2019 ANNUAL STATEMENT www.zgh.hr ZAGREB HOLDING 2019 Annual Statement ZAGREB HOLDING GROUP IN BRIEF 4 A LETTER BY THE PRESIDENT OF THE MANAGEMENT BOARD 8 PROFILE OF ZAGREB HOLDING GROUP 10 1 Activities of the Group 14 Strategic Framework Elements 16 CORPORATE GOVERNANCE 18 2 Governance Structure 19 Corporate Governance Statement 22 OUR BUSINESS OPERATIONS IN 2019 25 3 Group’s Investments in 2019 31 MANAGEMENT REPORT AND BUSINESS ANALYSIS 39 4 Group’s Strategic Objectives and Development Priorities 40 Corporate Responsibility and Sustainability 41 Research and Development Activities 47 Expected Future Development of the Group 51 Business Analysis 52 Table of Contents Consolidated annual statements for the year ended 31 December 2019 67 with the Independent Auditor’s Report Zagreb Holding Group in Brief The Group’s main task is efficient and continual conduct of services of public interest in the City of Zagreb with maximum environmental protection and maximum protection of interests of the local community in which we operate. Zagreb Holding Ltd. (hereinafter: the Company) is a The Group’s main task is efficient and continual conduct company wholly owned by the City of Zagreb. Its core of services of public interest with maximum environmental business operations are carried out through 14 subsidiaries protection and maximum protection of interests of the and it also owns eight companies and one institution. local community in which we operate. The main standards Together, the subsidiaries, related companies and the governing the provision of such services have been defined institution form the Zagreb Holding Group (hereinafter: the by the law and numerous other documents. As we are aware Group), with Zagreb Holding Ltd. as its leading company in of the responsibility that we have toward the citizens of the creation of business policies. The Group has a total of Zagreb, we constantly strive to improve the quality of public 7,794 employees – 5,291 working at Zagreb Holding Ltd. and services, while also respecting the principles of sustainable 2,474 working at related companies and at the institution, development. Thus, the standard of living in the City of whereas 29 employees work at Bjelovar City Gasworks Ltd., Zagreb is visibly higher than in other cities in the Republic a subsidiary of the related company Zagreb City Gasworks of Croatia. At the same time, the Company promotes social Ltd. dialogue and allows its employees to acquire new advanced knowledge and skills. By increasing the quality and scope of public services to the benefit of the citizens, businesses and local government and self-government of the City of Zagreb, thus improving the standard of living, competitiveness of the city’s economy The Group provides a wide range of services and the reputation of the City of Zagreb in comparison with grouped under the following five business areas: other cities, the Group’s main objective becomes a reality: we secure a healthy, pleasant and safe urban life for the • Municipal activities citizens of Zagreb and the local community – day in and day out. • Energy-related activities • Public water supply and drainage activities • Pharmaceutical activities • Commercial activities. 4 2019 ANNUAL STATEMENT ZAGREB HOLDING 5 Zagreb Holding of water supplied Group / 2019 to consumers in Numbers of water supply pipelines , , , kWh of natural gas distributed to consumers of public traffic areas maintained on a regular basis of gas network in Zagreb OF PUBLIC TRAFFIC AREAS CLEANED ON A REGULAR BASIS of park areas maintained on a regular basis of grassland mown 199.181 t of asphalt produced The following is maintained parking spaces bus terminal on a regular basis: in seven parking services zones provided of roads of bridges traffic-light controlled junctions 6 2019 ANNUAL STATEMENT Financial performance indicators 2019 2018 Sales income (in HRK 000) 3,506,889 3,263,744 Operating expenses (in HRK 000) 4,013,084 3,686,413 EBIT (in HRK 000) 74,468 160,764 EBITDA (in HRK 000) 464,166 533,940 Net debt-to-equity ratio 61.2 60.3 Total income-to-expense ratio 100.5 102.4 Self-financing indicator 39.8 39.2 Share of staff costs in total operating expenses 28.6 28.7 Current ratio 1.0 1.1 biodegradable bags for separate collection of biowaste and plastic and metal waste packaging employees distributed to service users 23.576.720 kWh containers for separate of electricity collection of recyclable generated waste based on the from landfill gas “door-to-door” system of landfill gas extracted in total of drainage water drains canals cleaned cleaned 287.975 t of waste collected ZAGREB HOLDING 7 A Letter by the President of the Management Board When we look back at all the investments that we have realised, analyse the level of quality of the services that we provide and evaluate our financial results, it can be concluded that the main task of Zagreb Holding – namely the efficient and continual conduct of services of public interest in the City of Zagreb with maximum environmental protection and maximum protection of interests of the local community in which we operate – was fulfilled in 2019 as well. Majority of the Group’s services are regarded as services of Investments in establishing an efficient waste management general economic interest. As such, they are not provided for system were increased for the third year in a row. Over the purpose of generating profit, but rather to ensure that the those three years, more than HRK 191 million was invested services are rendered to end users in an efficient, cost-effective in the equipment, machinery, vehicles and construction and purposeful manner as well as at the lowest possible cost works. Last year, we expanded the separate waste collection for service users. Therefore, the Group’s activities mostly focus system to include biowaste collection at family homes and on investments in expanding and reconstructing the existing multi-apartment buildings. Among other things, 10,293,920 infrastructure, modernising business operations, improving the biodegradable bags for separate biowaste collection as well relationship with service users and establishing an efficient as 8,942,960 bags for separate collection of plastic and metal waste management system. waste packaging were procured for that purpose and they were provided to service users in two distribution cycles. Moreover, Total investments realised by Zagreb Holding Group in 2019 numerous informative and educational activities were carried amounted to HRK 459.8 million, representing an increase by out as well. On the weekends last year, our teams held about HRK 35 million compared to the previous year, and additional 50 educational events on waste prevention, separate waste HRK 84.7 million was invested in the construction of public collection and responsible treatment of waste. The events purpose facilities developed by the Group’s companies for were held at marketplaces, parks and shopping malls in Zagreb the City of Zagreb and in the construction of the city area with the aim of familiarising the citizens with such issues and Podbrežje One of the most state-of-the-art schools in Zagreb allowing them to receive first-hand information about anything and Croatia, Hrvatski Leskovac Primary School, which is also they wanted to know regarding the new system. the sixth primary school built by Zagreb Holding, was handed over to the City for management in early 2019. Thanks to all those measures and citizens who separate waste, the amount of biowaste collected from the households in Zagreb As every year, the largest investments pertained to the water in 2019 increased more than sevenfold in comparison with 2018. supply and drainage system, amounting to HRK 223.7 million In the same period, the amount of waste paper, plastic and in 2019 and representing a 26% increase compared to 2018. glass collected separately increased by 47.7%, 80.2% and 13.2.% Besides improving the quality of water supply and drainage in respectively. Accordingly, as the result of the implementation of the existing facilities, the investments in the water supply and waste prevention and minimisation measures and activities, as drainage system also allow for the development of adequate well as of separate collection of recyclable waste, the mass of capacities for new facilities. In terms of the works performed, mixed municipal waste produced in Zagreb in 2019 decreased this means that 17 kilometres of new pipelines and 14 kilometres by 7.3% compared to 2018. of drainage network were constructed, resulting in 1,924 new water supply connections and 1,056 new canal connections. These results are definitely encouraging, but Zagreb Holding and the subsidiary City Waste Disposal still have a long way Investments in the gas network development were also to go before the waste management objectives in the City increased and amounted to HRK 85.3 million in 2019. Among of Zagreb are accomplished and we can only do so with the other things, 34 kilometres of a new distribution network were support and cooperation from the citizens. constructed. 8 2019 ANNUAL STATEMENT Taking care of our employees At the end of the year, namely on 30 December, a new Furthermore, by virtue of the Decision of the Management Collective Agreement for the employees of Zagreb Holding Board, the employees working under arduous conditions will was executed, with effect as of 1 January 2020. The employees’ receive a bonus pay up to the non-taxable amount, which basic wage was increased by 5.8% and non-taxable benefits on average amounts to HRK 400-500 per employee/month. (annual bonus, food allowance and childbirth allowance) were This bonus pay was introduced as a temporary measure also increased, which will result in an increase in the employees’ between 1 August and 31 December 2019 until the execution net income in the next year.