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

AND AN ASSESSMENT OF THE MANNER IN WHICH THE COMPANY FULFILS ITS INFORMATION OBLIGATIONS WITH REGARD TO CORPORATE GOVERNANCE PRINCIPLES

 

 

I.    ACTIVITY OF THE SUPERVISORY BOARD IN 2018

 

1.     Legal basis of activity and composition of the Supervisory Board.

The Supervisory Board of Impel S.A. operates on the basis of the provisions of the Commercial Companies Code, the Company's Articles of Association and the Regulations of the Supervisory Board of Impel S.A. Pursuant to the Articles of Association, the Supervisory Board consists of at least five and at most nine members.

 

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

-         Prof. Andrzej Kaleta - Chairman of the Board,

-         Dr Andrzej Malinowski - Deputy Chairman of the Board,

-         Józef Biegaj,

-         Prof. Stefan Forlicz,

-         Piotr Pawłowski,

-         Piotr Urbańczyk.

 

In connection with the death of Piotr Pawłowski, the Extraordinary General Meeting of Shareholders on 6 November 2018 appointed Tadeusz Więckowski as a member of the Supervisory Board of Impel S.A.

 

The composition of the Supervisory Board as at 31 December 2018 and as at the date of this report was as follows:

-         Prof. Andrzej Kaleta - Chairman of the Board,

-         Dr Andrzej Malinowski - Deputy Chairman of the Board,

-         Józef Biegaj,

-         Prof. Stefan Forlicz,

-         Piotr Urbańczyk,

-         Prof. Tadeusz Więckowski.

 

 

2.     Activity of the Supervisory Board.

 

In 2018, the Supervisory Board held 5 meetings and adopted 16 resolutions.

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

 

In 2018, the Supervisory Board focused on matters of significant importance for the operations of Impel S.A. and its Group.

The Supervisory Board issued opinions on the current and planned activities of the Company, based on the documents and information presented by the Management Board. As in previous years, the Board's main priorities were as follows:

-         implementation of statutory corporate governance obligations;

-         assisting the Management Board in establishing business priorities and financial plans - the Board familiarised itself with the Impel Group's budget plan for 2018 and conducted an ongoing analysis of its implementation;

-         analysis of financial results and cost structure of Impel Group, as well as results for individual Business Areas and Product Groups within the Group.

 

In the course of its work, the Supervisory Board discussed topics such as:

-         risks related to the activity of Impel Group,

-         implementation in Impel Group of the provisions of the EU Regulation on the protection of personal data - GDPR,

-         other changes in the law affecting the operation of Impel Group.

The Supervisory Board, based on the recommendation of the Audit Committee, selected an auditor to audit the financial statements of Impel S.A. and the consolidated report of the Impel Group for 2018-2020.

 

The Supervisory Board appointed the Audit Committee of the Supervisory Board for the 11th term of office in the following composition, which was in force as at 31 December 2018 and as at the date of issuing this report:

-      Piotr Urbańczyk - Chairman of the Committee,

-      Józef Biegaj - Member of the Committee,

-      Andrzej Kaleta - Member of the Committee.

 

As part of its work, the Audit Committee in 2018 and 2019 until the adoption of this report:

-         met with an expert auditor to discuss the progress of semi-annual review and annual audit of 2018 financial statements and the final results of the auditor's work,

-         evaluated the reports of the Management Board on the activity of Impel S.A. and Impel Group and the financial statements of Impel S. A. and Impel Group for the year 2018 and familiarized itself with the conclusions of the audit and presented the recommendations of the Supervisory Board in this respect,

-         examined the operation of internal control, risk management and compliance systems,

-         checked the activity of the auditing company in the scope of permitted services other than an audit of financial statements of Impel S.A. and consolidated statements of the Impel Group, and gave its consent to them,

-         examined the manner in which Impel S.A. fulfils its disclosure obligations concerning the application of corporate governance rules set forth in the Exchange Rules and regulations concerning current and periodic information provided by issuers of securities,

-         familiarized itself with changes in the accounting regulations and the accounting policy of Impel Group, in particular with their impact on the presentation of results.

-         participated in the procedure of selecting an expert auditor,

-         submitted current reports on the activities of the Audit Committee at the Supervisory Board meetings.

-         prepared (as a result of performing its duties under Article 130(2) of the Act of 11 May 2017 on Expert Auditors, Audit Companies and Public Supervision and on the basis of the Policy and Procedure of Selection of Audit Company Approved by the Resolution of the Supervisory Board of October 2017) a recommendation for the Supervisory Board regarding selection of an audit company to audit financial statements of Impel S.A. and the consolidated report of the Impel Group, with a justification. The recommendation of the Audit Committee concerning the selection of an auditing company to carry out the audit met the conditions specified in the aforementioned Act and internal normative regulations of Impel S.A. and was drawn up following the selection procedure organised by Impel S.A.

 

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

 

The Board shall regularly carry out an informal self-evaluation during its meetings through internal discussions and exchange of views with the Management Board. In 2018, the Board made its evaluation informally by focusing mainly on questions related to the scope of supervision and support for the Management Board during the restructuring process.

Pursuant to the definition of independence set forth in Article 129.3 of the Act on Statutory Auditors, Audit Firms and Public Supervision of 11 May 2017, the Supervisory Board of Impel S.A. consists of four independent members, including the Chairman of the Supervisory Board (Mr Andrzej Kaleta) and the Chairman of the Audit Committee (Mr Piotr Urbańczyk). Failure to meet the independence criteria in the case of other members of the Supervisory Board relates to an affiliation with the Company in connection with its shareholding structure (Mr Józef Biegaj) and due to being a member of the Supervisory 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, despite not applying the formal criteria of independence, based on their own assessment are independent and guarantee transparency of the Company's operation, proper protection of the interests of its shareholders, and implementation of supervisory activities in the Company.

 

 

II.      BRIEF EVALUATION OF THE COMPANY'S STANDING, INCLUDING AN ASSESSMENT OF INTERNAL CONTROL, RISK MANAGEMENT, COMPLIANCE SYSTEMS AND THE INTERNAL AUDIT PROCEDURE.

 

1.   The Company’s financial and market position.

The Supervisory Board evaluated the situation of Impel S.A. and Impel Group at the end of 2018 positively. There are no risks threatening the continuation of the Company's and the Group's operations.

Both the Supervisory Board and the Management Board emphasize that the general situation of Impel S.A. and its subsidiaries has significantly improved after two very difficult years of 2016 and 2017, when changes in legal circumstances took place, significantly increasing the real costs of labour in Poland, both in terms of line work positions and highly specialized positions of so-called administrative employees. In 2018, the Group continued its strategy of increasing the profitability of its order portfolio by renegotiating economically ineffective contracts. Consequently, the Group managed to improve its key economic indicators. This is particularly noticeable in an increase in operating profit, an increase in profitability in all business segments and an improvement in financial liquidity. The Group increased the effectiveness of debt collection, and at the same time the receivables turnover ratio was reduced.

The business environment is still very complex and unstable. The frequency and direction of changes in the law and the business environment makes it difficult to predict how customers and suppliers will adapt to these new and economically difficult conditions and requires the Group to adopt a very flexible operating strategy based on continuous adaptation.

Changes in legislation that increase labour costs are still a particular challenge for the service sector in Poland. That is why the Impel Group is constantly increasing growing its portfolio of highly specialized services, which are becoming the driving force behind the Group's development. By acting flexibly, the Group implements services resulting from real customer needs based on modern technologies.

 

FINANCIAL POSITION OF THE COMPANY:

 

Operating activities

Revenues from sales and subsidies of Impel Group amounted to PLN 2,172,475 thousand and were lower by PLN 83,455 thousand, i.e. by 3.84 %, than in 2017. The decrease in revenues was related to the reduction of low-profit contracts and selective acquisition of other contracts with higher margins. The sales result amounted to PLN 46 167 thousand. Profitability on sales expressed as the ratio of sales result to revenues from sales and subsidies was increased from 1.63% in 2017 to 2.12% in 2018.

Other operating revenues amounted to PLN 14,719 thousand and were lower by PLN 6,081 thousand, i.e. by 29.23 %, than in 2017. Other operating costs decreased by PLN 4 245 thousand, i.e. from PLN 20 828 thousand in 2017 to PLN 16 583 thousand. Economic relations shaped in this way resulted in an improvement in the operating result as compared to 2017 by PLN 7,658 thousand. The effect of other operating activities improved the result, which amounted to PLN 44,303 thousand in terms of operating activity.

 

Net result

Financial activity decreased the financial result by PLN 14,760 thousand, i.e. PLN 765 thousand less than in 2017. The gross result after taking into account financial activity amounted to PLN 29 543 thousand. The result was charged with income tax in the amount of PLN 13,479 thousand. The Impel Group ended 2018 with a net result of PLN 16,264,000, i.e. PLN 2,550,000 more than in 2017. Net profit attributable to the shareholders of the parent company amounted to: PLN 13,255,255 thousand.

 

Due to low profitability of operations, the Board stresses the need to monitor profitability and the amount and structure of costs on an ongoing basis in order to maintain the Group's ability to generate sustainable, positive financial results.

 

Financial flows and liquidity

The Group's activity in 2018 brought about an increase in net cash by PLN 32,094 thousand. Net cash flows from operating activities amounted to PLN 61,938 thousand and were PLN 24,846 thousand less than in 2017. Investment activity resulted in a decrease in cash by PLN 13,152 thousand, which is PLN 10,215 thousand less than in 2017, when the activity consumed PLN 23,367 thousand. Financial activity in 2018 resulted in a decrease in cash by PLN 16 175 thousand. PLN 96,788 thousand was raised in credits and loans taken out. At the same time, the expenditure was: PLN 112 963 thousand , in particular PLN 79 640 thousand of credits and loans were repaid, interest and liabilities under lease contracts in the amount of PLN 21 769 thousand were repaid.

 

Structure of the balance sheet

The share of equity in the financing of total assets increased at the end of 2018 (from 33.05% to 33.58%). Fixed assets are fully financed with fixed components of the financing structure, i.e. equity, provisions and long-term liabilities. In the structure of assets, the share of current assets in the total assets increased at the expense of fixed assets.

 

In 2018, the company made greater use of short-term financing. This situation resulted mainly from higher employee benefit liabilities (pressure on employees to pay higher salaries). Working capital as at 31 December 2018 expressing the difference between current assets and short-term liabilities is positive and amounts to PLN 105 687 thousand.

 

In 2018, net debt decreased by PLN 14.9 million, i.e. 7.2%. In 2018, Impel Group met bank covenants -  capital / balance sheet total was 33.6%, net debt / EBITDA was 2.65.

 

Dividend

In 2018, the Management Board decided to submit a recommendation of non-payment of dividend from the profit for 2018 to the Supervisory Board and the Ordinary General Meeting of Shareholders. When making decisions on the payment of dividends, the Management Board takes into account the current financial standing of the Company and its Group, which enables it to maintain an appropriate level of financial liquidity and to implement development plans. The Supervisory Board supports the position of the Management Board.

 

MARKET POSITION OF THE COMPANY:

 

With regard to outsourcing in Poland, 2018 saw continuation of changes in the business models of many market players. Both customers and service providers operating on the Polish B2B market are increasingly aware of the consequences of annual increases in minimum wages and legal changes resulting in higher labour costs. In the current reality, the role of Impel Group as a leader of the business services market is to further educate about the implications of the processes for the contracts and to promote the idea of partnership between the service provider and the customer, with a good understanding of common business objectives. In the light of sustained increases in labour costs, as well as other parallel changes [digitisation, automation, robotisation, IoT (Internet of Things), I4.0 (Fourth Industrial Revolution)], many of previously formed standards in outsourcing are being redefined; the era of searching for cheap contractors for the simplest tasks is inevitably becoming history. The Impel Group continues to make every effort to ensure that the services it provides maintain the expected level of quality, but also, together with its customers, seeks to optimally support specific business processes that take place at the customers' enterprises. Implementation of new organisational, process, technological or product solutions helps to achieve this goal.

 

2. Internal Control System.

 

Internal controls.

The internal control system is based primarily on supervision exercised by superiors in accordance with the Group's organisational structure. Depending on the business decisions made, their type and economic importance, decisions are made at ever higher levels of the organizational structure. The quality of management controls is strengthened by the integrated SAP IT system.

 

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, inter alia:

-      a system of internal regulations and acts,

-      procedures for the granting entitlements within ZSI,

-      procedures for financial expenditure approval,

-      managerial record-keeping systems,

-      accounting and financial reporting procedures,

-      a system for carrying out internal inspections.

 

The process of managing user privileges and roles within the scope of Integrated Information System privileges in Impel Group is regulated by the procedure called "Management of Integrated Information System privileges" (SAP System). The procedure covers all the companies of the Group using the System within their operation.

The procedure is supervised by the Director of IT GI.

 

Preparation of 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 system of internal control and risk management within the financial reporting process works on the basis of:

-      principles and scope of reporting established in the internal procedures of the Impel Group, responsibility for preparing periodical reports and financial statements and ensuring their quality and correctness, authorisation and publication;

-      regular reviews of published financial statements by a certified auditor.

 

Accounting books are kept in the SAP system in accordance with uniform rules in line with the accounting policy of the Group and the International Accounting Standards. When preparing financial statements, a uniform tool is used, which also applies to the calculation of taxes (corporate income tax and VAT). Reporting packages are verified by auditors who examine the Group companies. The financial statements of the Group companies are prepared by their chief accountants, consolidated financial statements - by the Director of Consolidation and Audit.

Independent assessment of the reliability and correctness of prepared financial statements is performed by certified auditors and the Audit Committee. Deloitte Audyt Polska sp. z o.o. Sp. k. was selected to audit the financial statements of key Impel Group companies and the consolidated financial statements for 2018.  The audit covers in particular the adequacy of financial data and the scope of necessary disclosures. The results of the audits are reported to the Financial Director - Vice President of the Management Board of Impel S.A., the Audit Committee, and then to the Supervisory Board of the Company.

 

3. Significant risk management system.

 

The Corporate Management Board of Impel Group is responsible for the management of risk significant for the Group, while at the level of individual business areas, the responsible entity is a Member of the Management Board - Operational Director of GI and subordinate Business Area Managers: FM, DS. & BPO and IS. As part of the development of the Group's strategy, the following main areas of risk significant to 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 others, the risk of sales of contracts at too low margins, which do not ensure satisfactory profitability. The Vice President of the Management Board, GI Sales Director, is currently responsible for monitoring this area and taking appropriate actions.

 

The risk of operating activity includes, among others, the risk of increasing costs higher than assumed in the process of contract calculation, due to e.g. price and pay increases during contract execution. The Vice President of the Management Board, Chief Operating Officer of GI, is responsible for monitoring and mitigating this type of risk. The Group shall operate on the basis of an approved budget. Throughout the year, the Management Board analyses the current financial results and compares them with the adopted budget using the Group's management reporting.

 

Financial risk refers to threats, including ensuring financial resources for the operation and development of Impel Group and safe liquidity ratios. The Vice President of the Management Board, Chief Financial Officer of GI, is responsible for monitoring and counteracting this type of risk as part of a centralised position at the Financial Office. Based on current market information and the situation on the financial market, the credit cost is assessed in terms of the financial plan for a given period and short-term forecasts. The risk of loss or impairment of liquidity shall be monitored using a periodic liquidity planning tool (for all units and at all levels of activity), taking into account the maturity of trade receivables/commitments, investments and financial assets. Moreover, the appropriate level of the balance sheet structure at the Impel Group is controlled, thus limiting the risk of losing creditworthiness in the event of failure to meet the required bank ratios. Short-term cash flow planning, current indicator control, interest rate monitoring allow for quick identification of negative deviations and initiation of corrective actions.

 

The tax risk within the Group is supervised by Business Tax Professionals sp. z o.o. Sp. k., which conducts tax audits in order to verify the Group's tax risks, supervises implementation of the transfer pricing policy in the Group and takes other actions resulting from the above strategy. The whole area remains under the supervision of the Vice President of the Management Board of Impel S.A. Financial Director.

 

The risk of human resources management in the area is managed by the Vice President of the Management Board, GI Employee Director. The risk in this area is mainly related to the recruitment, retention and development of employees in conditions of double pressure. On the one hand, the minimum wage is being raised and wage expectations are rising, and on the other hand, the company must maintain maximum wage discipline because personnel costs are the basic costs and the pressure to lower the prices of services does not decrease.

 

Legal risk is related to the legal circumstances, in particular with respect to changes in regulations concerning labour costs and their impact on the Group's operations. Legal services follow legislative changes by informing other services, especially operational ones, in advance of possible changes in the relevant regulations and the need to prepare for them - Business Tax Professionals sp. z o.o. sp.k.

 

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

 

The Group operates on the basis of the budget prepared by the Management Board of the Company. Every year the budget for the following year is adopted by the Management Board of Impel S.A. Throughout the year, the Management Board analyses the current financial results and compares them with the adopted budget using the company's management reporting. Middle and senior level management of the Finance and Administration Division, under the supervision of the Vice President of the Management Board of the GI Finance Director, analyses the Company's financial results against budget assumptions after closing the accounts for each calendar month.

 

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

 

The Supervisory Board assesses the situation of the Company and the Group as difficult but financially stable. The biggest financial challenge is the requirement to assess the contracts in the face of the constant increase in  costs of operations due to the increase in salaries, and the related increase in the Company's debt. The Supervisory Board evaluates the Company's internal control and risk management system positively. In the opinion of the Supervisory Board, this system covers risks that are significant for the Company, recognizable and predictable.

 

4. Compliance risk.

 

The following entities function within the Group's structure:

-      Legal Services Office,

-      GI Information Security Office,

-      specialised organisational units for  controlling licensed areas of activity,

-      Department of Organisation.

 

Legal Services Office centrally organizes legal services for all organizational units of Impel Group, coordinates the work of law firms providing services for the Group, ensuring high standards of legal services. The Office keeps track of changes in  legal circumstances and informs the management about changes affecting the business activity, also providing recommendations for necessary actions to be taken. Lawyers participate in all material processes related to the Group's activities.

 

The GI Information Security Office is responsible for monitoring the protection of classified information and compliance with applicable regulations.

 

Within the structures of the Group's companies there are services which ensure compliance with procedures resulting from specific regulations in particular areas of activity, e.g. the Licence Control and Safety Office operates in the FM Business Area,  Security Product Group, which monitors on an ongoing basis implementation of statutory requirements for the protection of persons and property and the obligations specified in the licence. The tasks of the Office include ensuring licence safety and looking after continuous improvement of product quality, assessment and analysis of risks resulting from insufficient quality of performed services and planning preventive actions for potential incompatibilities and supervision over the implementation of these actions. The Licence Control and Safety Office reports to the Security Director at Impel Facility Services Sp. z o.o. The Control and Security Department, Cash Handling Group, operates within the DS&BPO Business Area, which conducts internal audits aimed at assessing service performance and monitoring the implementation of the CP service line employee training programme.

 

The rules of conduct within the Impel Group are defined in the internal legal acts. The President of the Management Board is responsible for this system. Regulations governing the functioning of the entire Group and its organisational units are issued within the Group. These rules are be drawn up by the Department of Organisation. The regulations are issued depending on their scope by the President of the Management Board and the Directors of the Company. These acts consist of orders, regulations, procedures and circular letters.

 

Supervision of compliance with internal law is the responsibility of the persons responsible for the management of the areas regulated by internal regulations. Central internal control units also implement compliance projects.

 

 

III.  ASSESSMENT OF THE MANNER IN WHICH THE COMPANY FULFILS ITS DISCLOSURE OBLIGATIONS.

In 2018, the Company provided timely periodic reports which were prepared in accordance with the accounting principles and 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, among others:  on internal rules, i.e. the regulations of circulation and protection of access to confidential information and performance of information duties within the Impel Group.

 

In 2018, Impel S.A. applied the corporate governance principles set out in the document "Good Practices of Companies Listed on the GPW 2016", excluding the following recommendations and principles of 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 Company published a report on the application of new best practices and posted information on its website (www.impel.pl) on the status of the application of recommendations and principles contained in the DPSN 2016 by the company in accordance with the requirements of rule I.Z.1.13.

 

The Supervisory Board familiarised itself with the statement on the application of corporate governance principles contained in the Annual Report of Impel S.A. for 2018 and the report containing the Company's comments on the application of the recommendations and principles contained in the DPSN by the Company. In the opinion of the Supervisory Board, the Company reliably and completely complies with the disclosure requirements concerning the application of corporate governance rules.

 

 

IV. EXAMINATION OF THE REPORT.

Acting pursuant to Art. 382 §3 of the Commercial Companies Code and the Company's Statute, the Supervisory Board, on the basis of the Audit Committee's report and the auditor's report, analysed and evaluated the following documents in terms of their consistency with the books and documents, as well as with the actual state of affairs:

-      the financial statements of Impel S.A. for financial year 2018,

-      the Management Board's report on the activity of Impel S.A. in financial year 2018,

-      the consolidated financial statements of the Impel Group for financial year 2018,

-      the Management Board's report on the activity of Impel Group in financial year 2018,

-      the motion of the Management Board for non-payment of dividend from the profit for 2018.

The abovementioned financial statements for 2018 were audited by Deloitte Audyt Polska Sp. z o.o. S.K. with its registered office in Warsaw. The reports of this examination, containing the opinions of the experts, constituted the basic analytical material evaluated by the Board. Therefore, taking into account the findings and assessments contained in the abovementioned source materials and considering them competent and exhaustive, the Board decided that the financial statements for 2018 in all material aspects were prepared in accordance with the applicable laws, accounting principles and standards, as well as with the facts disclosed in the books. The Supervisory Board recommends to the General Meeting of Shareholders to approve the financial statements of Impel S.A. and Impel Group for financial year 2018.

 

The Supervisory Board also analysed the Management Board's report on the activity of Impel S.A. and Impel Group for financial year 2018. The Supervisory Board stated that these reports reliably present the economic activities undertaken and allow for an assessment of the financial standing and assets of the Company and its Group.

The Supervisory Board adopted separate resolutions on the audit of the financial statements.

 

 

V.  DIVISION OF THE RESULT.

The Supervisory Board reviewed the recommendation of the Management Board concerning the non-payment of dividend from the profit for 2018 and, taking into account the explanations of the Management Board, agrees with the Management Board's request to retain the profit for 2018 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 recognise proper fulfilment of duties of members of the Company's Management Board in financial year 2018.