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REPORT ON THE ACTIVITIES OF THE SUPERVISORY BOARD OF IMPEL S.A. INCLUDING ASSESSMENT OF THE COMPANY'S STANDING, TAKING ACCOUNT OF THE INTERNAL CONTROL SYSTEMS, RISK MANAGEMENT, COMPLIANCE AND INTERNAL AUDIT

AND AN ASSESSMENT OF THE WAY THE COMPANY FULFILS ITS INFORMATION OBLIGATIONS RELATED TO THE APPLICATION OF CORPORATE GOVERNANCE PRINCIPLES

 

 

I.    OPERATIONS OF THE SUPERVISORY BOARD IN 2019.

 

1.     Legal grounds for operations and the make-up of the Supervisory Board.

The Supervisory Board of Impel S.A. operates based on the provisions of the Code of Commercial Companies, the Company's Articles of Incorporation and the Regulations of the Supervisory Board of Impel S.A. According to the Articles of Incorporation, the Supervisory Board consists of a minimum of five and maximum of nine members.

 

On 13 June 2018, the Ordinary General Meeting determined the number of the Members of the Supervisory Board for the next, 11th term at six persons and appointed the following Members of the Board for the 11th term:

-         Prof. Andrzej Kaleta – the Chairman of the Board,

-         Andrzej Malinowski, PhD – Deputy Chairman of the Board,

-         Józef Biegaj,

-         Prof. Stefan Forlicz,

-         Piotr Pawłowski,

-         Piotr Urbańczyk.

 

Due to the death of Mr Piotr Pawłowski, on 6 November 2018, the Extraordinary General Meeting of Shareholders of the Company appointed Mr. Tadeusz Więckowski as a Member of the Supervisory Board of Impel S.A.

 

As at 31 December 2019 and as of the date of preparing this report, the make-up of the Supervisory Board was as follows:

-         Andrzej Kaleta, PhD – the Chairman of the Board,

-         Andrzej Malinowski, PhD – Deputy Chairman of the Board,

-         Józef Biegaj,

-         Prof. Stefan Forlicz,

-         Piotr Urbańczyk,

-         Prof. Tadeusz Więckowski.

 

 

2.     Activities of the Supervisory Board.

 

In 2019, the Supervisory Board held 5 meetings and adopted 24 resolutions.

The Management Board provided the Supervisory Board with information on all important matters concerning the Company's operations.

 

In 2019, the Supervisory Board focused on issues of significant importance for the operations of Impel S.A. and its Group.

The Board’s main priorities included:

-         delivery of of statutory corporate governance obligations;

-         analysis of the financial results and cost structure of Impel Group, as well as the results of Business Areas and Product Groups separated within the Group’s organisation.

 

 

Within the Supervisory Board, the Audit Committee of the Supervisory Board of Impel S.A. operated according to the working plan approved by the Supervisory Board. The motions of the Audit Committee were communicated and discussed at the Supervisory Board meetings on an ongoing basis. In 2019 the make-up of the Audit Committee was as follows:

-         Piotr Urbańczyk – Chairman of the Committee,

-         Józef Biegaj – Member of the Committee,

-         Andrzej Kaleta – Member of the Committee.

 

As part of its activities, the Audit Committee:

-         met with the auditor to discuss the course of the interim review and the audit of annual financial statements for 2019 and to discuss the final results of the auditor’s work,

-         assessed the Management Board's reports on operations of Impel S.A. and Impel Group and financial statements of Impel S.A. and Impel Group for 2019, read the auditor’s conclusions, and presented Supervisory Board recommendations in this respect,

-         assessed the systems for internal control, risk management, compliance,

-         monitored the implementation of the internal control plan and read the conclusions from the controls,

-         controlled the certified auditor in the scope of permitted services other than audit of financial statements of Impel S.A. and consolidated statements of Impel Group,

-         assessed the method of fulfilling by Impel S.A. information obligations regarding the application of corporate governance rules set out in the Stock Exchange Rules and regulations regarding current and periodic information provided by issuers of securities,

-         met with representatives of the services responsible for the process of creating and verifying data for the financial statements of Impel Group in the area of: financial and management accounting and financial analysis.

 

 

SELF-ASSESSMENT OF THE BOARD AND ASSESSMENT OF INDEPENDENCE OF SUPERVISORY BOARD MEMBERS

 

The Supervisory Board systematically conduct self-assessments during the meetings on an informal basis, through internal discussions and exchanges of views with the Management Board.

In line with the definition of independence as set out in Article 129 sec. 3 of the Act on Statutory Auditors, Audit Firms and Public Supervision of 11 May 2017, in 2019 the Supervisory Board of Impel S.A. was composed of four independent members, including the Chairman of the Supervisory Board (Mr. Andrzej Kaleta) and the Chairman of the Audit Committee (Mr. Piotr Urbańczyk); On 19 May 2020, Piotr Urbańczyk ceased meeting the independence criterion as he exceeded the period of 12 years serving in the Supervisory Board. Failure to meet the independence criteria in the case of other members of the Board consists in being connected with the Company through its shareholding (Mr. Józef Biegaj) and due to serving in the Board for more than 12 years (Mr. Andrzej Malinowski).

 

Dependent Members of the Supervisory Board of Impel S.A., appointed by the Ordinary General Meeting of Shareholders, despite of not meeting the formal independence criteria according to their own judgement are independent and guarantee the transparency of the Company's operation, proper protection of the interests of its shareholders, and the performance of supervisory activities in the Company.

 

 

II.      SHORT ASSESSMENT OF THE COMPANY'S STANDING, TAKING ACCOUNT OF THE SYSTEMS FOR INTERNAL CONTROL, RISK MANAGEMENT, COMPLIANCE AND INTERNAL AUDIT

 

1.   Financial and market standing of the Company.

The Supervisory Board positively assesses the standing of Impel S.A. and Impel Group at the end of 2019.

The financial standing of Impel Group is stable. The company has been operating for years at low profitability, with an improving trend. The Group has financial liquidity and its financing structure is correct.

The continuity of Impel Group's operations is not at risk.

 

Impel Group is the leader in outsourcing services in Poland. It offers a wide range of services, from traditional security and cleaning services to IT services. The business environment in which the Group operates is very complex and volatile. The frequency and direction of changes in the law and economic environment makes it difficult to predict how the clients and suppliers will adapt to these new and economically difficult conditions, which requires a very flexible strategy and constant adaptation.

Regulatory changes that increase labour costs are still a challenge for the service sector in Poland. This is why Impel Group is constantly increasing its offer of highly specialised services, which are becoming the growth driver for the Group. Acting flexibly, the Group implements services resulting from the actual needs of the clients based on modern technologies.

 

FINANCIAL STANDING OF THE COMPANY:

 

Operating revenues and costs

 

Consolidated revenues from sales of services (products), materials, and goods in 2019 were at to PLN 2,178,051 k, which represents an increase by PLN 37,137 k, i.e. by +1.7% versus 2018. The highest share in revenues of Impel Group from external clients in H1 2019  was achieved by the Facility Management segment, which in that period were at PLN 1,507,776 k, which represents a drop by PLN 35,226 k, i.e. by 2.4% versus 2018. The above increase in revenues mainly results from indexation of the prices of contracts underway, especially for cleaning and services and physical security for property.

The Industrial Services segment generated revenues of PLN 343,094 k, which represents an increase by 13.9%; the increase in sales mainly results from the increase in the scope of current works and the acquisition of new contracts in the area of technical real estate maintenance and industrial cleaning.

 The Digital Services and Business Process Outsourcing segment achieved revenues of PLN 327,181 k, which represents a drop by -10.9%. Lower revenues result from the reorganization of temporary work processes to a new model, which is to increase profitability from this product in the future.

The remaining operating income of Impel Group amounted to PLN 19,197 k, which represents an increase by PLN 4,478 k, i.e. by 30.4% compared to the previous year.

 

The consolidated operating costs of Impel Group in 2019 were at PLN 2,160,105 k, showing an increase by PLN 33,797 k, i.e. by 1.6% versus 2018. Despite the dynamic economic situation, Impel Group maintained operating costs at the level from 2018, and the biggest deviation, Depreciation increased by 46.1% due to the introduction of the rules of recording leases in the lessee’s assets (IFRS 16). Similar deviation was recorded under the item related to remuneration, with an increase of PLN 21,718 k, but given the business profile of most of Impel Group companies (provision of services) and the increase in the minimum wage (from 1 January 2019 it is at PLN 2,250 compared to PLN 2,100 in 2018, and PLN 14.70/h in 2019 versus PLN 13.70/h in 2018) this is a relatively small change.

 

EBIT/EBITDA

EBIT result on operations in 2019 was at PLN 49,154 k and is higher compared to 2018 by PLN 4,851 k.

EBITDA was at PLN 120,588 k, which means an increase by PLN 27,390 k, i.e. by 29.4% versus 2018. Such a large difference was caused by the introduction of IFRS 16, which resulted in an increase in depreciation with a simultaneous decrease in the cost of third-party services.

 

Net result

At the end of 2019, Impel Group recorded a net profit for shareholders in the parent entity at PLN 13,685 k, i.e. PLN 430 k higher than in the preceding year.

 

Assets and structure of finance

 

The balance sheet total in the consolidated statement of Impel Group as at 31 December 2019 came in at PLN 1,125,812 k and is higher compared to the level as at 31 December 2018 by PLN 115,673 k, i.e. by 11.5%.

Fixed assets represent 31.9% of the balance sheet total as at 31 December 2019, versus 29.5% as at 31 December 2018 and current assets respectively 68.1% versus 70.5%. The key changes in assets were related to fixed assets, which increased by PLN 61,634 k versus the balance as at 31 December 2018 (the impact of the IFRS 16). The largest asset item are trade receivables and other receivables, which at the end of 2019 amounted to PLN 502,786 k (4.2% vs. 2018).

As at 31 December 2019, equity represented 31.6% of the sources of finance, versus 33.6% as at 31 December 2018. The largest items under liabilities is equity of the parent entity, whose level in 2019 was at PLN 333,106 k and increased by PLN 13,546 k and short-term loans and bank loans, whose level as at 31 December 2019 was at PLN 282,059 k, i.e. decreased by PLN -2,754 k versus the level as at 31 December 2018.

 

 

Dividend

In 2019, the Management Board decided to recommend to the Supervisory Board and the Ordinary General Meeting of the Company that no dividend would be paid for 2019. When deciding on dividend payment, the Management Board takes account of the current financial standing of the Company and its Group, which makes it possible for it to maintain a relevant level of financial liquidity and supports the growth plans. The Supervisory Board supports the position of the Management Board.

 

MARKET STANDING OF THE COMPANY:

 

Impel Group offers a wide range of outsourcing services for many sectors of the economy and public services, operating in a very competitive market. The Group's clients include banks, industrial plants, hospitals, local government and state authorities, commercial entities and hotels. In many services, such as cleaning services, patient care, security, cash processing, the company is the market leader or an important player. At this point in time, due to the ongoing Covid 19 pandemic, the Company and Impel Group found themselves in a completely new situation,, which other industry players also have to face. In the new reality, Impel Group operates efficiently, focusing on the uninterrupted provision of services to its clients. The pandemic has its impact on the Group, as in its initial period, many areas of the economy were frozen, including: industry, trade, hotels; also, due to the blockage of international traffic, some of the services provided by Impel Group companies were provided to a limited extent or were suspended. To meet customer demand, Impel Group implemented new services such as: surface disinfection, fogging disinfection, temperature measurement, ozone treatment, monitoring of outdoor stations, providing personal protective equipment to clients. The previously initiated digitisation of internal processes helped to cope with the new reality. By implementing new organisational and technological solutions, the Group strives to develop the most optimal model of relationships with Clients, adapted to the present day needs, while at the same time seeking new opportunities in the services pioneered by Impel Group.

 

2. Internal control system.

 

Internal control.

The internal control system is based primarily on supervision performed by managers in line with the organisational structure of the Group. Depending on the business decisions made, their type and economic significance, decisions are made at higher levels of the organizational structure. The quality of management control is enhanced by the integrated IT system, SAP.

 

The Management Board of Impel S.A. is responsible for maintaining effective internal control systems, risk management, compliance and internal audit functions in the Group.

 

The internal control system consists of, among other:

-      the system of internal regulations and acts,

-      procedures of assigning rights in the integrated IT system,

-      procedures for approving financial expenses,

-      management records systems,

-      procedures for posting entries and preparing financial statements,

-      a system for conducting internal control proceedings.

 

The process of managing user rights and roles within the scope of the Integrated IT System in Impel Group is regulated by “Integrated IT System Rights Management” procedure (SAP System). The procedure applies to all Group companies using the System in their operations.

The delivery of the procedure is supervised by Impel Group’s IT Director.

 

Drawing up financial statements.

The Management Board of Impel S.A. is responsible for the internal control system and its effectiveness in the process of preparing financial statements.

 

The internal control and risk management system in the financial reporting process operates through:

-      the rules and scope of reporting established in the internal procedures of Impel Group, responsibility for the preparation of periodic reports and financial statements, including ensuring their quality and correctness, authorisation and publication;

-      regular reviews of the published financial statements by a chartered auditor,

 

Accounts are kept in SAP system, according to uniform principles in line with the accounting policy and International Accounting Standards applicable in the Group. When preparing the financial statements, a uniform tool format is required, which is also used for tax calculation (CIT and VAT). Reporting packages are verified by auditors examining Group companies. Financial statements of Group companies are drawn up by their chief accountants, consolidated financial statements – by the Consolidation and Audit Director.

Independent assessment of reliability and correctness of the prepared financial statements is done by chartered auditors and Audit Committee. Deloitte Audyt Polska Sp. z o.o. Sp. k. was selected to audit the financial statements of the key Impel Group companies and the consolidated financial statement for 2019. The audit covered in particular adequacy of financial data and the scope of required disclosures. The results of audits are reported to the Finance Director – Vice-President of the Management Board of Impel S.A., Audit Committee, and then the Supervisory Board of the Company.

 

3. System for managing material risks for the company.

 

Impel Group's Corporate Management Board is responsible for managing the Group's material risks. As part of building the Group's strategy, the following areas of material risks for the Company were diagnosed:

-      commercial risk,

-      operating risk,

-      financial risk,

-      tax risk,

-      human resources management risk,

-      legal risk,

-      investment risk.

 

The commercial risk includes, among other things, the risk of making contracts at too low margins, which do not ensure satisfactory profitability. The Vice President of the Management Board of IG is currently responsible for monitoring this area and taking appropriate actions.

 

The operating risk includes, among other things, the risk of incurring costs that are higher than assumed in the contract calculation process, as a result of e.g. increase in prices and wages during contract delivery. The Vice President of the Management Board, Operations Director of IG, is responsible for monitoring and mitigating such risks. The Group operates on the basis of the approved budget. During the year, the Management Board analyses the current financial results, comparing them to the adopted budget and using the management reporting applied in the Group.

 

The financial risk refers to threats such as the provision of funds for the operation and development of Impel Group and ensuring safe liquidity ratios. The Vice President of the Management Board, Chief Financial Officer of IG, as part of a centralised function in the Financial Office, is responsible for monitoring and mitigating such risks. Based on current market information and the situation on the financial market, credit costs are assessed in terms of the financial plan for a given period and the short-term forecasts. Monitoring of the risk of loss or disruption of financial liquidity is performed using the tool for periodic liquidity planning (for all entities and at all levels of activity), taking into account the maturity dates of trade receivables/ liabilities, investments and financial assets. In addition, the appropriate level of the balance sheet structure in Impel Group is controlled, thus limiting the risk of losing repayment capacity if the required bank ratios are not met. Short-term cashflow planning, on-going control of the indicators, and interest rate monitoring allow for a quick identification of negative deviations and launching corrective actions.

 

Tax risk within the Group is supervised by Business Tax Professionals sp. z o.o. Sp. k., which conducts tax audits to verify the Group's tax risks, supervises the implementation of the Group's transfer pricing policy and takes other actions driven by the above strategies. The entire area is supervised by the Vice President of the Management Board, the Chief Financial Officer of Impel S.A.

 

The human resources management risk is managed by the Vice President of the Management Board, Personnel Director of IG. The risk in this area is mainly related to the acquisition and retention of employees and their development, in the conditions of the two-sided pressure. On the one hand, the minimum wage is increased and wage expectations are rising, and on the other hand, the company must maintain maximum wage discipline as personnel costs are the key costs, while the pressure on reducing service prices continues.

 

The legal risk is related to the legal environment, in particular with regard to changes in regulations concerning the costs of labour and their impact on the Group’s operations. Legal services follow legislative changes and inform the remaining services, especially the operating ones, in advance about possible changes in the regulations in this area and the necessity to comply with them – Business Tax Professionals sp. z o.o. sp.k.

 

The investment risk includes risks related to the investment process and acquisitions. Impel S.A. has an Investment Committee, which analyses and provides opinions on significant investments.

 

The Group operates on the basis of an approved budget. Every year, by the Management Board of Impel S.A. adopts the budget for the following year. During the year, the Company's Management Board analyses the current financial results, comparing them with the adopted budget, using the Company’s management reporting. The middle and senior management of the Controlling and Administration Division, under the supervision of the Vice President of the Management Board, the Controlling and Administration Director of IG, analyses the financial results of the Company as compared to the budget assumptions after closing the books for each calendar month.

 

These risks are identified and monitored on an ongoing basis. Additionally, the risk analysis is periodically conducted by the Management Board of Impel S.A. and discussed with the Supervisory Board of Impel S.A.

 

4. Compliance risk.

 

The following units operate within the Group structure:

-      Legal Services Office,

-      IG Information Security Office,

-      specialised organizational units to control licensed areas of activity,

-      Organization Department.

 

The Legal Services Office centrally provides legal services to all organisational units of Impel Group, coordinates the work of law firms who provide services for the Group, ensuring high standards of legal services. The Office keeps track of changes in the legal environment and informs managing persons about changes impacting business activity together with the recommendations of the required actions. Lawyers participate in all relevant processes related to the Group's activities.

 

IG Information Security Office is responsible for controlling protection of classified information and compliance with the regulations in this area.

 

Within the structures of the Group's companies, there are services which ensure compliance with the procedures resulting from specific legal regulations of given areas of activity, e.g. in FM Business Area, Security Product Group, there is the Concession Control and Security Office, which monitors on an ongoing basis the status of compliance with statutory requirements concerning the regulations on the protection of persons and property and obligations specified in the concession. The tasks of the Office include ensuring the security of concessions and taking care of continuous improvement of the quality of products, estimating and analysing risks resulting from insufficient quality of the services provided, planning preventive actions for potential incompliance, and supervising the implementation of these actions. The Concession Control and Security Office reports to the Director of Security at Impel Facility Services Sp. z o.o. In the DS&BPO Business Area (since January 2019 under the name: Business Process Outsourcing), in the Cash Handling Product Group, there is the Control and Security Department, which conducts internal audits to assess how services are performed and monitor the implementation of the training programme for line employees on CP service.

 

The rules of conduct within Impel Group are set out in internal regulations. The President of the Management Board is responsible for this system. Within the Group's organisation, regulations governing the operation of the entire Group and its organisational units are issued. These regulations are prepared by the Organisation Department. Regulations are issued by the President of the Management Board and the Directors of the Company, depending on the scope. These acts include: orders, regulations, procedures and circular letters.

 

Supervision of compliance with internal law is the responsibility of those responsible for managing the areas governed by the internal regulations. The central internal control structures
also carry out compliance projects.

 

 

 

III.  ASSESSMENT OF THE WAY THE COMPANY FULFILS ITS INFORMATION OBLIGATIONS

In 2019, the Company provided periodical reports in a timely manner, which were prepared in accordance with the accounting rules and the applicable regulations. The Company also prepared current reports, which correctly informed about significant corporate and business events. The Company implemented the provisions of Regulation (EU) No. 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (Market Abuse Regulation - MAR), based on, among others: internal rules, i.e. Regulations for circulation and protection of access to confidential information and performance of information duties in Impel Group.

 

In 2019, Impel S.A. applied the principles of corporate governance contained in the document “Best Practices for WSE Listed Companies 2016" with the exception of the following recommendations and rules: I.R.2. I.Z.1.16., I.Z.1.20., II.Z.2., II.Z.8., II.Z.10.4, III.R.1, IV.R.2., IV.Z.2., V.Z.6., VI.Z.4.

 

The Supervisory Board has familiarized itself with the statement on the application of corporate governance included in the Annual Report of Impel S.A. for 2019 and the report containing the Company's comments on the status of implementation of the recommendations and principles contained in DPSN. According to the Supervisory Board, the Company fulfils its information obligations concerning the application of corporate governance principles in a reliable and complete manner.

 

 

IV. AUDIT OF THE REPORT.

Acting pursuant to the provisions of art. 382 §3 of the Commercial Companies Code and the Company's Articles of Association, the Supervisory Board, based on the report of the Audit Committee and the auditor’s report, analysed and assessed the following documents with regard to their compliance with the accounts and documents, and with the factual status:

-      financial statement of Impel S.A. for the financial year 2019,

-      the Management Board’s Report on operations of Impel S.A. in the financial year 2019,

-      the consolidated financial statement of Impel Group for the financial year 2019,

-      the Management Board’s report on operations of Impel Group in the financial year 2019,

-      the Management Board’s motion that no dividend would be paid for 2019.

The above financial statements for 2019 were audited by Deloitte Audyt Polska Sp. z o.o. S.K. with registered office in Warsaw. The reports from this audit, containing auditor’s opinions, were the main analytical material assessed by the Supervisory Board. Therefore, taking into account the findings and assessments contained in these source materials and considering them competent and exhaustive, the Supervisory Board considered that the financial statements for 2019 were prepared in all material respects in accordance with applicable laws, accounting rules and standards, and in accordance with the factual status disclosed in the books. The Supervisory Board recommends that the General Meeting of Shareholders approve the financial statements of Impel S.A. and Impel Group for the financial year 2019.

 

The Supervisory Board also analysed the Management Board's report on the operations of Impel S.A. and Impel Group for the financial year 2019. The Supervisory Board confirmed that these reports reliably present the economic activities undertaken and that they allow for the assessment of the financial standing and assets of the Company and its Group.

The Supervisory Board adopted separate resolutions regarding the audit of the statements.

 

 

V.  PROFIT DIVISION

The Supervisory Board has familiarised itself with the Management Board's recommendation that no dividend should be paid for 2019 and, taking into account the Management Board's explanations, it agrees with the Management Board's motion to retain the profit for 2019 in the Company.

Taking into account the Supervisory Board's assessment of the Company's standing, the Supervisory Board proposes that the General Meeting of Shareholders should grant a vote of approval to members of the Company's Management Board for the performance of their duties in the financial year 2019.