Business Plan 2006

Pursuant provisions of the Securities Market Act and the Rules and Regulations of the
Ljubljana Stock Exchange, the company Poslovni sistem Mercator, d.d., Ljubljana
hereby informs the stockholders and the interested public in regard to
BUSINESS PLAN SUMMARY OF THE COMPANY POSLOVNI SISTEM
MERCATOR, d.d., AND THE MERCATOR GROUP FOR THE YEAR 2006
The Supervisory Board of the company Poslovni sistem Mercator, d.d., adopted at its
meeting held on February 27th 2006 the Business Plan of the company and the Mercator
Group for the year 2006. Following is a summary of the Business Plan for the year 2006.
SUMMARY
According to the corporate Business Plan for 2006, the net sales revenues will amount to
SIT 465,362 million, which is an 11.0 % increase over the previous year. The planned growth
of net sales revenues is mainly expected due to opening new Mercator Centers in Maribor,
Zagreb and Rijeka, and new trade centers in Cerknica, Lesce, Krško, Bohinjska Bistrica,
Novigrad, Mostar and Novi Beograd (New Blegrade). Furthermore, the increase will also be
propelled by revenues from new shopping centers in a ak, Dobrinja and Zemuno at the end
of 2005 and the takeover of Era retail and wholesale network in Slovenia and Croatia.
Profit before taxes of the Mercator Group for 2006 is planned at SIT 9,143 million, which is
85.4 % more than in the year before. Net profit is planned at SIT 6,135 million, representing
a 87.9% increase over the year 2005.
The growth of gross cash flow from operating activities is also planned for 2006; this
category should rise by 12.7 % compared to the previous year, to SIT 30,016 million.
Mercator Group will continue to expand and update the retail network, as well as to invest in
distribution centers and information technology. In 2006, SIT 40,181 million are planned for
investment activities, whereof 63 % will be allocated to investment in Slovenia and the
remaining 37 % will be invested abroad.
In line with the planned activities we anticipate an increase of the number of employees,
which should rise from 16,372 to 17,643, of which 13,870 will be employed in Slovenia.
The Management Board is estimating that the planned business activities and
accomplishments mean the realization of the planned strategic directives of the Mercator
Group.
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GENERAL INFORMATON
COMPOSITION AND ORGANIZATION OF THE MERCATOR GROUP
The Mercator Group consists of trade and non-trade companies, operating in processing
industry, catering and service sector. The company Poslovni sistem Mercator, d.d., is the
parent / controlling company of a group of associated companies (The Mercator Group),
which will include the following companies in 2006:
•
Trade companies in Slovenia: Poslovni sistem Mercator, d.d.
(along with merged companies Emona Maximarket,
d.d., Alpkomerc Tolmin, d.d., Mercator – Modna
hiša, d.o.o.)
Mercator – SVS, d.d.
•
Trade companies abroad:
Mercator – H, d.o.o., (Croatia)
Mercator – S, d.o.o., (Serbia and Montenegro)
Mercator – BH, (Bosnia in Herzegovina)
Mercator Makedonija, d.o.o., (Macedonia)
•
Non-trade companies:
Pekarna Grosuplje, d.d.
Belpana, d.o.o., (Croatia)
Eta, d.d.
Mercator – Emba, d.d.
Mercator – Optima, d.o.o.
M Hotel, d.o.o.
Considering the product and service specialization, the trade division of the Mercator Group
currently comprises a well rounded assortment, offered in specially designed programs:
•
Market program, which harbors the development of hypermarkets, supermarkets and
smaller neighborhood grocery stores, comfort stores, Hura! discount stores and an
internet store. Hura! discount stores are developed in order to meet the requirements
of the low end market, i.e. the customers with weaker purchase power and the
customers that wish to rationalize their consumption despite their substantial income.
•
Technical apparel program, which combines the furniture and interior equipment
programs, digital home and entertainment products, and construction and installation
material.
3
•
Textile program and beauty program, which comprises clothing for all age groups
and a selected assortment of drugstore and fragrance and body care products; two
types of textile retail outlets are develop within the program with trademarks Modiana
and Avenija mode ('The Fashion Avenue'), while the fragrance and body care program
is offered under the trademark Beautique.
•
Mercator is the holder of the Intersport license in Slovenia, Croatia, Bosnia and
Herzegovina and Serbia, thus offering a variety of sportswear and equipment by
globally acclaimed manufacturers.
OWNERSHIP STRUCTURE
On December 31st 2005, 20,401 shareholders were registered in the Share Register of the
company Poslovni sistem Mercator, d.d., which means a decrease by 1,458 or 6.67%
compared to the year before (21,859 on December 31st 2004).
Ownership structure of the company Poslovni sistem Mercator, d.d., on December 31st 2005:
Investment Funds
10.08%
Other legal entities
36.89%
Individuals
24.25%
Slovenska
odškodninska družba,
d.d.
Banka Koper, d.d.
15.00%
13.78%
CORPORATE GOVERNANCE
General Meeting of Shareholders
The Shareholders meeting is convened by the company Management Board, normally once
a year, and it can be attended by all shareholders that announce their attendance in writing
no later than three days before the meeting, as well as by shareholder representatives and
4
proxies that exercise the voting right on behalf of shareholders. General Shareholder
Meeting convention must be published in the Delo daily paper and the electronic information
system of the Ljubljana Stock Exchange SEOnet, no later than 30 days before the meeting
date.
Supervisory Board
Proceedings of the meetings, convening the meetings and other affairs regarding the work of
the Supervisory Board of the company Poslovni sistem Mercator, d.d., are determined by the
Company’s Articles of Association and the Procedures for the Work of the Supervisory
Board. The Supervisory Board members are paid a net compensation of 80,000 SIT per
meeting and the Supervisory Board Chairman is paid 100,000 SIT.
Presentation of the Supervisory Board members
Since October 30th 2005, the Supervisory Board of the company consists of twelve members
with four-year terms:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Supervisory Board Chairman
Robert Šega
Supervisory Board members (shareholder representatives)
Matjaž Boži
Gorazd uk (Supervisory Board vice-president)
Dušan Mohorko
Kristjan Sušinski
Mateja Vidnar
Supervisory Board members (employee representatives)
Ksenija Bra i
Jože Cvetek
Dragica Derganc
Jelka Žekar
Ivica Župeti
On November 13th 2005, Supervisory Board member Mrs. Vera Aljan i Falež resigned her
post because of her appointment into the Management Board of the company Poslovni
system Mercator, d.d. the Employee Council of the company Poslovni sistem Mercator, d.d.,
has not yet appointed a substitute Supervisory Board member.
5
MELR shares owned by the members of the Supervisory Board of the company Poslovni
sistem Mercator, d.d., on January 1st 2006:
First and last name
Robert Šega
Mateja Vidnar
Dušan Mohorko
Matjaž Boži
Gorazd uk
Kristjan Sušinski
Ksenija Bra i
Jože Cvetek
Dragica Derganc
Jelka Žekar
Ivica Župeti
TOTAL
Number of shares
300
2,000
500
2,800
Share in %
0.0094%
0.0623%
0.0156%
0.0873%
Management Board
The Management Board of the company Poslovni sistem Mercator, d.d., consists of a
president and three board members, who began their five-year term on January 1st 2006.
The Management Board members have the following responsibilities:
1. Žiga Debeljak, President of the Management Board:
• Management Board coordination in the company Poslovni sistem Mercator, d.d., and
the Mercator Group,
• development and investment,
• information technology,
• finance, controlling, accounting, internal auditing and investor relations.
2. Mateja Jesenek, Management Board member in charge of marketing and procurement:
• product and service marketing,
• market analysis and development,
• procurement and supplier relations,
• public relations,
• other fields subject to Management Board President's assignment.
3. Peter Zavrl, Management Board member in charge of retail, wholesale and logistics:
• retail,
• wholesale,
• franchise system,
• logistics,
• other fields subject to Management Board President's assignment.
6
4. Vera Aljan i Falež, Management Board member in charge of human resources,
organization, legal and general affairs:
• human resource management,
• organization and quality,
• legal affairs,
• general affairs,
• other fields subject to Management Board President's assignment.
Following the Supervisory Board resolution, adopted on the December 13th 2005 meeting,
the Management Board Members were appointed for a five-year term, beginning on January
1st 2006. All members of the Management Board of the company Poslovni sistem Mercator,
d.d., signed a contract of employment with the company for a pre-defined period of five
years, coinciding with their term of office. Monthly salary of the Board members is divided
into a fixed and variable part. The fixed part of the gross monthly salary is 15,000 € for the
Management Board President Mr. Žiga Debeljak, and 12,000 € for other board members,
Mrs. Vera Aljan i Falež, Mrs. Mateja Jesenek and Mr. Peter Zavrl. The variable part of the
base salary is determined by the Supervisory Board in the range of 0 to 30% of the fixed part
and amounts to 15% for 2006. Board Members are also awarded a success bonus, in line
with the criteria, designed by the Supervisory Board.
MELR shares owned by the members of the Management Board of the company Poslovni
sistem Mercator, d.d., on January 1st 2006:
First and last name
Žiga Debeljak
Mateja Jesenek
Vera Aljan i -Falež
Peter Zavrl
TOTAL
Number of shares
1,100
1,000
30
60
2,190
Share in %
0.0343%
0.0312%
0.0009%
0.0019%
0.0683%
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STRATEGIC POLICIES OF THE MERCATOR GRROUP
IN THE PERIOD 2006 – 2010
VISION
To become the leading retail/wholesale chain for alimentary and daily consumption products
for households (market program) in the South-Eastern Europe.
MISSION
Our business operation creates benefits for the consumers, employees, suppliers, owners
and the broad company's environment.
CORPORATE VALUES
We are bound by trust and mutual respect. Our values are:
• sound teamwork,
• sincere relationships,
• encouraging creativity,
• motivating the fellow workers.
Nobody knows the customer preferences better than we do. Our values are:
• unwavering education at home and abroad,
• constant transfer of knowledge,
• ensuring personal growth and development,
• excellent staff competitiveness.
Our operations are always diligent and transparent at all levels. Our values are:
• competitiveness as the foundation of any partnership,
• accessibility of key information,
• consistency and honesty.
We are expanding with a sound corporate culture. Our values are:
• training key human resources for assuming international tasks,
• understanding the differences and adjusting to local environment.
8
STRATEGIC POLICIES
1. Largest retailer in Slovenia: To retain the leading market share of market program in
Slovenia, primarily by:
• improving the competitiveness of our offer and
• development of the retail network.
2. Leading retailer in the neighboring markets of SE Europe: To remain the first or
second largest retailer with market program in the markets of Croatia, Serbia and
Montenegro and Bosnia and Herzegovina, especially by:
• strategic partnerships and
• development of our own retail network.
3. Entering other SE European markets: To enter or enable the entrance to other markets
in Southeastern Europe, where we could become on of the five leading retailers with
market program; this will be attained by:
• purchasing appealing locations,
• developing our own retail network and
• strategic partnerships.
4. Development of non-market programs: To develop non-market program which:
• enable reaping the potential of positive synergies with market program and/or
• enable a concept for development of the second fundamental commercial program
with a long-term potential of growth and profitability in the target markets.
5. Profitable operations: Ensure profitable operations by:
• measures for retaining the level of trade margins,
• measures for cost rationalization and increasing the productivity and
• measures for increasing the productivity of invested capital.
STRATEGIC GOALS
1. Growth of net sales revenue
a. average annual organic growth in EUR: 5 %
b. additional growth by strategic partnerships
2. Target market shares
a.
b.
c.
d.
Slovenia
Croatia
Serbia and Montenegro
Bosnia in Herzegovina
40 %
12 %
10 %
5%
3. Investment and their financing sources
a. annual investment in the amount of 130 – 150 mio EUR
b. issuing new capital for forming strategic partnerships/alliances
9
4. Successful business performance and efficiency
a. The Business Performance Optimization project in the Mercator Group (OPTSM): at
least 40 million EUR of annual savings from 2008 on (disregarding implementation
cost).
b. The Category Management project (UBS): at least 20 million EUR of annual effects
from 2009 forward (disregarding the implementation costs).
c. Growth of gross cash flow from operating activities should be 1 percentage point
higher than net sales revenue growth + 1/3 effect of the OPTSM and UBS savings, or
more in case of strategic partnerships.
d. At least 1 % average annual growth of economic labor productivity in the period 20062010 (measured as a ratio of net sales revenues to labor cost).
e. At least 1 % annual productivity growth of invested capital in the period 2006-2010
(measured as a ratio of gross cash flow from operating activities to average net
assets).
KEY OBJECTIVES AND TASKS IN 2006
In 2006, the Mercator Group intends to perform the following activities for realization of the
five strategic goals:
1. THE LARGEST RETAILER IN SLOVENIA
We will continue to expand our retail network in Slovenia by opening a Mercator center in
Maribor – Pobrežje and by opening trade centers in Cerknica, Lesce, Krško and
Bohinjska Bistrica.
We will expand the web store delivery area in the field of market program in Slovenia,
and should the economic feasibility calculation prove positive, set up a web store with
non-market program products from Mercator's technical range.
We will update websites of the Mercaotr Pika charge card and the Healthy Life Club and
separate corporate content from sales content.
The Business Mercator Pika card will be introduced in the first half of 2006; the card is
intended for enterprises and their purchases in the Mercator retail network.
We will spread intensively the number of products in the Mercator trademark ranges and
introduce two more product ranges: the Mercator line and the Eco line. We shall also
reposition the generic product line in order to enable the most affordable deals on daily
use products in the market.
The holder of Mercator Pika charge card will be enabled a wider applicability of the card,
since its operation will be expanded to telecommunications (mobile phones, internet
access etc.) and to fuel.
On March 1st 2006, all prices in retail units will be given both in Slovenian Tolars and
Euros.
We will continue to set up the new "store concept" of hypermarkets that was first
introduced in a ak, in all newly opened or renovated Mercator Centers.
We will carry out a central humanitarian campaign aimed at motivating people for quality
life and development of reading culture.
We shall invest SIT 24,465 million into non-current assets SIT.
10
2. LEADING RETAILER IN THE NEIGHBORING MARKETS OF SE EUROPE
We shall open shopping centers in Zagreb, Rijeka and Novigrad in Croatia, Mostar in
Bosnia and Herzegovina and New Belgrade in Serbia and Montenegro; furthermore, we
shall purchase land in Banja Luka in Bosnia and Herzegovina.
We will study the possibilities of strategic partnerships with local retail or commercial
chains in Croatia, Serbia and Montenegro and Bosnia and Herzegovina.
Special attention will be paid to proactive performing of market analysis for potential
locations to place Mercator sales ranges / programs in foreign markets, to performing indepth studies of potential micro-markets for expanding Mercator retail network, especially
in capital cities of the countries that we are already present in.
We shall invest SIT 14,770 million into non-current assets.
3. ENTRANCE TO OTHER SE EUROPEAN MARKETS
We will study and analyze the opportunities to expand our operations in the Macedonian
market.
4. DEVELOPMENT OF NON-MARKET PRODUCT RANGE
As a part of the trade consolidation and business rationalization processes, we shall
transfer in 2006 the activities of the companies Emona Maximarket, d.d., Mercator –
Modna hiša, d.o.o., to the controlling (parent) company and merge them to the controlling
company legally as well.
We will look for a potential strategic partner.
We will merge and reorganize the companies Emona Maximarket, d.d., and Mercator –
Modna hiša, d.o.o.;
We will continue to seek even greater synergy effects of non-market and market
programs.
We will introduce the concept of category management.
5. PROFITABLE OPERATIONS
We shall perform the business rationalization program of the Mercator Group; the
program will be carried out within four sub-programs:
o Optimizing the Mercator Group Organization (OPTSM),
o Redesign of the information system (PIS),
o Optimizing logistic infrastructure (OLI),
o Category management (UBS);
We shall ensure revenue growth.
We will manage the working capital.
We shall disinvest from commercially unviable or unnecessary assets.
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Financial highlights of the 2006 business plan
Mercator Group
2005
Net sales revenues (in SIT 000)
Net profit / loss (in SIT 000)
Plan 2006
Poslovni sistem Mercator, d.d.
Index
2005
Plan 2006
Index
419.067.091
465.362.410
111,0
289.458.574
323.231.216
111,7
3.264.506
6.135.219
187,9
7.457.061
11.563.354
155,1
Gross cash flow from operating activities (in SIT 000) *
26.623.745
30.015.815
112,7
-
-
-
Capital expenditure (in SIT 000)
57.062.149
40.180.896
70,4
31.569.753
20.742.066
65,7
Long-term financial investment (in SIT 000)
9.498.100
0
-
30.038.419
1.490.985
5,0
Return on equity
2,7%
4,6%
170,4
7,0%
9,2%
131,4
Return on sales
Gross cash flow from operating activities per net sales
revenue
0,8%
1,3%
162,5
2,6%
3,6%
138,9
6,4%
6,4%
101,5
-
-
-
Number of employees based on hours worked
15.086
16.444
109,0
9.216
10.585
114,9
Number of employees based on balance (at Dec 31)
16.372
17.643
107,8
9.458
11.480
121,4
Note: Gross cash flow from operating activities is equivalent to the category "cash flow from operating
activities before changes in working capital" from the cash flow statement in accordance with IAS 7,
shown on page 27.
PLANNED ACTIVITIES OF THE MERCATOR GROUP
DEVELOPMENT AND INVESTMENT
In 2006, our investment activity will be defined by a special policy that is harmonized with
newly designed Mercator strategy. The primary orientation of this strategy is expanding and
renovation of retail network in the markets where we are currently present and where we
wish to become one of the leading retailers.
Investment activities in trade operations in 2006 will comprise building Mercator shopping
centers, purchasing Era retail units in Slovenia (partly carried out in 2005), building Hura!
discount stores and supermarkets, as well as investment into distribution centers, store
renovations and information technology.
List of planned investments in Mercator Group
Country
SLOVENIA
Total investments in trade sector
Total investments in non-trade sector
CROATIA
BOSNIA AND HERZEGOVINA
SERBIA AND MONTE NEGRO
TOTAL
Plan 2006
(in thousand SIT)
25,410,404
24,465,404
945,000
9,178,107
3,334,965
2,257,420
40,180,896
Share
(in %)
63.2%
60.9%
2.4%
22.8%
8.3%
5.6%
100.00%
12
List of currently operating Mercator centers and Trade centers in Slovenia and in foreign
markets with planned openings in 2006:
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MARKETING
Basic marketing strategy of Mercator is our concern for customer satisfaction and loyalty. We
are well aware that the quality of life has become an increasingly important category, so we
have based our marketing strategy on the fact that we want to provide to the customer such
products and services which would best satisfy this objective, following the motto to offer the
customers the best value for money in every moment.
In the year 2006 in the field of customer relations management our plans include activities
specifically related to the users of the Mercator Pika charge card to the end of attracting and
increasing the loyalty of Mercator customers. We will perform numerous activities aimed at
establishing the comprehensive system of customer loyalty management, and above all we
would like to expand the use of the Mercator Pika charge card.
13
Designed activities to be developed in the field of improving customer relations will comprise
the following areas:
KLUBI –
dodatne
storitve
Širjenje partnerjev
vstop v tujino
CRM
Druge skupine
Poslovna
Pika kartica –
prva polovica 2006
Posebne ponudbe
Key projects within the range of Mercator trade mark, which in 2006 will be used as basis for
building recognition and positive image and backed with aggressive communication support,
are the following: Lumpi, »Mizica, pogrni se!«, Zdravo življenje, and Generiki. In addition to
the above we will also maintain and expand the identification of other ranges of products and
brands, and we also plan to develop new ranges of products: ''the MERCATOR range''
(including products of high quality, intended to offer the customer to purchase 'best value for
money' option), and ECO (including the products from ecological fabrication and/or
treatment). The Product Plan to be included in particular ranges of trading products during
the year 2006 comprises 233 new products.
Corporate and sales promotion activities in the year 2006 will be devoted to building
customer trust in the Mercator brand, expansion of the number of customers and sales, with
special attention to specific critical locations.
In the year 2006 we will continue with the erection of the 'store concept' hypermarkets, first
presented in a ak at the end of the year 2005. New sale concept is friendlier to customers,
because particular hypermarket departments are designed for easier orientation of the
customer. Particular product categories are displayed together at one place – in accordance
with the process of product category management. The customer can also easily find help or
advice for shopping. Large emphasis is placed on non-alimentary range, and on fresh
aliments range. The new concept is also structurally oriented to our target groups of
customers: young people, families with children, and retired people.
During the year 2006 we will also continue with the specialization of product ranges and
selling formats, because the assortment of various sales ranges is one of the competitive
advantages of Mercator, but it must be accompanied by the architecture and standardization
of relevant formats of various selling forms which will be able to follow both the potential on
14
the market, and the specific requirements of the customers for shopping in different sales
formats.
MANAGEMENT OF PRODUCT CATEGORIES AND SUPPLIER RELATIONS
In the year 2006 we commence the project of comprehensive management of product
categories (MPC), and our plans anticipate that its implementation will increase profit for
EUR 20 million annually from the year 2009. The project implies acceleration of activities
started in recent years, and devised systematically to cover all areas, from the all-inclusive
strategy of Mercator, through the assessment of categories, to the implementation and
optimization of assortments, positioning, pricing policy, and comprehensive promotional
policy by product categories.
The new organizational structure of Mercator, which is currently in progress, must support
the MPC Project and associated with the program of implementation and with the objectives
of each particular category, and the final aim which is planned for the year 2009. To the end
of the most successful implementation of the MPC Project in Mercator we will place special
emphasis to the training and instruction of personnel, and to new methods of work. Because
of the requirements for constant monitoring of work on the Project, both internally and with
key suppliers, we will design systemic requirements for data acquirement within the project of
information backup of product category movements.
Parallel to the preparation of purchasing policy we will also prepare the purchasing plan by
sales programs, by markets, and by suppliers, including all suppliers we had been
associated in the year 2005, and which meet the criteria defined by the ISO standards. New
suppliers appearing during the year with interesting and competitive products, suitable for the
expansion and diversification of the existing range of retail assortment, will be evaluated by
the same criteria as the existing ones, with additionally applied criteria for the assessment of
the financial status of the company from the aspect of satisfying the requirements in the
supply of goods. Availability of newly offered products will additionally be quantified by
market surveys and surveys of customer shopping habits.
In the year 2006 suppliers will be required to improve the level of stability of their prices
compared to the year 2005. Low inflation and keen competitive race allow no price
increases, so we will try to allow price adjustments only once a year, and if the increases are
firmly supported by reasonable professional explanations.
SALES
For the year 2006, Mercator Group is planning to realize SIT 465,362 million of net sales
revenues, of which SIT 36,408 pertains to revenues from products and services sold and SIT
430,044 million to goods and material sold. Net sales revenues from goods and material are
decreased by early payment discounts granted and subsequent discounts, in the amount of
SIT 1,090 million.
15
The structure of net sales revenues by business segments and countries
Net sales revenues
in thousand SIT
Index
2005
Plan 2006
Slovenia
344,984,105
365,208,119
105.9
Croatia
45,093,785
64,482,143
143.0
Serbia and Monte Negro
10,897,321
13,608,516
124.9
Bosnia and Herzegovina
TRADE
11,617,408
412,592,619
14,638,407
457,937,185
126.0
111.0
17,153,058
18,226,156
106.3
-10,678,586
419,067,091
-10,800,931
465,362,410
101.1
111.0
NON-TRADE
Revenues between segments
SKUPINA MERCATOR
According to the plan, 96.2% of net sales revenues will be realized by trade operations, of
which 19.5% will be contributed by operations abroad. Non-trade companies of the Mercator
Group are planned to attain a 3.8% share in net sales revenues.
Compared to 2005, an 11.0% nominal increase of net sales revenues is planned; 11.0% of
these are planned in trade operations, primarily on the account of takeover of retail and
wholesale units of the company Era, d.d. (SIT 23,292 million), and the nine-month takeover
of retail and wholesale units of the companies Era Tornado, d.o.o., and Trgohit, d.o.o. (SIT
15,384 million).
Trade companies in Slovenia are planning a 5.9% nominal increase of net sales revenues in
2006. The planned increase is a consequence of the takeover of retail and wholesale
operations of Era, d.d., opening of three trade centers in 2005, opening of 4 trade centers
and one Mercator center in 2006, opening of 4 Hura! discount stores and renovation of 10
retail units in 2006 by the end of 2006.
Due to uncertainty of the constitutionality of the trade Act amendment regarding the Sunday
and holiday opening hours the decrease of 1/3 of Sunday sales respectively SIT 4.5 billion
has been taken into consideration in 2006.
For 2006, trade companies abroad are planning a 37.2% nominal increase of net sales
revenues compared to the year before, mostly due to the planned opening of new Mercator
centers in Zagreb and Rijeka and trade centers in Mostar, Novigrad and Novi Beograd (New
Belgrade) in 2006, and the newly opened shopping centers in a ak, DObrinja and Zemun
at the end of 2005, as well as the takeover of retail and wholesale operations of the company
Era Tornado, d.o.o.
Non-trade companies are planning a nominal increase of the same sales revenues by 6.3%
in 2006.
16
LOGISTICS
Plans for the activities in the field of logistics for the Mercator Group have been compiled
bearing in mind the current situation in logistics and the processes being practiced in the past
year, since mergers by acquisitions of companies are expected to affect the operation,
functioning, and integration processes in the area of logistics in the year 2006.
Fast growth in the extent of business in Mercator Group is reflected also in the growth of the
scope of logistic activities. Current state of equipment and facilities in logistics does not
match the extent of operations for modern retail operations. Therefore the plans for the next
several years include maximum usage of existing warehousing capacities, and in the long
term the plans will have to include central, i.e. optimized architecture of logistic infrastructure.
In the year 2006 we will focus on the integration and consolidation of warehousing
operations, and optimization of activities in all fields of logistics. Unfortunately, in the year
2006 the final unification of logistic activities in one location is still not feasible. In spite of this,
we will aim our efforts to the reduction of the number of locations where logistic processes
are performed, and other locations will be used for other purposes, or will be disposed of.
The optimization of activities will predominantly comprise the rationalization of processes
with the long term effect in reduction of logistic costs. To this end we will carry out activities
within the Optimization of Logistic Infrastructure (OLI) project, associated especially with the
optimization of customer delivery frequency, optimization of inventories, updated adjustment
of the number of employees related to the extent of operations, and changes in the work
organization, as well as control and reduction of costs at those segments under our direct
control.
In the year 2006 we will organize distribution of goods from our available warehousing
capacities both to our own retail outlets, and to the external buyers in accordance with the
realization of sales plan.
EMPLOYEES
Strategic objective in human resources management is to expand and improve employment
approaches, processes, methods, and tools for the recruitment of competitive, motivated,
and satisfied employees. To this end our plans include the following activities:
1. Providing relevant human resources for efficient operations, raising the structural share of
employees with secondary, college and university education by 5%, increasing the
productivity of employees and reduction of costs per employee.
2. Providing relevant compensations of associates for evident efficiency and successful
work.
17
3. Recruitment of competent employees to assure excellence of services and transfer of
good practices to foreign markets, and adjustment of on the job training with the
requirements of particular sales programs.
4. Maintaining low level of exterior fluctuation (below 5%), low level of absence (below 7%),
and efficient usage of working hours (coverage of total working hours for not less than
83%), favorable organizational atmosphere (average grade 4.00), and relevant corporate
culture (average grade 4.00).
5. Providing safe working environment (i.e. reducing the number of accidents at work and
the number of handicapped), increased usage of working hours, increased recruitment of
disabled persons and their motivation for active work.
6. Availability of international education and exchange for executive, managing and
professional personnel who display interest for working abroad, opportunity of specific
and general training. Gaining international experience will facilitate the key executives
and managers to implement uniform standards of business and exchange of good
practice.
Number of employeesin Mercator Group
Number of
employees based
on balance
(at Dec 31 2005)
Slovenia
Croatia
Serbia and Monte Negro
Bosnia and Herzegovina
MERCATOR GROUP
Number of
employees based
on hours worked
(in 2005)
Number of
employees based
on balance
(at Dec 31 2006)
Number of
employees based
on hours worked
(Plan 2006)
12,781
12,478
13,870
12,963
2,520
1,772
2,603
2,425
565
379
616
537
506
457
554
519
16,372
15,086
17,643
16,444
ORGANIZATION AND QUALITY MANAGEMENT
Quality management is primarily focused into rationalization of operations in order to boost
business efficiency, standardize the processes and prevent and eliminate inconsistencies.
The main project in 2006 is management and coordination of the Business performance
optimization project in the Mercator Group (OPTSM), which is aimed at improving efficiency
and cutting the operation costs. Business process rearrangement is based on
standardization, simplifying and, in some cases, centralization, optimization of inventory,
warehousing and transport, and reconstructing the information system. These activities will
first take place in the parent company Poslovni sistem Mercator, d.d.; subsequently, the
business model will be redefined and the processes and business rules will be accordingly
transferred to the entire Mercator Group.
18
A SOCIALLY RESPONSIBLE COMPANY
Protection of environment
In the year 2006 the guiding principle of Mercator to maintain the leading position among
retail chains in Slovenia will be realized also by carrying out comprehensive environmental
activities based on the principle of continuous development. We wish to expand and
implement our business in the manner of customer friendly trading chain and to this end the
corporation will work out the comprehensive assessment of out effect on environment and
include activities for the reduction of environmental threat into our processes. These activities
for preservation of natural environment in Mercator in the year 2006 include efficient
management of the existing system for treating waste packaging, implementation of new
system of their treatment along with other types of waste, and reduced consumption of
energy.
In order to be able to efficiently include the activities regarding the protection of environment
into the daily activities of Mercator, we will continue the environmental education for all
associates, as well as obtain and respect opinions and motions by our customers, and
include them actively into the environmental activities, especially children. We will also
continue our already employed practice to strictly follow the standing legislation regarding
construction of facilities and physical planning in the erection and modernization of our
shopping facilities in Slovenia and abroad.
Mercator has a sense for environmental requirements
We will continue with the development of central humanitarian activities, characterized by
features like the all-Slovenian nature, improving quality of life, identification of Mercator with
the relevant message, and actuality. During the year 2006 we plan to carry out at least one
charity action with a supplier, and continue the project 'We all were once children'.
As sponsors of a variety of projects we will actively participate in the fulfillment of
requirements in wide social surroundings. Sponsor and donation funds will be devoted to the
development of sports, culture, education, and humanitarian projects contributing to the
improvement of the quality of life.
INFORMATION TECHNOLOGY
In the IT field, we intend to ensure regular running of existing applications, to design new
applications and to integrate the purchased packages and decrease the number of different
applications for the same business processes.
The main project for 2006 is the information system reconstruction for basic and support
processes, based on the fundamental policy of providing information support on the
transaction level by implementing package solutions. We wish to aim our own development
efforts to fields that have not been appropriately tended to within package solutions, and
19
fields where we can achieve certain competitive advantages by devising our own solution.
Purchased and own solutions will be integrated in the framework of a common architecture.
Due to large scale and complexity of the anticipated changes, we have set up a special
Information System Reconstruction (PIS) program which comprises a project of
reconstructing the support functions information system, the project of reconstructing the
goods handling/management information system and the project of arranging the registration
data.
We will also continue the activities of the key projects of computer data exchange and
information support to teamwork.
Together with Mercator companies in foreign markets, we shall provide unified information
support to these companies and their inclusion into the information system for management
and decision support in the Mercator Group.
FINANCIAL OPERATIONS
In 2006, financial operations will be oriented towards finding favorable financing sources,
maintaining financial stability of the Mercator Group and financial risk management.
Mercaotr Group will procure the funding for planned investment and refinancing the existing
debt from different sources, thus improving its financial flexibility; we shall continue our
efforts to attain the target capital composition of 1:1.
•
•
•
In the beginning of 2006, the capital increase payment was made in the total amount of
SIT 14,615 million, which will be followed by the due entry into the Court Register and by
an additional capital increase;
we shall increase the amount of bank loans, especially in foreign markets, whereby we
expect the increase in financing by syndicated loans;
We intend to further increase the scale of financial lease (which involves lower current
liabilities of debt servicing), especially on foreign markets and already purchased
locations. In the beginning of 2006, four operational lease agreement and two financial
lease agreements of the company Era, d.d., will be transferred to Mercator.
20
CREATING VALUE FOR THE SHAREHOLDERS
Capital increase of the company Poslovni sistem Mercator, d.d.
The capital increase process of the company Poslovni sistem Mercator, d.d., is summarized
as follows:
•
Kapitalska družba, d.d. (National Capital Fund), paid on October 27th 2005 the entire
purchase price for 106,950 new shares in total amount of 4,064,100,000.00 SIT;
•
Slovenska odškodninska družba, d.d. (Slovenian Compensation Fund), paid on
December 15th 2005 the entire purchase price along with pertaining interest for 106,950
new shares in the total amount of SIT 4,089,153,037.50;
•
The company KD Group, d.d., paid on January 31st 2006 the purchase price and the
pertaining interest for 106,950 new shares in the total amount of SIT 4,115,318,355.00;
•
The company KLM, d.d., paid on October 28th the purchase price for 40,700 shares in
total amount of SIT 1,546,600,000.00; on January 31st 2006, the same company paid for
additional 20,790 shares, amounting to SIT 799,976,331.00, including the interest. Thus,
the company KLM, d.d., paid by January 31st 2006 the purchase price for 61.490 shares
of the company Poslovni sistem Mercator, d.d.
Considering the necessary approvals and the relevant administrative proceedings, Mercator
estimates that the newly issued shares will be registered with KDD (Central Securities
Clearing Corporation) and listed on the Ljubljana Stock Exchange organized market by April
2006.
At the meeting held on July 19th 2005, the company's Supervisory Board also adopted the
resolution that the offered shares which are not paid for by one of the investors or are only
paid for partially, are offered to other investors, either in their entire sum or in a proportionate
share. Since KLM, d.d., did not fully exercise the right to purchase 320,850 shares, the
companies that took part in the capital increase were be invited to buy the remaining 259.360
shares, or up to 86.453 shares per company. As the existing investors waived the
preemptive right to pay for the additionally offered shares, these will either remain unsold, or
will be offered to a new investor, subject to Supervisory Board's agreement.
Dividend policy
In 2001, the company Poslovni sistem Mercator, d.d., based its dividend policy for the period
2001–2004 on shareholder expectations, equity composition of the company, investment
policy and taxation considerations. The dividend policy for 2006 remains unchanged and
continues to allocate a part of the net profit for dividends. In 2006, a payment of SIT 600 per
share is planned.
21
Dividend level
2003
2004
2005
Plan 2006
Gross dividend per share (in SIT)
450
500
318*
600
*Single deviation from the regular dividend policy in 2005 is a consequence of taxation considerations.
RISK MANAGEMENT
In 2006, special attention will be paid to the following fields:
•
•
•
in the field of business risk, we shall continue the in-depth analysis of all critical risks,
defined in 2005; the following risks will be particularly heeded:
the process on non-competitive prices,
the process of new competition arrival,
creating new offers and product ranges in shopping centers,
monitoring investment efficiency,
weaker position in negotiations with multinational suppliers, compared to
foreign competition;
in the field of financial risks, interest and exchange rate risks remain the primary
concerns;
in the field of operational risks we will pay more attention to risk, responsibility
towards third persons and maintenance risk, as we shall continue to carefully manage
cost risks and IT related risks..
Additional activities in 2006 will be primarily oriented towards:
•
•
•
•
Expanding the findings of the Risk Management Council of the Mercator Group to all
fields that take part in the risk management process.
More active inclusion of subsidiaries into the risk management process and
harmonization of reports and statements of the subsidiary undertakings with the parent
company Risk Management Council reports.
Continuing the process of systemization and formalization of performing and
controlling the risk management measures, designed by the Risk Management
Council.
Further development of the Risk Register.
The Management Board estimates that the level of exposure to particular types of risks will
not change significantly, compared to 2005.
22
FINANCIAL STATEMENT PLAN
BASIC ACCOUNTING POLICIES
The Shareholder Assembly Meetings adopted the resolutions that as of January 1st 2006, the
Mercator Group shall compile Annual reports solely according to IFRS. The planned financial
statements of the company Poslovni sistem Mercator, d.d., and the consolidated financial
statements of the Mercator Group for 2006 have been prepared only in accordance with the
currently valid IFRS.
Consolidated financial statements (balance sheet, income statement, cash flow statement
and statement of changes in equity) shall be compiled according to the single company
method. In line with this method, the effects of all transactions between associated
enterprises are entirely omitted. Consolidated financial statements include only subsidiaries
that are controlled by the parent company.
23
FINANCIAL STATEMENTS OF THE MERCATOR GROUP
Balance Sheet
Type of assets / liabilities
1
A.
I.
II.
III.
IV.
V.
B.
I.
II.
III.
IV.
A.
I.
II.
III.
B.
I.
III.
IV.
C.
I.
II.
III.
2
ASSETS
LONG-TERM ASSETS
Intangible long-term assets
Tangible fixed assets
Derivative financial instruments
Long-term financial investments
Deferred tax liabilities
SHORT-TERM ASSETS
Inventories
Other financial assets at fair value
Operating/trade and other receivables
Cash and cash equivalents
TOTAL ASSETS
EQUITY
Majority interest equity
Share capital
Other reserves
Retained earnings
Minority interest
LIABILITIES
LONG-TERM LIABILITIES
Financial liabilities
Employee benefit liabilities
Deferred tax liabilities
SHORT-TERM LIABILITIES
Financial liabilities
Operating and other liabilities
Long-term provisions
TOTAL LIABILITIES
TOTAL LIABILITIES
Number of employees based on balance (at Dec 31)
in SIT 000
Unaudited
31.12. 2005
IFRS
Plan
31.12.2006
Structure plan
2006
Index
3
4
5
6=4/3
281,200,346
2,425,106
275,551,749
27,770
2,512,217
683,504
86,178,549
43,109,610
718,042
38,390,093
3,960,805
367,378,895
303,233,915
2,223,320
297,754,831
30,000
1,985,643
1,240,121
84,986,865
43,602,447
270,407
37,599,412
3,514,599
388,220,780
78.1%
0.6%
76.7%
0.0%
0.5%
0.3%
21.9%
11.2%
0.1%
9.7%
0.9%
100.0%
107.8
91.7
108.1
108.0
79.0
181.4
98.6
101.1
37.7
97.9
88.7
105.7
132,048,107
128,938,350
33,380,064
17,090,225
78,468,061
3,109,757
139,959,237
136,937,006
34,657,464
19,972,967
82,306,575
3,022,231
36.1%
35.3%
8.9%
5.1%
21.2%
0.8%
106.0
106.2
103.8
116.9
104.9
97.2
110,563,185
106,239,658
4,228,571
94,956
124,767,604
60,382,752
60,985,415
3,399,438
235,330,789
367,378,895
16,372
114,133,565
109,904,945
4,228,620
0
134,127,978
63,975,187
66,753,353
3,399,438
248,261,542
388,220,780
17,643
29.4%
28.3%
1.1%
0.0%
34.5%
16.5%
17.2%
0.9%
63.9%
100.0%
0.0%
103.2
103.5
100.0
107.5
105.9
109.5
100.0
105.5
105.7
107.8
24
Income Statement
in SIT 000
Type of revenue / expense / cost
1
A.
1.
2.
3.
2
NET SALES REVENUE
Revenue from products sold
Revenue from services sold
Revenue from goods and material sold
COST OF GOODS SOLD OR PURCHASE VALUE OF GOODS
B. SOLD
1. Production costs
2. Purchase value of goods and material sold
C. GROSS PROFIT/LOSS FROM SALES
1. Other net operating revenues
2. Selling costs
3. Overhead/administrative costs
. NET OPERATING PROFIT/LOSS
1. Financial revenue
2. Financial costs
D. PROFIT / LOSS (BEFORE TAXES)
1. Income tax
2. Deferred tax
E. NET PROFIT/LOSS FOR THE FINANCIAL PERIOD
F. Net profit/loss for the majority interest
G. Net profit/loss for the minority interest
H. Gross cash flow from operating activities *
Unaudited 2005
Plan 2006
Index
3
419,067,091
6,349,615
27,993,170
384,724,307
4
465,362,410
6,905,448
29,503,462
428,953,501
5=4/3
111.0
108.8
105.4
111.5
-301,472,890
-12,307,023
-289,165,867
117,594,201
3,160,598
-95,459,083
-18,012,362
7,283,355
3,653,392
-6,004,330
4,932,416
-2,217,990
550,080
3,264,506
3,186,555
77,951
26,623,745
-337,425,294
-11,271,325
-326,153,969
127,937,116
1,584,628
-90,423,246
-24,364,691
14,733,808
1,067,158
-6,658,111
9,142,854
-3,557,636
550,000
6,135,219
5,993,020
142,198
30,015,815
111.9
91.6
112.8
108.8
50.1
94.7
135.3
202.3
29.2
110.9
185.4
160.4
100.0
187.9
188.1
182.4
112.7
* Gross cash flow from operating activities is equivalent to the category Cash flow before
changes in working capital from the Cash flow statement according to IAS7, shown on page
26.
25
Cash Flow Statement
in SIT 000
Cash flows
Net profit / loss before taxes
Depreciation / amortization
Proceeds from sale of property, plants and equipment
Negative goodwill
Impairment of tangible non-current assets
Amortization of negative goodwill
Interest income
Interest expenses
Proceeds from sale of financial assets
Net change in provisions
Gross cash flow from operating activities before change in working
capital
Changes in working capital
Operatig and other receivables
Inventories
Operating and other liabiliites/payables
Cash flow from operating activities
Interest income
Interest expenses
Tax expenses
Offset cash flow from operating activities
INVESTMENT ACTIVITIES
Acquisitions of subsidiary undertakings
Purchase of non-current tangible assets
Purchase of long-term intangible assets
Net change/movement in long-term financial investments
Purchase of short-term financial investments
Expenses for borrowings made/granted
Proceeds from disposal of non-current tangible assets
Proceeds from disposal of long-term intangible assets
Proceeds from borrowings made and disposal of lon-term financial
investments
Proceeds from borrowings made and disposal of lon-term financial
investments
Offset cash flow for investment activities
FINANCING ACTIVITIES
Proceeds from issuing of ordinary shares
Expenses for acquisition of treasury shares
Proceeds/expenses from borrowings made
Expenses for shareholder dividend disbursement
Offset cash flow for financing activities
Net increase / (decrease) in cash and cash equivalents
Net flow of cash and cash equivalents
Beginning of financial year
Increase / (decrease)
Foreign exchange adjustment
End of financial year
2005
4,932,416
14,670,233
-769,127
2,629,408
3,182,970
-286,608
-703,718
4,972,937
-1,487,204
-517,562
Plan 2006
9,142,854
15,477,144
-352,151
0
0
0
-474,857
5,797,824
425,000
0
26,623,745
30,015,815
-1,789,016
-4,342,667
3,175,604
23,667,666
703,718
-4,972,937
-2,217,990
17,180,457
-790,681
492,837
5,342,939
35,060,911
474,857
-5,797,824
-3,557,636
26,180,308
-6,386,320
-46,352,854
-789,009
-2,739,000
0
-211,249
2,436,015
28,104
0
-39,225,584
-955,312
0
0
6,667
3,243,115
0
627,459
20,152
0
-53,386,854
304,089
-36,606,873
9,699,853
-1,250,976
30,064,394
-995,938
37,517,333
1,310,936
4,915,295
0
7,270,197
-2,154,506
10,030,985
-395,580
2,664,001
131,936
-14,132
3,960,805
3,960,805
-395,580
-50,626
3,514,599
26
Statement of Changes in Equity
in SIT 000
I. Share capital
Balance at January 1 2006
Net profit / loss for the financial year
Capital increase
Dividend disbursement
Currency translation differences
Change in ownership in subsidiaries
Equity balance at December 31 2006
33,380,064
0
1,277,400
0
0
0
34,657,464
II. Other
reserves
17,090,225
0
0
0
-755,153
0
9,972,976
III. Retained
earnings
78,468,061
5,993,020
3,637,895
-2,154,506
0
0
82,306,575
Minority capital
3,109,757
142,198
0
0
0
-229,724
3,022,231
Total
132,048,107
6,135,219
4,915,295
-2,154,506
-755,153
-229,724
139,959,237
Poslovni sistem Mercator, d.d.
Management Board
27