Pursuant provisions of the Securities Market Act and the Rules and Regulations of the Ljubljana Stock Exchange, the company Poslovni sistem Mercator, d.d., Ljubljana hereby informs the stockholders and the interested public in regard to BUSINESS PLAN SUMMARY OF THE COMPANY POSLOVNI SISTEM MERCATOR, d.d., AND THE MERCATOR GROUP FOR THE YEAR 2006 The Supervisory Board of the company Poslovni sistem Mercator, d.d., adopted at its meeting held on February 27 th 2006 the Business Plan of the company and the Mercator Group for the year 2006. Following is a summary of the Business Plan for the year 2006.
Transcript
Pursuant provisions of the Securities Market Act and the Rules and Regulations of the Ljubljana Stock Exchange, the company Poslovni sistem Mercator, d.d., Ljubljana hereby informs the stockholders and the interested public in regard to
BUSINESS PLAN SUMMARY OF THE COMPANY POSLOVNI SISTEM
MERCATOR, d.d., AND THE MERCATOR GROUP FOR THE YEAR 2006
The Supervisory Board of the company Poslovni sistem Mercator, d.d., adopted at its meeting held on February 27th 2006 the Business Plan of the company and the Mercator Group for the year 2006. Following is a summary of the Business Plan for the year 2006.
2
SUMMARY
According to the corporate Business Plan for 2006, the net sales revenues will amount to SIT 465,362 million, which is an 11.0 % increase over the previous year. The planned growth of net sales revenues is mainly expected due to opening new Mercator Centers in Maribor, Zagreb and Rijeka, and new trade centers in Cerknica, Lesce, Krško, Bohinjska Bistrica, Novigrad, Mostar and Novi Beograd (New Blegrade). Furthermore, the increase will also be propelled by revenues from new shopping centers in �a�ak, Dobrinja and Zemuno at the end of 2005 and the takeover of Era retail and wholesale network in Slovenia and Croatia. Profit before taxes of the Mercator Group for 2006 is planned at SIT 9,143 million, which is 85.4 % more than in the year before. Net profit is planned at SIT 6,135 million, representing a 87.9% increase over the year 2005. The growth of gross cash flow from operating activities is also planned for 2006; this category should rise by 12.7 % compared to the previous year, to SIT 30,016 million. Mercator Group will continue to expand and update the retail network, as well as to invest in distribution centers and information technology. In 2006, SIT 40,181 million are planned for investment activities, whereof 63 % will be allocated to investment in Slovenia and the remaining 37 % will be invested abroad. In line with the planned activities we anticipate an increase of the number of employees, which should rise from 16,372 to 17,643, of which 13,870 will be employed in Slovenia. The Management Board is estimating that the planned business activities and accomplishments mean the realization of the planned strategic directives of the Mercator Group.
3
GENERAL INFORMATON
COMPOSITION AND ORGANIZATION OF THE MERCATOR GROUP
The Mercator Group consists of trade and non-trade companies, operating in processing industry, catering and service sector. The company Poslovni sistem Mercator, d.d., is the parent / controlling company of a group of associated companies (The Mercator Group), which will include the following companies in 2006:
• Trade companies in Slovenia: Poslovni sistem Mercator, d.d. (along with merged companies Emona Maximarket, d.d., Alpkomerc Tolmin, d.d., Mercator – Modna hiša, d.o.o.) Mercator – SVS, d.d.
Mercator – S, d.o.o., (Serbia and Montenegro) Mercator – BH, (Bosnia in Herzegovina) Mercator Makedonija, d.o.o., (Macedonia)
• Non-trade companies: Pekarna Grosuplje, d.d.
Belpana, d.o.o., (Croatia) Eta, d.d. Mercator – Emba, d.d. Mercator – Optima, d.o.o. M Hotel, d.o.o.
Considering the product and service specialization, the trade division of the Mercator Group currently comprises a well rounded assortment, offered in specially designed programs:
• Market program, which harbors the development of hypermarkets, supermarkets and smaller neighborhood grocery stores, comfort stores, Hura! discount stores and an internet store. Hura! discount stores are developed in order to meet the requirements of the low end market, i.e. the customers with weaker purchase power and the customers that wish to rationalize their consumption despite their substantial income.
• Technical apparel program, which combines the furniture and interior equipment
programs, digital home and entertainment products, and construction and installation material.
4
• Textile program and beauty program, which comprises clothing for all age groups and a selected assortment of drugstore and fragrance and body care products; two types of textile retail outlets are develop within the program with trademarks Modiana and Avenija mode ('The Fashion Avenue'), while the fragrance and body care program is offered under the trademark Beautique.
• Mercator is the holder of the Intersport license in Slovenia, Croatia, Bosnia and
Herzegovina and Serbia, thus offering a variety of sportswear and equipment by globally acclaimed manufacturers.
OWNERSHIP STRUCTURE On December 31st 2005, 20,401 shareholders were registered in the Share Register of the company Poslovni sistem Mercator, d.d., which means a decrease by 1,458 or 6.67% compared to the year before (21,859 on December 31st 2004). Ownership structure of the company Poslovni sistem Mercator, d.d., on December 31st 2005:
CORPORATE GOVERNANCE General Meeting of Shareholders The Shareholders meeting is convened by the company Management Board, normally once a year, and it can be attended by all shareholders that announce their attendance in writing no later than three days before the meeting, as well as by shareholder representatives and
Other legal entities36.89%
Slovenska odškodninska družba,
d.d.
13.78%
Banka Koper, d.d.15.00%
Individuals24.25%
Investment Funds10.08%
5
proxies that exercise the voting right on behalf of shareholders. General Shareholder Meeting convention must be published in the Delo daily paper and the electronic information system of the Ljubljana Stock Exchange SEOnet, no later than 30 days before the meeting date. Supervisory Board Proceedings of the meetings, convening the meetings and other affairs regarding the work of the Supervisory Board of the company Poslovni sistem Mercator, d.d., are determined by the Company’s Articles of Association and the Procedures for the Work of the Supervisory Board. The Supervisory Board members are paid a net compensation of 80,000 SIT per meeting and the Supervisory Board Chairman is paid 100,000 SIT. Presentation of the Supervisory Board members Since October 30th 2005, the Supervisory Board of the company consists of twelve members with four-year terms: Supervisory Board Chairman 1. Robert Šega Supervisory Board members (shareholder representatives) 2. Matjaž Boži� 3. Gorazd �uk (Supervisory Board vice-president) 4. Dušan Mohorko 5. Kristjan Sušinski 6. Mateja Vidnar Supervisory Board members (employee representatives) 7. Ksenija Bra�i� 8. Jože Cvetek 9. Dragica Derganc 10. Jelka Žekar 11. Ivica Župeti�
On November 13th 2005, Supervisory Board member Mrs. Vera Aljan�i� Falež resigned her post because of her appointment into the Management Board of the company Poslovni system Mercator, d.d. the Employee Council of the company Poslovni sistem Mercator, d.d., has not yet appointed a substitute Supervisory Board member.
6
MELR shares owned by the members of the Supervisory Board of the company Poslovni sistem Mercator, d.d., on January 1st 2006:
Management Board The Management Board of the company Poslovni sistem Mercator, d.d., consists of a president and three board members, who began their five-year term on January 1st 2006. The Management Board members have the following responsibilities: 1. Žiga Debeljak, President of the Management Board:
• Management Board coordination in the company Poslovni sistem Mercator, d.d., and the Mercator Group,
• development and investment, • information technology, • finance, controlling, accounting, internal auditing and investor relations.
2. Mateja Jesenek, Management Board member in charge of marketing and procurement:
• product and service marketing, • market analysis and development, • procurement and supplier relations, • public relations, • other fields subject to Management Board President's assignment.
3. Peter Zavrl, Management Board member in charge of retail, wholesale and logistics:
• retail, • wholesale, • franchise system, • logistics, • other fields subject to Management Board President's assignment.
First and last name Number of shares Share in %Robert Šega - -Mateja Vidnar - -Dušan Mohorko - -Matjaž Boži� - -Gorazd �uk - -Kristjan Sušinski 300 0.0094%Ksenija Bra�i� - -Jože Cvetek 2,000 0.0623%Dragica Derganc - -Jelka Žekar 500 0.0156%Ivica Župeti� - -TOTAL 2,800 0.0873%
7
4. Vera Aljan�i� Falež, Management Board member in charge of human resources, organization, legal and general affairs:
• human resource management, • organization and quality, • legal affairs, • general affairs, • other fields subject to Management Board President's assignment.
Following the Supervisory Board resolution, adopted on the December 13th 2005 meeting, the Management Board Members were appointed for a five-year term, beginning on January 1st 2006. All members of the Management Board of the company Poslovni sistem Mercator, d.d., signed a contract of employment with the company for a pre-defined period of five years, coinciding with their term of office. Monthly salary of the Board members is divided into a fixed and variable part. The fixed part of the gross monthly salary is 15,000 € for the Management Board President Mr. Žiga Debeljak, and 12,000 € for other board members, Mrs. Vera Aljan�i� Falež, Mrs. Mateja Jesenek and Mr. Peter Zavrl. The variable part of the base salary is determined by the Supervisory Board in the range of 0 to 30% of the fixed part and amounts to 15% for 2006. Board Members are also awarded a success bonus, in line with the criteria, designed by the Supervisory Board. MELR shares owned by the members of the Management Board of the company Poslovni sistem Mercator, d.d., on January 1st 2006:
First and last name Number of shares Share in %Žiga Debeljak 1,100 0.0343%Mateja Jesenek 1,000 0.0312%Vera Aljan�i�-Falež 30 0.0009%Peter Zavrl 60 0.0019%TOTAL 2,190 0.0683%
8
STRATEGIC POLICIES OF THE MERCATOR GRROUP IN THE PERIOD 2006 – 2010
VISION
To become the leading retail/wholesale chain for alimentary and daily consumption products for households (market program) in the South-Eastern Europe.
MISSION Our business operation creates benefits for the consumers, employees, suppliers, owners and the broad company's environment.
CORPORATE VALUES We are bound by trust and mutual respect. Our values are:
Nobody knows the customer preferences better than we do. Our values are:
• unwavering education at home and abroad, • constant transfer of knowledge, • ensuring personal growth and development, • excellent staff competitiveness.
Our operations are always diligent and transparent at all levels. Our values are:
• competitiveness as the foundation of any partnership, • accessibility of key information, • consistency and honesty.
We are expanding with a sound corporate culture. Our values are:
• training key human resources for assuming international tasks, • understanding the differences and adjusting to local environment.
9
STRATEGIC POLICIES 1. Largest retailer in Slovenia: To retain the leading market share of market program in
Slovenia, primarily by: • improving the competitiveness of our offer and • development of the retail network.
2. Leading retailer in the neighboring markets of SE Europe: To remain the first or
second largest retailer with market program in the markets of Croatia, Serbia and Montenegro and Bosnia and Herzegovina, especially by:
• strategic partnerships and • development of our own retail network.
3. Entering other SE European markets: To enter or enable the entrance to other markets
in Southeastern Europe, where we could become on of the five leading retailers with market program; this will be attained by:
• purchasing appealing locations, • developing our own retail network and • strategic partnerships.
4. Development of non-market programs: To develop non-market program which:
• enable reaping the potential of positive synergies with market program and/or • enable a concept for development of the second fundamental commercial program
with a long-term potential of growth and profitability in the target markets. 5. Profitable operations: Ensure profitable operations by:
• measures for retaining the level of trade margins, • measures for cost rationalization and increasing the productivity and • measures for increasing the productivity of invested capital.
STRATEGIC GOALS 1. Growth of net sales revenue
a. average annual organic growth in EUR: 5 % b. additional growth by strategic partnerships
2. Target market shares
a. Slovenia 40 % b. Croatia 12 % c. Serbia and Montenegro 10 % d. Bosnia in Herzegovina 5 %
3. Investment and their financing sources
a. annual investment in the amount of 130 – 150 mio EUR b. issuing new capital for forming strategic partnerships/alliances
10
4. Successful business performance and efficiency
a. The Business Performance Optimization project in the Mercator Group (OPTSM): at least 40 million EUR of annual savings from 2008 on (disregarding implementation cost).
b. The Category Management project (UBS): at least 20 million EUR of annual effects from 2009 forward (disregarding the implementation costs).
c. Growth of gross cash flow from operating activities should be 1 percentage point higher than net sales revenue growth + 1/3 effect of the OPTSM and UBS savings, or more in case of strategic partnerships.
d. At least 1 % average annual growth of economic labor productivity in the period 2006-2010 (measured as a ratio of net sales revenues to labor cost).
e. At least 1 % annual productivity growth of invested capital in the period 2006-2010 (measured as a ratio of gross cash flow from operating activities to average net assets).
KEY OBJECTIVES AND TASKS IN 2006
In 2006, the Mercator Group intends to perform the following activities for realization of the five strategic goals:
1. THE LARGEST RETAILER IN SLOVENIA
��������We will continue to expand our retail network in Slovenia by opening a Mercator center in Maribor – Pobrežje and by opening trade centers in Cerknica, Lesce, Krško and Bohinjska Bistrica.
��������We will expand the web store delivery area in the field of market program in Slovenia, and should the economic feasibility calculation prove positive, set up a web store with non-market program products from Mercator's technical range.
��������We will update websites of the Mercaotr Pika charge card and the Healthy Life Club and separate corporate content from sales content.
��������The Business Mercator Pika card will be introduced in the first half of 2006; the card is intended for enterprises and their purchases in the Mercator retail network.
��������We will spread intensively the number of products in the Mercator trademark ranges and introduce two more product ranges: the Mercator line and the Eco line. We shall also reposition the generic product line in order to enable the most affordable deals on daily use products in the market.
��������The holder of Mercator Pika charge card will be enabled a wider applicability of the card, since its operation will be expanded to telecommunications (mobile phones, internet access etc.) and to fuel.
��������On March 1st 2006, all prices in retail units will be given both in Slovenian Tolars and Euros.
��������We will continue to set up the new "store concept" of hypermarkets that was first introduced in �a�ak, in all newly opened or renovated Mercator Centers.
��������We will carry out a central humanitarian campaign aimed at motivating people for quality life and development of reading culture.
��������We shall invest SIT 24,465 million into non-current assets SIT.
11
2. LEADING RETAILER IN THE NEIGHBORING MARKETS OF SE EUROPE
��������We shall open shopping centers in Zagreb, Rijeka and Novigrad in Croatia, Mostar in Bosnia and Herzegovina and New Belgrade in Serbia and Montenegro; furthermore, we shall purchase land in Banja Luka in Bosnia and Herzegovina.
��������We will study the possibilities of strategic partnerships with local retail or commercial chains in Croatia, Serbia and Montenegro and Bosnia and Herzegovina.
��������Special attention will be paid to proactive performing of market analysis for potential locations to place Mercator sales ranges / programs in foreign markets, to performing in-depth studies of potential micro-markets for expanding Mercator retail network, especially in capital cities of the countries that we are already present in.
��������We shall invest SIT 14,770 million into non-current assets.
3. ENTRANCE TO OTHER SE EUROPEAN MARKETS
��������We will study and analyze the opportunities to expand our operations in the Macedonian market.
4. DEVELOPMENT OF NON-MARKET PRODUCT RANGE
��������As a part of the trade consolidation and business rationalization processes, we shall transfer in 2006 the activities of the companies Emona Maximarket, d.d., Mercator – Modna hiša, d.o.o., to the controlling (parent) company and merge them to the controlling company legally as well.
��������We will look for a potential strategic partner.
��������We will merge and reorganize the companies Emona Maximarket, d.d., and Mercator – Modna hiša, d.o.o.;
��������We will continue to seek even greater synergy effects of non-market and market programs.
��������We will introduce the concept of category management.
5. PROFITABLE OPERATIONS
��������We shall perform the business rationalization program of the Mercator Group; the program will be carried out within four sub-programs:
o Optimizing the Mercator Group Organization (OPTSM), o Redesign of the information system (PIS), o Optimizing logistic infrastructure (OLI), o Category management (UBS);
��������We shall ensure revenue growth.
��������We will manage the working capital.
��������We shall disinvest from commercially unviable or unnecessary assets.
12
Financial highlights of the 2006 business plan
Note: Gross cash flow from operating activities is equivalent to the category "cash flow from operating activities before changes in working capital" from the cash flow statement in accordance with IAS 7, shown on page 27.
PLANNED ACTIVITIES OF THE MERCATOR GROUP
DEVELOPMENT AND INVESTMENT
In 2006, our investment activity will be defined by a special policy that is harmonized with newly designed Mercator strategy. The primary orientation of this strategy is expanding and renovation of retail network in the markets where we are currently present and where we wish to become one of the leading retailers. Investment activities in trade operations in 2006 will comprise building Mercator shopping centers, purchasing Era retail units in Slovenia (partly carried out in 2005), building Hura! discount stores and supermarkets, as well as investment into distribution centers, store renovations and information technology. List of planned investments in Mercator Group
SLOVENIA 25,410,404 63.2%Total investments in trade sector 24,465,404 60.9%Total investments in non-trade sector 945,000 2.4%CROATIA 9,178,107 22.8%BOSNIA AND HERZEGOVINA 3,334,965 8.3%SERBIA AND MONTE NEGRO 2,257,420 5.6%TOTAL 40,180,896 100.00%
Country Plan 2006 (in thousand SIT)
Share (in %)
2005 Plan 2006 Index 2005 Plan 2006 Index
Net sales revenues (in SIT 000) 419.067.091 465.362.410 111,0 289.458.574 323.231.216 111,7
Net profit / loss (in SIT 000) 3.264.506 6.135.219 187,9 7.457.061 11.563.354 155,1Gross cash flow from operating activities (in SIT 000) * 26.623.745 30.015.815 112,7 - - -
Capital expenditure (in SIT 000) 57.062.149 40.180.896 70,4 31.569.753 20.742.066 65,7
Long-term financial investment (in SIT 000) 9.498.100 0 - 30.038.419 1.490.985 5,0Return on equity 2,7% 4,6% 170,4 7,0% 9,2% 131,4
Return on sales 0,8% 1,3% 162,5 2,6% 3,6% 138,9Gross cash flow from operating activities per net sales revenue 6,4% 6,4% 101,5 - - -
Number of employees based on hours worked 15.086 16.444 109,0 9.216 10.585 114,9Number of employees based on balance (at Dec 31) 16.372 17.643 107,8 9.458 11.480 121,4
Mercator Group Poslovni sistem Mercator, d.d.
13
List of currently operating Mercator centers and Trade centers in Slovenia and in foreign markets with planned openings in 2006:
MARKETING Basic marketing strategy of Mercator is our concern for customer satisfaction and loyalty. We are well aware that the quality of life has become an increasingly important category, so we have based our marketing strategy on the fact that we want to provide to the customer such products and services which would best satisfy this objective, following the motto to offer the customers the best value for money in every moment. In the year 2006 in the field of customer relations management our plans include activities specifically related to the users of the Mercator Pika charge card to the end of attracting and increasing the loyalty of Mercator customers. We will perform numerous activities aimed at establishing the comprehensive system of customer loyalty management, and above all we would like to expand the use of the Mercator Pika charge card.
Designed activities to be developed in the field of improving customer relations will comprise the following areas:
Key projects within the range of Mercator trade mark, which in 2006 will be used as basis for building recognition and positive image and backed with aggressive communication support, are the following: Lumpi, »Mizica, pogrni se!«, Zdravo življenje, and Generiki. In addition to the above we will also maintain and expand the identification of other ranges of products and brands, and we also plan to develop new ranges of products: ''the MERCATOR range'' (including products of high quality, intended to offer the customer to purchase 'best value for money' option), and ECO (including the products from ecological fabrication and/or treatment). The Product Plan to be included in particular ranges of trading products during the year 2006 comprises 233 new products. Corporate and sales promotion activities in the year 2006 will be devoted to building customer trust in the Mercator brand, expansion of the number of customers and sales, with special attention to specific critical locations. In the year 2006 we will continue with the erection of the 'store concept' hypermarkets, first presented in �a�ak at the end of the year 2005. New sale concept is friendlier to customers, because particular hypermarket departments are designed for easier orientation of the customer. Particular product categories are displayed together at one place – in accordance with the process of product category management. The customer can also easily find help or advice for shopping. Large emphasis is placed on non-alimentary range, and on fresh aliments range. The new concept is also structurally oriented to our target groups of customers: young people, families with children, and retired people. During the year 2006 we will also continue with the specialization of product ranges and selling formats, because the assortment of various sales ranges is one of the competitive advantages of Mercator, but it must be accompanied by the architecture and standardization of relevant formats of various selling forms which will be able to follow both the potential on
Širjenje partnerjev vstop v tujino
Posebne ponudbeDruge skupine
PoslovnaPika kartica –
prva polovica 2006
CRMCRM
KLUBI – dodatne storitve
15
the market, and the specific requirements of the customers for shopping in different sales formats.
MANAGEMENT OF PRODUCT CATEGORIES AND SUPPLIER RELATIONS In the year 2006 we commence the project of comprehensive management of product categories (MPC), and our plans anticipate that its implementation will increase profit for EUR 20 million annually from the year 2009. The project implies acceleration of activities started in recent years, and devised systematically to cover all areas, from the all-inclusive strategy of Mercator, through the assessment of categories, to the implementation and optimization of assortments, positioning, pricing policy, and comprehensive promotional policy by product categories. The new organizational structure of Mercator, which is currently in progress, must support the MPC Project and associated with the program of implementation and with the objectives of each particular category, and the final aim which is planned for the year 2009. To the end of the most successful implementation of the MPC Project in Mercator we will place special emphasis to the training and instruction of personnel, and to new methods of work. Because of the requirements for constant monitoring of work on the Project, both internally and with key suppliers, we will design systemic requirements for data acquirement within the project of information backup of product category movements. Parallel to the preparation of purchasing policy we will also prepare the purchasing plan by sales programs, by markets, and by suppliers, including all suppliers we had been associated in the year 2005, and which meet the criteria defined by the ISO standards. New suppliers appearing during the year with interesting and competitive products, suitable for the expansion and diversification of the existing range of retail assortment, will be evaluated by the same criteria as the existing ones, with additionally applied criteria for the assessment of the financial status of the company from the aspect of satisfying the requirements in the supply of goods. Availability of newly offered products will additionally be quantified by market surveys and surveys of customer shopping habits. In the year 2006 suppliers will be required to improve the level of stability of their prices compared to the year 2005. Low inflation and keen competitive race allow no price increases, so we will try to allow price adjustments only once a year, and if the increases are firmly supported by reasonable professional explanations.
SALES For the year 2006, Mercator Group is planning to realize SIT 465,362 million of net sales revenues, of which SIT 36,408 pertains to revenues from products and services sold and SIT 430,044 million to goods and material sold. Net sales revenues from goods and material are decreased by early payment discounts granted and subsequent discounts, in the amount of SIT 1,090 million.
16
The structure of net sales revenues by business segments and countries
According to the plan, 96.2% of net sales revenues will be realized by trade operations, of which 19.5% will be contributed by operations abroad. Non-trade companies of the Mercator Group are planned to attain a 3.8% share in net sales revenues. Compared to 2005, an 11.0% nominal increase of net sales revenues is planned; 11.0% of these are planned in trade operations, primarily on the account of takeover of retail and wholesale units of the company Era, d.d. (SIT 23,292 million), and the nine-month takeover of retail and wholesale units of the companies Era Tornado, d.o.o., and Trgohit, d.o.o. (SIT 15,384 million). Trade companies in Slovenia are planning a 5.9% nominal increase of net sales revenues in 2006. The planned increase is a consequence of the takeover of retail and wholesale operations of Era, d.d., opening of three trade centers in 2005, opening of 4 trade centers and one Mercator center in 2006, opening of 4 Hura! discount stores and renovation of 10 retail units in 2006 by the end of 2006. Due to uncertainty of the constitutionality of the trade Act amendment regarding the Sunday and holiday opening hours the decrease of 1/3 of Sunday sales respectively SIT 4.5 billion has been taken into consideration in 2006. For 2006, trade companies abroad are planning a 37.2% nominal increase of net sales revenues compared to the year before, mostly due to the planned opening of new Mercator centers in Zagreb and Rijeka and trade centers in Mostar, Novigrad and Novi Beograd (New Belgrade) in 2006, and the newly opened shopping centers in �a�ak, DObrinja and Zemun at the end of 2005, as well as the takeover of retail and wholesale operations of the company Era Tornado, d.o.o. Non-trade companies are planning a nominal increase of the same sales revenues by 6.3% in 2006.
Index2005 Plan 2006
Slovenia 344,984,105 365,208,119 105.9
Croatia 45,093,785 64,482,143 143.0
Serbia and Monte Negro 10,897,321 13,608,516 124.9
Bosnia and Herzegovina 11,617,408 14,638,407 126.0TRADE 412,592,619 457,937,185 111.0
NON-TRADE 17,153,058 18,226,156 106.3
Revenues between segments -10,678,586 -10,800,931 101.1SKUPINA MERCATOR 419,067,091 465,362,410 111.0
in thousand SITNet sales revenues
17
LOGISTICS Plans for the activities in the field of logistics for the Mercator Group have been compiled bearing in mind the current situation in logistics and the processes being practiced in the past year, since mergers by acquisitions of companies are expected to affect the operation, functioning, and integration processes in the area of logistics in the year 2006. Fast growth in the extent of business in Mercator Group is reflected also in the growth of the scope of logistic activities. Current state of equipment and facilities in logistics does not match the extent of operations for modern retail operations. Therefore the plans for the next several years include maximum usage of existing warehousing capacities, and in the long term the plans will have to include central, i.e. optimized architecture of logistic infrastructure. In the year 2006 we will focus on the integration and consolidation of warehousing operations, and optimization of activities in all fields of logistics. Unfortunately, in the year 2006 the final unification of logistic activities in one location is still not feasible. In spite of this, we will aim our efforts to the reduction of the number of locations where logistic processes are performed, and other locations will be used for other purposes, or will be disposed of. The optimization of activities will predominantly comprise the rationalization of processes with the long term effect in reduction of logistic costs. To this end we will carry out activities within the Optimization of Logistic Infrastructure (OLI) project, associated especially with the optimization of customer delivery frequency, optimization of inventories, updated adjustment of the number of employees related to the extent of operations, and changes in the work organization, as well as control and reduction of costs at those segments under our direct control. In the year 2006 we will organize distribution of goods from our available warehousing capacities both to our own retail outlets, and to the external buyers in accordance with the realization of sales plan.
EMPLOYEES Strategic objective in human resources management is to expand and improve employment approaches, processes, methods, and tools for the recruitment of competitive, motivated, and satisfied employees. To this end our plans include the following activities: 1. Providing relevant human resources for efficient operations, raising the structural share of
employees with secondary, college and university education by 5%, increasing the productivity of employees and reduction of costs per employee.
2. Providing relevant compensations of associates for evident efficiency and successful
work.
18
3. Recruitment of competent employees to assure excellence of services and transfer of good practices to foreign markets, and adjustment of on the job training with the requirements of particular sales programs.
4. Maintaining low level of exterior fluctuation (below 5%), low level of absence (below 7%),
and efficient usage of working hours (coverage of total working hours for not less than 83%), favorable organizational atmosphere (average grade 4.00), and relevant corporate culture (average grade 4.00).
5. Providing safe working environment (i.e. reducing the number of accidents at work and
the number of handicapped), increased usage of working hours, increased recruitment of disabled persons and their motivation for active work.
6. Availability of international education and exchange for executive, managing and
professional personnel who display interest for working abroad, opportunity of specific and general training. Gaining international experience will facilitate the key executives and managers to implement uniform standards of business and exchange of good practice.
Number of employeesin Mercator Group
ORGANIZATION AND QUALITY MANAGEMENT Quality management is primarily focused into rationalization of operations in order to boost business efficiency, standardize the processes and prevent and eliminate inconsistencies. The main project in 2006 is management and coordination of the Business performance optimization project in the Mercator Group (OPTSM), which is aimed at improving efficiency and cutting the operation costs. Business process rearrangement is based on standardization, simplifying and, in some cases, centralization, optimization of inventory, warehousing and transport, and reconstructing the information system. These activities will first take place in the parent company Poslovni sistem Mercator, d.d.; subsequently, the business model will be redefined and the processes and business rules will be accordingly transferred to the entire Mercator Group.
Number of employees based
on balance (at Dec 31 2005)
Number of employees based on hours worked
(in 2005)
Number of employees based
on balance (at Dec 31 2006)
Number of employees based on hours worked
(Plan 2006)
Slovenia 12,781 12,478 13,870 12,963
Croatia 2,520 1,772 2,603 2,425
Serbia and Monte Negro 565 379 616 537Bosnia and Herzegovina 506 457 554 519
MERCATOR GROUP 16,372 15,086 17,643 16,444
19
A SOCIALLY RESPONSIBLE COMPANY ��Protection of environment In the year 2006 the guiding principle of Mercator to maintain the leading position among retail chains in Slovenia will be realized also by carrying out comprehensive environmental activities based on the principle of continuous development. We wish to expand and implement our business in the manner of customer friendly trading chain and to this end the corporation will work out the comprehensive assessment of out effect on environment and include activities for the reduction of environmental threat into our processes. These activities for preservation of natural environment in Mercator in the year 2006 include efficient management of the existing system for treating waste packaging, implementation of new system of their treatment along with other types of waste, and reduced consumption of energy. In order to be able to efficiently include the activities regarding the protection of environment into the daily activities of Mercator, we will continue the environmental education for all associates, as well as obtain and respect opinions and motions by our customers, and include them actively into the environmental activities, especially children. We will also continue our already employed practice to strictly follow the standing legislation regarding construction of facilities and physical planning in the erection and modernization of our shopping facilities in Slovenia and abroad. ��Mercator has a sense for environmental requirements We will continue with the development of central humanitarian activities, characterized by features like the all-Slovenian nature, improving quality of life, identification of Mercator with the relevant message, and actuality. During the year 2006 we plan to carry out at least one charity action with a supplier, and continue the project 'We all were once children'. As sponsors of a variety of projects we will actively participate in the fulfillment of requirements in wide social surroundings. Sponsor and donation funds will be devoted to the development of sports, culture, education, and humanitarian projects contributing to the improvement of the quality of life.
INFORMATION TECHNOLOGY In the IT field, we intend to ensure regular running of existing applications, to design new applications and to integrate the purchased packages and decrease the number of different applications for the same business processes. The main project for 2006 is the information system reconstruction for basic and support processes, based on the fundamental policy of providing information support on the transaction level by implementing package solutions. We wish to aim our own development efforts to fields that have not been appropriately tended to within package solutions, and
20
fields where we can achieve certain competitive advantages by devising our own solution. Purchased and own solutions will be integrated in the framework of a common architecture. Due to large scale and complexity of the anticipated changes, we have set up a special Information System Reconstruction (PIS) program which comprises a project of reconstructing the support functions information system, the project of reconstructing the goods handling/management information system and the project of arranging the registration data. We will also continue the activities of the key projects of computer data exchange and information support to teamwork. Together with Mercator companies in foreign markets, we shall provide unified information support to these companies and their inclusion into the information system for management and decision support in the Mercator Group.
FINANCIAL OPERATIONS In 2006, financial operations will be oriented towards finding favorable financing sources, maintaining financial stability of the Mercator Group and financial risk management. Mercaotr Group will procure the funding for planned investment and refinancing the existing debt from different sources, thus improving its financial flexibility; we shall continue our efforts to attain the target capital composition of 1:1. • In the beginning of 2006, the capital increase payment was made in the total amount of
SIT 14,615 million, which will be followed by the due entry into the Court Register and by an additional capital increase;
• we shall increase the amount of bank loans, especially in foreign markets, whereby we expect the increase in financing by syndicated loans;
• We intend to further increase the scale of financial lease (which involves lower current liabilities of debt servicing), especially on foreign markets and already purchased locations. In the beginning of 2006, four operational lease agreement and two financial lease agreements of the company Era, d.d., will be transferred to Mercator.
21
CREATING VALUE FOR THE SHAREHOLDERS
Capital increase of the company Poslovni sistem Mercator, d.d. The capital increase process of the company Poslovni sistem Mercator, d.d., is summarized as follows:
• Kapitalska družba, d.d. (National Capital Fund), paid on October 27th 2005 the entire purchase price for 106,950 new shares in total amount of 4,064,100,000.00 SIT;
• Slovenska odškodninska družba, d.d. (Slovenian Compensation Fund), paid on
December 15th 2005 the entire purchase price along with pertaining interest for 106,950 new shares in the total amount of SIT 4,089,153,037.50;
• The company KD Group, d.d., paid on January 31st 2006 the purchase price and the
pertaining interest for 106,950 new shares in the total amount of SIT 4,115,318,355.00;
• The company KLM, d.d., paid on October 28th the purchase price for 40,700 shares in total amount of SIT 1,546,600,000.00; on January 31st 2006, the same company paid for additional 20,790 shares, amounting to SIT 799,976,331.00, including the interest. Thus, the company KLM, d.d., paid by January 31st 2006 the purchase price for 61.490 shares of the company Poslovni sistem Mercator, d.d.
Considering the necessary approvals and the relevant administrative proceedings, Mercator estimates that the newly issued shares will be registered with KDD (Central Securities Clearing Corporation) and listed on the Ljubljana Stock Exchange organized market by April 2006. At the meeting held on July 19th 2005, the company's Supervisory Board also adopted the resolution that the offered shares which are not paid for by one of the investors or are only paid for partially, are offered to other investors, either in their entire sum or in a proportionate share. Since KLM, d.d., did not fully exercise the right to purchase 320,850 shares, the companies that took part in the capital increase were be invited to buy the remaining 259.360 shares, or up to 86.453 shares per company. As the existing investors waived the preemptive right to pay for the additionally offered shares, these will either remain unsold, or will be offered to a new investor, subject to Supervisory Board's agreement. Dividend policy In 2001, the company Poslovni sistem Mercator, d.d., based its dividend policy for the period 2001–2004 on shareholder expectations, equity composition of the company, investment policy and taxation considerations. The dividend policy for 2006 remains unchanged and continues to allocate a part of the net profit for dividends. In 2006, a payment of SIT 600 per share is planned.
22
Dividend level 2003 2004 2005 Plan 2006
Gross dividend per share (in SIT) 450 500 318* 600
*Single deviation from the regular dividend policy in 2005 is a consequence of taxation considerations.
RISK MANAGEMENT
In 2006, special attention will be paid to the following fields:
• in the field of business risk, we shall continue the in-depth analysis of all critical risks, defined in 2005; the following risks will be particularly heeded:
�� the process on non-competitive prices, �� the process of new competition arrival, �� creating new offers and product ranges in shopping centers, ��monitoring investment efficiency, ��weaker position in negotiations with multinational suppliers, compared to
foreign competition; • in the field of financial risks, interest and exchange rate risks remain the primary
concerns; • in the field of operational risks we will pay more attention to risk, responsibility
towards third persons and maintenance risk, as we shall continue to carefully manage cost risks and IT related risks..
Additional activities in 2006 will be primarily oriented towards:
• Expanding the findings of the Risk Management Council of the Mercator Group to all fields that take part in the risk management process.
• More active inclusion of subsidiaries into the risk management process and harmonization of reports and statements of the subsidiary undertakings with the parent company Risk Management Council reports.
• Continuing the process of systemization and formalization of performing and controlling the risk management measures, designed by the Risk Management Council.
• Further development of the Risk Register. The Management Board estimates that the level of exposure to particular types of risks will not change significantly, compared to 2005.
23
FINANCIAL STATEMENT PLAN
BASIC ACCOUNTING POLICIES
The Shareholder Assembly Meetings adopted the resolutions that as of January 1st 2006, the Mercator Group shall compile Annual reports solely according to IFRS. The planned financial statements of the company Poslovni sistem Mercator, d.d., and the consolidated financial statements of the Mercator Group for 2006 have been prepared only in accordance with the currently valid IFRS. Consolidated financial statements (balance sheet, income statement, cash flow statement and statement of changes in equity) shall be compiled according to the single company method. In line with this method, the effects of all transactions between associated enterprises are entirely omitted. Consolidated financial statements include only subsidiaries that are controlled by the parent company.
TOTAL LIABILITIES 235,330,789 248,261,542 63.9% 105.5TOTAL LIABILITIES 367,378,895 388,220,780 100.0% 105.7Number of employees based on balance (at Dec 31) 16,372 17,643 0.0% 107.8
25
Income Statement
* Gross cash flow from operating activities is equivalent to the category Cash flow before changes in working capital from the Cash flow statement according to IAS7, shown on page 26.
in SIT 000
Type of revenue / expense / cost Unaudited 2005 Plan 2006 Index
1 2 3 4 5=4/3A. NET SALES REVENUE 419,067,091 465,362,410 111.01. Revenue from products sold 6,349,615 6,905,448 108.82. Revenue from services sold 27,993,170 29,503,462 105.43. Revenue from goods and material sold 384,724,307 428,953,501 111.5
B.COST OF GOODS SOLD OR PURCHASE VALUE OF GOODS SOLD -301,472,890 -337,425,294 111.9
1. Production costs -12,307,023 -11,271,325 91.62. Purchase value of goods and material sold -289,165,867 -326,153,969 112.8C. GROSS PROFIT/LOSS FROM SALES 117,594,201 127,937,116 108.81. Other net operating revenues 3,160,598 1,584,628 50.12. Selling costs -95,459,083 -90,423,246 94.73. Overhead/administrative costs -18,012,362 -24,364,691 135.3�. NET OPERATING PROFIT/LOSS 7,283,355 14,733,808 202.31. Financial revenue 3,653,392 1,067,158 29.22. Financial costs -6,004,330 -6,658,111 110.9D. PROFIT / LOSS (BEFORE TAXES) 4,932,416 9,142,854 185.41. Income tax -2,217,990 -3,557,636 160.42. Deferred tax 550,080 550,000 100.0E. NET PROFIT/LOSS FOR THE FINANCIAL PERIOD 3,264,506 6,135,219 187.9F. Net profit/loss for the majority interest 3,186,555 5,993,020 188.1G. Net profit/loss for the minority interest 77,951 142,198 182.4H. Gross cash flow from operating activities * 26,623,745 30,015,815 112.7
26
Cash Flow Statement
in SIT 000
Cash flows 2005 Plan 2006Net profit / loss before taxes 4,932,416 9,142,854Depreciation / amortization 14,670,233 15,477,144Proceeds from sale of property, plants and equipment -769,127 -352,151Negative goodwill 2,629,408 0Impairment of tangible non-current assets 3,182,970 0Amortization of negative goodwill -286,608 0Interest income -703,718 -474,857Interest expenses 4,972,937 5,797,824Proceeds from sale of financial assets -1,487,204 425,000Net change in provisions -517,562 0Gross cash flow from operating activities before change in working capital 26,623,745 30,015,815Changes in working capitalOperatig and other receivables -1,789,016 -790,681Inventories -4,342,667 492,837Operating and other liabiliites/payables 3,175,604 5,342,939Cash flow from operating activities 23,667,666 35,060,911Interest income 703,718 474,857Interest expenses -4,972,937 -5,797,824Tax expenses -2,217,990 -3,557,636Offset cash flow from operating activities 17,180,457 26,180,308INVESTMENT ACTIVITIESAcquisitions of subsidiary undertakings -6,386,320 0Purchase of non-current tangible assets -46,352,854 -39,225,584Purchase of long-term intangible assets -789,009 -955,312Net change/movement in long-term financial investments -2,739,000 0Purchase of short-term financial investments 0 0Expenses for borrowings made/granted -211,249 6,667Proceeds from disposal of non-current tangible assets 2,436,015 3,243,115Proceeds from disposal of long-term intangible assets 28,104 0Proceeds from borrowings made and disposal of lon-term financial investments 627,459 20,152Proceeds from borrowings made and disposal of lon-term financial investments 0 304,089Offset cash flow for investment activities -53,386,854 -36,606,873FINANCING ACTIVITIESProceeds from issuing of ordinary shares 9,699,853 4,915,295Expenses for acquisition of treasury shares -1,250,976 0Proceeds/expenses from borrowings made 30,064,394 7,270,197Expenses for shareholder dividend disbursement -995,938 -2,154,506Offset cash flow for financing activities 37,517,333 10,030,985Net increase / (decrease) in cash and cash equivalents 1,310,936 -395,580Net flow of cash and cash equivalentsBeginning of financial year 2,664,001 3,960,805Increase / (decrease) 131,936 -395,580Foreign exchange adjustment -14,132 -50,626End of financial year 3,960,805 3,514,599
27
Statement of Changes in Equity
Poslovni sistem Mercator, d.d. Management Board
in SIT 000
I. Share capitalII. Other reserves
III. Retained earnings
Minority capital Total
Balance at January 1 2006 33,380,064 17,090,225 78,468,061 3,109,757 132,048,107Net profit / loss for the financial year 0 0 5,993,020 142,198 6,135,219Capital increase 1,277,400 0 3,637,895 0 4,915,295Dividend disbursement 0 0 -2,154,506 0 -2,154,506Currency translation differences 0 -755,153 0 0 -755,153Change in ownership in subsidiaries 0 0 0 -229,724 -229,724
Equity balance at December 31 2006 34,657,464 9,972,976 82,306,575 3,022,231 139,959,237
