02Consolidated
directors´ report

(Free translation from the original version in Spanish. In the event of discrepancy, the original Spanish-language version prevails.)

In 2012 gross sales under banner reached EUR11.7bn, up 5.6% (6.7% at constant currency) while gross profit grew by 3.1% with a 19bps decline in the gross margin. As for Opex, the excellent work and the increase in the share of franchises are reflected in the 1.1% growth rate, three percentage points less than net sales growth.

Adjusted EBITDA in 2012 increased by 8.6% to EUR609.5m (9.4% ex-currency), which implied a 25bps improvement in the adjusted EBITDA margin to 6.0%. The impact on adjusted EBITDA of the discontinuation of Beijing activities in 2012 was EUR5.1m (vs EUR2.7m in 2011). Adjusted EBIT rose by 13.3% to EUR330.5m, reflecting a 27bps expansion in the adjusted EBIT margin to 3.3%

Net attributable profit went up 60% to EUR157.9m in the full year 2012, while underlying net profit grew by 19.3% to EUR190.1m. The effective tax rate of 2012 declined from 46% to 40%. Excluding the negative tax basis of France, Turkey and China, the adjusted tax rate of 2012 would be 33.4%.

DIA GROUP: 2012 RESULTS

(EURm) 2011 (1) % 2012 % INC INC w/o FX
Gross sales under banner 11,062.3 11,678.9 5.6% 6.7%
Net sales 9,728.5 100.0% 10,124.3 100.0% 4.1% 5.2%
Cost of sales & other income (7,637.6) -78.5% (7,967.8) -78.7% 4.3% 5.6%
Gross profit 2,091.0 21.5% 2,156.5 21.3% 3.1% 3.9%
Labour costs (803.7) -8.3% (813.6) -8.0% 1.2% 2.0%
Other operating expenses (420.7) -4.3% (411.4) -4.1% -2.2% -0.9%
Real estate rents (305.4) -3.1% (322.0) -3.2% 5.4% -5.6%
OPEX (1,529.9) -15.7% (1,547.0) -15.3% 1.1% 1.9%
Adjusted EBITDA (2) 561.1 5.8% 609.5 6.0% 8.6% 9.4%
D&A (269.4) -2.8% (279.0) -2.8% 3.6% 4.1%
Adjusted EBIT (2) 291.7 3.0% 330.5 3.3% 13.3% 14.3%
Non-recurring items (74.9) -0.8% (42.9) -0.4% -42.7% -42.7%
EBIT 21.8 2.2% 287.6 2.8% 32.6% 34.0%
Net financial income/expenses (35.4) -0.4% (33.0) -0.3% -6.9% -6.4%
Associate companies 0.9 0.0% 1.1 0.0% 23.0% 34.2%
EBT 182.3 1.9% 255.7 2.5% 40.3% 41.8%
Income taxes (83.4) -0.9% (101.8) -1.0% 22.0% 22.6%
Consolidated profit 98.8 1.0% 153.8 1.5% 55.7% 58.0%
Discontinued operations (4.5) -0.0% (7.5) -0.1% 67.4% 50.9%
Minority interests 4.1 0.0% 11.5 0.1% 181.3% 177.9%
Net attributable profit 98.5 1.0% 157.9 1.6% 60.4% 63.4%
Underlying net profit 159.3 1.6% 190.1 1.9% 19.3%
(1) Pro-forma figures with Beijing activities discontinued. (2) Adjusted by non-recurring items

Non-recurring items fell sharply in 2012 to EUR42.9m. The Ed to DIA transformation process in France was completed last August, while the number of stores upgraded during 2012 to the new Market and Maxi II versions was not material. The costs related to the long term incentive programmes have been reclassified from labour costs to non-recurrent items to better reflect the underlying trend of operating costs. These incentives are exceptional and will be settled in shares which have been already acquired by the company.

NON-RECURRING ITEMS

(EURm) 2011 (1) % 2012 % INC
Restructuring costs (53.6) -0.6% (22.5) -0.2% -57.9%
Impairment & other (17.0) -0.2% (8.3) -0.1% -51.1%
Gains/losses on disposal of assets (4.3) -0.0% (12.1) -0.1% 180.8%
Total non-recurring items (74.9) -0.8% (42.9) -0.4% -42.7%
(1) Pro-forma figures with Beijing activities discontinued.
WORKING CAPITAL & NET DEBT

DIA’s negative working capital reached EUR1.05bn, which represents a minor decrease of EUR15m. The value of the stock rose by 1.0% in spite of the net addition of 244 stores and a 2.8% increase in store selling area, with a reduction in the number of inventory days from 24.4 to 23.7. The 1.2% decline in trade & other payables can be partly attributed to the advanced payments carried out in Argentina, the slowdown of sales growth in Turkey and the discontinuation of the Beijing activities.

WORKING CAPITAL

(EURm) 2011 2012 INC
Inventories 521.9 527.1 1.0%
Trade & other receivables 191.3 179.6 -6.1%
Trade & other payables 1,780.2 1,758.6 -1.2%
Trade working capital (1,067.0) (1,051.9) -1.4%

At the end of December 2012, net debt was EUR629.3m, up EUR53.5m versus the same period last year. The change in net debt was affected in 2012 by several exceptional issues such as the purchase of 1% of the treasury stock (EUR24.0m), the reclassification from operating to financial leases carried out in France (EUR24.0m) and other taxes/legal issues paid after the settlement of claims already provisioned (EUR73.0m). This amount of net debt implies a stable 1.0x net debt to adjusted EBITDA ratio.

NET DEBT

(EURm) 2011 (1) 2012 INC
Long-term debt 599.7 553.1 -7.8%
Short-term debt 266.1 426.6 60.3%
Total debt 865.8 979.7 13.2%
Cash & cash equivalents (289.9) (350.4) 20.9%
Net debt 575.9 629.3 9.3%
Net debt / Adjusted EBITDA LTM 1.0x 1.0x 0.6%

The adjustments to net attributable profit and to underlying profit are shown in the following table.

UNDERLYING NET PROFIT

(EURm) 2011 (1) 2012 INC
Net attributable profit 98.5 157.9 60.3%
Non-recurring items (2) 78.3 41.1 -47.5%
Equity-swap & other financials -9.4 -13.4 43.3%
Discontinued operations 4.5 7.5 66.7%
Taxes -12.6 -3.0 -76.2%
UNDERLYING NET PROFIT 159.3 190.1 19.3%

(1) Pro-forma figures with Beijing activities discontinued, (2) Adjusted by LTIP costs in 2011 and minority stakes.

As of 31 December 2012 the company held in treasury stock 20,178,722 shares acquired at an average price of EUR3.1107/share. Additionally, the company held indirectly through an equity swap 13,586,720 shares at price of EUR3.558/share.

TREASURY STOCK & EPS

2011 (1) 2012 INC
Number of shares outstanding 679,336,000 679,336,000 0.0%
Average number of treasury shares 4,531,060 17,042,103 276.1%
Year-end number of treasury shares 13,500,984 20,178,722 49.5%
WEIGHTED AVERAGE NUMBER OF SHARES 674,804,940 662,293,897 -1.9%
Reported EPS €0.146 €0.238 63.4%
Underlying EPS (2) €0.236 €0.287 21.6%

(1) Pro-forma figures with Beijing activities discontinued, (2) Underlying net profit / weighted average number of shares

The Board of Directors will propose to the AGM a dividend distribution of EUR0.13 per share, an amount that is 18.2% higher than the EUR0.11 dividend paid against 2011 profits. This dividend payment represents a pay-out ratio calculated on underlying net profit of 46.5%.

In addition to the dividend payment, the Board of Directors will propose to the AGM the cancellation of 28,265,442 shares representative of 4.16% of the capital. These shares represent an equivalent amount of EUR167m at current market prices (EUR5.9/share).

After the cancellation of the 4.16% shares of treasury stock DIA will continue to hold 5,500,000 shares (0.81% of the capital) as treasury stock to cover the potential distribution of shares related with the execution of the long term incentive plan approved by the AGM in 2012.

STORES & EXPANSION

At the end of 2012, DIA operated 6,914 stores (7,085 stores with Beijing), which represents a net addition of 244 stores in 2012 in comparable terms. The number of integrated (COCO) stores fell by 147 from 4,171 to 4,024. The total number of franchised stores already represents 41.8% of the total company’s network, 4.3 percentage points more than a year ago.

NUMBER OF STORES

2011 (1) % 2012 % CHANGE
DIA Urban 1,092 37.7% 610 22.2% -482
DIA Market 1,804 62.3% 2,134 77.8% 330
Proximity stores 2,896 434% 2,744 39.7% 152
DIA Parking 247 19.4% 44 3.4% -203
DIA Maxi 1,028 80.6% 1,236 96.6% 208
Attraction stores 1,275 19.1% 1,280 18.5% 5
Total COCO stores 4,171 62.5% 4,024 58.2% -147
FOFO 1,529 61.2% 1.619 56.0% 90
COFO 970 38.8% 1,271 44.0% 301
Total franchised stores 2,499 37.5% 2,890 41.8% 391
TOTAL NUMBER OF STORES 6,670 100.0% 6,914 100.0% 244

(1) Pro-forma figures with Beijing activities discontinued.

In 2012, total capex reached EUR331.7m, of which EUR95.6m was devoted to the expansion of the network, 11% more than in 2011. Capex in France was down 34% in 2012, while in Brazil it grew by 34% in the same period. In this regard, in 2012 Iberia and the Latam countries represented two-thirds of the company’s total investment.

CAPEX

BY SEGMENT (EURm) 2011 2012 INC
Iberia 120.2 133.3 10.8%
Emerging markets 90.8 106.2 17.0%
France 138.9 92.2 -33.6%
TOTAL 349.9 331.7 -5.2%
BY CONCEPT (EURm) 2011 2012 INC
Openings 86.1 95.6 11.1%
Remodelling 154.8 92.0 -40.5%
On-going 109.0 144.1 32.1%
TOTAL 349.9 331.7 -5.2%
BUSINESS REVIEW BY GEOGRAPHIC SEGMENT

IBERIA

(EURm) 2011 2012 INC INC (w/o FX)
Gross sales under banner 5,600.0 5,868.9 4.8% 4.8%
LFL gross sales under banner 1.7%
Net sales 4,947.1 5,117.5 3.4% 3.4%
Adjusted EBITDA (1) 413.7 456.9 10.4% 10.4%
Adjusted EBITDA margin 8.4% 8.9% 56 pb
Adjusted EBIT (1) 256.2 300.0 17.1% 17.1%
Adjusted EBIT margin 5.2% 5.9% 68 pb

(1) Adjusted by non-recurring items

EMERGING MARKETS

(EURm) 2011 (1) 2012 INC INC (w/o FX)
Gross sales under banner 2,817.6 3,364.9 19.4% 24.0%
LFL gross sales under banner
Net sales 2,424.6 2,867.3 18.3% 22.8%
Adjusted EBITDA (2) 58.8 59.0 0.3% 7.7%
Adjusted EBITDA margin 2.4% 2.1% -37 pb
Adjusted EBIT (2) 24.3 16.9 -30.1% -17.7%
Adjusted EBIT margin 1.0% 0.6% -41 pb

(1) Pro-forma figures with Beijing activities discontinued (2) Adjusted by non-recurring items

FRANCE

(EURm) 2011 2012 INC INC (w/o FX)
Gross sales under banner 2,644.8 2,445.1 -7.5% -7.5%
LFL gross sales under banner 15.0%
Net sales 2,356.9 2,139.5 -9.2% -9.2%
Adjusted EBITDA (1) 88.5 93.6 5.7% 5.7%
Adjusted EBITDA margin 3.8% 4.4% 62 pb
Adjusted EBIT (1) 11.3 13.6 20.5% 20.5%
Adjusted EBIT margin 0.5% 0.6% 16 pb

(1) Adjusted by non-recurring items

NUMBER OF STORES BY OPERATIONAL MODEL

2011 (1) % 2012 % CHANGE
Iberia COCO 1,985 58.7% 1,948 55.7% -37
COFO 523 15.5% 652 18.6% 129
FOFO 872 25.8% 897 25.7% 25
IBERIA 3,380 100.0% 3,497 100.0% 117
E. Markets COCO 1,515 63.8% 1,443 57.1% -72
COFO 250 10.5% 396 15.7% 146
FOFO 609 25.7% 690 27.3% 81
EMERGENTES 2,374 100.0% 2,529 100.0% 155
France COCO 671 73.3% 633 71.3% -38
COFO 197 21.5% 223 25.1% 26
FOFO 48 5.2% 32 3.6% -16
FRANCIA 916 100.0% 888 100.0% -28
DIA GROUP COCO 4,171 62.5% 4,024 52.8% -147
COFO 970 14.5% 1,271 18.4% 301
FOFO 1,529 22.9% 1,619 23.4% 90
TOTAL DIA 6,670 100.0% 6,914 100.0% 244

(1) Pro-forma figures with Beijing activities discontinued.

STORES BY COUNTRY

(Mln sqm) 2011 (1) 2012 INC
COCO COFO+FOFO TOTAL COCO COFO+FOFO TOTAL
Spain 1,640 1,187 2,827 1,615 1,310 2,925 98
Portugal 345 208 553 333 239 572 19
IBERIA 1,985 1,395 3,380 1,948 1,549 3,497 117
Argentina 376 119 495 403 156 559 64
Brazil 249 231 480 249 312 561 81
Turkey 703 412 1,115 614 479 1,093 -22
China 187 97 284 177 139 316 32
EMERGING MARKETS 1,515 859 2,374 1,443 1,086 2,529 155
FRANCE 671 245 916 633 255 888 -28
TOTAL DIA 4,171 2,499 6,670 4,024 2,890 6,914 244

(1) Valores pro-forma con actividades de Beijing interrumpidas, (2) Ajustado por elementos no recurrentes.

During 2012, DIA added 98 stores in Spain, of which 18 under the new DIA Fresh banner. In emerging markets, DIA accelerated openings in Brazil and Argentina. Excluding Turkey, the net number of openings in 2012 was 266, fully consistent with the 225-275 updated target of net stores guided for the year at the last Investor Day.

STORE SELLING AREA

(Mln sqm) 2011 (1) % 2012 % INC
Spain 1.2150 44.3% 1.2429 44.1% 2.3%
Portugal 0.2113 7.7% 0.2172 7.7% 2.8%
IBERIA 1.4264 52.0% 1.4601 51.8% 2.4%
Argentina 0.1479 5.4% 0.1649 5.8% 11.5%
Brazil 0.2088 7.6% 0.2573 9.1% 23.2%
Turkey 0.2284 8.3% 0.2230 7.9% -2.4%
China 0.0667 2.4% 0.0713 2.5% 7.0%
EMERGING MARKETS 0.6518 23.8% 0.7165 25.4% 9.9%
FRANCE 0.6643 24.2% 0.6418 22.8% -3.4%
TOTAL DIA 2.7424 100.0% 2.8184 100.0% 2.8%

(1) Pro-forma figures with Beijing activities discontinued

SALES BY COUNTRY

GROSS SALES UNDER BANNER

(EURm) 2011 (1) % 2012 % INC INC (w/o FX)
Spain 4,665.8 42.2% 4,919.6 42.1% 5.4% 5.4%
Portugal 934.2 8.4% 949.2 8.1% 1.6% 1.6%
IBERIA 5,600.0 50.6% 5,868.9 50.3% 4.8% 4.8%
Argentina 868.0 7.8% 1,189.0 10.2% 37.0% 39.8%
Brazil 1,341.6 12.1% 1,529.2 13.1% 14.0% 23.1%
Turkey 461.9 4.2% 468.9 4.0% 1.5% 1.2%
China 146.0 1.3% 177.7 1.5% 21.7% 9.6%
EMERGING COUNTRIES 2,817.6 25.5% 3,364.9 28.8% 19.4% 24.0%
FRANCE 2,644.8 23.9% 2,445.1 20.9% -7.5% -7.5%
TOTAL DIA 11,062.3 100.0% 11,678.9 100.0% 5.6% 6.7%

(1) Pro-forma figures with Beijing activities discontinued

NET SALES

(EURm) 2011 (1) % 2012 % INC INC (w/o FX)
Spain 4,140.6 42.6% 4,317.3 42.6% 4.3% 4.3%
Portugal 806.4 8.3% 800.2 7.9% -0.8% -0.8%
IBERIA 4,947.1 50.9% 5,117.5 50.5% 3.4% 3.4%
Argentina 695.5 7.1% 951.6 9.4% 36.8% 39.5%
Brazil 1,194.4 12.3% 1,350.6 13.3% 13.1% 22.2%
Turkey 412.1 4.2% 416.8 4.1% 1.1% 0.3%
China 122.6 1.3% 148.3 1.5% 20.9% 9.0%
EMERGING COUNTRIES 2,424.6 24.9% 2,867.3 28.3% 18.3% 22.8%
FRANCE 2,356.9 24.2% 2,139.5 21.1% -9.2% -9.2%
TOTAL DIA 9,728.5 100.0% 10,124.3 100.0% 4.1% 5.2%

(1) Pro-forma figures with Beijing activities discontinued

GLOSSARY

Gross sales under banner: total turnover value obtained in stores, including indirect taxes (sales receipt value) and in all the company’s stores, both owned and franchised.

Net sales: sum of the revenues generated in our integrated stores and the sales to franchises.

LFL sales growth under banner: growth rate of gross sales under banner of all DIA stores which have been operating for more than a year.

Adjusted EBITDA: operating profit after adding back restructuring costs, impairment, re-estimation of useful life and gains/losses arisen on disposal of assets and depreciation and amortization of fixed assets.

Adjusted EBIT: operating profit after adding back restructuring costs, impairment and re-estimation of useful life and gains/losses arisen on disposal of assets.

Underlying net profit: net income calculated on net profit attributable to parent company, excluding non-recurring items (restructuring costs, impairment and re-estimation of useful life, gain/losses on disposal of assets, tax litigations, exceptional financial expenses and equity derivatives), discontinued operations and the corresponding tax impact.

OTHER INFORMATION

Non-current assets held for sale and associated liabilities

As the Group is actively seeking to sell its investment in Beijing DIA Commercial Co., LTD., this asset qualifies for classification as an available-for-sale non-current asset at 31 December 2012 and has therefore been measured at fair value less costs to sell and transferred to current assets.

Risks and uncertainties

Risk management is controlled by the Group’s finance department, which identifies, evaluates and mitigates financial risks in close collaboration with the Group’s operational units. The Group’s risks and uncertainties are described in note 24 to the consolidated annual accounts.

Environmental issues

The DIA Group is committed to environmental issues and aims to minimise its activity’s impact on the environment, although it never loses sight of the economic cost of its actions. It strongly supports environmental protection as well as the development and management of a sustainable activity based on efficiency, ongoing improvements and finding new tools to control and reduce the impact caused by its business.

Research and development expenses

DIA’s R&D costs are minimal as a percentage of the total expenditure incurred in carrying out its statutory activities.

Parent own shares

On 27 July 2011, in accordance with article 146 and subsequent articles of the Spanish Companies Act, the board of directors of the Parent approved an own share buy-back programme, the terms of which are as follows:

  • The maximum number of own shares that can be acquired is equivalent to 2% of share capital.
  • The maximum duration of the programme will be 12 months, unless an amendment to the term is announced in accordance with article 4 of Commission Regulation (EC) No 2273/2003.
  • The purpose of the programme is to meet obligations derived from the remuneration plan for board members and from the terms of any share distribution or share option plans approved by the board of directors.
  • A financial intermediary will be appointed to manage the programme, in accordance with article 6.3 of Commission Regulation (EC) No 2273/2003.

By 13 October 2011 the Parent had acquired 13,586,720 own shares, reaching the maximum number foreseen in the buy-back programme.

On 14 November 2011 the Board of Directors agreed the realization of buy back own shares of DIA up to a maximum amount equivalent to 2% of the Company’s share capital (additional to those already held by the Company at the date of this agreement).

As authorised by the sole shareholder of the Parent in a decision taken on 9 May 2011 and in accordance with the Parent’s Internal Regulations of Conduct on Stock Markets and the Own Share Policy approved by the board of directors, on 7 June 2012 the board of directors of DIA agreed to buy back additional own shares up to a maximum amount equivalent to 1% of the Parent’s share capital. This scheme to buy back 6,793,360 shares ended on 2 July 2012.

Other transactions during 2012 include the transfer of 115,622 shares to the Parent’s directors and senior management personnel as remuneration, with a charge of Euros 148 thousand to voluntary reserves. In 2011 85,736 shares were transferred to the Group’s directors as remuneration, with a charge of Euros 22 thousand to voluntary reserves.

As a result, at the 2012 year end the Parent holds 20,178,722 own shares with an average purchase price of Euros 3.1107 per share which represent a total amount of 62,769,075.43 Euros .

Events after the reporting date

With effect from 21 January 2013, the Parent has signed an extension to the contract for the acquisition of 13,586,720 own shares signed on 21 December 2011. In this extension, the parties have agreed to modify the settlement options, leaving only the share-based option. With this contract, the Parent has therefore taken on a firm commitment to acquire these own shares. The date for the purchase of 8,086,720 of these shares is six months from the extension signature date, and the remaining 5,500,000 shares must be acquired by the contract expiry date, 21 January 2014.

In an agreement signed between DIA and Schlecker International GmbH on 28 September 2012, DIA agreed to acquire 100% of the share capital of Schlecker, S.A. Unipersonal (“Schlecker Spain”) and, indirectly, 100% of the share capital of Schlecker Portugal, Sociedade Uniperssoal Lda. Once authorisation had been obtained from the Spanish and Portuguese competition authorities, the final sale and purchase contract was signed on 1 February 2013, which is, therefore, the date on which the Parent took control over the acquired businesses. DIA agreed a total price of Euros 69,287,307.46 for 100% of Schlecker Spain and Schlecker Portugal’s share capital and certain industrial property rights and other credit rights associated with these businesses. This price was calculated based on (a) an enterprise value of Euros 70,500,000 for Schlecker Spain, and (b) Schlecker Spain and Schlecker Portugal’s respective debt and cash balances. This price has still to be adjusted using the usual mechanisms for transactions of this nature. As the acquired companies have not prepared annual accounts for 2012, the fair values of the assets, liabilities and contingent liabilities acquired by the Group cannot be determined at the date of authorisation for issue of these consolidated annual accounts.

To fund the acquisition of these 100% stakes in Schlecker Spain and Portugal, as well as other general financing requirements of the Parent, on 8 February 2013 DIA signed an agreement to borrow Euros 200 million from a syndicate of six international credit institutions. This loan bears interest at a variable rate and falls due on 8 February 2017.

At the ordinary general meeting of shareholders, the directors will table a proposal to redeem 28,265,442 shares, representing 4.16% of the Company’s capital, from the own shares held by the Company and acquired through the equity swap contract.

Corporate Governance Report

The DIA Group’s corporate governance report is available at www.diacorporate.com and is published as price-sensitive information on the CNMV (Spanish National Securities Market Commission) website.

Edit:
DIA, S.A.
Parque empresarial de las Rozas - Edif. TRIPARK
C/ Jacinto Benavente 2 A 28232 Las Rozas. Madrid - España

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