61
Business Report of the Mercator Group and the company Poslovni sistem Mercator, d.d., for the period 1-6 2012 Poslovni sistem Mercator, d.d. Management Board August 2012
Business Report
of the Mercator Group
and the company Poslovni sistem Mercator, d.d.,
for the period 1-6 2012
Poslovni sistem Mercator, d.d.
Management Board
August 2012
i
Table of contents
SUMMARY ........................................................................................................................................ 1
INTRODUCTION ............................................................................... 3
MERCATOR GROUP PROFILE ....................................................................................................... 3
MERCATOR GROUP BUSINESS STRATEGY ............................................................................... 6
MAJOR EVENTS IN THE PERIOD 1-6 2012 .................................................................................. 7
MERCATOR GROUP PERFORMANCE HIGHLIGHTS IN THE PERIOD 1-6 2012 .................... 8
BUSINESS REPORT .......................................................................... 9
EFFECT OF ECONOMIC CONDITIONS AND COMPETITION ON MERCATOR GROUP
OPERATIONS IN THE PERIOD 1-6 2012 ....................................................................................... 9
DEVELOPMENT AND REAL ESTATE MANAGEMENT ........................................................... 11
SALES AND MARKETING ............................................................................................................ 15
COUNTER-CRISIS MEASURES .................................................................................................... 24
FINANCIAL MANAGEMENT ........................................................................................................ 25
MERCATOR SHARE AND INVESTOR RELATIONS .................................................................. 27
RISK MANAGEMENT .................................................................................................................... 30
SUSTAINABILITY REPORT ......................................................... 36
RESPONSIBILITY TO CUSTOMERS ............................................................................................ 36
RESPONSIBILITY TO EMPLOYEES ............................................................................................ 37
RESPONSIBILITY TO NATURAL ENVIRONMENT .................................................................. 38
RESPONSIBILITY TO SOCIAL ENVIRONMENT ....................................................................... 39
RESPONSIBILITY TO SUPPLIERS ............................................................................................... 39
RESPONSIBILITY OF PROVIDING SECURITY ......................................................................... 39
RESPONSIBILITY TO QUALITY .................................................................................................. 40
FINANCIAL REPORT ..................................................................... 41
ACCOUNTING POLICIES .............................................................................................................. 41
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE MERCATOR GROUP
........................................................................................................................................................... 42
Condensed consolidated statement of financial position ............................................................... 43
Condensed consolidated income statement ................................................................................... 44
Condensed consolidated statement of comprehensive income ...................................................... 44
Condensed consolidated statement of changes in equity ............................................................... 45
Condensed consolidated statement of cash flows .......................................................................... 47
Notes to condensed consolidated interim financial statements ..................................................... 48
FINANCIAL REPORT OF THE COMPANY POSLOVNI SISTEM MERCATOR, D.D. ............. 51
Condensed statement of financial position .................................................................................... 52
Condensed income statement ........................................................................................................ 53
Condensed statement of comprehensive income ........................................................................... 53
Condensed statement of changes in equity .................................................................................... 54
Condensed statement of cash flows ............................................................................................... 55
Notes to condensed interim financial statements .......................................................................... 56
MANAGEMENT BOARD STATEMENT PURSUANT TO ARTICLE 113 OF THE MARKET IN
FINANCIAL INSTRUMENTS ACT ................................................................................................ 59
1
SUMMARY
Mercator Group revenue in the first half of 2012 remains the same as in the corresponding
period last year; revenue growth in international markets just under 5 percent.
In the first half of 2012, Mercator Group revenue exceeded EUR 1.4 billion which is approximately
the same as in the corresponding period last year. Revenue in Slovenia dropped by 1.6 percent while
in international markets, it rose by 4.9 percent. Greatly challenged economic recovery, mounting
uncertainty, increase in fuel prices, and changes in exchange rates had a strong and pronouncedly
negative effect on Mercator Group operations and performance. This resulted in negative Mercator
Group income in the amount of EUR 16.5 million. The Management Board of Poslovni sistem
Mercator, d.d., adopted three sets of counter-crisis measures to proactively hedge the risks related to
the hostile market situation.
Harsh economic conditions in all Mercator's markets
In the first half of 2012, the euro zone saw weak economic activity and rising uncertainty. In Slovenia
and international markets alike, Mercator is still facing high levels of unemployment leading to starkly
reduced purchasing power of the consumers. Changes in consumer behaviour are manifest in the drop
of shopping frequency, lower value of shopping basket, and in the tendency to look for the most
inexpensive retailers and products. Increase in the value-added tax rate in Croatia exerted negative
pressure on consumption as well. Higher prices of fuel and some raw materials caused upward
pressure on product prices. Depreciation of the Serbian dinar also had a negative effect on Mercator's
results.
Further growth in international markets despite negative currency translation differences
In the period 1-6 2012, Mercator Group generated revenue of EUR 1,402,022 thousand, which is
47.3% of the figure planned for the entire year. Revenue in Slovenia shrunk by 1.6 percent relative to
the corresponding period last year. In international markets, however, revenue continued to grow at a
rate of 4.9%; assuming constant exchange rates, the growth would have amounted to 9.4%. The
highest growth was seen in Bosnia and Herzegovina as Mercator's revenue there soared by
54.6 percent as a result of the takeover of the company Drvopromet, d.o.o.
Continuing with strategic projects and development activities
Mercator Group invested EUR 37,281 thousand in the development of retail network in the period 1–6
2012, gaining over 31 thousand square meters of new gross area. We carried on the project of
refreshment of FMCG offer; 24 supermarkets in Slovenia and 9 supermarkets in Croatia were
refurbished according to the new sales concept. We are aware of the rapid changes in the market that
move from making major purchases in hypermarkets towards increasing smaller purchases and
visiting neighbourhood stores. Therefore we have engaged actively in the development of different
store formats in order to adapt to changes in shopping habits
Accelerated continuation of monetization project
To reduce the debt and thereby to relieve the banking sector in Slovenia, we want to continue with the
monetization project. With the start of the new Management Board, the project was accelerated. We
have received several non-binding offers by the global real estate investment funds, which we assess
as a positive signal for the continuation and successful conclusion of the project. Mercator will be able
to reduce the debt by the end of this year.
Employees
As at June 30, 2012, Mercator Group had 24,414 employees. Relative to the end of 2011, the number
of employees rose by 148 or 0.6 percent, which is mostly the effect of the acquisition of the trade
activities of Drvopromet, d.o.o.
2
Stable Financial Operations
In the period 1–6 2012, Mercator Group succeeded in improving the composition of financial
liabilities by maturity and reducing the net financial debt as at the last day of the financial period.
Optimization of working capital and current liability management, and the resulting additional release
of financial assets tied up in working capital was among the key projects at all Mercator Group
companies in the first half of 2012. In the first half of 2012, we thus managed to decrease the value of
inventory by 11.4 percent or EUR 35,477 thousand.
Business performance
Mercator Group performance was negatively affected especially by strong fluctuation of the Serbian
dinar exchange rate, as well as by the increase in the prices of fuel and some raw materials.
Responding to all these adverse circumstances, we allocated more resources in the first half of the year
for sales promotion and increasing the sales, as well as for adjustment of our assortment to the changes
in consumer behaviour. EBITDAR amounted to EUR 91.6 million (42.1% of the annual plan); Group
results from operating activities in the first half reached EUR 24.5 million (32.1% of the amount
planned for the entire year 2012). In the period 1-6 2012, Mercator Group incurred a loss of EUR 16.5
million as a result of the strongly detrimental effects of the economic crisis and negative currency
translation differences pertaining to the substantial depreciation of the Serbian dinar.
Measures to rationalize the operations
Challenging economic conditions and uncertainty in the market require efficient operations. To this
end, the Management Board of the company Poslovni sistem Mercator, d.d., launched upon the start of
its term a series of measures to rationalize the operations. Three sets of counter-crisis measures were
developed. The first stage to be completed by the end of 2012 includes simple, yet very specific short-
term measures with instant cost cutting effects. The second stage will introduce more challenging and
complex changes with more long-term consequences. The third stage will involve long-term strategic
measures and policies based on the previously implemented short-term and long-term measures.
3
INTRODUCTION
MERCATOR GROUP PROFILE
Company profile
The company Poslovni sistem Mercator, d.d., is the controlling company of a group of associated
companies (the Mercator Group), one of the largest corporate groups in Slovenia and the entire region
of Southeastern Europe.
Full name Poslovni sistem Mercator, d.d.
Abbreviated name Mercator, d.d.
Activity G 47.110
Retail in non-specialized food retail outlets
Registration number 5300231
VAT tax code 45884595
Court registry date January 1, 1990
Company share capital as at
June 30, 2012 EUR 157,128,514.53
Number of shares issued and paid-up as at
June 30, 2012 3,765,361
Share listing Ljubljana Stock Exchange, d.d., prime market, symbol
MELR
President of the Management Board Toni Balažič
Senior Vice Presidents Drago Kavšek, Igor Maroša, Stanka Pejanović
Supervisory Board Chairman Matej Lahovnik
Deputy Supervisory Board Chairman Rok Rozman
4
Mercator Group Composition
As at June 30, 2012, Mercator Group included the following companies:
MERCATOR GROUP
MERCATOR OPERATIONS SLOVENIA
Poslovni sistem Mercator, d.d., Slovenia
Mercator IP, d.o.o., Slovenia (100.0 %) M - Tehnika, d.d., Slovenia (100.0 %)
M.COM, d.o.o., Slovenia (100.0 %)* · Mercator centar tehnike d.o.o. za trgovinu i usluge,
Croatia (100.0 %)
M - Energija, d.o.o., Slovenia (100.0 %) TP Vesna, d.d., Slovenia (100.0 %)
MERCATOR OPERATIONS SOUTHEASTERN EUROPE
Mercator - S, d.o.o., Serbia (100.0 %) Mercator - B, e.o.o.d., Bulgaria (100.0 %)
Mercator - H, d.o.o., Croatia (99.9 %) Mercator - A, sh.p.k., Albania (100.0 %)
Mercator - BH, d.o.o., Bosnia and Herzegovina
(100.0 %) Mercator Makedonija, d.o.o.e.l., Macedonia (100.0%)*
M - BL, d.o.o., Bosnia and Herzegovina (100.0 %) Mercator - K, l.l.c., Republic of Kosovo (100.0 %)*
Mercator - CG, d.o.o., Montenegro (100.0 %)
MERCATOR REAL ESTATE
Investment Internacional, d.o.o.e.l., Macedonia
(100.0 %)* Argentum - D, d.o.o., Slovenia (100.0 %)**
Mercator - Optima, d.o.o., Slovenia (100.0 %) Argentum - E, d.o.o., Slovenia (100.0 %)**
M - nepremičnine, d.o.o., Slovenia (100.0 %) Argentum - F, d.o.o., Slovenia (100.0 %)**
Argentum - A, d.o.o., Slovenia (100.0 %)** Argentum - G, d.o.o., Slovenia (100.0 %)**
Argentum - B, d.o.o., Slovenia (100.0 %)** Argentum - H, d.o.o., Slovenia (100.0 %)**
Argentum - C, d.o.o., Slovenia (100.0 %)** Argentum - I, d.o.o., Slovenia (100.0 %)**
OTHER OPERATING ACTIVITIES
Intersport ISI, d.o.o., Slovenia (100.0 %) Modiana, d.o.o., Slovenia (100.0 %)
· Intersport S-ISI, d.o.o., Serbia (100.0 %) · Modiana, d.o.o., Serbia (100.0 %)
· Intersport H, d.o.o., Croatia (100.0 %) · Modiana, d.o.o., Croatia (100.0 %)
· Intersport BH, d.o.o., Bosnia and Herzegovina
(100.0 %)
· Modiana, d.o.o., Bosnia and Herzegovina
(100.0 %)
Mercator - Emba, d.d., Slovenia (100.0 %)
* The company has not yet commenced its business operations.
** Project-based real estate company, established for real property monetization purposes.
Corporate governance
Supervisory Board of the company Poslovni sistem Mercator, d.d., held nine sessions in the period
1-6 2012. Six new Supervisory Board members were appointed at the Shareholders Assembly on
March 30, 2012. The New Supervisory Board held their first session on April 10, 2012. At the first
session, the Supervisory Board appointed Mr. Matej Lahovnik as the new Supervisory Board
chairman. They also appointed the new members of the Audit Committee and the Human Resource
Committee. Moreover, they were presented the Business Report of the Mercator Group and the
company Poslovni sistem Mercator, d.d., in the period 1-3 2012. On March 29, 2012, the five-member
Management Board, consisting of Mr. Žiga Debeljak, Mrs. Vera Aljančič Falež, Mrs. Melita
Kolbezen, Mrs. Stanka Pejanović (Čurović), and Mr. Peter Zavrl, submitted their resignation. At the
session held on May 22, 2012, the Supervisory Board relieved Mr. Žiga Debeljak of his duties as the
President of the Management Board, effective as of May 31, 2012. The Supervisory Board further
agreed that Mr. Toni Balažič was the most appropriate candidate to succeed Mr. Debeljak as the
President of the Management Board. At their 6th meeting, the Supervisory Board relieved of duty the
Management Board member Mrs. Melita Kolbezen, effective May 31, 2012, and appointed a new
5
Senior Vice President in charge of finance and IT Mr. Drago Kavšek. At their 7th meeting, the
Supervisory Board relieved of duty Mr. Peter Zavrl, Mrs. Vera Aljančič Falež, and Mrs. Stanka
Pejanović (Čurović), all effective June 18, 2012. Mrs. Stanka Pejanović (Čurović) was reappointed as
Senior Vice President in charge of Mercator Operations Southeastern Europe. The Supervisory Board
furthermore appointed Mr. Igor Maroša as Senior Vice President in charge of Mercator Operations
Slovenia and Croatia. All new Management Board members were appointed for a term of five years.
As of June 19, 2012, Mrs. Vera Aljančič Falež assumed the post of assistant to the President of the
Management Board in charge of human resources, legal affairs, and organization; Mr. Peter Zavrl was
appointed advisor to the President of the Management Board in charge of retail.
6
MERCATOR GROUP BUSINESS STRATEGY
Vision
To be the consumers' first choice when shopping for fast moving consumer goods and home
products.
Mission
Mercator’s mission is:
1) To provide optimum value for the consumers with our service and offer of fast moving
consumer goods and home products.
2) To provide consumers with the best possible service in a pleasant shopping environment, by
offering expert support of highly motivated employees.
3) To provide returns for our shareholders through growth and efficient operation.
4) To manage our operations in a way that improves the quality of life in our social and natural
environment.
Corporate values
Following are Mercator's corporate values:
Responsibility
Each employee is responsible for their work.
Responsiveness
Prompt response is our advantage.
Integrity
We work honestly and fairly.
Learning
We build on our knowledge and experience.
Respect
Each individual matters and deserves respect.
Cooperation
What one person cannot do, we can
accomplish together.
Strategic objectives
Following are Mercator Group's fundamental strategic goals:
1) In our domestic market (Slovenia):
a) To retain the position of the leading fast moving consumer goods retailer.
b) To consolidate the position of the second largest retailer of home products.
c) To develop supplementary trade services related to our customer loyalty system.
2) In existing foreign markets (Serbia, Croatia, Bosnia and Herzegovina, Montenegro):
a) To consolidate or attain the position of the second largest fast moving consumer goods
retailer.
b) To rank among the top three retailers of home products.
c) To develop supplementary trade services related to our customer loyalty system.
7
MAJOR EVENTS IN THE PERIOD 1-6 2012
Retail network development
In the period 1-6 2012, we:
- invested EUR 37,281 thousand,
- divested EUR 1,079 thousand,
- acquired 44 new units spanning 31,137 square meters of gross retail area on all our markets of
operations, which includes real estate owned by Mercator and operating leases.
Strategic combinations
On February 23, 2012, the agreement on strategic combination based on which the company Poslovni
sistem Mercator, d.d., increased its shareholding in the company Vesna, trgovsko podjetje (trade
company), d.d., Ljutomer, from 45 percent to 100 percent, thus acquiring seven stores in Northeastern
Slovenia, which operated as Mercator franchise units to date, entered into force.
Corporate activities
In February 2012, the Mercator Group Management Board held an international press conference to
present the Group operations and performance in 2011 and the business plans for this year.
On April 24, 2012 Mercator participated on 7th Slovene Capital Markets Day, organised by Ljubljana
Stock Exchange and partners - the Central Securities Clearing Corporation (KDD), Alta Invest, d.d.
and NLB, d.d., where the companies presented themselves through individual presentations and one-
on-one meetings aimed at exclusively portfolio investors.
Awards received
At the 12th competition of bread, pastry, and pasta, held by the Bakery Section of the Chamber of
Agricultural and Food Companies with the Chamber of Commerce and Industry of Slovenia,
Mercator's own bakery Pekarna Grosuplje received the highest possible rating for all nine zero-
additive products submitted
8
MERCATOR GROUP PERFORMANCE HIGHLIGHTS IN THE PERIOD 1-6 2012
Mercator Group
1-6 2012
1-6 2011
restated*
Index
1-6 2012/
1-6 2011
restated*
Revenue (EUR thousand) 1,402,022 1,387,368 101.1 Results from operating activities (EUR thousand) 24,504 47,633 51.4 Profit before income tax (EUR thousand) -13,318 24,200 - Profit for the financial period (EUR thousand) -16,536 18,525 - EBITDA (EUR thousand) 64,245 87,658 73.3 EBITDAR (EUR thousand) 91,641 109,066 84.0 Capital expenditure (EUR thousand) 37,281 67,766 55.0 Return on sales -1.2% 1.3% - EBITDA / revenue 4.6% 6.3% 72.5 EBITDAR / revenue 6.5% 7.9% 83.1 Number of employees based on hours worked 22,998 22,219 103.5 Number of employees as at the end of the period 24,414 23,620 103.4
* Considering the changes in accounting policies, revenue for the period 1-6 2011 was restated accordingly. Detailed
explanation is provided in the financial report.
9
BUSINESS REPORT
EFFECT OF ECONOMIC CONDITIONS AND COMPETITION ON MERCATOR GROUP OPERATIONS IN THE PERIOD 1-6 2012
Economic conditions in the markets of Mercator operations in the period 1-6 2012
The negative trend seen in previous years has persisted to this day and the short-term economic
indicators in the euro zone continue to forecast feeble economic activity paired with high uncertainty.
In addition to the slowdown in the growth of international trade, the bleaker outlook was mostly a
result of the uncertainty regarding the Greek elections, amount of aid required for the Spanish banking
system, and sustainability of sovereign debt in Italy. In the banking sector, conditions are once again
turning more severe as the liquidity of the European banks has been greatly impaired. The banks avoid
providing loans as they are uncertain about their exposure to the troubled countries. Stagnation of
economic activity was seen in the entire euro zone. Manufacturing output in processing industries
dropped; retail revenue continued to slip; and construction activity was also in decline. Real gross
domestic product growth of the euro zone in the first quarter of 2012 remained at approximatela the
same level as in the same period last year, after shrinking by 0.3 percent the quarter before. In
Slovenia, too, the value of short-term indicators paints a similar picture. Retail revenue hit a low of the
last two years and construction and manufacturing output also remains depressed. Household
consumption is low and consumer confidence has suffered another blow in the recent months.
Consumer confidence indicators slumped in the second quarter. Combined with the increase in savings
rate of individuals as a response to instability in the labour market and high unemployment, this has a
negative effect on consumption, particularly of durables. The drop in confidence in the entire euro
zone resulted in the rise of year-on-year prices of fuels and unprocessed food. Inflation in the euro
zone is gradually dropping. In June, it stood at 2.4%, which is 0.3 percentage point less than as at the
beginning of the year.
6-month EURIBOR was at 0.930% at the end of the first half of 2012, which is 0.676 percentage point
lower than at the beginning of the year (at the start of 2012, the 6-month EURIBOR was at 1.606%).
Average 6-month EURIBOR in the period 1-6 2012 was 1.163%; in the corresponding period last
year, it amounted to 1.530%. European Central Bank's key interest rates in the period 1–6 2012
remained unchanged; however, they were decreased by 25 base points as at July 5, 2012.
Slovenia's credit rating saw a strong downward revision in early August. Government bonds were
downgraded by three notches from A2 to Baa2. While Slovenia is facing rising costs of financing and
restricted access to financial markets, the state banks are increasingly dependent for liquidity on the
European Central Bank.
Slovenia
Economic growth in 2011 was negative at -0.20%; for 2012, the economy is forecast to shrink even
more than in 2011 as anticipated GDP growth rate is at -1.40%. In the first quarter of 2012, GDP
growth stood at -0.20%. In June, year-on-year inflation was at 2.3%. In 2012, inflation is predicted at
2.20%.
Serbia
Economic growth in Serbia in 2011 amounted to 1.60%. For 2012, zero growth rate is estimated for
the Serbian economy. Inflation reached 7% in 2011; in 2012, it is expected to be only 0.50 percentage
10
point lower at 6.50%. In the first half of 2012, GDP rose by 1.30 percent. In May, year-on-year
inflation was at 3.9%. Average exchange rate of the Serbian dinar for 2012 is forecast to amount to
RSD 113.00 per 1 EUR, which is 10.8 percent more than the average rate of RSD 101.95 per 1 EUR in
2011. In the first half of 2012, average exchange rate of the Serbian dinar was at RSD 110.92 per
1 EUR.
Croatia
In 2011, economic growth rate in Croatia equalled zero; inflation was at 2.30%. GDP growth in 2012
is expected to be negative at -1.00%. According to the analysts, inflation in 2012 is expected at 3.00%.
In the first quarter of 2012, the economy shrunk by -1.30 percent. Average exchange rate for Croatian
kuna amounted to HRK 7.43 per 1 EUR in 2011. For 2012, the exchange rate is forecast at HRK 7.56
per 1 EUR. Average rate in the first half of 2012 was at HRK 7.54 per 1 EUR.
Bosnia and Herzegovina
The growth rate of GDP in 2011 amounted to 1.90% while inflation reached 3.60%. In 2012,
economic growth rate in Bosnia and Herzegovina is expected to be zero; inflation is anticipated at
2.20%. In June, year-on-year inflation was at 2.2%. The exchange rate of the convertible mark is
pegged to euro at the rate of KM 1.95583 per 1 EUR.
Montenegro
In 2011, Montenegro saw economic growth of 2.50% and inflation rate of 3.50%. In 2012, inflation
rate is forecast to be the same as in the year before. Economic growth in 2012 is expected to decelerate
to 0.50%. Montenegrin official currency is the euro.
Bulgaria
In 2011, the growth of the Bulgarian economy was at 1.70%. For 2012, somewhat slower growth is
expected, at 0.50%. In 2011, inflation rate was at 3.40%; the forecast for 2012 is at 2.70 percent. In the first
half of 2012, inflation was at 0.50%; GDP growth also amounted to 0.50%. The exchange rate of Bulgarian
lev is pegged to euro at the rate of BGN 1.95583 per 1 EUR.
Albania
Economic growth in Albania in 2011 reached 3.10%; inflation in that year was at 1.70%. In 2012,
GDP growth is forecast at 2.00% while the inflation rate is expected at 2.30%. In the first quarter of
2012, GDP actually fell by -0.20 percent. In June, year-on-year inflation amounted to 2.20%. Average
annual exchange rate for Albanian lek in 2011 reached ALL 140.34 per 1 EUR; in 2012, it is expected
at ALL 139.70 per 1 EUR. In the first half of 2012, average exchange rate of the Albanian lek was at
ALL 139.27 per 1 EUR.
11
Changes in consumer behaviour and effect of the market situation on consumption
The economic crisis resulted in an increase of unemployment which has reached new historical highs
in key markets of Mercator operations. Higher unemployment and lower purchasing power leave
consumers more sensitive to prices and increase their propensity to save. This is reflected in
lower number of shopping sessions and lower value of each shopping basket.
In Slovenia, the recession is felt with the greatest intensity to date. As many as 77 percent
1 of the people believe that they can personally feel the effects of the economic crisis in their
daily lives, which is five percentage points more than half a year ago. The share of those expecting
their salary to drop in the near future has also increased considerably. The fact that individuals feel
affected by the recession and their pessimistic expectations about the future have lead to a change in
behaviour as consumers have grown more rational and their confidence has been shattered (consumer
confidence index dropped to the level from early 2009 when it hit historical lows). Changes in
consumer behaviour are manifest in the tendency to look for the most inexpensive products, shopping
at several different retailers, and increased response to low-priced offers.
In Mercator's international markets, consumers are also facing a profound recession. Due to low
economic growth, rising unemployment, and low personal income, consumer purchasing power
remains low. Changes in consumer behaviour are reflected in less frequent shopping or lower value of
the shopping basket. Price sensitivity of consumers is also exhibited in increased shopping for private
label products.
DEVELOPMENT AND REAL ESTATE MANAGEMENT
In the period 1-6 2012, Mercator Group efforts in development and real estate management remained
geared towards meeting the goals laid down in the adopted development strategy. Taking retail area on
lease is preferred over own construction of retail facilities. We have also focused on refurbishments
and updates of our existing retail network.
The Refreshment of FMCG Offer project provides the conditions for the implementation of a new
concept of sales. In the period at hand, we revised 24 supermarkets in Slovenia and 9 supermarkets in
Croatia to comply with our new standards.
In the period 1-6 2012, we conducted various development activities to optimize Mercator's real estate
management, and analyzed the possibilities of updating the concept of Mercator's shopping centers,
improving the mix of products and services there, improving composition of third-party providers, and
establishing strategic partnerships with renowned international tenants.
Following are Mercator key goals in real estate management:
1 Marketing Monitor, SMA, April 2012
Development of Mercator retail
network
Effective real estate
management
Improvement and update of
shopping centers
Monetization
12
Investment and Divestment In the period 1-6 2012, Mercator Group's investment into property, plant, and equipment (CAPEX)
amounted to EUR 37,281 thousand. 67.7% of these funds was invested in Slovenia; 31.7% was
invested in currently developed international markets (Serbia, Croatia, Bosnia and Herzegovina, and
Montenegro); and 0.6% was invested in other markets (Albania, Bulgaria, and Macedonia).
Capital expenditure
Composition (in %) 1-6 2012 (in EUR thousand)
Slovenia 25,235 67.69%
Serbia 5,664 15.19%
Croatia 2,794 7.49%
Bosnia and Herzegovina 2,840 7.62%
Montenegro 532 1.43%
Bulgaria 209 0.56%
Albania 7 0.02%
TOTAL 37,281 100.00 %
Investments in development of retail capacity (Mercator centers, trade centers, individual stores, and
stores within other shopping centers) represent 61.3% of total investments; 23.6% was allocated for
refurbishment of the existing facilities; and the remaining 15.1% was invested into logistics, IT, and
non-trade activities.
In the period 1-6 2012, the company acquired 31,137 square meters of new gross area, of which 86.4%
was obtained by operating lease and 13.6% was acquired by acquisitions, construction, or extension of
existing facilities.
In the period 1-6 2012, Mercator Group divested EUR 1,079 thousand worth of property, plant and
equipment.
Share of newly launched facilities by markets Share of investments by markets
13
Summary of retail unit launches by markets
h
Slovenia
Area of new facilities: 11,442 m2
Number of retail units: 8
Openings: Modiana Outlet in Ljubljana (Šmartinska 102), Tehnika Outlet in Mariboru (Tržaška 14), Department store Ljutomer, superettes in Veržej and Križevci, hypermarket in shoppig center Supernova in Nova Gorica, furniture store Ptuj, furniture store DOM in BTC in Ljubljana
Other openings: petrol station in Kranj and in Ajdovščina
Croatia
Area of new facilities: 1,434 m2
Number of retail units: 2
Openings: Modiana in City Center One East in Zagreb, superette in Vodice
Serbia
Area of new facilities: 6,145 m2
Number of retail units: 3
Openings: supermarket in Čačak, Roda center Valjevo, hypermarket Beograđanka in Beograd
Bosnia and Herzegovina
Area of new facilities: 11,429 m2
Number of retail units: 29
Openings: stores of the company Drvopromet (27 units) on total area 9,962 m2, supermarket in Laktaši and supermarket Nova Varoš in Banja Luka
Montenegro
Area of new facilities: 186 m2
Number of retail units: 1
Openings: Superette Dobrota in Kotor
Bulgaria
Area of new facilities: 501 m2
Number of retail units: 1
Openings: Superette Dianabad in Sofija
14
Summary of total gross retail area as at June 30, 2012
Gross retail area in m2
Used for own
operations Leased out Total
Owned retail area 804,335 173,300 977,635
Leased retail area 397,077 25,231 422,308
Total retail area 1,201,413 198,531 1,399,943
Owned warehouse capacity 142,065 85 142,150
Leased warehouse capacity 53,080 0 53,080
Total warehouse capacity 195,145 85 195,230
Owned commercial facilities 27,856 2,274 30,130
Leased commercial facilities 6,527 43 6,570
Total commercial facilities 34,383 2,317 36,700
GROSS AREA UNDER MANAGEMENT 1,430,941 200,933 1,631,874
- of which owned 974,256 175,659 1,149,915
- of which leased 456,685 25,274 481,959
Activities of Real Property Monetization
As early as in 2011, the monetization project included an international tender to select an
internationally renowned consultant, the global real estate consultancy Cushman & Wakefield from
Great Britain; thus, the activities to carry out the project were commenced. In the first quarter of 2012,
we worked with the consultancy to define the portfolio of real estate to be offered for sale to
international investors, and to hold an international tender which resulted in the selection o the law
firm Schoenherr, cooperating with the law firm SJ Berwin, as the best bidder of legal services. We
also founded 9 project companies through which the monetization of real property will be effected,
consistently with the prevailing international practice.
In the second quarter of 2012, we developed a list of investors, consistently with the previously
specified goals, to which documentation will be submitted in the third quarter, based on which we
expect to obtain offers for the sale and lease back of a part of our real estate portfolio in Slovenia.
Consistently with the adopted strategy, the proceeds from the monetization process will be allocated
for reduction of debt.
Final decision on the scope and timing of the project implementation will be adopted when all terms
and conditions of the monetization are specified, considering the market conditions and investor
interest.
15
SALES AND MARKETING
Sales
In the period 1-6 2012, Mercator Group generated EUR 1,402,022 thousand of revenue, which is 1.1
percent more relative to the period 1-6 2011. Majority of Group revenue is generated by sales of
goods, material, and products, mostly retail and wholesale of trade goods. Revenue in Slovenia has
decreased by 1.6 percent relative to the same period last year; in foreign markets, revenue growth
reached 4.9 percent.
Mercator Group revenue by geographical segments:
Mercator Group revenue from trade operations by programs:
In the period 1-6 2012, the majority of Mercator Group revenue resulted from sales of fast-moving
consumer goods as they accounted for 85.9% of the total figure; revenue from other specialized
programs amounted to 14.1%.
16
Marketing
At Mercator Group, the consumer is always at the heart of our efforts. By conducting the activities for
our customers we are pursuing our vision to be the consumer's first choice when shopping for fast-
moving consumer goods and home products. Our goal is to please the customers who insist on giving
priority to quality, safety, and product origin, despite the effects of the crisis and the tendency to
choose cheaper products.
Following are our key policies:
1. Mercator is providing competitively priced offer.
2. Mercator is developing high-quality private label products.
3. Shopping offered by Mercator is transparent, simple, and well-priced.
4. Mercator is committed to sustainability for the benefit of the consumer and the environment.
1. Mercator is providing competitively priced offer.
In a time when consumers are reducing their spending and searching for inexpensive shopping,
Mercator is carefully planning and conducting marketing activities in order to offer the most at the
best price. In addition to regular and theme-oriented campaigns, we have also included products of
renowned brands in our special activities "buy one, get one free" and "buy two, get one free", offered
products at attractive rounded prices, and promoted examples of family meals at very good prices in
our flyers.
The sales promotion activities are adjusted carefully and deliberately to the local characteristics of
individual markets. Key activities in the markets of Mercator's operations in the first half of 2012
included the following:
Country Key activities
Slovenia Revised regular and theme-oriented flyer; issued every two weeks;
each week, households receive a different flyer.
Presentation of private label products and revised private label lines in
flyers.
Tuesday's Yes! (To!) discounts, Thursday retiree discounts, awarding
double Pika bonus points in refurbished stores on the opening day, and
the Happy Hours activity.
20% discount coupon for selected product in the regular flyer.
"Buy one, get one free" and "buy two, get one free" campaigns for
branded products, and the "Rounded prices" activity.
Weekend offers and theme-oriented category discounts.
Introduction of the Good Price activity with in-store communication.
"Five per day" project – get a bagful of fruit and vegetables at half the
price.
"Cheer With Us" prize contest.
Dormeo, M Holidays, and Smurfs customer loyalty programs.
Serbia 10-percent discount on Saturdays and Sundays at the Roda format
stores for purchases above RSD 2,000.00.
Tuesday's Yes! (To!) discounts at Mercator hypermarkets.
Wednesday's retiree discounts at Roda stores.
Regular triweekly campaign at the Mercator hypermarkets and regular
biweekly campaign at the Roda stores.
Campaign flyer for the technical consumer goods program and
discount on technical consumer goods from Monday to Friday.
Weekend campaign Mercator and Roda.
17
Country Key activities
"Super Offer, Super Price" campaign at Wednesdays and Thursdays
Delimano and Dormeo Go! customer loyalty program.
Croatia Saturday's 10-percent discount on purchases over HRK 100 at
Mercator and Getro stores.
Saturday's HRK 30 coupon awarded for purchases over HRK 300 at
Getro centers (Getro friend card).
Thursday's discount for retirees at Mercator stores, and Tuesday's
discount at Getro stores.
Regular weekly Mercator flyer and regular biweekly Getro flyer.
Private label presentation flyer.
Weekend campaigns and theme-oriented category discounts.
Linked purchase – issuing coupons for 10-percent discount in
December to be used in January.
"Five per day" project, exotic days at hypermarkets.
Bosnia and Herzegovina Regular campaign Mercator and DP Marketi.
Weekend campaigns at the Mercator and DP Marketi stores.
Tuesday's Yes! (To!) discount and Thursday's retiree discount at
Mercator stores.
Tuesday's discount for DP card holders at DP Marketi stores.
Delimano and Dormeo Go! customer loyalty program.
Combined shopping Mercator and DP Marketi – issuing coupons for a
10-percent discount at Modiana, Intersport, and Beautique stores.
Montenegro Regular Mercator and Roda campaign and a weekend campaign.
Weekend campaign Mercator and Roda.
Tuesday's Yes! (To!) discounts at Mercator and Thursday's retiree
discounts at Mercator and Roda stores.
Sales promotion activities at critical locations.
"Presenting the supplier" campaigns.
"Exclamation Mark" activity at Roda format stores.
Delimano and Dormeo Go! customer loyalty program.
Bulgaria Biweekly flyers and weekly flyers presenting the offer of the best-
priced products – "Top 10-19".
10-percent weekend discount for purchases above BGN 80 at
megamarkets.
Valentine's Day flyer and special offer flyer for products of non-
market (non-FMCG) program.
Delimano and Dormeo Go! customer loyalty program.
Albania Tuesday's Yes! (To!) discounts.
Special weekend campaigns.
Special offer – monthly flyer.
Smart shopping – monthly flyer.
In Slovenia, we regularly conducted in the first half of 2012 our corporate campaigns of awarding
double Pika bonus points at food stores, Hura stores, franchise stores, M Holidays and HoReCa
outlets, Modiana stores, Intersport stores, and Beautique drugstores, and triple Pika bonus points at
M Tehnika, M Gradnja (construction), M Pohištvo (furniture), and M Tehnika (technical consumer
goods) web store.
At M Tehnika, we introduced a new activity called "Magnetic Products", which includes discounts
on popular or attractive products by 30 percent or more relative to the regular prices for that product in
the market.
18
2. Mercator is developing high-quality private label products.
Mercator private label products represent a quality and reasonably priced choice for the consumers.
The range of products is continuously expanded. A total of twelve lines provides comprehensive offer
of alimentary products, household products, apparel and other textile products, technical consumer
goods, cosmetic products, baby care products and toys, ready-made food, and products for a healthy
diet.
We renamed and revised the appearance of the "Healthy living"
line; now, it is available with its new visual identity and the name
Active life. Products of the Active Life line are carefully selected in
compliance with the recommendations and modern trends in
healthy nutrition.
We are actively expanding and upgrading the assortment of the
MyBody cosmetics line and revising the visual identity of the
existing products in order to make them even more attractive for the
consumers.
We have revised the packaging designs for most product groups within the central
Mercator line; for others, we have prepared blueprint solutions and thus nearly
completed the project of concept designs for packaging update.
Our offer was further enriched by the new product line called Pro Magic available exclusively at
Mercator stores. The line offers products for home and household.
In communicating the Lumpi line, we are working with Slovenia's best ski jumper, world champion,
and winner of the small crystal globe in ski flying Robert Kranjec. Advantages of Lumpi products
were related to the success of Robert Kranjec in an amusing way that is tailored to the target group of
children and parents.
At the 12th competition of bread, pastry, and pasta, Mercator's own bakery
Pekarna Grosuplje received nine gold medals for quality and the highest score
for zero-additive products (Krjavelj, Malnar, Sosed, Wholegrain bread, Dolenc,
Homemade bread, Buckwheat homemade bread, Corn homemade bread, and
Korošec). The gold medals were presented by the Bakers Section of the
Chamber of Agricultural and Food Companies at the Slovenian Chamber of
Commerce and Industry.
3. Shopping offered by Mercator is transparent, simple, and well-priced.
In early 2012, Mercator launched the modernization of retail network in Slovenia and in Croatia. In
the first half, we comprehensively refurbished a large number of supermarket format stores: we
introduced new technologies, visual identity, and transparent tagging; we revised the offer (e.g. adding
the service of baking pizzas, extending the fresh produce departments, extending the offer of ready-
made products); and we improved energy economy.
We have been offering our customers various benefits with the Mercator Pika customer loyalty card
for the 13th year. We appreciate and reward the loyalty of our customers by awarding double and
triple Pika bonus points, offering discounts on selected products (special Pika discounts), offering
deferred payment without charging any interest, and by offering 3-6% discount on the entire offer
subject to the amount of collected Pika points.
19
At Mercator, we are constantly expanding and improving our offer of quality services. Thus, we have
added new travel arrangements (we issued a new catalogue Spring-Summer and revised the M
Holidays website), as well as the FotoFiniš photo services.
In 2012, we opened M Maxen petrol stations (Kranj, Velenje,
Ajdovščina) which are located next to Mercator Centers. In April, we
launched the test of the M Maxen bonus system.
At Mercator, we subscribe to the notion that a company will be more
efficient in the long run if care for the environment, clean technologies,
and offer of local produce are included in its development strategy.
Hence, Mercator's business strategy is focused on three key areas of
corporate social responsibility: social responsibility, responsibility to the
broad environment, and business responsibility. Activities are conducted
within each of these three areas, in pursuit of the goals laid down in
compliance with the guidelines of sustainable development.
Consistently with the medium term strategic alliances
in sustainable development with the project "From Slovenian Farms",
consumers are offered homemade fresh produce from local farms. Every product
is hand packed and the packaging carries the stamp and description of the farm,
which guarantees its origin. Products from Slovenian farms reach our aisles via
the shortest possible routes. We wish to work with our suppliers and consumers in
a sustainable way and to create a healthy and safe future for the people and our
common environment. The first product within this project has already been
offered to the consumers: Brešar farm's baby potatoes.
To boost recognition and appeal of the products, we additionally labelled
and exposed the fruit and vegetable produce with the slogan "Grown in
Slovenia".
Private label products were also labelled with a distinguishable sign
"Slovenian Origin".
4. Mercator is committed to sustainability for the benefit of the consumer and the
environment.
20
Digital Communication
In digital communication, we are intensively preparing two major projects that are scheduled for
launch in August or September 2012: "Click and Collect", and "Mercator Profile with a single
banner".
The "Click and Collect" project is aimed to establish and expand web sale and benefit from the trend
of shopping via mobile devices, which has recently been especially evident abroad. The project
included revision of Mercator's web store:
• integration with back-office systems
• assortment management
• technical support for commissioning
• new service "collect", initially at HM Šmartinka, according to the drive-in principle
• web payment
• improved user experience
In order to offer fast and easy shopping for consumers with particularly busy schedules, the option of
web payment with Mercator Pika card in the Mercator web store was added to the expanded
assortment of products. Useful information about properties was added to product descriptions, as well
as the option to rate the product. In Ljubljana, the option to collect the shopping basket at the drive-in
point at Mercator Center on Šmartinska cesta will be offered for those looking to complete their
shopping for food as quickly as possible. Considering the positive response and customer feedback,
the project will most likely be expanded in terms of addition of new delivery areas, as well as the
"collect" service allowing the customer to pick up the order at select Mercator stores. The "Click and
Home" service (delivery to the selected location) will be introduced gradually, starting in Ljubljana,
Maribor, Koper, Kranj, and Celje.
The "Mercator Profile with a single banner" project will bring
together communication and user experience of registered users across
all Mercator websites, stores, and portals. This will also provide the
basis for targeted monitoring of our users and, in turn, targeted
communication. Mercator Profile will offer the users all Mercator's
web services and products at a single place.
Websites and web stores
In March, we refurbished and upgraded the website www.mholidays.si. We have set up new
presentation websites for the visitors of Mercator centers MC Maribor Tabor II, MC Ljubljana, MC
Kranj Primskovo, MC Koper, and MC Celje, at our central website at www.mercator.si .
In the second quarter of 2012, we were also active in the Southeastern European markets where the
following activities were conducted:
a new website www.mercatorpremium.rs was set up for the Mercator Premium store format in
Serbia,
we revised our Croatian website www.mercator.hr,
we refurbished the "My Pika" portal in Croatia.
Activities on social networking sites
It has been found characteristic of the social media that a company that communicates openly with the
users will appear more frequently in the users' conversations, which means more praise as well as
more criticism. Above all, active communication on social networking sites involves building a
relationship with the users, open communication between the users sharing their experiences and
thereby expanding the number of sympathizers, consumers, and users of the services offered by the
company.
21
Over 140,000 users have joined the group of Mercator's friends on social networking sites.
Store Formats
Currently, Mercator Group's retail units are present in seven markets of different economic maturity.
This requires adjusting our operations to the needs of the customers in each market. To this end,
Mercator has put in place a multi-level strategy of store brands and a multi-format strategy with a
broad range of store formats. These are intended to cater to major, previously planned shopping
sessions, as well as minor, daily or occasional shopping for fast-moving consumer goods, technical
consumer goods, cosmetics, and sportswear.
Fast-moving consumer goods
Mercator Group has developed a dense and extensive retail network throughout Slovenia and other
countries, providing high-quality offer to meet every customer's desires, tastes, and needs. We are
working to bring our shopping centers, hypermarkets, supermarkets, neighbourhood stores,
convenience stores, and the web store as close as possible to the customers, and to provide a pleasant
shopping experience.
Home products
Mercator Group is offering home products in stores called M Tehnika (technical consumer goods), M
Gradnja (construction), and M Pohištvo (furniture); the offer of products is complemented by
favourable terms of payment. The offer includes high-quality and reliable construction materials,
modern furniture and equipment for every room in the home and office, modern home appliances and
major appliances, and consumer electronics by globally renowned manufacturers. In order to
accommodate the consumers' rapid pace of every day even better, we also offered technical consumer
goods in our web store.
Other operating activities
In order to present a comprehensive offer to consumers, Mercator Group has been developing
additional business activities that include the offer of sportswear at the Intersport stores, apparel at
Modiana stores, Maxen self-service petrol stations, and M Holidays tourist services. Mercator Group
also includes the manufacturing company Mercator - Emba, d.d.
MULTI-LEVEL STRATEGY OF STORE BRANDS and MULTI-FORMAT STRATEGY
Slovenia
Slovenia
Current foreign markets
Serbia, Croatia, Bosnia and Herzegovina, Montenegro
New foreign markets
Bulgaria, Albania
22
IMPLEMENTED EXAMINATION/ TESTING STAGE
Self-service checkouts
(Tik Tak)
Price readers
Info stands
Digital advertising
Photo corner
Scales with LCD screen
Electronic labels
Closed cash management
system at checkout
Beverage vending
machines
PSA (Personal shopping assistant)
Composition of retail units as at June 30, 2012
Composition of retail units is not comparable between the periods due to the changes in the classification of retail
units.
Development of New Technological Solutions
In order to be perceived as a modern and innovative retailer, Mercator is looking to keep up with the
latest technological solutions that reduce energy consumption and waste, provide pleasant and
stimulating shopping experience for the customers and a pleasant and healthier working environment
for the employees.
COUNTRY
ACTIVITYNumber of
units
Number of
units
Number of
unitsNumber of units
Number of
units
Number of
units
Number of
units
Number of
units
Gross sales
area
Net sales
area
Hypermarkets 22 16 13 7 2 1 2 63 297,779 194,909
Supermarkets 128 47 29 33 10 - 1 248 268,372 173,537
Neighbourhood stores 334 51 40 49 69 2 1 546 195,163 112,954
Convenience stores 2 - 1 1 - - - 4 6,544 3,752
Getro market - - 22 - - - - 22 11,785 7,461
Cash & Carry 13 5 16 - - - - 34 138,394 97,292
Hard discount stores 9 - - - - - - 9 6,452 4,820
Restaurants 22 7 - 2 1 - - 32 9,888 5,879
M holidays 13 - - - - - - 13 229 229
TOTAL FMCG program 543 126 121 92 82 3 4 971 934,606 600,833
Home program 62 13 12 - - - - 87 118,604 70,915
Furniture program 23 1 - - 1 - - 25 29,425 22,810
TOTAL home program 85 14 12 - 1 - - 112 148,029 93,725
Clothing program and drugstores 89 15 34 12 - - - 150 67,707 56,908
Clothing program 72 8 34 8 - - - 122 64,523 54,193
Drugstores and perfumeries 17 7 - 4 - - - 28 3,185 2,715
Intersport 32 8 29 9 2 2 - 82 51,071 39,339
TOTAL specialised programs 121 23 63 21 2 2 - 232 118,778 96,246
TOTAL retail units under management 749 163 196 113 85 5 4 1,315 1,201,413 790,805
Franchise stores 223 20 51 - - - - 294 51,255 33,802
TOTAL with franchise stores 972 183 247 113 85 5 4 1,609 1,252,668 824,607
SLOVENIA SERBIA CROATIABOSNIA AND
HERZEGOVINA
MONTE-
NEGROALBANIA BULGARIA MERCATOR GROUP
23
Development of New Store Concepts
Hypermarkets
The new concept of Mercator stores brings fresh produce to the fore of Mercator's offer. These
products are offered at the entrance to the store. Another novelty in the offer is the "Minute"
department located directly at the entrance into the store, which allows the customers to quickly and
simply, from the walkway, purchase freshly prepared food suitable for immediate consumption.
In May, we opened a new and attractive hypermarket that employs a modern sales concept as a
response to the shopping trends and offers our customers a pleasant shopping experience.
Neighbourhood stores
Modern trends and changes in the market conditions again favour smaller stores. At Mercator, we are
aware that neighbourhood stores are one of our major competitive advantages (number of stores,
regional coverage, locations) which has not been fully utilized as some stores are in dire need of
refurbishment and adjustment to the life on the fast lane.
Therefore, Mercator launched a campaign to reposition this store format in order to maintain and
consolidate the position of the best neighbour in every neighbourhood, one that is "always there,
caring, friendly, and involved in the local community". We wish to contribute to the benefit of the
neighbourhood and our customers by offering excellent fresh program and innovative ideas for the
mix of products and services that will make our customers' lives easier.
Convenience stores
As an innovative retailer that keeps up to date with the modern market trends, we actively approached
the development of the store format of convenience stores. The offer at this format is adjusted to each
particular micro location and its main mission is to allow quick shopping and varied choice of ready-
made products for a customer in a hurry.
24
COUNTER-CRISIS MEASURES
In an unstable global macroeconomic situation with stagnant economies and pessimistic expectations
regarding any improvement in economic conditions, efficient operations require effective adjustment,
management, and risk management. The Management Board of the company Poslovni sistem
Mercator, d.d., has therefore started immediately upon assuming their term to implement some
measures to rationalize the operations. These efforts include development of 50 counter-crisis
measures divided into three stages. The first stage will include short-term measures which are simpler
and deliver immediate effects; they will be implemented by the end of 2012. The second stage will
introduce more complex changes with more long-term consequences. The third stage will involve the
definition of long-term strategic measures and policies based on the measures previously implemented
in the first and second stage.
Improvement in employee productivity while maintaining the quality of service represents a big
opportunity for Mercator. In addition, focusing on the consumers and identification of their desires and
expectations is of key importance. Assortment will be adjusted to the changes in consumer behaviour
and lower purchasing power, by introduction of more competitively priced products and renegotiation
of terms with suppliers. Neighbourhood stores are one of Mercator's competitive advantages that
should be retained and further developed. To this end, we shall analyze the under-performing units and
find solutions for their revitalization and better utilization of our competitive edge. One very important
short-term measure is the improvement of cost efficiency which involves focus on slashing the
operating costs and expenses, suspension of currently non-essential projects, optimization of logistics
costs, and a move towards more rational use of fuel and energy. Due to increasingly harsh economic
conditions and identified potential for further optimization of working capital, we also specified new
goals regarding the release of financial assets tied up in working capital at the level of Mercator
Group.
25
FINANCIAL MANAGEMENT
Net financial debt
Mercator Group's net financial debt as at June 30, 2012 amounted to EUR 1,028,459 thousand, which is
4.3 percent less than as at June 30, 2011.
in EUR thousand June 30, 2012 Dec. 31, 2011 June 30, 2011
Index
June 30, 2012/
June 30, 2011
Non-current financial liabilities 743,889 822,145 766,470 97.1
Current financial liabilities 373,782 362,588 396,790 94.2
Derivative financial instruments
(liabilities) 5,375 4,562 1,504 357.5
Financial liabilities including
derivative financial instruments 1,123,046 1,189,295 1,164,764 96.4
Cash and cash equivalents 24,898 27,540 15,314 162.6
Derivative financial instruments
(assets) 27 158 487 5.5
Available-for-sale financial assets 2,704 2,628 3,843 70.4
Loans and deposits 66,958 67,824 70,012 95.6
Financial assets 94,587 98,150 89,656 105.5
NET FINANCIAL DEBT 1,028,459 1,091,145 1,075,107 95.7
Working capital management
Harsh economic conditions compel us to tap into the internal improvement potential within the
Mercator Group as much as possible. One such possibility is the improvement of working capital
management that would release additional funds tied up in working capital. Hence, Mercator Group
laid down in this year the working capital management project which is to improve the days
outstanding for working capital.
In the first half of 2012, Mercator Group decreased the value of inventory by EUR 35,477 thousand,
especially by intensively conducting the following activities:
• optimizing the strategic stock;
• optimization of the ordering process;
• even more intensive adjustment of the product assortment to the needs of the customers, and
adjusting the dynamics of ordering to the dynamics of sales,
• update and implementation of new application tools for aid in ordering and clearance of old
inventory.
Management of trade receivables included the following activities conducted at the Mercator Group:
• intensive efforts to collect unpaid overdue receivables;
• updating the application support for receivables management;
• faster calling on the instruments used as payment insurance;
• looking for additional possibilities to offset the receivables;
• earlier stop of deliveries in case of payment defaults;
• restricting open sales without first-grade insurance;
• raising the bar for suitability of payment insurance.
Mercator Group shall continue to conduct the working capital optimization project in the future.
26
Diversifying the sources of financing
Long-term operating lease of retail units has been a highly important and actively used form of
financing for the Mercator Group in recent years.
In the first half of 2012, Mercator Group decreased its financial liabilities by over EUR 65 million
relative to the figure from December 31, 2011.
Ratio of variable to fixed or hedged financial liabilities
As at June 30, 2012 the ratio between variable and fixed or hedged financial liabilities at the Mercator
Group amounted to 39.0 percent vs. 61.0 percent (as at June 30, 2011, the ratio was at 31.6 percent vs.
68.4 percent).
Finance expenses
The variable interest rate 6-month EURIBOR was at 0.930% at the end of the first half of 2012, which
is 0.676 percentage point lower than at the beginning of the year (at the start of 2012, the 6-month
EURIBOR was at 1.606%). Average 6-month EURIBOR in the period 1-6 2012 was 1.163%; in the
corresponding period last year, it amounted to 1.530%.
Debt to equity and current to non-current financial liability ratio
As at June 30, 2012 Mercator Group attained a debt-to-equity ratio of 1:1.46. The ratio is a quotient
between equity, which includes share capital as reported in financial statements and net financial debt.
In the first half of 2012, Mercator Group improved composition of financial liabilities by maturity.
The share of non-current financial liabilities as at June 30, 2012, amounted to 66.6% (65.9% as at June
30, 2011).
Compliance with financial covenants under loan agreements
Under the existing loan agreements Mercator has agreed with the banks to comply with certain
financial covenants on a consolidated basis that are expected to be fully met at the end of each
financial year. The covenants are reviewed on the basis of the audited consolidated financial
statements for the respective financial year. The exception are the syndicated loan facilities and one
bilateral loan facility where financial covenants are reviewed on a semi-annual basis. Due to the partial
breach of such financial covenants in the first half of the year 2012 Mercator will simultaneously with
the publication of the respective half-year financial statements, approach the banks with a request for
a waiver.
27
MERCATOR SHARE AND INVESTOR RELATIONS
Mercator share and ownership structure
Basic information on the share of the company Poslovni sistem Mercator, d.d., as at June 30, 2012
Code / Symbol MELR
Type Ordinary share
Listing Prime market of Ljubljana Stock Exchange, d.d.
Share capital EUR 157,128,514.53
Number of shares 3,765,361
Number of treasury shares 42,192
Number of shareholders 15,282
Ownership structure of the company Poslovni sistem Mercator, d.d., as at June 30, 2012
Major Shareholders
As at June 30, 2012, the following ten largest shareholders combined owned 66.10 percent of the
company.
Major Shareholders Country Number of shares Share
1 Pivovarna Union, d.d. Slovenia 464,390 12.33%
2 NLB d.d. Slovenia 404,832 10.75%
3 Societe Generale-Splitska banka, d.d. Croatia 334,098 8.87%
4 Pivovarna Laško, d.d. Slovenia 317,498 8.43%
5 UniCredit banka Slovenija, d.d. Slovenia 301,437 8.01%
6 Nova KBM d.d. Slovenia 197,274 5.24%
7 GB d.d., Kranj Slovenia 142,920 3.80%
8 Prvi faktor - faktoring, d.o.o., Beograd Serbia 125,963 3.35%
9 Abanka, d.d. Slovenia 103,400 2.75%
10 Radenska, d.d. Slovenia 96,952 2.57%
Total 2,488,764 66.10%
PIVOVARNA
UNION D.D.,
12.33%
NLB d.d., 10.75%
SOCIETE
GENERALE-
SPLITSKA BANKA D.D. - F, 8.87%
Pivovarna Laško,
d.d., 8.43%
UNICREDIT BANKA
SLOVENIJA d.d.,
8.01%
Investment funds,
7.26%
Other commercial
banks, 18.21%
Individuals,
14.57%
Other legal entities, 11.56%
28
Foreign shareholders
As at June 30, 2012, the share in the company Poslovni sistem Mercator, d.d., held by foreign
investors amounted to 19.19 percent, which is 1.75 percentage point more than at the end of 2011.
Shares held by Management and Supervisory Board Members as at June 30, 2012
First and last name Position Number of shares Share
Management Board
1 Toni Balažič Management Board President 0 0.0000%
2 Stanka Pejanović Senior Vice President 0 0.0000%
3 Drago Kavšek Senior Vice President 0 0.0000%
4 Igor Maroša Senior Vice President 0 0.0000%
Total 0 0.0000%
Supervisory Board
1 Matej Lahovnik Supervisory Board Chairman 0 0.0000%
2 Rok Rozman Deputy Supervisory Board Chairman 0 0.0000%
3 Boris Galić Supervisory Board member 0 0.0000%
4 Zdenko Podlesnik Supervisory Board member 0 0.0000%
5 Marjeta Zevnik Supervisory Board member 0 0.0000%
6 Mateja Širec Supervisory Board member 36 0.0010%
7 Sandi Leban Supervisory Board member 0 0.0000%
8 Ivan Valand Supervisory Board member 0 0.0000%
Total 36 0.0010%
Movement of closing price per MELR share in last six month, compared to the movement of the SBITOP index
29
Key information for the shareholders
June 30, 2012 December 31, 2011 Index
Number of shares entered in the Court Register 3,765,361 3,765,361 100.0
Number of treasury shares 42,192 42,192 100.0
Market capitalization (in EUR) 463,139,403 553,508,067 83.7
Market price per share (in EUR) 123.00 147.00 83.7
Book value per share (in EUR) 216.37 221.81 97.5
Minimum close rate in the period (EUR) 120.00 136.00 88.2
Maximum close rate in the period (EUR) 151.95 182.00 83.5
Average close rate in the period (EUR) 130.82 162.85 80.3
Market capitalization is calculated by multiplying the number of shares entered into the court register as at the end of
the period with market price per share as at the end of the period.
Share book value is calculated as the ratio between the value of the equity of the company Poslovni sistem Mercator,
d.d., as at the end of the period, and the weighted average number of ordinary shares in the period at hand, excluding
treasury shares.
Dividend policy
As at 18th regular Shareholders Assembly held on March 30, 2012, the resolution on the payment of
dividends in the amount of EUR 6.00 per share was adopted. On May 29, 2012 the company Poslovni
sistem Mercator, d.d., began to pay dividends in total amount of EUR 22,339 thousand.
Treasury shares
As at June 30, 2012, the company Poslovni sistem Mercator, d.d., held 42,192 treasury shares. In
period 1-6 2012, the company neither acquired nor disposed of treasury shares.
30
* Survey measurement; semi-annual data are extrapolated to the monthly level.
** Survey measurement; quarterly data are extrapolated to the monthly level.
RISK MANAGEMENT
Management of key risks in the period 1-6 2012
Risk is defined as any uncertainty regarding future business events, which can decrease the probability
of attainment of the business goals laid down or the level of attainment of business goals, thus bearing
a negative effect on the performance. Harsh and unpredictable economic circumstances that have been
the background of our operations for a while require systematic and deliberate management of risks
the company is facing in its operations. Active risk management is geared towards the objective of
timely recognition and response to potential threats by developing appropriate measures to hedge
against identified risks or to reduce risk exposure.
In the first half of 2012, challenging conditions in global financial markets put a damper on the entire
economic environment both globally and in the markets of Mercator's operations. This was reflected in
notable drop in retail demand and a change in the composition of consumption, as well as in the
persistence of the trend of uncertainty with regard to financial risks which were not common in the
period before the crisis. For Mercator Group, systematic and deliberate risk management is of key
importance in such difficult economic environment.
Business Risks
Business risks are related to company operations and our core activity.
Risks in the operations of trade companies or retailers increase as a result of economic conditions due
to changes in the shopping behaviour of the consumers, as well as due to a drop in their purchasing
power. The unemployment rate is the key indicator of purchasing power and the sense of security on
the part of the consumers. This category has reached the highest levels of recent years in the key
markets of Mercator's operations.
Risk of a decline in purchasing power
Assessment of the risk of a decline in purchasing power (size of market) due to challenging economic
conditions.
The risk of a decline in purchasing power is
related to economic growth, unemployment
rate, increase in personal income, and changes
in the prices of essentials. As early as in 2011,
economic situation had a negative impact on
the disposable income of consumers; such
effect persisted in the period 1-6 2012. In
Slovenia, GDP is expected to drop by about
1 percent in 2012. Unemployment rate in the
period 1-6 2012 is at 12% which is higher
than last year. In key international markets
of Mercator's operations, unemployment rate
is even higher than in Slovenia; moreover, it –
with the exception of Montenegro – continues
to rise. In Mercator's international markets,
average income is notably lower than in Slovenia. In the long run, some convergence in development
can be expected in Mercator's international markets as they catch up with the developed economies;
however, in the harsh economic conditions, significant increase in purchasing power cannot be
expected even in the medium run. Increase in wages has been low in all markets and its effect has been
neutralized by the increase in the consumer prices.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Key markets unemployment rate
Slovenia Bosnia and Herzegovina Serbia* Croatia Montenegro**
31
Risks of suboptimal marketing mix and effects of the competitive environment
Assessment of risk based on market conditions and Mercator's position in the Group's target markets.
At Mercator Group, we are regularly monitoring the perception of key elements of the marketing mix
and in the period 1-6 2012, we further pursued the implementation of the measures adopted to mitigate
the risk of suboptimal marketing mix and effects of the competition. Adjustment of the marketing mix
is a part of the strategic project of Refreshment of FMCG Offer in Slovenia. Refurbishment of
supermarkets has brought our offer even closer to the needs of our customers.
We are also establishing a new assortment policy for all our stores. The aim of this policy is to keep in
all stores in any given moment the best-selling products as a part of a unified assortment. In the period
at hand, progress was made towards the improvement of procurement sources for non-alimentary
products and technical consumer goods. A lot has been achieved in terms of improvement of private
label product quality as well.
Risks of failure to attain the planned profit margin
Assessment of the risk of failure to attain the planned profit margin.
As the economic conditions are worsening, Mercator is facing higher price sensitivity of the customers
and higher propensity to save, which affects the amount spent on shopping and, in turn, the profit
margin.
To combat the deterioration of the economic situation and a drop in consumers' purchasing power, we
focused in the first half of the year on additional sales promotion in order to increase the profit margin.
This was done by various marketing activities (Good Price project, higher campaign discounts, update
of the private label lines); in addition, the assortment and layout of stores is also being adapted to the
current consumer demand.
Positive effects of the transition to net-net pricing system carried out in Slovenia as of January 1, 2012,
are expected in the second half of the year when the effects of proactive retail and upstream price
management, which is aimed at improving the perception of price competitiveness among consumers,
will be more clearly manifest.
Risks in the supply process
Assessment of global and local impact on Mercator's supply processes.
In the period 1-6 2012, we worked with proven suppliers. Our cooperation is transparent to allow
timely identification of any problems faced by the suppliers in the harsh economic conditions, and
prompt adjustment, which reduces the probability of delivery failures. Regular monitoring and
checking of supplier solvency allows timely redirection to new supply sources.
Fuel and energy prices rose in the first half of 2012, which has resulted in increases in product prices
that depend heavily on changes in energy prices. Furthermore, prices of some raw materials rose as
well (coffee, cocoa), which caused upward pressure on the prices of products containing these
ingredients. We are reducing or dispersing these risks by carefully thought out procurement policy and
choice of different suppliers for each category. Synergy effects of joint procurement, lower purchasing
prices and better supply channels are attained by combining our procurement operations with those of
our subsidiaries in Southeastern Europe. We are joined by Mercator - H, d.o.o., in joint purchasing of
seasonal assortment and home products.
We seek to mitigate local effects on the supply processes by managing the risks of delivery failures.
Supply processes are supervised on monthly basis and corrective measures are adopted to reduce such
effects.
32
Financial risks
Financial risks are those that may negatively affect the ability to generate cash flows, management of
cash flows, maintaining the value of financial assets, and managing financial liabilities.
According to the reports of the European Central Bank (ECB), euro zone saw zero real GDP growth in
the first quarter of 2012. For the second half of the year, growth rate is expected to be even lower; in
addition, the prevalent uncertainty has a negative effect on confidence and the economic climate. In
the long run, the ECB Board continues to expect the economy of the euro zone to gradually recover.
According to ECB data, global economic activity is picking up the pace, although the recovery is
rather brittle.
Credit risk in wholesale
Assessment of the risk that receivables from business partners resulting from deferred payment will
only be settled partly or not at all.
In order to manage the credit risk in wholesale in the period 1-6 2012, Mercator Group further
restricted the exposure to individual customers, hired an external agency to collect some of the
receivables, and increased the number of offsetting/netting operations, both multilateral and bilateral.
From customers with lower rating Mercator obtaines high quality collateral to minimize default risk.
With bigger customers repayment agreements for due unpaid receivables have been concluded.
Payment delinquency and defaults, representing a major problem in the entire economy, are present
with business partners of the Mercator Group as well. This, in turn, increases the credit risk in
wholesale.
Mercator Pika card credit risk
Assessment of the Mercator Pika card credit risks (possibility that receivables from customers, resulting
from deferred payment, shall only be settled partly or not at all).
By introducing SMS (text message) notices and regular monitoring of Mercator Pika card credit
history, as well as other already introduced measures, Mercator Group is looking to additionally hedge
and thus manage and control the credit risk related to the Mercator Pika card, or at least keep it at the
same level as to date. Receivables related to Mercator Pika card credit risk are monitored and
supervised on a daily basis. On top of that Mercator Group aims to intensify collection process.
Currency risk
Assessment of the loss of economic benefit due to changes in exchange rate.
In the period 1-6 2012, we saw strong volatility of
exchange rates of Serbian dinar, which had a negative
impact on Mercator Group's performance in the period.
Average exchange rate of the Serbian dinar in the period
1-6 2012 was RSD 110.92 per 1 EUR, which is
8.88 percent more than in the corresponding period last
year. Croatian kuna reached HRK 7.54 per 1 EUR in the
period 1-6 2012, which means it depreciated by nearly 2%
relative to euro, compared to the equivalent period last
year.
To reduce the level of risk Mercator Group monitors the macroeconomic environment and exchange
rate movements and other related macroeconomic indicators and trends. Based on the trends and
expectations Mercator Group adapts its operations in the direction of minimising exposure to currency
risk. The most effective method for minimizing such risks is a natural hedging which Mercator is
effectively using.
100.0
105.0
110.0
115.0
120.0
EUR/RSD movement in the period 1-6 2012
105.79
115.82
33
Interest rate risk
EURIBOR interest rate is subject to market fluctuations and it is changing on a daily basis, which can
lead to increased financing costs.
The variable interest rate 6-month EURIBOR was at
0.930% at the end of the first half of 2012, which is
0.676 percentage point lower than at the beginning of
the year (at the start of 2012, the 6-month EURIBOR
was at 1.606%). Average 6-month EURIBOR in the
period 1-6 2012 was 1.163%; in the corresponding
period last year, it amounted to 1.530%.
To minimise interest rate risk, the Mercator Group regularly monitors changes in variable interest
rates. In case interest rates increases, Mercator Group examines the possibility to conclude additional
derivative financial instruments to hedge interest rate risk. Mercator’s policy is to hedge at least 50%
of total financial liabilities, financing non-current assets, and at least 25% of total financial liabilities
Liquidity risk
Assessment of the risk that at a certain moment, the company will not have enough liquid assets to
settle its current liabilities.
The ratio between non-current and current financial liabilities in the period 1-6 2012 was 66.6 : 33.4.
In the equivalent period of last year, the ratio between non-current and current financial liabilities was
at 65.9 : 34.1. Compared to the first quarter when the ration was at 65.3 : 34.7, this ratio was improved
by the end of the first half of the year.
Mercator Group is minimising liquidity risk with the following measures:
- Improving working capital.
- Implementation of real estate monetization project.
- Refinance existing financial obligations.
- Finding alternative sources of funding (sale and leaseback, Schuldschein, etc.).
- Consistent application of the recommendations to reduce the credit risk in order to ensure
constant inflows from wholesale customers and Mercator Pika card holders.
- Increase the volume of compensations (mutual and chain compensation).
- Establishing daily contact with major customers and proactive collection of overdue
receivables.
- Establishing liquidity management at the level of the Mercator Group in accordance with the
needs of each company by regularly monitoring the volume of refinancing required by
individual banks and closely monitor the daily liquidity of the Mercator Group for the two
months in advance.
- Renovation of the existing system for liquidity planning at the level of individual companies, as
well as at the level of the Mercator Group.
0.6
0.8
1.0
1.2
1.4
1.6
1.8
6m Euribor movement in the period 1-6 2012
0.930
1.606
34
Operational risks
Operational risks affect the ability to conduct business processes and to attain the goals laid down, and
the cost efficiency of Mercator Group operations.
Category management operational risks
Increase of tradable commodity prices, seasonal effect.
Our category management involves close monitoring of the prices of raw materials, on which the
prices of our products are heavily dependent. Since commodity market changes affect the prices for all
products in a category, loss of sales and profit margin cannot be recovered by the use of substitutes.
We are actively monitoring the surges in energy prices and their impact on manufacturer prices. The
second quarter brought no changes regarding the risk of increase of prices of traded commodities,
which is related to efficient management of those categories that may be subject to considerable
influence from the commodity market. According to the European Commission estimate, the prices of
agricultural products will remain approximately the same in the medium run. Circumstances in the
market for grain will depend on low inventories and prices that will exceed the most recent average. In
the dairy sector, the European Commission announced positive changes due to competition from
developing countries. These positive changes can already be seen in the market of the European
Union. In Slovenia, milk suppliers are holding their prices in expectations of an increase. For the meat
sector, moderate improvement of conditions is expected, particularly for pork and poultry whose
prices remained stable in Slovenia.
We take special care to also monitor the inventory of seasonal products and we adopt measures to
clear such inventory as necessary.
Environmental risks
Electrical energy.
Pilot project Retail Care is in progress at Mercator center in Ljubljana, which involves providing
constant access to data on power consumption for refrigeration equipment, monitoring of this data, and
compiling reports that make it easier to identify the problematic users of electricity (chests, cabinets,
counters, chambers etc.) and to develop the measures required to cut power consumption.
Notification was made regarding the requirement of compliance with the measures for efficient use of
energy. This notification is sent each quarter to the users to inform them of the seasonal changes in
parameter settings.
At M-Tehnika and Mercator-S, operative monitoring and control of monthly use of fuel and energy
was launched.
Human resource risks
Absenteeism due to illness.
In order to manage illness-related absenteeism, in Mercator, d.d., we added in the period 1-6 2012 to
the standard activities of the Health Promotion project some new ones:
- Working with the Kranj Institute of Public Health, we organized the Healthy Diet seminar
intended for employees in HoReCa activities; the seminar was attended by 92 employees.
- We organized the campaign Week of healthy nutrition which included the release of a
brochure with recommendations for a healthy diet, a poster presenting a Balanced light snack
as an important part of healthy nutrition, guidelines for a healthy diet of Mercator employees,
and the film titled Healthy Nutrition. - The campaign Five minutes to feel better at work involved preparing brief presentational
videos and posters presenting recommended exercise.
- We also organized the campaign Week in motion which included shooting a brief
presentational film Exercise protects your health, and publishing the Guidelines for exercise as
developed by the Institute of Public Health, booklet Exercise for health that also includes a
35
Nordic walking calendar, and an article on Nordic walking. We also organized a Nordic
walking test. After the test, the participants could also submit to a measurement of their blood
pressure, heart rate, and oxygen saturation.
- Medical campaign Measurement of Ankle Brachial Index and plethysmography was
attended by 719 participants in May and June.
- A workgroup was established to redefine the purpose and goals of interviews with the
employees with the highest rate of absenteeism.
36
SUSTAINABILITY REPORT
Sustainable development policy
Mercator operations are sustainable and responsible, creating a healthy and
safe future for the people and the environment.
RESPONSIBILITY TO CUSTOMERS
STRATEGIC GOALS ATTAINMENT OF GOALS (1-6 2012)
Care for food safety. 282 regular and 12 extraordinary controls were carried
out.
We recorded 583 inspection reviews.
We analyzed 724 samples of private label products.
We monitored 684 samples in open departments (mostly
meat departments). We recorded 128 samples as a part
of national monitoring.
Introduction of environmentally friendly
formats, standards, and technologies at our
stores.
We prepared the visual identity for the "eco house", an
environmentally friendly store.
Technologically advanced refrigeration equipment was
installed only in those stores where comprehensive
refurbishment was planned.
At the Nova Gorica hypermarket, shopping carts made
of recycled materials were introduced and energy-
efficient refrigeration equipment (closed refrigerators)
was installed.
Marketing activities related to the offer of
environmentally friendly and well-priced
products and services, and informing and
educating the consumers about the
environmentally friendly activities.
By communicating the slogan "Grown in Slovenia" we
provided additional exposure of seasonally offered fruit
and vegetables to allow the customer to quickly identify
and pick the products grown in Slovenia.
The first product in the project "From Slovenian
Farms" in standardized Mercator packaging was baby
potatoes from the Brešar farm, which can be found in
local hypermarkets.
37
RESPONSIBILITY TO EMPLOYEES
Number of employees
MARKET Number of
employees as at
June 30, 2012
Number of
employees as at
December 31,
2011
Index
Number of
employees
June 30, 2012/
December 31, 2011
Number of
employees
based on hours
worked in the
period
1-6 2012
Slovenia 12,174 12,034 101.2 11,276
Serbia 4,523 4,806 94.1 4,533
Croatia 3,838 3,873 99.1 3,514
Bosnia and Herzegovina 1,980 1,722 115.0 1,899
Montenegro 1,553 1,429 108.7 1,447
Bulgaria 221 268 82.5 217
Albania 125 134 93.3 112
TOTAL 24,414 24,266 100.6 22,998
In the period 1-6 2012, we conducted the Competency Rating project for the managers at Mercator
Group. The project involved sending competency profiles to all managers and their superiors;
competency profiles are the central issue of this year's annual interviews. We organized Shop
Manager Schools at the company Poslovni sistem Mercator, d.d., and at trade companies of
Southeastern Europe. We included a new priority into our human resource strategy, referred to as
generation management, which consists of two parts: management of employees aged 55+ and
management of employees aged 30 or less.
STRATEGIC GOALS ATTAINMENT OF GOALS (1-6 2012)
Leadership development.
Employee education and training.
Employee motivation and compensation.
Staffing.
We revised the leader competencies and rated all
managers according to the 360° method. We also
worked with an independent partner to develop
competency profiles which were circulated to the leaders
and their superiors prior to the start of annual interviews.
We prepared the documentation required for conducting
the annual interviews which started on June 26, 2012.
Selection of participants of the 5th Mercator
International Business Academy took place in May and
June.
We organized Shop Manager Schools which were
attended by 533 participants.
Pursuant to the corporate standard of induction of new
employees, we organized for the first time a ten-day
rotation for 18 new employees with level VII education.
Our human resource strategy involved developing a new
priority called generation management, managing
employees aged 55 and more.
We also developed a standard for the corporate system
of internal instructors which, among other effects,
promotes training of new internal instructors. We
identified 1,288 internal instructors who will receive
standard certificates.
12th meeting of Mercator internal instructors was held at
Ljubljana Botanic Garden.
At the company Poslovni sistem Mercator, d.d., we
38
organized the "Preparatory School of Management"; in
Southeastern Europe, the "School for Future Managers"
was organized. At the company Mercator-BH, d.o.o.,
introductory seminars were held for workers who joined
Mercator as a result of the Drvopromet, d.o.o., merger.
In Slovenia, we developed an e-library titled Mercator's
Growing Book.
In Southeastern Europe, awards for the best stores in
2011 were presented.
Dialogue with employees and social partners.
Occupational health and safety. We started the team-building workshops in Vogel.
162 news announcements were made on the Intranet in
Slovenia.
We carried out Mercator's school for stock assistants
which was successfully completed by 44 sales assistants.
In Southeastern Europe, we introduced informative
brochures that are handed out with the salary reports at
all companies.
123 parents of newborn babies were presented with
Lumpi packages.
Mercator Humanitarian Foundation provided a total of
EUR 33,913 of aid to 72 employees that were ill or in
social distress.
We held the "Week of Safe Moving of Heavy Loads" at
the companies Poslovni sistem Mercator, d.d., Mercator
IP, d.o.o., and Modiana, d.o.o.
Mercator sports and culture society now has 730
members.
RESPONSIBILITY TO NATURAL ENVIRONMENT
STRATEGIC GOALS ATTAINMENT OF GOALS (1-6 2012)
Reducing consumption of power and fuels for
heating by implementing savings measures,
current maintenance, and minor investments.
Installation of co-generation (combined heat and power)
systems at six units: MC Maribor, MC Ptuj ERA, MC
Ptuj Ormoška, MC Kranj, MC Savski Otok, and MC
Nova Gorica.
Development of regular monthly reports for monitoring
the use of energy at retail units.
Pilot project of establishing control of the operation of
the Retail Care refrigeration equipment in progress.
Implementation of the "Eco House" project
(environmentally friendly store). Building permit obtained.
Cutting the use of natural resources and waste
generation. New electronic form developed for entering
environmental data on products into the GOLD
application, complete with relevant instructions.
Range of environmental documentation gradually
integrated in the SAP PM application.
Technological procedure of biological waste
management prepared to provide more efficient separate
waste collection.
Expanding the use of environmentally friendly
freight vehicles. Number of environmentally friendly freight vehicles
increased subject to available budget.
Relocation of logistics services to energy-
efficient and people- and environmentally
friendlier, suitably located facilities outside
urban areas.
Project slowed down due to harsh economic situation.
39
RESPONSIBILITY TO SOCIAL ENVIRONMENT
STRATEGIC GOALS ATTAINMENT OF GOALS (1-6 2012)
Corporate social responsibility.
Major projects completed in the first half of the year
include the following:
- donation of food to Slovenian Caritas;
- participation in the Slovenian Red Cross campaign
"Let's take them to the seaside";
- "kurentovanje" carnival in Ptuj;
- Slovenian drama week in Kranj;
- celebration of the 500th anniversary of the birth of the
famous cartographer and geographer Gerardus
Mercator;
- Idrija lace festival;
- 6th days of Slovenian municipalities and meeting of
mayors;
- national competition of high-school students in sales
techniques;
- international Slovenian open table tennis
championships;
- international Alpine ski race for the Loka Trophy
2012;
- finals of the ski jumping World Cup in Planica 2012;
- Tour of Slovenia bicycle race;
- hike along the wire;
- IIHF Ice Hockey World Championship, Division I.
M Tehnika, d.d., took part in the prize contest "Following
the footprints of Kekec to knowledge"; 49 institutions
(kindergartens and elementary schools) took part in the
contest.
RESPONSIBILITY TO SUPPLIERS
STRATEGIC GOALS ATTAINMENT OF GOALS (1-6 2012)
Working with proven suppliers. Upon signing the contracts for 2012, the suppliers also
signed Statements of Safety, Quality, and Compliance of
food and materials in contact with food.
Regarding respect for human rights and relation to our
broad environment, we received the offer to join UN
Global Compact.
RESPONSIBILITY OF PROVIDING SECURITY
In the first six months of the year, the number of loss events was quite high. The damage incurred was
mostly caused by persons not employed at Mercator; however, there were some loss events caused by
our employees as well. Loss events were rather dispersed by regions within Slovenia. The most events
resulting in damage took place in Central Slovenian region.
The aspect of preventive action is particularly important. In this respect, many activities were carried
out such as preventive inspections or visits to particular stores and cooperation with third-party
security service providers. In investments and refurbishments, we paid more attention to supervising
and controlling the installation of technical security equipment. In order to promote awareness of the
40
importance of security and safe conduct, we held several meetings and educational courses for
employees. Preventive activities were geared towards refreshing the knowledge and promoting
conduct that complies with internal acts on security. We also shared with our employees the novelties
and findings in this field, and the sound practices introduced, so that the employees can react more
easily and effectively in critical moments.
RESPONSIBILITY TO QUALITY
STRATEGIC GOALS ATTAINMENT OF GOALS (1-6 2012)
Maintenance, implementation, and
certification of international quality
management systems at Mercator Group
companies by independent certified bodies.
Mercator Group currently holds 16 active certificates.
We coordinated the certification audit for the
sustainability report within the Mercator Group Annual
Report according to the Global Reporting Initiative
guidelines, and we were awarded the relevant certificate.
We conducted the activities to prepare for the
external/independent audits. We carried out a total of 7
external audits; further audits will take place in
September.
Management of documentation, records, non-
compliance, and corrective and preventive
measures at the Mercator Group.
As at June 30, 2012, Mercator Standards collection
included 2,870 valid documents. 676 new or revised
documents were published in the period 1-6 2012.
We are operatively managing any non-compliance and
carrying out corrective and preventive measures.
Systemic monitoring of quality management
processes at the Mercator Group.
We monitored and analyzed the environmental
indicators for individual environmental aspects at
Mercator Group companies. In the period 1-6 2012, the
following applies to the 11 companies of the Mercator
Group:
- cost of energy amounted to EUR 22.98 million;
specific energy cost was EUR 13.46 per square
meter;
- carbon dioxide emissions from fuel and energy
consumed amounted to 157,042 tons of CO2;
specific emission was 92 kg of CO2/m2;
- electric energy consumption amounted to 252.9
GWh; specific power consumption stood at 148.15
kWh/m2.
New measures and improvements in environmental
indicator monitoring are currently being discussed.
Establishing IT support for managing the
quality management system requirements at
the Mercator Group.
We are currently completing the extensions and
improvements to the Mercator Standards document
management application.
The extended application for continues improvement
management is about to enter the production stage. It
was expanded to also allow monitoring of corrective
measures.
At Mercator - S, d.o.o., we completed the project of
implementing environmental indicator and consumption
monitoring at the level of a cost center. A similar project
will be carried out shortly at Mercator - H, d.o.o.
41
FINANCIAL REPORT
All financial statements of the Mercator Group for the period 1-6 2012 have been prepared in
compliance with International Financial Reporting Standards and are unaudited.
ACCOUNTING POLICIES
Pursuant to the provisions of Article 7 of the Code of Practice for the stakeholders in the agrifood
chain, adopted in 2011, Mercator Group changed on January 1, 2012 the way it manages its relations
with majority of suppliers of fast-moving consumer goods in Slovenia, by implementing pricing
according to net-net price system. Before, Mercator mostly managed its supplier relations according
to the principle of manufacturer or wholesale prices. Since this is a notable change that also affects the
valuation of inventories and cost of goods sold, Mercator made some changes pursuant to the
provisions of IAS 8 as of January 1, 2012 to the relevant accounting policies at the level of the entire
Group. In addition, appropriate restatements of previous period accounting categories provided
comparability of financial statements between periods. Changes to accounting policies do not have any
material effects on the past fiscal year from the aspect of performance of Group assets.
In transition to the valuation of inventories according to the net-net pricing system, all rebates and
other discounts that were previously reported for the entire period are now reported in current
purchasing transactions, which results in a lower value of inventory. At the same time, the value of
rebates and other discounts is reported as a decrease in the cost of goods sold rather than being
reported in revenue. Furthermore, Mercator Group companies in Slovenia changed, due to gradual
implementation of standardized IT systems in retail and warehouse units, which started during 2011
and which will presumably be completed by the end of 2012, the way of calculating and reporting the
cost of goods sold from calculation method to the actual method. This has a one-off effect on the same
accounting categories as the implementation of the net-net pricing system. Therefore, both changes
were made at the same time; because of these changes, restatements were made in the previous
financial statements pursuant to IAS 8.22. Detailed explanations regarding the restatements can be
found in explanations to non-audited financial statements, pertaining to particular accounting
categories. The plan for 2012 was also restated to reflect the changes in the accounting policies.
42
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE MERCATOR GROUP
Poslovni sistem Mercator, d.d. (hereinafter referred to as Mercator, d.d.), is a company headquartered
in Slovenia. The address of its registered head office is Ljubljana, Dunajska cesta 107. Condensed
consolidated financial statements for the period 1-6 2012 comprise the company Mercator, d.d., and its
subsidiaries, as follows:
in Slovenia: Intersport ISI, d.o.o., Modiana, d.o.o., M - Tehnika, d.d., Mercator - Emba, d.d., Mercator -
Optima, d.o.o., Mercator IP, d.o.o., M.COM, d.o.o., M - nepremičnine, d.o.o., M - Energija, d.o.o., TP
Vesna, d.d., Argentum - A, d.o.o., Argentum - B, d.o.o., Argentum - C, d.o.o., Argentum - D, d.o.o.,
Argentum - E, d.o.o., Argentum - F, d.o.o., Argentum - G, d.o.o., Argentum - H, d.o.o., in Argentum - I,
d.o.o.;
abroad: Mercator - H, d.o.o., Croatia, Intersport - H, d.o.o., Croatia, Modiana, d.o.o., Croatia,
Mercator centar tehnike, d.o.o., za trgovinu i usluge, Croatia, Mercator - S, d.o.o., Serbia, Intersport
S - ISI, d.o.o., Serbia, Modiana, d.o.o., Serbia, Mercator - BH, d.o.o., Bosnia and Herzegovina, M -
BL, d.o.o., Bosnia and Herzegovina, Intersport - BH, d.o.o., Bosnia and Herzegovina, Modiana,
d.o.o., Bosnia and Herzegovina, Mercator - CG, d.o.o., Montenegro, Mercator - K, l.l.c., Republic
of Kosovo, Mercator Makedonija, d.o.o.e.l., Macedonia, Investment Internacional, d.o.o.e.l.,
Macedonia, Mercator - B, e.o.o.d., Bulgaria and Mercator - A, sh.p.k., Albania;
(hereinafter referred to as »Mercator Group«). Mercator Group's predominant operating activity is
retail and wholesale of fast-moving consumer goods.
43
Condensed consolidated statement of financial position
EUR thousand 30/6/2012
Plan
31/12/2012
31/12/2011
restated
01/01/2011
restated
Index
30/06/2012/
31/12/2011
ASSETS
Non-current assets
Property, plant and equipment 1,871,872 1,681,787 1,906,018 1,870,428 98.2
Investment property 3,506 3,204 3,450 3,894 101.6
Intangible assets 43,584 40,640 47,623 52,626 91.5
Deferred tax assets 9,141 11,030 9,837 8,700 92.9
Loans and deposits 65,385 45,564 65,823 77,113 99.3
Available-for-sale financial assets 2,704 3,015 2,628 3,959 102.9
1,996,192 1,785,240 2,035,379 2,016,720 98.1
Current assets
Inventories 274,553 261,305 310,030 297,332 88.6
Trade and other receivables 274,772 245,410 243,402 231,871 112.9
Current tax assets 3,948 - 3,934 - 100.4
Loans and deposits 1,573 1,914 2,001 17,346 78.6
Derivative financial instruments 27 229 158 70 17.1
Cash and cash equivalents 24,898 16,364 27,540 20,766 90.4
579,771 525,222 587,065 567,385 98.8
Total assets 2,575,963 2,310,462 2,622,444 2,584,105 98.2
EQUITY
Share capital 157,129 157,129 157,129 157,129 100.0
Share premium 198,872 198,872 198,872 198,872 100.0
Treasury shares (3,235) (3,235) (3,235) (3,235) 100.0
Revenue reserves 260,552 244,530 260,552 245,449 100.0
Fair value reserve 193,059 190,170 192,209 200,187 100.4
Retained earnings (2,010) 24,494 10,294 6,671 -
Profit for the period (16,523) 15,721 7,983 30,396 -
Currency translation reserve (84,924) (56,859) (60,275) (62,295) 140.9
Total equity attributable to owners of
the parent company 702,920 770,822 763,529 773,174 92.1
Non-controlling interest 209 212 221 242 94.6
Total equity 703,129 771,034 763,750 773,416 92.1
LIABILITIES
Non-current liabilities
Trade and other payables 3,566 4,122 2,369 2,447 150.5
Financial liabilities 743,889 593,335 822,145 674,375 90.5
Deferred tax liabilities 45,596 63,913 49,830 51,269 91.5
Provisions 29,805 35,951 32,711 35,709 91.1
822,856 697,321 907,055 763,800 90.7
Current liabilities
Trade and other payables 667,762 635,643 583,982 642,666 114.3
Current tax liabilities 3,059 415 507 5,892 603.4
Financial liabilities 373,782 202,670 362,588 395,853 103.1
Derivative financial instruments 5,375 3,379 4,562 2,478 117.8
1,049,978 842,107 951,639 1,046,889 110.3
Total liabilities 1,872,834 1,539,428 1,858,694 1,810,689 100.8
Total equity and liabilities 2,575,963 2,310,462 2,622,444 2,584,105 98.2
44
Condensed consolidated income statement
EUR thousand 1-6 2012 Plan 2012
1-6 2011
restated
Index
1-6 2012/
1-6 2011
Index
1-6 2012/
Plan 2012
Revenue 1,402,022 2,966,521 1,387,368 101.1 47.3
Cost of sales (1,333,714) (2,798,960) (1,293,964) 103.1 47.7
Gross profit 68,308 167,561 93,404 73.1 40.8
Administrative expenses (55,042) (105,433) (53,083) 103.7 52.2
Other income 11,238 14,248 7,312 153.7 78.9
Results from operating activities 24,504 76,376 47,633 51.4 32.1
Finance income 2,170 3,936 4,653 46.6 55.1
Finance expenses (39,992) (56,140) (28,086) 142.4 71.2
Net finance expenses (37,822) (52,204) (23,433) 161.4 72.5
Profit before income tax (13,318) 24,172 24,200 - -
Tax (3,218) (8,464) (5,675) 56.7 38.0
Profit for the period (16,536) 15,708 18,525 - -
Profit for the period, attributable to:
Owners of the parent company (16,523) 15,721 18,535 - -
Non-controlling interest (13) (13) (10) 130.0 100.0
Condensed consolidated statement of comprehensive income
EUR thousand 1-6 2012 1-6 2011
Index
1-6 2012/
1-6 2011
Profit for the period (16,536) 18,525 -
Other comprehensive income
Foreign currency translation differences – foreign operations (24,648) 22,003 -
Changes in fair value of cash flow hedges (945) 708 -
Deferred tax 3,847 8 -
Other comprehensive income for the period (21,746) 22,719 -
Total comprehensive income for the period (38,282) 41,244 -
-
Total comprehensive income for the period, attributable to:
-
Owners of the parent company (38,270) 41,254 -
Non-controlling interest (12) (10) 150.0
45
Condensed consolidated statement of changes in equity
EUR thousand
Share
capital
Share
premium
Treasury
shares
Revenue
reserves
Fair value
reserve
Retained
earnings
Profit for
the period
Currency
translation
reserve
Total equity
attributable
to owners of
the parent
company
Non-
controlling
interest
Total
equity
Balance at January 1, 2011 157,129 198,872 (3,235) 270,194 200,187 6,671 30,396 (62,295) 797,919 246 798,165
Effects due to changes in accounting policy - - - (24,745) - - - - (24,745) (4) (24,749)
Balance at January 1, 2011 (restated) 157,129 198,872 (3,235) 245,449 200,187 6,671 30,396 (62,295) 773,174 242 773,416
Total comprehensive income for the
period
Profit for the period - - - - - - 18,535 - 18,535 (10) 18,525
Other comprehensive income - - - - (851) 1,567 - 22,003 22,719 - 22,719
Total comprehensive income for the
period - - - - (851) 1,567 18,535 22,003 41,254 (10) 41,244
Transactions with owners of the parent
company directly recognised in equity
Dividends to equity holders - - - - - (29,785) - - (29,785) - (29,785)
Transfer of profit for the period to retained
earnings - - - - - 30,396 (30,396) - - - -
Total contributions by and distributions
to owners - - - - - 611 (30,396) - (29,785) - (29,785)
Changes in ownership interest in
subsidiaries
Proceeds from sale of subsidiary - - - - (1,671) - - - (1,671) - (1,671)
Total transactions with owners - - - - (1,671) 611 (30,396) - (31,456) - (31,456)
Balance at June 30, 2011 (restated) 157,129 198,872 (3,235) 245,449 197,665 8,849 18,535 (40,292) 782,972 232 783,204
46
EUR thousand Share capital
Share
premium
Treasury
shares
Revenue
reserves
Fair value
reserve
Retained
earnings
Profit for
the period
Currency
translation
reserve
Total
equity
attributable
to owners
of the
parent
company
Non-
controlling
interest
Total
equity
Balance at January 1, 2012
(restated) 157,129 198,872 (3,235) 260,552 192,209 10,294 7,983 (60,275) 763,529 221 763,750
Total comprehensive income for
the period
Profit for the period - - - - - - (16,523) - (16,523) (13) (16,536)
Other comprehensive income - - - - 850 2,052 - (24,649) (21,747) 1 (21,746)
Total comprehensive income for
the period - - - - 850 2,052 (16,523) (24,649) (38,270) (12) (38,282)
Transactions with owners of the
parent company directly
recognised in equity
Dividends to equity holders - - - - - (22,339) - - (22,339) - (22,339)
Transfer of profit for the period to
retained earnings - - - - - 7,983 (7,983) - - - -
Total contributions by and
distributions to owners - - - - - (14,356) (7,983) - (22,339) - (22,339)
Balance at June 30, 2012 157,129 198,872 (3,235) 260,552 193,059 (2,010) (16,523) (84,924) 702,920 209 703,129
47
Condensed consolidated statement of cash flows
EUR thousand 1-6 2012 1-6 2011
Index
1-6 2012/
1-6 2011
Cash flows from operating activities
Gross cash flow from operating activities 59,241 87,628 67.6
Change in inventories 35,717 2,851 1,252.8
Change in trade and other receivables (31,201) (57,294) 54.5
Change in trade and other payables 88,014 (69,569) -
151,771 (36,385) -
Interest paid (26,569) (25,871) 102.7
Income tax paid (2,747) (5,809) 47.3
Net cash from (used in) operating activities 122,455 (68,065) -
Cash flows from investing activities
Acquisition of subsidiary and business operations, net of cash
acquired (442) - -
Acquisition of property, plant and equipment and investment
property (35,163) (66,105) 53.2
Acquisition of intangible assets (2,119) (1,662) 127.5
Acqusition of available-for-sale financial assets (5) - -
Proceeds from sale of property, plant and equipment and
investment property 1,067 6,002 17.8
Proceeds from sale of intangible assets 12 - -
Proceeds from sale of subsidiary - 10,000 -
Interest received 1,422 2,504 56.8
Dividends received 94 - -
Loans and deposits repayments received 837 24,447 3.4
Net cash used in investing activities (34,297) (24,813) 138.2
Cash flows from financing activities
Proceeds from (repayments of) borrowings (68,046) 87,033 -
Dividends paid (21,336) (12) -
Net cash from (used in) financing activities (89,382) 87,021 -
Net (decrease) increase in cash and cash equivalents (1,224) (5,858) 20.9
Cash and cash equivalents as at the beginning of the period 27,540 20,766 132.6
Effect of exchange rate fluctuations on cash and cash
equivalents (1,418) 405 -
Cash and cash equivalents as at the end of the period 24,898 15,314 162.6
48
Notes to condensed consolidated interim financial statements
Notes to condensed consolidated income statement
Revenue
In the period 1-6 2012, Mercator Group generated EUR 1,402,022 thousand of revenue, which is
1.1 percent more than in the period 1-6 2011, and 47.3% of the figure planned for 2012. Revenue
dropped in Slovenia (index 98.4); in international markets, revenue growth amounted to 4.9%. In
Slovenia, the largest drop in revenue relative to the equivalent period of last year was seen in home
product program, and textile/apparel program. Furthermore, investment into retail network was low in
Slovenia in this year due to harsh economic conditions; moreover, the divestment of the company Eta,
d.d., in June 2011 also contributed to the decrease in revenue. In international markets, change in
revenue relative to the first half of last year differs by countries. Taken as a whole, the growth is
mostly the result of the takeover of trade operations of the company Drvopromet in Bosnia and
Herzegovina in October 2011.
In compliance with the changes in accounting policies, revenue for the period 1-6 2011 was, pursuant
to IAS 8, reclassified in the amount of EUR -29,018 thousand, reducing the costs of sales in the first
half of 2011 by that amount.
Costs of sales
Mercator Group costs of sales which include the cost of goods sold, production costs, selling and
marketing costs, and other expenses, amounted to EUR 1,333,714 thousand in the period 1-6 2012,
which is 47.7% of the plan for 2012.
Cost of goods sold rose by 2.5 percent compared to the first half of last year, which is a steeper
increase than the rise in revenue; therefore, gross margin dropped by 1.1 percentage points to 23.6%.
In the period 1-6 2012, early payment discounts were also lower by approximately EUR 1 million as
the Group made less early payments because of worsened situation in the financial markets. Other
expenses in the first half of 2012 were higher than in the corresponding period last year by
EUR 595 thousand.
Costs of sales in the period 1-6 2011 were reduced by EUR 29,018 thousand pursuant to IAS 8, in
order to comply with the new accounting policies; revenue was adjusted downwards by the same
amount.
Gross profit
Gross profit for the period 1-6 2012 amounts to EUR 68,308 thousand. The share of gross profit in
revenue is 4.9% which is 1.8 percentage points less than in the equivalent period last year. In the
period at hand, Mercator Group invested substantial amounts in lower retail prices in order to maintain
the purchasing power of the consumers. This resulted in a relatively lower gross profit in the period
1-6 2012 compared to the equivalent period last year.
Administrative expenses
Mercator Group's administrative expenses in the period 1-6 2012 amounted to EUR 55,042 thousand,
which is 52.2% of the figure planned for the entire year 2012.
Total expenses, consisting of selling and marketing costs (included in costs of sales), production costs,
and administrative expenses amounted to EUR 348,052 thousand in the first half of 2012, an increase
of 3.7% over the last year's figure for such period. The highest increase was seen in rent payments as
Mercator is increasingly using operating lease to expand its retail network. Among other expenses, the
costs of services had the steepest growth of 10.9%; in particular, operating costs rose the most within
this category of costs, because the prices and consumption of energy rose along with maintenance
costs resulting from refurbishment projects at retail units, which were a part of the project of
refreshment of FMCG offer.
49
Results from operating activities
In the period 1-6 2012, Mercator Group's results from operating activities reached EUR 24,504
thousand, which is 51.4% of the figure for the first half of 2011. Results from operating activities are
lower especially because of negative effects of the economic situation on consumption, which in turn
tends to depress both revenue and the relative margin. Partially, results are also weakened by higher
rent payments, which are the result of expansion of the retail network through operating lease.
Finance income and expenses
Finance income amounted to EUR 2,170 thousand, derived mostly from revenue from regular interest
in the amount of EUR 267 thousand, default interest in the amount of EUR 1,156 thousand, revenue
from long-term financial investments in the amount of EUR 439 thousand, and other finance income
in the amount of EUR 308 thousand.
Finance expenses amounted to EUR 39,992 thousand in the period at hand, pertaining mostly to
expenses for regular interest on loans taken from commercial banks, in the amount of EUR 26,405
thousand, and negative currency translation differences in the amount of EUR 11,129 thousand, as a
result of the translation of euro loans in local currency as at the balance sheet date.
Net finance expenses are higher than in the first half of last year by EUR 14,389 thousand, which is
mostly due to the negative currency translation differences resulting from the depreciation of the
Serbian dinar (difference of EUR 10,900 thousand between the two periods), higher expenses from
interest paid on bank loans taken by EUR 630 thousand, lower finance income from long-term
financial investments which included gains from divestment of the company Eta, d.d., last year, and
higher revaluation adjustments of receivables.
Profit before income tax
In the period 1-6 2012, Mercator Group's profit before income tax was negative at
EUR -13,318 thousand.
Profit for the financial period
Mercator Group's net loss for the period 1-6 2012 amounts to EUR -16,536 thousand.
EBITDA
Mercator Group EBITDA in the period 1-6 2012 amounts to EUR 64,245 thousand, which represents
41.7% of the annual plan. Relative to the equivalent period of last year, it is lower by 26.7 percent; the
reasons for the drop in this figure are the same as in the case of results from operating activities.
EBITDAR
The relevant indicator of the ability to generate operating cash flow, which also accounts for the
expansion of Mercator Group's retail network through operating lease, is the EBITDAR which
amounted to EUR 91,641 thousand in the period 1-6 2012, or 42.1% of the figure planned for the
entire year 2012. Relative to the first half of last year, EBITDAR is lower by 16%, or by less than
EBITDA; this is a result of increased scope of operating lease.
50
Notes to condensed consolidated statement of financial position
Assets
Mercator Group assets as at June 30, 2012 amounted to EUR 2,575,963 thousand, which is EUR
46,481 thousand less than at the end of 2011, mostly due to lower property, plant, and equipment, and
lower inventories.
As at June 30, 2012, the value of Mercator Group non-current assets amounted to EUR 1,996,192
thousand, which is EUR 39,187 thousand less than as at December 31, 2011. The largest share of non-
current assets (93.8% or EUR 1,871,872 thousand) is represented by property, plant, and equipment,
the value of which was EUR 34,146 thousand lower than as at the end of 2011 as a result of lower
investment which was lower than depreciation and negative currency translation differences.
As at June 30, 2012, the value of Mercator Group current assets amounted to EUR 579,771 thousand,
which is EUR 7,294 thousand less than a the end of 2011. The largest share thereof involves
inventories (47.4%) and trade and other receivables (47.4%). In 2012, the Group has been intensively
implementing the measures for efficient working capital management. As a result, inventories dropped
by EUR 35,477 thousand.
Pursuant to the changes in accounting policies, the Group reduced the value of inventories as at
January 1, 2011, by EUR 24,749 thousand. The change pertains to the value of rebates in the inventory
in the amount of EUR 18,698 thousand and the estimated difference resulting from the change in the
method of recognizing the cost of goods sold in the amount of EUR 6,051 thousand. The value of
rebates in the inventory rose by EUR 470 thousand by the end of 2011; therefore, total adjustment of
the value of inventories as at December 31, 2011 is EUR -25,219 thousand.
Equity and liabilities
As at June 30, 2012, Mercator Group share capital amounted to EUR 703,129 thousand, which is EUR
60,621 thousand, or 7.9%, less than as at the end of 2011. The decrease pertains to the negative net
income in the amount of EUR 16,536 thousand, negative currency translation differences in translation
of financial statements of international subsidiaries in the amount of EUR -24,648 thousand, and
dividend payment in the amount of EUR 22,339 thousand, while the rest included increase of equity in
the amount of EUR 2,902 thousand, mostly due to deferred tax as a result of decrease of tax rate in
Slovenia.
As at June 30, 2012, total financial liabilities amounted to EUR 1,117,671 thousand, which is EUR
67,062 thousand less than as at the end of 2011. The decrease is the result of the Group's efforts to
reduce its debt. Net debt of the Mercator Group, calculated as the difference between financial
liabilities and financial assets, amounted to EUR 1,028,459 thousand as at June 30, 2012 (December
31, 2011: EUR 1,091,145 thousand).
As at June 30, 2012, provisions amounted to EUR 29,805 thousand. Compared to the end of 2011,
provisions have decreased by EUR 2,906 thousand, mostly due to partial reversal of provisions for
legal claims.
Trade and other payables as at June 30, 2012 amounted to EUR 671,328 thousand, which is EUR
84,977 thousand more than at the end of 2011. The increase in trade payables is a result of year-on-
year dynamics in the retail industry; in addition, it is related to the reduction of debt.
As at June 30, 2012, long-term coverage of non-current assets with non-current liabilities at the
Mercator Group amounts to 76.4%, which is 5.6 percentage points less than as at the end of 2011.
As a counter-entry to the adjustment of the value of inventory as at January 1, 2011, and as at the last
day of 2011, the value of equity was also adjusted pursuant to the changed accounting policies and the
IAS 8. As at January 1, 2011, the Group revenue reserves were decreased by EUR 24,745 thousand,
and non-controlling interests were decreased by EUR 4 thousand. Increase in the value of rebates in
inventories had an effect of EUR -470 thousand on the profit (net income) for the year 2011. Since this
effect on the profit (net income) for the entire year 2011 is immaterial, it is recognized in revenue
reserves. Thus, total amount of revaluation adjustment to equity in 2011 amounts to EUR -25,219
thousand.
51
FINANCIAL REPORT OF THE COMPANY POSLOVNI SISTEM MERCATOR, D.D.
Poslovni sistem Mercator, d.d., (hereinafter referred to as Mercator, d.d.), is a company headquartered
in Slovenia. The address of its registered head office is Ljubljana, Dunajska cesta 107. The company
Mercator, d.d., is the parent/controlling company of a group of related companies headquartered in
Slovenia, Serbia, Croatia, Bosnia and Herzegovina, Montenegro, Bulgaria, Albania, Republic of
Kosovo, and Macedonia.
The company has a double role: it is predominantly engaged in fast-moving consumer goods retail and
wholesale; however, it also performs various group-related corporate tasks for the companies included
in the Mercator Group. Hence, employing the financial statements of the company Poslovni sistem
Mercator, d.d., for economic analysis of Mercator Group's operation is inappropriate. For such
analysis, it is appropriate to apply above all the consolidated financial statements that present an
account of the performance of the Mercator Group as a uniform business entity.
Due to the transfer of a part of operating activities to the company M - Tehnika, d.d., financial
statements of the company Poslovni sistem Mercator, d.d., are not fully comparable between
particular periods in terms of substance.
52
Condensed statement of financial position
EUR thousand 30/06/2012
Plan
31/12/2012
31/12/2011
restated
01/01/2011
restated
Index
30/06/2012/
31/12/2011
ASSETS
Non-current assets
Property, plant and equipment 1,005,357 853,582 1,003,846 1,014,704 100.2
Investment property 3,372 3,204 3,450 3,894 97.7
Intangible assets 10,007 5,854 10,513 9,652 95.2
Deferred tax assets 8,018 10,081 8,657 8,216 92.6
Loans and deposits 789 971 870 286 90.7
Investment into equity of subsidiaries 633,617 632,659 636,319 618,813 99.6
Available-for-sale financial assets 2,404 2,738 2,399 3,547 100.2
1,663,564 1,509,089 1,666,054 1,659,112 99.9
Current assets
Inventories 90,431 94,357 136,003 136,429 66.5
Trade and other receivables 172,947 139,481 163,118 158,907 106.0
Current tax assets 3,257 9,759 2,167 5 150.3
Loans and deposits 58,231 38,675 34,575 48,848 168.4
Derivative financial instruments 27 229 158 70 17.1
Cash and cash equivalents 8,029 4,687 10,068 3,829 79.7
332,922 287,188 346,089 348,088 96.2
Total assets 1,996,486 1,796,277 2,012,143 2,007,200 99.2
EQUITY
Share capital 157,129 157,129 157,129 157,129 100.0
Share premium 198,872 198,872 198,872 198,872 100.0
Treasury shares (3,235) (3,235) (3,235) (3,235) 100.0
Revenue reserves 236,312 238,015 236,312 220,518 100.0
Fair value reserve 194,997 183,168 190,651 194,435 102.3
Retained earnings 8,240 36,221 13,246 3,612 62.2
Profit for the period 13,249 27,492 15,574 36,806 85.1
805,564 837,662 808,549 808,137 99.6
LIABILITIES
Non-current liabilities
Trade and other payables 2,023 2,466 2,022 2,447 100.0
Financial liabilities 566,518 452,677 628,686 456,547 90.1
Deferred tax liabilities 35,501 53,492 39,805 40,814 89.2
Provisions 24,311 22,490 26,926 29,459 90.3
628,353 531,125 697,439 529,267 90.1
Current liabilities
Trade and other payables 340,757 267,620 306,685 341,239 111.1
Current tax liabilities 2,623 9,805 - 5,759 -
Financial liabilities 213,814 146,686 194,908 320,320 109.7
Derivative financial instruments 5,375 3,379 4,562 2,478 117.8
562,569 427,490 506,155 669,796 111.1
Total liabilities 1,190,922 958,615 1,203,594 1,199,063 98.9
Total equity and liabilities 1,996,486 1,796,277 2,012,143 2,007,200 99.2
53
Condensed income statement
EUR thousand 1-6 2012 Plan 2012
1-6 2011
restated
Index
1-6 2012/
1-6 2011
Index
1-6 2012/
Plan 2012
Revenue 724,149 1,447,837 776,083 93.3 50.0
Cost of sales (668,657) (1,312,216) (706,165) 94.7 51.0
Gross profit 55,492 135,621 69,918 79.4 40.9
Administrative expenses (28,690) (66,475) (28,702) 100.0 43.2
Other income 6,561 7,200 3,889 168.7 91.1
Results from operating activities 33,363 76,346 45,105 74.0 43.7
Finance income 3,860 4,806 7,535 51.2 80.3
Finance expenses (20,958) (47,150) (24,406) 85.9 44.4
Net finance expenses (17,098) (42,344) (16,871) 101.3 40.4
Profit before income tax 16,265 34,002 28,234 57.6 47.8
Tax (3,016) (6,510) (5,365) 56.2 46.3
Profit for the period 13,249 27,492 22,869 57.9 48.2
Condensed statement of comprehensive income
EUR thousand 1-6 2012 1-6 2011
Index
1-6 2012/
1-6 2011
Profit for the period 13,249 22,869 57.9
Other comprehensive income
Changes in fair value of cash flow hedges (944) 708 -
Deferred tax 3,803 156 2,437.8
Disposal of an investment in a subsidiary 3,246 (2,980) -
Other comprehensive income for the period 6,105 (2,116) -
Total comprehensive income for the period 19,354 20,753 93.3
54
Condensed statement of changes in equity
EUR thousand
Share
capital
Share
premium
Treasury
shares
Revenue
reserves
Fair value
reserve
Retained
earnings
Profit for the
period Total equity
Balance at January 1, 2011 157,129 198,872 (3,235) 238,015 194,435 3,612 36,806 825,634
Effect due to change in accounting policies (17,497) (17,497)
Balance at January 1, 2011 (restated) 157,129 198,872 (3,235) 220,518 194,435 3,612 36,806 808,137
Total comprehensive income for the period
Profit for the period - - - - - - 22,869 22,869
Other comprehensive income - - - - (3,488) 1,372 - (2,116)
Total comprehensive income for the period - - - - (3,488) 1,372 22,869 20,753
Dividends to equity holders - - - - - (29,785) - (29,785)
Transfer of profit for the period to retained earnings - - - - - 36,806 (36,806) -
Balance at June 30, 2011 (restated) 157,129 198,872 (3,235) 220,518 190,947 12,005 22,869 799,105
EUR thousand
Share
capital
Share
premium
Treasury
shares
Revenue
reserves
Fair value
reserve
Retained
earnings
Profit for the
period Total equity
Balance at January 1, 2012 (restated) 157,129 198,872 (3,235) 236,312 190,651 13,246 15,574 808,549
Total comprehensive income for the period
Profit for the period - - - - - - 13,249 13,249
Other comprehensive income - - - - 4,346 1,759 - 6,105
Total comprehensive income for the period - - - - 4,346 1,759 13,249 19,354
Transactions with owners directly recognised in equity
Dividends to equity holders - - - - - (22,339) - (22,339)
Transfer of profit for the period to retained earnings - - - - - 15,574 (15,574) -
Balance at June 30, 2012 157,129 198,872 (3,235) 236,312 194,997 8,240 13,249 805,564
55
Condensed statement of cash flows
EUR thousand 1-6 2012 1-6 2011
Index
1-6 2012/
1-6 2011
Cash flows from operating activities
Gross cash flow from operating activities 49,871 65,269 76.4
Change in inventories 45,572 (3,557) -
Change in trade and other receivables (9,829) (32,504) 30.2
Change in trade and other payables 36,841 (24,657) -
Interest paid (18,777) (24,298) 77.3
Income tax paid (2,625) (5,555) 47.3
Net cash from operating activities 101,053 (25,302) -
Cash flows from investing activities
Acquisition of subsidiaries (capital increase) (14,481) (2,000) 724.1
Acquisition of property, plant and equipment and
investment property (23,071) (12,863) 179.4
Acquisition of intangible assets (1,355) (1,335) 101.5
Acqusition of available-for-sale financial assets (5) -
Loans and deposits made (23,574) (1,006) -
Proceeds from sale of subsidiary 17,967 10,000 179.7
Proceeds from sale of property, plant and equipment and
investment property 4,068 3,845 105.8
Proceeds from sale of intangible assets 12 35 34.3
Interest received 1,853 3,155 58.7
Dividends received 93 - -
Net cash used in investing activities (38,493) (169) -
Cash flows from financing activities
Proceeds from (repayments of) borrowings (43,263) 24,231 -
Dividends paid (21,336) (12) -
Net cash from financing activities (64,599) 24,219 -
Net increase (decrease) in cash and cash equivalents (2,039) (1,252) 162.9
Cash and cash equivalents as at the beginning of the period 10,068 3,829 262.9
Cash and cash equivalents as at the end of the period 8,029 2,577 311.6
56
Notes to condensed interim financial statements
Notes to condensed income statement
Revenue
In the period 1-6 2012, revenue of the company Poslovni sistem Mercator, d.d., amounted to
EUR 724,149 thousand. Majority of company revenue is generated by sales of goods, material, and
products, mostly retail and wholesale of trade goods. Compared to the equivalent period last year,
revenue is lower by EUR 51,934 thousand or 6.7%, which is the result of harsh economic conditions
and the transfer of a part of operations to the company M - Tehnika, d.d.
In compliance with the changes in accounting policies, revenue for the period 1-6 2011 was, pursuant
to IAS 8, reclassified in the amount of EUR -19,066 thousand to reduce the costs of sales in the first
half of 2011.
Costs of sales
Costs of sales at the company, which include the purchase value of goods sold, production costs,
selling and marketing costs, and other expenses, amounted to EUR 668,657 thousand in the period
1-6 2012. Compared to the first half of last year, costs of sales are lower by EUR 37,508 thousand or
by 5.3%. Lower costs of sales are a result of lower revenue.
Costs of sales in the period 1-6 2011 were reduced by EUR 19,066 thousand pursuant to IAS 8, in
order to comply with the new accounting policies; revenue was adjusted downwards by the same
amount.
Gross profit
Gross profit for the period 1-6 2012 amounts to EUR 55,492 thousand. The ratio of gross profit to
revenue is 7.7%. In the period 1-6 2011, the share of gross profit in revenue was 9.0%. Lower ratio of
gross profit to revenue is a result of higher investment into competitive pricing as a response to
increase price sensitivity of the customers.
Administrative expenses
Company administrative expenses in the period 1-6 2012 amounted to EUR 28,690 thousand, which is
comparable to the figure from the first half of last year.
Results from operating activities
In the period 1-6 2012, company result from operating activities amounted to EUR 33,363 thousand.
Compared to the first half of last year, results from operating activities are lower by
EUR 11,742 thousand or by 26.0%. Lower results from operating activities are an effect of lower
revenue and higher investment into competitive pricing.
Finance income and expenses
Finance income amounts to EUR 3,860 thousand. It mostly pertains to income from default and
regular interest on financing and income from long-term financial investments. In the period 1-6 2012,
finance income amounted to EUR 7,535 thousand. Higher finance income in 2011 is mostly the effect
of gains from divestment of a subsidiary, amounting to EUR 3,938 thousand.
Finance expenses for the relevant period amount to EUR 20,958 thousand, of which a major share
relates to expenses from interest paid to commercial banks and revaluation adjustments to receivables.
In the period 1-6 2011, finance expenses amounted to EUR 24,406 thousand.
57
Profit before income tax and net income
In the period 1-6 2012, the company profit before income tax amounted to EUR 16,265 thousand;
profit for the period amounted to EUR 13,249 thousand, which is lower by 42.1 percent compared to
the equivalent period of last year.
Notes to condensed statement of financial position
Assets
Company assets as at June 30, 2012 amounted to EUR 1,996,486 thousand, which is
EUR 15,657 thousand less than at the end of 2011.
As at June 30, 2012, the value of company non-current assets amounted to EUR 1,663,564 thousand,
which is EUR 2,490 thousand less than as at December 31, 2011. The largest share of non-current
assets is represented by property, plant and equipment, accounting for 61.2%
(EUR 1,018,736 thousand) of the total figure. Their value rose by EUR 927 thousand relative to the
end of 2011. The change in value in the period 1-6 2012 is related to investments, depreciation and
amortization, and disposal of non-core and non-viable property, plant, and equipment.
As at June 30, 2012, the value of company current assets amounted to EUR 332,922 thousand, which
is EUR 13,167 thousand less than a the end of 2011. The largest effect on the decrease of current
assets was the decrease of inventory by EUR 45,572 thousand. Decrease in the value of inventory is a
result of the transfer of a part of the operations to the company M - Tehnika, d.d., and the decrease in
inventory as a result of improved working capital management. The largest increase in current assets
was seen in loans and deposits, by EUR 23,656 thousand or 68.4%. The increase is a result of higher
loans granted to subsidiaries as a result of centralized financial assets management.
Pursuant to the changes in accounting policies, the company Mercator, d.d., reduced the value of
inventories as at January 1, 2011, by EUR 17,497 thousand. The change pertains to the value of
rebates in the inventory (EUR 11,446 thousand) and the estimated difference resulting from the
change in the method of recognizing the cost of goods sold (EUR 6,051 thousand). The value of
rebates in the inventory dropped by EUR 220 thousand by the end of 2011; therefore, total adjustment
of the value of inventories as at December 31, 2011 is EUR -17,277 thousand.
Equity and liabilities
Company share capital amounts to EUR 805,564 thousand as at June 30, 2012.
As at June 30, 2012, total financial liabilities amount to EUR 780,332 thousand, which is
EUR 43,262 thousand less than as at the end of 2011. The drop in financial liabilities is a result of
more efficient management of financial assets and liabilities, as the company's response to ever more
restricted access to new sources of financing.
As at June 30, 2012, provisions amounted to EUR 24,311 thousand. Compared to the end of 2011,
provisions have decreased by EUR 2,615 thousand, due to partial reversal of provisions for legal
claims.
Trade and other payables as at June 30, 2012 amounted to EUR 342,780 thousand, which is
EUR 34,073 thousand more than at the end of 2011. The increase in trade payables is mostly the effect
of the shift in the payments to suppliers as a part of the efforts to reduce the company's debt.
As a counter-entry to the adjustment of the value of inventory as at January 1, 2011, and as at the last
day of 2011, the value of equity was also adjusted pursuant to the changed accounting policies and the
IAS 8. As at January 1, 2011, the revenue reserves of the company Mercator, d.d., were decreased by
EUR 17,497 thousand. Decrease in the value of rebates in inventories had an effect of
EUR 220 thousand on the profit for the year 2011. Since this effect on the profit for the entire year
2011 is immaterial, it is recognized in revenue reserves. Thus, total amount of revaluation adjustment
to equity in 2011 amounts to EUR -17,277 thousand.
58
Related party transactions
There are two groups of related parties at the company Poslovni sistem Mercator, d.d.: managerial
personnel and subsidiaries. Managerial personnel includes members of management boards,
supervisory boards, and employees with individual employment contracts working at Mercator Group
companies.
Transactions between the company Poslovni sistem Mercator, d.d., and its subsidiaries within the
Mercator Group, taking place as a part of various forms of business and financial activity, are always
effected according to the arm's length principle. Managerial staff receives compensation and reward in
compliance with their respective employment contracts or consistently with the Shareholder Assembly
resolutions (Supervisory Board members).
59
MANAGEMENT BOARD STATEMENT PURSUANT TO ARTICLE 113 OF THE MARKET IN FINANCIAL INSTRUMENTS ACT
The Management Board hereby confirms that to their best knowledge, the summary of the financial
report of the company Poslovni sistem Mercator, d.d., and the Mercator Group is compiled in
compliance with the appropriate framework of financial reporting and that it presents a true and fair
account of assets and liabilities, financial position, and the income of the company Poslovni sistem
Mercator, d.d., and other companies included in the consolidated statements. The business report
includes a fair account of information on relevant transactions with related parties, and it is compiled
in compliance with the relevant accounting standards.
Poslovni sistem Mercator, d.d.
Management Board
Ljubljana, August 22, 2012
