 8% y/y.
• Consolidated gross margin on sales in the first quarter of 2018 reached more than 11.6% compared to 11.4% a year ago.
• EBITDA of the Eurocash Group, i.e. operating profit plus depreciation, increased by 5.7% y/y in the first quarter of this year and amounted to PLN 39.6 million.
• Consolidated net income amounted to PLN -18.5 million compared to PLN -15 million in the first quarter of 2017. The financial result of the Eurocash Group is still influenced by the high expenditure on the development of strategic projects aimed at ensuring long-term competitiveness of independent entrepreneurs operating retail stores in Poland.

— In the first quarter of this year, Eurocash Group sales increased by 7.5%, which is more than the entire FMCG market, which grew by an average of 6%. The result we achieved is all the more significant because it is not the result of acquisitions, but was primarily related to organic growth in the wholesale segment. In addition, a significant impact on the high average sales growth across the market was certainly the fact that the pre-Easter shopping period this year fell in the first quarter, while a year earlier in the second quarter. However, it is worth noting that Christmas shopping “in stock” is usually carried out in large-format stores. All the more satisfying is our increase in sales, which is mainly realized for small format stores — said Jacek Owczarek, Member of the Management Board and Chief Financial Officer of the Eurocash Group.

— In the retail segment, we continued to integrate ECO stores. In the first quarter, 41 of them changed the sign to Delicatesy Centrum. The accelerated remodeling in the short term has a negative impact on the level of sales and the EBITDA result of this segment, but we see positive effects of the changes made after the reopening of establishments undergoing rebranding and renovation. A clear, nearly 10% increase in sales in the first quarter of this year was recorded by Delikatesy Centrum's own stores. Franchise stores affiliated in this chain, in turn, record high like-for-like increases, that is, for the same number of outlets. Wholesale sales realized by Eurocash to Delicatesy Centrum franchise stores increased in the first quarter in like-for-like terms by 8.6% y/y, and the increase in retail sales of these establishments in like-fo-like terms reached 6.3% — pointed out Jacek Owczarek.

The EBITDA result of the Eurocash Group in the first quarter of this year was primarily influenced by a clear improvement in the wholesale segment, resulting, among others, from the improvement in the profitability of the Cash&Carry format, thanks to higher operating efficiency, as well as from a strong increase in sales of Eurocash Dystrybucja, i.e. a format involving the active distribution of goods (with delivery to the customer). The cost optimization program implemented in the Group also brings positive results, which in the first quarter resulted in savings of more than PLN 14 million. The negative impact on the level of the EBITDA result is in turn rising remuneration costs, which were PLN 22 million higher than a year ago — the Eurocash Group, like the entire FMCG industry, is feeling the effects of wage pressure.

The current profitability of the Eurocash Group is also negatively affected by the Projects segment, which includes investments in the development of innovative retail formats such as Big Ben, abc on wheels and Kontigo, as well as the development of the distribution of high-quality fresh products. These projects in the first quarter of this year charged the Group's EBITDA result by PLN 14 million (compared to PLN 16 million in the same period last year) . — We are convinced that in the long term these investments will translate into an increase in the competitiveness of independent Polish entrepreneurs, operating small and medium-sized retail stores, which are the main customers of the Eurocash Group. After the successful Faktoria Win and PayUp projects implemented in previous years, this year we decided to make the Big Ben concept available to franchisees. In addition, according to the updated strategy announced in March, deliveries of high-quality fresh products, previously implemented only in the Delicatesy Centrum chain, will also include stores affiliated with other chains supported by the Eurocash Group. This project has been very positively received by both our customers and final consumers, which is confirmed by the high like-for-like growth in the Delicatesy Centrum chain. — said Jacek Owczarek.

Selected consolidated financial results of the Eurocash Group:

PLN million1Q 20181Q 2017Change YoYSales revenue50004651 +7.5%Revenues from sales ¹⁾55415193 +6.7%Gross sales profit582531 +9.5%Gross margin on sales 11.6% 11.4% +0.2 p.p.EBITDA39,637.5 +5.6%EBITDA margin 0.8% 0.8% 0 p.p.Net profit/loss-18.5-15.0-Net equivalent -0.4% -0.3% -0.1 p.p.

^{1) Value of sales before application of IFRS 15 (presented analogously to previous years)}

Eurocash Group is the largest Polish company engaged in wholesale distribution of food products and marketing support for independent Polish entrepreneurs conducting retail activities. Franchise and partner networks supported by Eurocash bring together more than 14 thousand independent stores operating under brands such as abc, Groszek, Delikatesy Centrum, Lewiatan, Euro Sklep and Gama.

‍Since the beginning of the Faktoria Wine concept, Poles have reached several million bottles of wine from specially designed racks. They can already be found in 4500 stores throughout Poland. The latest one appeared in Warsaw's Prague.

Faktoria Win is a project developed by the Eurocash Group, which in 4 years has revolutionized the sale of table wines in small and medium-sized stores, significantly contributing to the growth of sales of this category in small-format establishments. As part of its cooperation with the owners of independent shops, Faktoria Win provides a special wine rack, thematically divided into five occasions in connection with which Poles most eagerly buy wine: For a meal, For a gift, For a date, Relaxing and With friends. Each includes selected wines that differ from each other in taste, color, aroma and price. The assortment of Wine Factory currently includes about 500 items.

In Poland there are already 4500 shops with the wine rack of Faktorii Wine. The first appeared in November 2013, and the latest one was in the last days in the Spolom store located in the new Rondo Wiatraczna shopping center in Warsaw's Prague.

Since the beginning of the Faktoria Win concept, Poles have reached nearly 15 million bottles from specially designed racks, and in 2017 alone the value of sales reached PLN 100 million.

— Faktoria Win is a concept that makes it easier for Poles to buy wine in their nearby store. It is also a response to the growing interest in wine among consumers — almost 4 liters of table wine per person are drunk annually in Poland, compared to about 3 liters per person in 2013, and it is estimated that the wine trend growing at a stable pace will continue in the coming years. When creating this concept, we relied on market analysis, tracking sales trends and consumer preferences. Thanks to this, Faktoria Win perfectly meets the tastes of Polish customers and is able to offer the best wine offer combined with an attractive price — says Michał Groniewski, Director of Faktoria Wine from the Eurocash Group.

Faktoria Win is not only special racks with a wide selection of table wines. Customers can also take advantage of recipes and tips, as well as a series of wine knowledge courses, which are published in the free Wine Factory Magazine. Its individual issues are also available in electronic version on the faktoriawin.pl website. The Faktoria Win project has been awarded in prestigious marketing competitions, including Effie and Innovation AD.

Since last year, the Eurocash Group has been developing a concept similar to the Wine Factory — Beer Territories. This is the first comprehensive solution in Poland for the sale of craft beers in independent grocery stores. Both concepts are available to stores affiliated in franchise chains and partner networks of the Eurocash Group. The Group also invites non-affiliated entrepreneurs to cooperate. It is open to cooperation with the best stores that want to offer their customers a wide selection of beer and wine species.

Eurocash Group is the largest Polish company engaged in wholesale distribution of food products and marketing support for independent Polish entrepreneurs conducting retail activities. Franchise and partner networks supported by Eurocash bring together more than 14 thousand independent stores operating under brands such as abc, Groszek, Delikatesy Centrum, Lewiatan, Euro Sklep and Gama.

Concerned about the fate of farm animals, the Eurocash Group, the largest Polish company dealing with wholesale distribution of food products and marketing support for independent Polish entrepreneurs conducting retail activities under such brands as abc, Groszek, Delikatesy Centrum, Lewiatan, Euro Sklep or Gama, declares its desire to withdraw caged eggs from its offer by 2025.

At the same time, we declare our readiness to provide educational communication addressed to the owners of stores operating within the above-mentioned partner and franchise networks. As a Group, we declare our willingness to cooperate with producers of non-caged eggs on terms that will allow our customers to provide an offer that allows independent Polish entrepreneurs to compete with discount chains and hypermarkets.

Eurocash Group is the largest Polish company engaged in wholesale distribution of food products and marketing support for independent Polish entrepreneurs conducting retail activities. Franchise and partner networks supported by Eurocash bring together nearly 15 thousand independent stores operating under brands such as abc, Groszek, Delikatesy Centrum, Lewiatan, Euro Sklep and Gama.

• Eurocash Group's sales in 2017 amounted to almost PLN 23.2 billion and were nearly 10% higher than the previous year. The main driver of revenue growth was the consolidation of the companies acquired at the end of 2016 and early 2017.
• Consolidated gross profit on sales increased last year by more than 15% y/y to
  PLN 2.44 billion, which is due to the higher gross profitability recorded in the Retail segment.
• Normalized EBITDA*, i.e. operating profit plus depreciation, amounted to PLN 361 million compared to PLN 440 million in 2016. The decrease in EBITDA is due to lower profitability in the Independent Wholesale segment, additional costs related to the integration of acquired companies and other one-time costs, as well as further investments in the development of new strategic projects.
• The Eurocash Group's normalized net profit in 2017 amounted to PLN 85 million compared to PLN 190 million a year earlier. In addition to the decrease in profitability at the EBITDA level, the negative impact on the net result was higher financial costs resulting from the increase in debt.
• In 2017, the Eurocash Group generated strong positive cash flows from operating activities amounting to PLN 494 million, which corresponds to 137% of the normalized EBITDA value.
• The strategic goal of the Eurocash Group is to create the largest supermarket chain in Poland. Independent entrepreneurs will be able to join the franchise network. To accelerate its expansion, it will also be expanded by opening new own stores (together with real estate partners) and further acquisitions of local supermarket chains.
• Over the next five years, the Eurocash Group, also together with franchisees, plans to open around 900 new stores. The total investment expenditure on the development of the retail network is estimated at around PLN 1-2 billion (incurred jointly with real estate partners).
• As part of its wholesale activity, the Eurocash Group will focus on the integration of individual business units, sharing the best solutions developed by each of the formats and the implementation of group synergies.
• The cost optimization program started in 2017 according to the assumptions should bring about PLN 150 million in savings by 2020.
• As part of the new projects, the Eurocash Group intends to focus on the development of the most promising formats, such as Big Ben, and to extend the fresh goods delivery project to all franchise chains supported by the Group.

Commentary on Eurocash Group's results

— In 2017, we recorded an increase in sales in every segment of the business. The greatest dynamics concerns the retail segment, where the growth engine is the acquisitions made at the turn of 2016 and 2017, and in particular the acquisition of the EKO supermarket chain. The costs of integration of these establishments with Delicatesami Centrum in the short term, however, affect the profitability of the Group — indicated Jacek Owczarek, Member of the Management Board and Chief Financial Officer of the Eurcoash Group.

In 2017, 55 EKO stores were rebranded as Delikatesy Centrum. In addition, the Delikatesy Centrum chain expanded by 30 outlets, which gave a total of 1,171 stores under the Delikatesy Centrum brand at the end of 2017.
— In 2017, as announced, we carried out a restructuring of the Cash&Carry network, as part of which we closed 10 warehouses and now the network has 180 outlets. Around 72% of sales previously made at closed locations were taken over by our other wholesalers, which even exceeded our expectations, while restructuring costs were in line with expectations. We estimate that the optimization measures taken will bring more than PLN 10 million in savings. Eurocash Serwis also recorded weaker results in 2017 due to lower margin on impulse products and additional costs related to logistics reorganization. The profitability of the entire Group was also under pressure from rising labour costs — pointed out Jacek Owczarek.

Last year, the Eurocash Group continued the development of new retail formats (such as Big Ben, abc on wheels and Kontigo) and the development of fresh goods distribution. These investments on a full year scale absorbed approximately PLN 48 million EBITDA compared to PLN 40 million a year earlier, which is in line with the assumptions. After the success of such projects as Faktoria Win and PayUp, the Eurocash Group is ready to provide independent entrepreneurs in Poland with the concept of a modern liquor store Duży Ben, as part of a franchise, which will help them compete with discount chains. On the other hand, the group suspended the development of 1minute convenience stores, due to the lack of an adequate product offer for this type of outlets.

Eurocash Group Strategy to 2023

According to the updated strategy for 2023, the intention of the Eurocash Group is to create the largest supermarket chain in Poland, based on its own and franchise stores.
— The base of this network will be the already functioning Delikatesy Centrum stores and EKO stores, as well as Mila stores, for the acquisition of which we still need the approval of UOKiK. In total, it is close to 1600 establishments. We see the potential to open about 900 new stores in the next five years, including a large number jointly with entrepreneurs who will want to join the idea. In this way, we will create a network of about 2400 proximity supermarkets recognizable throughout Poland — said Luis Amaral, President of the Eurcoash Group.

The source of expansion will be the development of the network in a franchise model, supported by subsequent acquisitions of local chains and the construction of stores from scratch (together with partners from the real estate sector). In this way, not only entrepreneurs from southeastern Poland will have access to a recognizable retail brand. In addition, the marketing positioning of such a network in the national media will be much more cost-effective than at present. In addition, store owners in the largest towns will be able to use the online store designed for them, based on experiences, among others, Frisco.pl.

As part of its wholesale activity, the Eurocash Group will focus on the integration of individual business units, sharing the best solutions developed by each of the formats and the implementation of group synergies.

— In recent years, the Eurocash Group has invested heavily in the competitiveness of its customers — Polish independent entrepreneurs. At the same time, each of the wholesale businesses maintained a certain flexibility in order to best adapt the offer to the needs and expectations of customers. However, it did not take full advantage of the synergies offered by the Group's scale. Therefore, we have decided to integrate wholesale businesses deeper, and the planned savings will result, among others, from joint tenders for non-commercial purchases and services, as well as from the implementation of a more economical approach, for example, to the consumption of fuel or electricity. In addition, there will be a closer exchange of know-how between business units — explained Jacek Owczarek.

In addition, the intention of the Eurocash Group is to expand the project for the supply of fresh products, implemented so far only in the Delikatesy Centrum network. Ultimately, this project will also include stores affiliated within the other networks supported by the Eurocash Group.

— In this way, we will create the first nationwide distribution network of high-quality fresh products, which will be one of the key competitive advantages of independent small format stores, which will allow them to compete effectively for a customer with discounts. However, in order to ensure the right quality and freshness of the products, an appropriate scale is needed. We estimate that the fresh produce supply project will reach break-even in 2019 — said Jacek Owczarek.

The intention of the Eurocash Group is to increase the competitiveness of retail stores run by independent entrepreneurs in Poland. Experiences developed in own stores will ultimately be passed on to franchisees. In addition to access to the fresh produce delivery platform, independent entrepreneurs will also have access to an advanced CRM platform in the future, allowing them to match promotions with local consumers.

— The main source of financing for the expansion of the retail segment will be a healthy, reorganized wholesale business, generating strong cash flows from operating activities. Thanks to the low debt ratio, we also have significant opportunities to obtain external financing — summed up a member of the board of the Eurocash Group.

Selected consolidated financial results of the Eurocash Group:

PLN million20172016Change Y/Y Sales revenue23 27121 220 +10% Gross profit on sales24412112 +16%Gross margin on sales 10.5% 10.0% +0.5 p.p.EBITDA* 361440-18%EBITDA margin* 1.6% 2.1% -0.5 p.p.Net profit/loss* 85190-55%Net Profit* 0.4% 0.9% -0.5 p.p.

^{*excluding the one-off charge for potential VAT liabilities included in the results for the first half of 2017.}

Eurocash Group is the largest Polish company engaged in wholesale distribution of food products and marketing support for independent Polish entrepreneurs conducting retail activities. Franchise and partner networks supported by Eurocash bring together more than 14 thousand independent stores operating under brands such as abc, Groszek, Delikatesy Centrum, Lewiatan, Euro Sklep and Gama.

‍Independent entrepreneurs in Poland receive new opportunities to compete with discounts. Big Ben, a chain of liquor stores of a new type created by the Eurocash Group, opens up for a franchise.

— The task of the Eurocash Group, as an independent trading partner in Poland, is to create additional opportunities for the owners of small and medium-sized retail stores to develop and compete with discounters. That's why we invest in innovative retail formats like Big Ben. We tested this concept and checked the best solutions. Independent research indicates that sales in Big Ben establishments are on average almost 50% higher than in other liquor stores, and in terms of wine or whiskey even several times higher. We are ready to put our concept in the hands of franchisees — said Luis Amaral, President of the Eurocash Group.

The first Big Ben was opened in May 2016 at Hetmańska Street in Poznań. Currently, the chain has 12 own stores in Wielkopolska. Thanks to the franchise, establishments with a characteristic logo will appear in cities throughout Poland. The offer of cooperation is addressed to entrepreneurs running both alcohol and convenience stores with a license for the sale of alcohol. Anyone considering specialization in this category, but also people who do not yet have their own premises, will be able to join the Big Ben network.

What exactly can future franchisees count on? — As Big Ben, we provide store equipment, signboards and other elements of internal and external visualization, a cash register system, as well as the first stacking on preferential terms. Importantly, we also provide marketing support, including recurring promotions, loyalty program and modern business management and control tools. Our customers can also count on the operational support of the store manager. By joining the Big Ben network, the client gains the support and purchasing power of the Eurocash Group, which has 20 years of experience in developing franchise networks — pointed out Piotr Kupczyk, expansion manager of the Duży Ben network. — Our stores are modern and friendly establishments where women are also happy to shop. We asked our customers for their opinion — they indicated, among other things, that they felt safe in the store and its surroundings, they also paid attention to the large, glazed windows, good lighting and nice and competent advisors — concluded Piotr Kupczyk.

About Big Ben

Big Ben is a format of a modern liquor store created from scratch by the Eurocash Group, combining a wide range of products at attractive prices and professional advice. The stores are built on the principle of one-stop-shop. This means that in Big Ben you can shop for different occasions — from an evening beer after work, to a meeting with friends, to a birthday or even a wedding, and all ingredients such as alcohol, drinks, snacks and accessories are available in one place. The concept is also distinguished by innovative solutions such as Winomat, a special wine vending machine that allows you to taste the wine before buying, or the beer tap allowing you to buy beer “straight from the barrel” poured into the bottle. Such solutions have so far been available only in catering formats. Big Ben stores are transparent, safe and open to the consumer — an important convenience is self-service: the customer has direct access to the products offered. In addition to well-known and popular brands of spirits, the store's offer also includes, among others, a wide selection of craft beers and wines from the most popular regions, as well as all the ingredients needed to prepare drinks, snacks or glasses for any type of alcohol.

In addition to the Big Ben concept, the Eurocash Group is also investing in the development of such retail formats as abc on wheels or Kontigo, which eventually, after the tests are completed, will also be developed in a franchise model. The Group also offers its customers ready-made innovative solutions, such as Faktoria Win, Piwne Terytoria and Whisky On The Rocks, allowing them to develop sales in key product categories for independent entrepreneurs in Poland.

***

More information about the Big Ben franchise offer can be found on the website http://www.duzyben.pl/franczyza

Eurocash Group is the largest Polish company engaged in wholesale distribution of food products and marketing support for independent Polish entrepreneurs conducting retail activities. Franchise and partner networks supported by Eurocash bring together more than 14 thousand independent stores operating under brands such as abc, Groszek, Delikatesy Centrum, Lewiatan, Euro Sklep and Gama.

Piwne Terytoria — Poland's first comprehensive solution for the sale of craft beers in independent grocery stores — is already present in 500 locations. By the end of the year, their number will increase by about 200 more establishments.

Piwne Terytoria is a project developed by the Eurocash Group that has revolutionized the sale of craft beers in independent grocery stores. The first Beer Territories were opened in January this year, and in mid-November they officially opened in the 500th Polish store — Delikatesach Centrum at Bursaki 29a Street in Krosno.

— At the end of June, we completed the tests of the project, which covered the area of the Mazowieckie voivodship. Since July we have been offering this concept to customers from all over Poland. Today, Piwne Terytoria can be found in every province (mostly in Mazovia, Silesia and Podkarpackie), both in franchise and partner networks of the Eurocash Group, as well as in non-affiliated stores. We estimate that we will close 2017 with about 700 locations — said Magdalena Chwieduk from Eurocash, project manager.

Craft beers are the fastest growing segment of the beer market in Poland. However, their sale in grocery stores encountered difficulties due, among others, to a large number of small suppliers and a multitude of beer styles, which is why craft beers were mainly offered in specialty or large-scale stores. Eurocash was the first in Poland to offer a solution introducing this category to independent trading. — We permanently cooperate with 11 Polish craft breweries. We believe in long-term cooperation and joint development of the craft beer category. Thanks to the Beer Territories, some breweries have gained the opportunity to present their beers to consumers nationwide for the first time — pointed out Magdalena Chwieduk.

Beers from the Beer Territories range can be purchased not only in stationary stores. Eurocash is also working on the development of the offer of regional and craft beers available to customers of the online store Frisco.pl.

Piwne Terytoria is another Eurocash project of this type after the Wine Factory, which supports grocery stores in competition with discount and large area stores. In 4 years, Faktoria Wine has revolutionized the sale of table wines in small and medium-sized stores, significantly contributing to a significant increase in sales of this category in small format stores.

Eurocash Group is the largest Polish company engaged in wholesale distribution of food products and marketing support for independent Polish entrepreneurs conducting retail activities. Franchise and partner networks supported by Eurocash bring together more than 14 thousand independent stores operating under brands such as abc, Groszek, Delikatesy Centrum, Lewiatan, Euro Sklep and Gama.

The Office for Competition and Consumer Protection has referred the procedure for the takeover of the supermarket chain Mila to the second phase.

The provision of UOKiK is in line with the forecasts of the Eurocash Group and is standard in similar cases. The decision involves, among other things, conducting analyses of local FMCG retail markets in a dozen towns, where both Mila stores and stores affiliated with the Eurocash Group (Delicatesy Centrum or/and Eko) operate. Referring the procedure to the second phase gives the UOKIK additional time to carry out the market research necessary to make a decision.

The agreement related to the acquisition by the Eurocash Group of 100% of the shares in the controlling companies of Mila S.A. — the owner of a chain of 188 supermarkets located mainly in central Poland — was concluded in mid-September this year.

The transaction is part of the Eurocash Group's strategy to build a nationwide supermarket chain based both on cooperation with partners operating franchise stores and on running its own outlets supporting the development of the network in new regions of the country. The strategic goal of the Eurocash Group remains to improve the competitiveness of Polish independent retail stores, which are the Group's main customers.

Eurocash Group is the largest Polish company engaged in wholesale distribution of food products and marketing support for independent Polish entrepreneurs conducting retail activities. Franchise and partner networks supported by Eurocash bring together more than 14 thousand independent stores operating under brands such as abc, Groszek, Delikatesy Centrum, Lewiatan, Euro Sklep and Gama.

• In the third quarter of 2017, consolidated sales of the Eurocash Group amounted to almost PLN 6.2 billion, which represents an increase of more than 7% compared to the same period of 2016. Increasingly for the three quarters of this year, consolidated revenues amounted to almost PLN 17.5 billion and were 10% higher than a year ago. This increase was mainly due to the consolidation of the results of the companies acquired at the end of 2016 and 2017 and the development of new projects of strategic importance.
• EBITDA of the Eurocash Group, i.e. operating profit plus depreciation, amounted to more than PLN 101 million in the third quarter of 2017 compared to PLN 123 million a year earlier. Increasingly, for the three quarters of 2017, normalized EBITDA (i.e. without taking into account the one-off charge for potential VAT liabilities included in the results for the first half of 2017) amounted to PLN 259 million and was 8% lower than the previous year. The lower EBITDA level is mainly due to a decrease in profitability in the Cash & Carry format and in the segment of distribution of cigarettes and impulse products, as well as further investments in the development of innovative retail formats and in the fresh product distribution project.
• The net profit of the Eurocash Group in the third quarter of this year amounted to PLN 37.5 million compared to PLN 61.7 million in the same period of 2016. Increasingly, after nine months of this year, the normalized net profit amounted to PLN 75 million compared to nearly PLN 117 million a year ago. The negative impact on net profit was higher financial costs, resulting from the increase in debt.
• The third quarter of this year was another in a row in which the Eurocash Group recorded strong positive cash flows from operating activities. They amounted to PLN 215 million (excluding one-off events), which corresponds to more than twice the EBITDA during this period.

Overview of Eurocash Group's results

The Eurocash Group's results in the third quarter of this year were influenced by three main factors. First, sales are growing thanks to acquisitions and investments in new projects. On the other hand, these investments put a temporary burden on the Group's results. An additional negative impact on the results of the third quarter was the lower profitability recorded in the Cash & Carry format and in the segment of distribution of cigarettes and impulse products.

Investments in the retail segment have made Retail the most dynamically growing segment of the Eurocash Group's business. Sales of this segment in the three quarters of 2017 exceeded PLN 1.6 billion, and in the third quarter alone amounted to PLN 561 million. This is more than twice as much as in the same period last year.

EBITDA of the Retail segment for the first nine months of this year reached PLN 28 million compared to PLN 21 million a year earlier, and in the third quarter alone amounted to nearly PLN 8 million and was at a comparable level y/y.

— The main driver of the dynamic growth of sales in the retail segment is the acquisitions made at the turn of 2016 and 2017, and in particular the acquisition of nearly 250 EKO supermarkets. We continue the integration of these establishments with Delikatesami Centrum, in order to eventually create a nationwide supermarket chain, with a strong brand, including franchise outlets and our own. The development of our own retail is of strategic importance for the future of the Eurocash Group and our customers. They will be the beneficiaries of the solutions that we will develop in our own stores, both in the context of efficient logistics, marketing, and the appropriate scale, which will allow us to obtain competitive purchasing conditions and, as a result, will allow us to jointly face discounts — said Jacek Owczarek, Member of the Management Board and Chief Financial Officer of the Eurocash Group.

During the first three quarters of this year, 28 EKO stores underwent rebranding as Delikatesy Centrum, and a further 9 outlets changed their signage in October 2017.

At the end of the third quarter of this year, the number of Eurocash Group's own retail stores included 452 outlets in the Inmedio chain, 118 in the Delikatesy Centrum chain and 227 in the EKO chain (including 37, which have already changed the sign to Delikatesy Centrum).

The Group also recorded an increase in sales thanks to the development of new retail formats (such as Big Ben, 1minute, abc on wheels and Kontigo) and the development of the distribution of fresh products. During the three quarters of this year, sales of the Projects segment exceeded PLN 395 million compared to less than PLN 170 million a year earlier. EBITDA of this segment for the first three quarters of 2017 amounted to PLN -39 million (compared to PLN -26 million in the same period last year), and in the third quarter alone, this segment charged the EBITDA of the Eurocash Group with an amount of nearly PLN 13 million compared to PLN 10 million a year ago.

— High-quality fresh products will be one of the competitive advantages of Delicatessen Centrum, which will allow them to compete effectively for the customer with discounts. We need to help them gain that advantage. In order to ensure the right quality and freshness of the products, the right scale is needed. Similarly, we look at other projects we are developing. By creating additional opportunities for our customers — owners of independent stores in Poland — to develop and compete with discounters, we invest in their development and thus in the future of the Eurocash Group. In the short term, these investments obviously mean significant expenses, which weighs on our EBITDA result. However, we are convinced that in the long term they will bring tangible, positive benefits — said Jacek Owczarek.

The lower EBITDA of the Group in the third quarter of this year was also influenced by the deterioration of profitability in the Independent Wholesale segment, especially in the Cash & Carry format and the distribution of cigarettes and impulse products. EBITDA of this segment for the first three quarters of this year amounted to PLN 121 million compared to PLN 156 million in the same period of 2016. In the third quarter alone, it reached PLN 51 million compared to PLN 73 million a year earlier.

— The worse result in the Hurt Independent segment is due, among others, to the weaker than expected summer season, which had a negative impact on the sales of drinks and beer. As announced, we continued the restructuring of the Cash&Carry network in the third quarter. This had a positive impact on like-for-like sales, which were slightly positive for the second quarter in a row, but in the short term it had an impact on the profitability of this format, which was also under pressure from labor costs. Eurocash Serwis also recorded worse results this year due to lower sales and margin on impulse products and additional costs related to the reorganization of logistics — explained the CFO of the Eurocash Group.

At the end of the third quarter of this year, the Cash&Carry network included 185 locations. The number of stores of the partner chain “abc”, which are the main customers of the Cash&Carry wholesale, amounted to 8,659 outlets at the end of September this year, 54 more than at the end of 2016.

The number of franchise stores belonging to the Delikatesy Centrum chain at the end of September this year amounted to 1,099 outlets, which is 13 more than at the end of 2016, while partner networks operated by Eurocash Dystrybucja (Groszek, Euro Sklep, Lewiatan, PSD) at the end of the third quarter numbered 4,830 stores, which means an increase from the beginning of this year by 80 outlets.

Eurocash Group is the largest Polish company engaged in wholesale distribution of food products and marketing support for independent Polish entrepreneurs conducting retail activities. Franchise and partner networks supported by Eurocash bring together more than 14 thousand independent stores operating under brands such as abc, Groszek, Delikatesy Centrum, Lewiatan, Euro Sklep and Gama.

A chain of 188 supermarkets will acquire a strong industry investor

• The Eurocash Group will acquire 100% of the shares in the controlling companies of Mila S.A. — the owner of a chain of 188 supermarkets located mainly in central Poland.
• In this way, Mila will acquire a strong strategic partner developing its retail business.
• The purchase transaction of Mila is part of the strategy of building a nationwide supermarket chain based both on cooperation with partners running franchise stores and on running their own outlets supporting the development of the chain in new regions of the country.
• The strategic goal of the Eurocash Group is to improve the competitiveness of Polish independent retail stores, which are the Group's main customers.
• The acquisition of the Mila network depends, among others, on the positive decision of UOKiK.
• The value of the transaction was set at PLN 350 million.

After the successful completion of the transaction, the national leader in the wholesale distribution of food products will be the owner of a chain of 188 supermarkets under the Mila brand, located mainly in central Poland. The Mila chain covers most of the voivodships, with the largest number of stores in Kujawsko-Pomorskie, Mazowiecki, Łódź, Lubuskie, Wielkopolskie, Świętokrzyskie and Silesia. The total sales realized by this network in 2016 amounted to nearly PLN 1.5 billion.

Thanks to Eurocash's investment, the Mila network will acquire a strong strategic partner with the know-how and resources necessary to further develop the network and increase its efficiency in the field of logistics.

The Mila purchase transaction, like the acquisition of the EKO supermarket chain completed in January 2017, is part of the strategy of building a nationwide supermarket chain, based both on cooperation with partners running franchise stores and on running their own outlets supporting the development of the chain in new regions of the country.

— Our mission is always to improve the competitiveness of Polish independent retail stores. In view of the continuous expansion of discount stores, in order to ensure the competitiveness of our customers, we must work on increasing the scale of the Group's activities and on improving our efficiency. The Mila chain has a very high competence in the field of running supermarkets with a wide range of fresh products. With this acquisition, we are taking another step on the road to building a nationwide supermarket chain that includes both franchised outlets and those run by Eurocash, especially in those regions of the country where the franchise network is not yet sufficiently developed — said Jacek Owczarek, member of the board of Eurocash.

— The professional approach of the owners and the management of Mila made it possible to carry out the transaction process smoothly. We are comfortable that Mila will be very well managed until the closing of the transaction and later within the Eurocash group — added Jacek Owczarek.

The acquisition of the Mila network will strengthen Eurocash Group's logistics capabilities, particularly in the distribution of fresh products to franchisees operating stores in central Poland. This transaction will also allow the Group to develop its competence in the field of retail operations and address the expectations of final consumers.

To finalize the transaction, the consent of the President of the Office for Competition and Consumer Protection is required. The value of the transaction was set at PLN 350 million, but this value does not include selected properties that will not be acquired by Eurocash.

The transaction advisor to the owners of Mila was PwC, while the legal advisors were Weil, CMS and Gessel. The financial advisor to Eurocash was Trigon, while the legal advisor was Deloitte Legal.

Eurocash Group is the largest Polish company engaged in wholesale distribution of food products and marketing support for independent Polish entrepreneurs conducting retail activities. Franchise and partner networks supported by Eurocash bring together more than 14 thousand independent stores operating under brands such as abc, Groszek, Delikatesy Centrum, Lewiatan, Euro Sklep and Gama.

Double-digit sales growth and higher gross profitability thanks to acquisitions in the retail segment. Eurocash was harmed by third parties involved in the VAT fraud scheme and as a result the financial results were charged with a one-off reserve for potential VAT liabilities.

• In the second quarter of 2017, consolidated sales of the Eurocash Group reached almost PLN 6.1 billion and were 14% higher than in the same period of 2016. In the entire first half of this year, consolidated revenues amounted to almost PLN 11.3 billion, which means an increase of almost 12% y/y. The main driver of sales growth were acquisitions of companies, as well as organic expansion and development of new projects.
• Consolidated gross profitability on sales in the second quarter of this year exceeded 11% and was 0.55 p.p. higher than in the same period of 2016. This translated into an increase in gross profit on sales by 20% to PLN 670 million. Increasingly, for the first two quarters of 2017 the gross margin reached 10.8% (an increase of 0.7 p.p.), and the gross profit on sales exceeded PLN 1.2 billion (+19% y/y).
• The reported financial results take into account the one-off charges resulting from Eurocash's internal audit. It showed that the Company was exploited by external entities participating in the VAT evasion mechanism. The negative impact of this event on Eurocash's net profit in 2017 is approximately PLN 114 million, i.e. PLN 0.82 per share. The negative impact on Eurocash's consolidated net debt will amount to almost PLN 96 million. This situation will not affect Eurocash's dividend policy.
• Normalized EBITDA, i.e. without taking into account the above one-off events, amounted to more than PLN 120 million in the second quarter of this year, which means an increase of 9% compared to the same period in 2016. Normalized EBITDA for the first half of 2017 was at a comparable level with last year and reached PLN 158 million. The EBITDA level in the period under review was influenced by the investments of the Eurocash Group in the development of the distribution of fresh products to Delicatesów Centrum and the development of new retail formats, such as Duży Ben, Kontigo, 1minute, and abc on wheels.
• The normalized net profit of the Eurocash Group in the second quarter of 2017 amounted to almost PLN 53 million and was at the same level as in the second quarter of 2016, and in the entire first half of this year it amounted to almost PLN 38 million compared to PLN 55 million a year ago.
• In the second quarter, the Eurocash Group recorded more than PLN 260 million of net cash flows from operating activities, which — despite the payment of more than PLN 100 million in dividends — allowed to reduce the net debt ratio to 1.1x normalized EBITDA at the end of June this year from 1.36x EBITDA a quarter earlier.

Comment on a potential liability for VAT settlements — Eurocash harmed by third parties participating in the VAT fraud mechanism

In August of this year, Eurocash completed an extensive and detailed study on VAT settlements in 2013-2017. The analysis carried out by the Management Board indicates that the Company was used in the mechanism of VAT fraud by a group of external entities in transactions concerning the intra-Community supply of goods. As a result, Eurocash may be obliged to refund VAT to the State Treasury. According to the estimates of the Management Board, the amount of the refund may amount to close to PLN 121.5 million.

— Eurocash has been scammed by a group of VAT fraud criminals. After the first signs of such a possibility, we conducted an internal audit to determine the facts. Our internal investigation confirmed that we were duped. The evidence is extensive. We handed it over to the Regional Prosecutor's Office in Poznań together with a notice of the possibility of committing a crime. We hope he will help with the investigation. At the same time, we have paid security for a possible tax liability to the tax office, and in the future we will seek redress of our damage from the perpetrators. In the interest of the investigation, the Company will refrain from further comment on this matter — said Jacek Owczarek, Member of the Management Board and Chief Financial Officer of the Eurocash Group.

In the opinion of the Eurocash Management Board, the payment of a potential VAT liability will not affect the ability of the Eurocash Group to conduct normal business, nor its dividend policy. However, it may have a significant negative impact on the Company's results, which has already been included in the report for the second quarter of this year. The negative impact on Eurocash's net profit in 2017 amounts to approximately PLN 114 million (PLN 0.82 per share). The negative impact on Eurocash's consolidated net debt will amount to less than PLN 96 million. This is the amount that Eurocash paid to the tax office and corresponds to the value of the potential VAT liability (PLN 121.5 million), less the overpaid CIT.

— We have a very good liquidity situation and a safe level of debt. At the end of June this year, the net debt ratio stood at 1.1x normalized EBITDA. The amount we paid to the tax office will be reflected in the cash flow account for the third quarter. If we included this payment already at the end of Q2, the net debt-to-reported EBITDA ratio would increase to 1.8x. It would be at a safe level — pointed out Jacek Owczarek.

Overview of Eurocash Group's results

— In the second quarter of this year, as in the entire first half of the year, sales of the Eurocash Group increased at a double-digit rate, which is mainly due to the acquisitions completed at the end of 2016 and the beginning of 2017, and in particular the acquisition of the chain of nearly 250 EKO supermarkets in south-western Poland. According to the announcements, we have started to integrate the acquired establishments into the Delicatesy Centrum network. In the first half of the year, 11 EKO stores changed their sign to Delikatesy Centrum. The development of our own retail segment is an important element of our strategy, because thanks to this we are able to build a scale that will ensure competitiveness not only for the Delicatesów Centrum franchisees, but all the Group's customers — said Jacek Owczarek, Member of the Management Board and Chief Financial Officer of the Eurocash Group.

The number of its own retail stores controlled by the Eurocash Group at the end of the first half of this year included 452 establishments in the Inmedio chain, 116 in the Delikatesy Centrum chain and 244 in the EKO chain (including 11, which are already operating under the Delikatesy Centrum brand). Total sales of the retail segment for the first six months of 2017 exceeded PLN 1.1 billion compared to almost PLN 470 million in the same period of 2016. EBITDA of this segment in the first half of this year amounted to more than PLN 20 million compared to PLN 13 million a year ago.

In addition to the surge in revenues in the retail segment, where the growth was driven by acquisitions, growth in the Eurocash Group's total sales also contributed to the growth in the wholesale channels.

In the first half of this year, sales of the Independent Wholesale segment (which mainly includes sales made through the network of Cash&Carry, Eurocash Alcohols and Eurocash Serwis wholesalers) increased by nearly 6% year-on-year and reached PLN 6.2 billion. EBITDA of the segment amounted to nearly PLN 71 million compared to PLN 83 million a year ago. The decrease in EBITDA was due to the weaker performance of Eurocash, a service specialized in the distribution of cigarettes and impulse products. On the other hand, the restructuring of the Eurocash Cash&Carry network, which started this year, brings results in line with expectations. The results of this format have stabilized. After the closure of three facilities in the first half of the year, their number at the end of June was 187.

The number of stores of the partner chain “abc”, which are the main customers of Eurocash Cash & Carry, increased by more than 50 outlets in the first half of this year and at the end of June there were 8,659 locations.

In the first half of this year, sales of goods of the Integrated Wholesale segment (including, in particular, the sale of goods carried out by Delikatesy Centrum and Eurocash Dystrybucja to customers operating within franchise and partner networks) amounted to nearly PLN 3.1 billion and were at a comparable level with the same period in 2016. The impact on the flat year-on-year sales dynamics in this segment was influenced by a change in the presentation of the results of franchised companies customers of the Delicatesy Centrum chain acquired by Eurocash (FHC-2, Madas, Firma Rogala). Their sales are currently presented in the retail segment. EBITDA of the Integrated Wholesale segment for the first half of this year amounted to more than PLN 125 million, which is almost 25% more than a year earlier.

Wholesale sales for a fixed number of like-for-like stores belonging to the Delikatesy Centrum chain in the first half of 2017 increased by nearly 11% year-on-year, and in the second quarter alone by more than 13%. The number of stores belonging to the Delikatesy Centrum chain at the end of June in the first half of this year increased by 16 and at the end of June amounted to 1,102 establishments.

The number of partner stores operated by Eurocash Dystrybucja (Groszek, Euro Sklep, Lewiatan, PSD) at the end of the first half of this year amounted to 4,789 outlets, 39 more than at the end of 2016.

The Projects segment also has a significant impact on the financial results presented by the Eurocash Group. It includes the sale of innovative retail projects and formats developed by Eurocash, such as Big Ben, 1 minute, abc on wheels and Kontigo, as well as the distribution of fresh, high-quality products to the Delicatessen Centrum franchise stores, making the range of vegetables, fruits and meat and sausages offered by these establishments even more attractive to consumers.

In the first half of this year, sales of the Projects segment amounted to PLN 247 million compared to PLN 102 million a year earlier, and EBITDA was negative and amounted to PLN -26 million (compared to PLN -15 million in the first half of 2016) . — The results of these projects have a negative impact on the profitability of the Eurocash Group, which is natural at the current stage of their development. However, these are necessary investments to ensure the development of our customers and the Eurocash Group in the next 5-10 years. These projects create additional opportunities for our customers — owners of independent stores in Poland — to develop and compete with discounts — emphasized Jacek Owczarek.

Eurocash Group is the largest Polish company engaged in wholesale distribution of food products and marketing support for independent Polish entrepreneurs conducting retail activities. Franchise and partner networks supported by Eurocash bring together more than 14 thousand independent stores operating under brands such as abc, Groszek, Delikatesy Centrum, Lewiatan, Euro Sklep and Gama.

The abc Stores Chain — developed by the Eurocash Group, the largest Polish network of small and medium-sized independent grocery stores — will celebrate the opening of an 8,000 store next Saturday. It will also be the first store in the new “city” format, perfectly suited to the centers of large cities.

8000. abc store is located in the heart of Warsaw's old town, at 2 Senatorska Street, on the ground floor of a modern office and service building Plac Zamkowy — Business with Heritage.

— It will be a store different from the existing establishments operating under the banner “abc po edzku”. In order to meet the expectations of consumers and our franchisees, we are testing a completely new concept “city”, perfectly fitting into the centers of large cities, suitable, among others, for such prestigious locations as Warsaw's old town. It will be a combination of modern design and convenience concept. In terms of equipment and arrangement, it will be a more premium store, but still “next door”. Its distinguishing feature will be a unique bistro with a rich gastronomic offer, addressed to both residents and tourists — said Łukasz Chady, director of the abc chain of stores.

The bistro offer will include crepesandwich pancakes, croissants or panini with several types of filling (including chicken and pesto, beetroot and camembert, bryndza and grilled vegetables) and healthy salads (e.g. with mango and chicken masala, mozzarella with tomatoes or feta with olives), as well as sweet snacks, including French pastries and Italian desserts.

The new store at Senatorska Street in Warsaw will operate under the name “abc on the way”. The premises was equipped with a sign consistent with the markings of other tenants, corresponding to the prestigious neighborhood, made of aluminum in the color of old gold and illuminated by LED light. Inside, the store was arranged in the style of Warsaw retro, with clear elements of naturalness (the combination of stone and wood) and individualism and locality (breaking with the typical network). The renowned ARS Retail group was involved in the design and arrangement of the interior of the premises and the development of the menu.

1000 new stores in 1.5 years

The addition of the 8000th store to the abc Chain of Stores took place almost 1.5 years since the moment when the Eurocash Group celebrated the opening of the 7000th store under this logo. Thus, it is not only the largest, but also one of the fastest growing grocery store chains in Poland, while the total number of small-format stores in Poland is steadily decreasing. According to Bisnode Polska data, recently published by the daily Rzeczpospolita, in the first half of 2016 the total number of convenience stores shrank by 1.7 thousand to 71.3 thousand outlets.

The continued rapid pace of development of the abc Chain of Stores confirms the effectiveness of the activities of the Eurocash Group, which has been supporting the development of Polish independent trade for more than a dozen years. — The dynamic development of the franchise network organized by us is pleasing, but we know that we cannot fall asleep pears in ashes, because the competition from discounters is not weakening — on the contrary, discount chains are systematically expanding. market shares. That is why we are constantly investing in new formats and solutions and testing new concepts, such as the opening abc store in the “city” format, offering our customers new opportunities to develop and compete with discounts — said Jacek Owczarek, Member of the Management Board of the Eurocash Group.

Opening ceremony next Saturday

The “abc on the way” store at Senatorska Street in Warsaw will be inaugurated next Saturday, August 27 this year. Customers who visit the store between 10:00 and 18:00, will be waiting for various attractions, including cake, drinks, cake, salty snacks, as well as competitions for children and adults, with unique prizes.

Eurocash Group is the largest Polish company engaged in wholesale distribution of food products and marketing support for independent Polish entrepreneurs conducting retail activities. Franchise and partner networks supported by Eurocash bring together more than 14 thousand independent stores operating under brands such as abc, Groszek, Delikatesy Centrum, Lewiatan, Euro Sklep and Gama.