DP EURASIA N.V.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL

INFORMATION AS AT 30 JUNE 2019 AND 31 DECEMBER 2018

NOTE 1 - GROUP'S ORGANIZATION AND NATURE OF ACTIVITIES

DP Eurasia N.V. (the "Company"), public limited company, having its statutory seat in Amsterdam, the Netherlands, was incorporated under the law of the Netherlands on 18 October 2016. The Company has been incorporated by incorporating shares of Fides Food Systems Coöperatief U.A. and Vision Lovemark Coöperatief U.A. in Fidesrus B.V. and Fides Food Systems B.V. Acquisition occurred on 18 October 2016 when the Company acquired Fidesrus and Fides Foods and their subsidiaries and from this point forward consolidated Group was formed. This was a transaction under common control.

The Company's registered address is: Herikerbergweg 238, Amsterdam, the Netherlands.

The Company and its subsidiaries (together referred as the "Group") operate company and franchise-owned stores in Turkey and the Russian Federation, including providing technical support, control and consultancy services to the franchisees.

As at 30 June 2019, the Group operates in 736 stores (499 franchise stores, 237 company-owned stores) (31 December 2018: 724 stores (486 franchise stores, 238 company-owned stores). Split of stores based on operating countries are as follows:

Subsidiaries

The Company has a total of four fully-owned subsidiaries. The entities included in the scope of the condensed consolidated financial interim information and nature of their business is as follows:

Pizza Restaurants LLC is established in the Russian Federation. Domino's Russia is operating a pizza delivery network of company and franchise-owned stores in Russian Federation. Domino's Russia has a Master Franchise Agreement (the "MFA Russia") with Domino's Pizza International for the pizza delivery network in Russia until 2030.
 

Fides Grup Gıda Restaurant İşletmeciliği A.Ş. and Pizza Restaurantları A.Ş. ("Fides Turkey" and "Domino's Turkey", respectively) are established in Turkey. Domino's Turkey is operating a pizza delivery network of company and franchise-owned stores in Turkey. Fides Turkey is an investment company, which has a Master Franchise Agreement (the "MFA Turkey") with Domino's Pizza International pizza delivery network in Turkey until 2032. The rights obtained under the MFA have been reassigned from Fides Turkey to Domino's Turkey in order for it to operate the pizza delivery network. Fides Turkey was merged with Domino's Turkey with all of its assets and liabilities as of 12 December 2018 through a tax-free legal merger.

Fides Food Systems BV and Fidesrus BV ("Fides Food Systems" and "Fidesrus", respectively) are established in the Netherlands. Both Fides Food Systems and Fidesrus are acting as investment companies.

Significant changes in the current reporting period

In spite of the challenging trading conditions in the first half of 2019, the Group remains well placed to grow revenues through a simplified menu, opening new stores, increased investment in our digital channels and refocused local store marketing activities. The Group has not identified any risks that could impact the financial performance or position of the Group as at 30 June 2019. It has sufficient headroom to enable it to conform to covenants on its existing borrowings and sufficient working capital and undrawn financing facilities to service its operating activities and ongoing investments.

NOTE 2 -     BASIS OF PRESENTATION OF INTERIM FINANCIAL STATEMENTS

2.1       Basis of preparation

These condensed consolidated interim financial statements for the six months ended 30 June 2019 have been prepared in accordance with International Accounting Standard 34 ("IAS 34") Interim Financial Reporting.

The interim report does not include all the notes of the type normally included in annual financial report. Accordingly, this report is to be read in conjunction with the annual report for the year ended
31 December 2018 and any public announcements made by the Company during the interim reporting period.

The accounting policies adopted are consistent with those of the previous financial year and corresponding interim reporting period, except for the adoption of new and amended standards as set out at Note 2.3.

Seasonality of operations

There is no significant seasonality effect on the Group's revenue. According to financial year ended
31 December 2018, 48% of revenues accumulated in the first half year, with 52% accumulating in the second half.

Consolidation of foreign subsidiaries

Financial statements of subsidiaries operating in foreign countries are prepared in the currency of the primary economic environment in which they operate. Assets and liabilities in financial statements prepared according to the Group's accounting policies are translated into the Group's presentation currency, Turkish Liras, from the foreign exchange rate at the statement of financial position date whereas income and expenses are translated into TRY at the average foreign exchange rate. Exchange differences arising from the translation are included in the "currency translation differences" under shareholders' equity.

The foreign currency exchange rates used in the translation of the foreign operations within the scope of consolidation are as follows:

2.2       New and amended international financial reporting standards as adopted by European Union

New and amended standards adopted by the Group, which are effective for the financial statements as at 30 June 2019

A number of new or amended standards became applicable for the current reporting period:

- Amendment to IFRS 9, 'Financial instruments'

- IFRS 16, 'Leases'

- IFRIC 23, 'Uncertainty over income tax treatments'

- Annual improvements 2015-2017

- Amendments to IAS 19, 'Employee benefits' on plan amendment, curtailment or settlement'

The impact of the adoption of the leasing standard IFRS 16 and the new related accounting policies are disclosed in note 2.3 below. The other standards did not have any impact on the Group's accounting policies and did not require retrospective adjustments.

The new standards, amendments and interpretations, which are issued but not effective for the financial statements as at 30 June 2019

- Amendments to IAS 1 and IAS 8 on the definition of material

- Amendments to IFRS 3 - definition of a business

This note explains the impact of the adoption of IFRS 16 Leases on the Group's financial statements and disclose the new accounting policies that have been applied as from 1 January 2019.

The Group has adopted IFRS 16 from 1 January 2019 but has not restated comparatives for the 2018 reporting period, as permitted under the specific transition provisions in the standard, the Group has applied the modified retrospective method for adoption. The reclassifications and the adjustments arising from the new lease accounting rules are therefore recognised in the opening balance sheet on 1 January 2019.

(a)        Adjustments recognised on adoption of IFRS 16

On adoption of IFRS 16, the group recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate as of 1 January 2019. The weighted average lessee's incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 23.12% for TRY and 9.7% for RUB.

For leases previously classified as finance leases, the Group recognised the carrying amount of lease assets and lease liability immediately before transition as the carrying amount of the right-of-use asset and the lease liability at the date of initial application. The measurement principles of IFRS 16 are only applied after that date. Any remeasurement in a lease contract is recognised as an adjustment to the related right-of-use of assets.

Definition of a lease

In accordance with IFRS 16, the Group recognises a lease liability reflecting future lease payments and a 'right of use asset' for all of its lease contracts. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The Group assesses whether a contract is, or contains, a lease at the inception date. The inception date is the earlier of the date of a lease agreement and the date of commitment by the parties to the principal terms and conditions of the lease.

Subleases

The Group operates as intermediate lessor for a significant proportion of its leases. The Group has evaluated its rent agreements and classified its sub-leases as financial lease as required in IFRS 16.

Where the Group recognised a leasing agreement form a sublease transaction, which are classified as financial leasing, the right of use asset from head-lease is derecognised and a lease receivable equal to the lease receivables in the sub-lease is recognised.

Lease term

The lease term includes the non-cancellable period for which the lessee has the right to use an underlying asset. Periods covered by an option to extend the lease term are included in the lease term if the lessee is reasonably certain to exercise that option. The same rationale applies to termination options. The term covered by a termination option is included in the lease term if the lessee is reasonably certain not to exercise the option. Otherwise, the lease term ends at the point in time when the lessee can exercise the termination option.
 

Measurement

The lease liability is initially measured at the present value of the future lease payments that are not paid at the commencement date, discounting using an incremental borrowing rate. The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, a change in the estimate or the amount expected to be payable under a residual value guarantee, or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain

to be exercised or a termination option is reasonably certain not to be exercised. The Group recognizes in the right-of-use asset an estimate of the costs to be incurred for dismantling, removal and/or restoration to the conditions required by the terms of the lease.

Impact on transition

The impact on transition to IFRS 16 is summarized in the table below. Accounts that were not affected by the changes have not been included. As a result, the sub-totals and the totals disclosed can not be recalculated from the numbers provided.

The changes in the accounting the policy affected the following items in balance sheet on
1 January 2019:

The associated right-of-use assets for property leases were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 31 December 2018. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application.

The recognised right-of-use assets relate to the following types of assets:

(i)         Impact on segment disclosures and earnings per share

Adjusted EBITDA, segment assets and segment liabilities for June 2019 all increased as a result of the change in accounting policy.

Impact for the period

(ii)        Practical expedients applied 

In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:

-           The use of a various discount rates to a portfolio of leases with reasonably similar characteristics

-           Reliance on previous assessments on whether leases are onerous

-           The exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application, and

-           The use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

The Group has also elected not to reassess whether a contract is, or contains, a lease at the date of initial application.  Instead, contracts entered into before the transition date the Group relied on its assessment made appliying IAS 17 and IFRIC 4 Determining whether an Arrangement contains a Lease.

(b)       The group's leasing activities and how these are accounted for

The group leases various offices, warehouses, retail stores and cars. Rental contracts are typically made for fixed periods of 3 to 5 years but may have extension options as described in (i) below. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes.

Until the 2018 financial year, leases of property, plant and equipment were classified as either finance or operating leases. Payments made under operating leases were charged to profit or loss on a
straight-line basis over the period of the lease.

From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:

-           Fixed payments (including in-substance fixed payments),

-           Variable lease payment that are based on an index or a rate

-           The exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and

-           Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.

The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be determined, the lessee's incremental borrowing rate is used, being the rate that the lessee would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions.

Right-of-use assets are measured at cost comprising the following:

-           The amount of the initial measurement of lease liability

-           Any lease payments made at or before the commencement date less any lease incentives received

-           Any initial direct costs, and

-           Restoration costs.

Payments associated with the leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Low value assets comprise small office furniture. There are no residual value guarantees and the initial direct costs are negligible.
 

(i)         Extension, termination options

The lease term includes the non-cancellable period for which the lessee has the right to use an underlying asset. Periods covered by an option to extend the lease term are included in the lease term if the lessee is reasonably certain to exercise that option. The same rationale applies to termination options. The term covered by a termination option is included in the lease term if the lessee is reasonably certain not to exercise the option. Otherwise, the lease term ends at the point in time when the lessee can exercise the termination option.

Extension options are available for all contracts. In more than 90% of the contracts, DP Eurasia has the right to extend the contract unilaterally, which does not need the consent of the landlord.

Critical judgements in determining the lease term

In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). Potential future cash outflows have not been included in the lease liability because it is not reasonably certain that the leases will be extended (or not terminated).

The assessment is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment and that is within the control of the lessee. During the current financial year, there were no revisions related to the lease liabilities.

(ii)        Discount rates used

Incremental borrowing rate is used - rates that the Group would borrow if they wanted to purchase an asset for the relative periods.

(iii)       Variable elements used

Variable element is the rent increase rate and its calculated based on Consumer Price Index ("CPI"), Producer Price Index ("PPI") or an average of both. Variable lease payments based on an index or a rate are initially measured using the index or the rate at the commencement date.

Estimation uncertainty arising from variable lease payments

The Group does not forecast future changes of the index/rate; these changes are considered when the lease payments change. Variable lease payments that are not based on an index or a rate are not part of the lease liability, but they are recognised in the income statement when the event or condition that triggers those payments occurs.

Nearly 90% of future lease payments for stores are linked to consumer price index, producer price index or an average of both. Variable payment terms are mostly used to make up for the volatile inflation rates in a country. An average of 5% increase in the consumer price index and producer price index indices would increase total lease payments by approximately TRY12,247.

NOTE 3 - SEGMENT REPORTING

The business operations of the Group are organized and managed with respect to geographical positions of its operations. The information regarding the business activities of the Group as of 30 June 2019,
31 December 2018 and 30 June 2018 comprise the performance and the management of Turkish and Russian operations and Head Office.

The Group has two business segments, determined by management according to the information used for the evaluation of performance and the allocation of resources, the Turkish and Russian operations. Other operations are composed of corporate expenses of Dutch companies. These segments are managed separately because they are affected by the economic conditions and geographical positions in terms of risks and returns.

The segment analysis for the period ended 30 June 2019 and June 2018 are as follows:

EBITDA, adjusted EBITDA, net debt, adjusted net debt, adjusted net income and non-recurring and non-trade income/expenses are not defined by IFRS. The amounts provided with respect to operating segments are measured in a manner consistent with that of the financial statements. These items determined by the principles defined by the Group management comprises incomes/expenses which are assumed by the Group management that are not part of the normal course of business and are non-recurring items. These items which are not defined by IFRS are disclosed by the Group management separately for a better understanding and measurement of the sustainable performance of the Group.

The reconciliation of adjusted EBITDAs as of 30 June 2019 and June 2018 is as follows:

The reconciliation of adjusted net debt as of 30 June 2019 and 31 December 2018 is as follows:

The reconciliation of adjusted net income as of 30 June 2019 and 2018 is as follows:

NOTE 4 - REVENUE AND COST OF SALES

NOTE 5 - EXPENSES BY NATURE

NOTE 6 - FOREIGN EXCHANGE LOSSES, FINANCIAL INCOME AND EXPENSES

NOTE 7 - EARNINGS PER SHARE

The reconciliation of adjusted earnings per share as of 30 June 2019 and 2018 is as follows: