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Management's Discussion and Analysis Of MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN Q1 2015 May 29th, 2015 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, 2014 and with our unaudited consolidated financial statements for the periods ended March 31st, 2014 and March 31st, 2015 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 2014 consolidated statement and the forefront part of the unaudited consolidated quarterly financial statements for the period ended March 31st, 2015. 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 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 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 Q1 2015 with the same period last year we need to emphasize that Mercator acquisition had a significant impact on our financial results. Within the Restricted Subsidiaries our sales showed a decrease of 2.9 per cent 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 8.3 per cent due to the realization of synergies. On a consolidated basis both sales and EBITDA were enhanced by the Mercator acquisition. On a consolidated basis our total sales1 increased by 73.9 per cent from HRK 6,138.6 million to HRK 10,676.9 million. EBITDA increased by 49.9 per cent, from HRK 541.8 million to 811.9 million, while EBITDA margin decreased from 8.8 per cent to 7.6 per cent. Decrease in EBITDA margin is the result of the consolidation of Mercator which has a lower profitability when compared to that of the rest of the Restricted Subsidiaries. During Q1 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 further systematization and reorganization of the companies across the Group. Retailing and Wholesale division contributed with 87.1 per cent of total consolidated sales and posted an increase of 94.7 per cent compared to the previous year with sales increasing from HRK 4,774.6 million to HRK 9,297.2 million. Division’s EBITDA increased from HRK 258.2 million to HRK 524.6 million representing a 103.2 per cent increase with EBITDA margin increasing from 5.2 per cent to 5.4 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 generated 9.7 per cent of the total consolidated sales. Sales in this division decreased by 3.4 per cent compared to the same period last year, from HRK 1,076.3 million to HRK 1,040.0 million. Division’s EBITDA on the other hand increased, from HRK 307.4 million to HRK 311.2 million representing a 1.2 per cent increase. EBITDA margin increased from 14.7 per cent to 15.0 per cent, on an unconsolidated basis, predominantly due to better performance of Ice Cream and Frozen Food and Water and Beverages segments. 1 Total sales includes Revenues and Sale of Services 2 Other Businesses2 division posted a significant increase in total consolidated sales of 18.2 per cent, from HRK 266.6 million to HRK 315.1 million. This division contributed 3.0 per cent of the consolidated sales. EBITDA posted a strong decline of 24.8 per cent from HRK 14.9 million to HRK 11.2 million with EBITDA margin decreasing from 3.1 per cent to 2.0 per cent, on an unconsolidated basis. Both increase in sales and a decrease in EBITDA were a result of our commodities brokerage business that had a strong increase in sales but a significant decrease in profitability as margins were decreased. 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 relatively stable sales within the Restricted Subsidiaries. Consolidated sales were enhanced by the Mercator acquisition. Maintaining market shares across the region We have 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 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 On February 20th 2015 we signed €300 million club term loan facility with Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan and Morgan Stanley. This facility matures on August 20, 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. In February 2015 Agrokor acquired from Agrokor Investments B.V. an additional 9.5 per cent in Mercator, increasing its shareholding to 59.5 per cent. Recent Developments We recently reviewed a number of options to increase the financial flexibility of the consolidated group post Mercator acquisition and the integration of the businesses, including a comprehensive refinancing of our debt obligations, including a portion of Mercator’s obligations and the debt obligations of Agrokor’s holding company, but have concluded not to pursue such a refinancing at this stage. We have signed in May a share purchase agreement for our animal husbandry business Dijamant Agrar for an undisclosed amount. Mercator signed in April a share purchase agreement with Don Don, a regional pastry company, for the sale of Pekarna Grosuplje, its bakery business. Completion is conditional to Anti-Monopoly approvals. The sale of other non-core businesses and assets is ongoing. We are currently exploring the sale of Mercator’s: (i) Intersport – sports goods stores, (ii) Modiana – fashion apparel stores, (iii) M Tehnika – technical goods stores, and (iv) Mercator–Emba – food company. In May, we commenced sale and leaseback process of Mercator’s real estate properties in Slovenia. We expect to receive binding bids until end of June and close the transaction until end of July. 2 Excluding Agrokor Holding 3 Performance of divisions Retailing and Wholesale Although some of our Primary markets (Slovenia in particular) are showing modest signs of recovery, in general the retail environment across the Primary markets is still facing adverse trends. As a response to these conditions we have continued adjusting the private label offering 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 consumer perception. Furthermore, although physical integration of Mercator stores was completed in 2014, we continued to focus on the operations of the stores that were taken over, particularly by adjusting in store operations and sharing best practices across the region. Regarding refurbishments, focus has been shifted to the refurbishment of Mercator stores taken over (including Slovenian network), especially those we consider anchor stores. Synergy extraction is going as planned and we continue to be confident that approximately EUR 130million will be realised throughout 2015. As of March 31st, 2015 we had completed measures (implementing certain organizational changes, execution of contracts with suppliers etc.) and which are expected to deliver EUR 100 million of the total estimated net cost synergies in 2015. Retailing and Wholesale division in Q1 2015 posted 94.3 per cent increase in sales on unconsolidated basis, from HRK 4,987.0 million to HRK 9,691.7 million, with an EBITDA increase of 103.2 per cent, from HRK 258.2 million to HRK 524.6 million. EBITDA margin increased by 24 bps, from 5.2 per cent to 5.4 per cent. The increase in sales and profitability is predominantly due to the Mercator acquisition.
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