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Poor Operations Outside Slovenia

Chairman, Toni Balažič, cited adverse exchange rates as the main reason for the loss as he commented on the results at a news conference. Exchange rates contributed EUR 11m to the loss. He also blamed poor operations in Croatia, Bulgaria and Albania and worse than expected performance in the technical goods, clothing and fuel retail divisions (Mercator Tehnika, Modiana, Maxen). Balažič, who took over in June, noted that the strategy had mainly been orientated to growth through acquisitions which had been financed chiefly by loans. "A break for the gross cash flow happened in 2008 when relative profitability no longer followed revenue growth," Balažič said. Cashflow in the first half of the year was positive at EUR 64.2m. Balažič said the half year figures called for serious and fast action. The management's prime goal is to reverse the operational trend and to put the company in good form. "We must take action this year and maximise the yield for the shareholders. We are confident Mercator shares can be restored to the levels they were in the past," Balažič asserted. In his view, the value of a share is considerably higher than the current market price, which is why the management will embark on a buy-back plan. Shares are currently trading around EUR 115 on the Ljubljana Stock Exchange The share price hit its peak in September 2007 at well over EUR 300. Mercator reported EUR 18.52m in group net profit for the first half of 2012.

Intensive Cost Cutting Ahead

The management set about developing 50 measures to cut costs as soon as it took over which included the reduction of sevice costs, consultancy etc. which are now being implemented, while measures to cut sales, marketing and logistic costs will be launched in September. In the third phase, to be implemented in 2013, strategic and tactical measures will follow. Based on the planned cost cutting phases, Balažič expects at least EUR 8m in savings in 2012 but is confident the figure will top EUR 10m. More strategic measures are expected to bring in EUR 50m -EUR 60m within three years. "With the help of these measures we'll get Mercator back where it belongs - in a situation of a highly profitable major retailer," the Chairman said, adding that the strategy would be presented to the banks and other major shareholders in early autumn. The management would also like to improve the management of working capital and is preparing a divestment plan and a project to monetise real estate to reduce indebtedness, which currently stands at EUR 1.1bn. Balažič said Mercator was already in talks to sell its real estate based on bids from serious European and global real estate funds. In the first phase, Mercator plans to sell and lease back EUR 280m worth of real estate. Balažič said the company was also keen to further enhance its position in the region which is why it will focus more on improving customer service.

New Strategic Partner?

The Chairman was reserved in his comments about the planned sale of the company, noting that it was a decision for the owners to make, while the management's call was to address profitability. "The goal of all our plans, targets and activities is to establish, in dialogue with the owners, how to maximise the value," he said, adding that the current ownership structure was an obstacle for the company. Balažič would not speculate about the operating results for the full year as it would mainly depend on exchange rate margins. He did say that the management hoped for profit for 2012. The core company saw its sales revenues drop by 7% in the first half of the year, operating profit stood at EUR 33.3m, pre-tax profit at EUR 16.2m and net profit at EUR 13.2m.