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Management's Discussion and Analysis of Financial Condition and Results of Operations in Fy 2015

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Management's Discussion and Analysis of Financial Condition and Results of Operations in Fy 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN FY 2015 April 29th, 2016 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements for the year ended December 31st, 2015 and with our audited consolidated financial statements for the period ended December 31st, 2014 and the related notes. Our consolidated financial statements have been prepared in accordance with IFRS. This discussion includes forward-looking statements based on assumptions about our future business that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on our current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from those contained in the forward-looking statements. For most relevant accounting policies please refer to Note 1 of our FY 2015 consolidated statement. Important Notice: The Management’s discussion and analysis of financial condition and results of operations in this document refers to the Agrokor Group and all of its Restricted and Unrestricted Subsidiaries (“Agrokor” or “Company”). Restricted Subsidiaries are all Agrokor’s subsidiaries which form the Agrokor Group excluding Poslovni sistem Mercator d.d. (“Mercator”). Pursuant to the indenture governing our Senior Secured Notes due 2019 and 2020 and our other financial arrangements which are in general in line with the Senior Notes indentures, Mercator has been designated as an Unrestricted Subsidiary of Agrokor. All information regarding Mercator can be found on their IR website http://www.mercatorgroup.si/en/investor-relations/. Overview When comparing the results for the 2015 with the same period last year we need to emphasize that Mercator acquisition had a significant impact on our financial results. On a consolidated basis both total sales1 and EBITDA were enhanced by the Mercator acquisition. On a consolidated basis our total sales increased by 40.2 per cent from HRK 34,969.1 million to HRK 49,013.6 million. EBITDA increased by 33.2 per cent, from HRK 3,164.6 million to 4,216.2 million, while EBITDA margin2 decreased from 9.0 per cent to 8.6 per cent. Decrease in EBITDA margin is the result of the consolidation of Mercator which has a lower profitability when compared to the Restricted Subsidiaries. Within the Restricted Subsidiaries our total sales showed a decrease of 2.6 per cent from HRK 30,392.2 million to HRK 29,609.4 million due to the discontinuation of iDEA which was not fully compensated by the inclusion of Mercator revenues in Croatia and Bosnia and Herzegovina. EBITDA on the other hand improved by 6.8 per cent, from HRK 3,008.3 million to HRK 3,213.0 million predominantly due to the realization of synergies. During 2015 our primary focus was on the continuation of the integration of Mercator, predominantly focusing on negotiations with suppliers and SG&A savings as key drivers of synergy realization. We have also continued to focus on increasing and/or maintaining our market shares across both of our divisions through proactive measures in the form of effective marketing strategies, investments in prices and adequate product portfolio management which also included various portfolio extensions. We further continued to focus on cost optimization and efficiency improvement measures coupled with continuous systematization and reorganization of the companies across the Group. It must be noted that 2015 was marked by deflationary pressures and strong competitive environment in food retail in all of our Primary Markets. We took proactive measures in a form of significant price investments in particular during Q4 to address the more competitive environment and maintain our leading market shares hence impacting both top line and EBITDA of our Retailing and Wholesale Division and the Group as a whole. Retailing and Wholesale division contributed 84.2 per cent to the total consolidated sales and posted an increase of 49.6 per cent compared to the previous year with sales increasing from HRK 27,588.8 million to HRK 41,265.1 million. Division’s EBITDA increased from HRK 1,636.0 million to HRK 2,554.9 million representing a 56,2 per cent increase with EBITDA margin increasing from 5.6 per cent to 5.9 per cent, on an unconsolidated basis. Strong growth in both sales and EBITDA was predominantly driven by the Mercator acquisition. Food Manufacturing and Distribution division contributed 11.9 per cent to the total consolidated sales. Sales in this division decreased by 1.3 per cent compared to the same period last year, from HRK 5,897.1 million to HRK 1 Total sales includes Revenues and Sale of Services 2 EBITDA margin defined as EBITDA/Total sales 2 5,818.1 million. Division’s EBITDA increased from HRK 1,423.8 million to HRK 1,480.0 million representing a 3.9 per cent increase. EBITDA margin increased from 12.9 per cent to 13.5 per cent, on an unconsolidated basis, predominantly due to better performance of Ice Cream and Frozen Food and Water and Beverages. Other Businesses3 division contributed 3.3 per cent to the total consolidated sales. Sales in this division posted an increase of 14.7 per cent, from HRK 1,414.0 million to HRK 1,621.3 million. EBITDA however decreased by 36.9 per cent from HRK 232.8 million to HRK 146.8 million with EBITDA margin decreasing from 9.2 per cent to 5.5 per cent, on an unconsolidated basis. Increase in sales was predominantly driven by adding a new business, Projektgradnja, a construction company, to the mix while decrease in EBITDA was predominantly related to our commodity brokerage business and certain one-offs. Key highlights of Group Results and Strategy Increase in topline predominantly as a result of the Mercator acquisition Excluding for the transfer of Agrokor retail operations in Serbia to Mercator we have posted modest topline growth within the Restricted Subsidiaries. Consolidated sales were enhanced by the Mercator acquisition. Maintaining market shares across the region We have generally managed to maintain or even increase our market shares and keep our leadership positions across most of our businesses within the Food Manufacturing and Distribution division whilst in the Retailing and Wholesale division we have increased our market shares as a result of the Mercator acquisition. We managed to further improve our offering as we continued to refurbish our stores, tailor our pricing policies, marketing activities through promotions and innovations as well as product assortment to be able to cope with the overall environment. M&A and other activities We have signed in February €300 million club term loan facility with Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan and Morgan Stanley. This facility matures in August 2016. We also amended and restated existing agreement with BNP Paribas resulting with an additional €25 million exposure which maturity is aligned to the club facility. We have signed in October 2015 another €200 million club term loan facility with BNP Paribas, Credit Suisse, Goldman Sachs and J.P. Morgan. This facility matures in April 2017. Agrokor acquired from Agrokor Investments B.V. an additional 9.5 per cent in Mercator, increasing its shareholding to 59.5 per cent. Agrokor acquired management control of Projektgradnja, through the purchase of 80.9 per cent ownership for HRK 122.5 million. The main business activity of Projektgradnja is design and construction of buildings. Agrokor acquired management control of INIT, through the purchase of 67.0 per cent ownership for HRK 1.3 million. The main business activity of INIT is data processing, hosting and related services. Agrokor disposed its animal husbandry business Dijamant Agrar. Konzum acquired management control of Kozmo, through the purchase of 100.0 per cent ownership for HRK 57.7 million. The main business activity of Kozmo is retail of cosmetics and similar products in specialty shops. Konzum acquired management control of Ambalažni servis, through the purchase of 96.9 per cent ownership for HRK 4.1 million. The main business activity of Ambalažni servis is production and sales of wavy paper, cardboard and cardboard and paper packaging. 3 Excluding Agrokor Holding 3 Mercator signed an agreement with the company ERA GOOD to acquire/transfer a part of their operations related to wholesale. Mercator sold Pekarna Grosuplje, its bakery business, to Don Don, a regional pastry company. Mercator sold its coffee brands Santana and Loka to Ivero Trade, an associated company of Franck, the leading Croatian coffee producer. These two brands will continue to be produced by Mercator Emba. Recent Developments In April 2016 we have signed a €350 million term loan facility with Sber Bank. This facility matures in 2022. The sale of other non-core businesses and assets is ongoing. We are running couple of sale and leaseback processes in terms of real estate property in Slovenia and Croatia. Performance of divisions Retailing and Wholesale Throughout 2015 our Primary markets have shown modest signs of recovery and economic growth. The retail environment across these markets is slowly following the macroeconomic trends, however the segment was marked by both competitive and deflationary pressures that intensified in the last quarter. We have continued adjusting our product assortment and further leveraging our customer-centric retailing capabilities which enabled us to tailor competitive pricing policies and focus further on customer care while offering the best value for money proposition to our faithful customers. In addition, we changed our pricing policy that combined with modified loyalty program scheme should additionally enhance favourable pricing perception amongst our consumers.
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