Presentation of viability plans for Agrokor companies and business sectors

Agrokor Viability Plan (updated 06032018)

The restructuring of Retail was announced, key point indicators for the Food sector continue to grow, capitalization on previous strategic investments in Agriculture and the selling process of other non-core businesses

Viability plans were presented today for five business segments of Agrokor Group which include Agrokor d.d., Retail, Food, Agriculture and Agrokor Portfolio Holdings (APH). Alongside Ante Ramljak, the Extraordinary trustee and Alastair Beveridge, chief restructuring advisor, viability plans and the business future of companies and specific business segments were presented by advisors to the Extraordinary trustee: Teo Vujčić, advisor to the Extraordinary trustee for Retail, Zvonimir Mršić, advisor to the Extraordinary trustee for Food sector, Vlado Čondić-Galiničić, advisor to the Extraordinary trustee for Agriculture sector and Irena Weber, advisor to the Extraordinary trustee for non-core business and assets portfolio.

For the past six months the Extraordinary administration and the managements of Agrokor and individual companies, in cooperation with AlixPartners who are Agrokor’s chief restructuring advisors, have been intensively working on the preparation of viability plans for individual companies and business sectors of the Group. This plan is the result of significant efforts invested in achieving operational improvements during the previous months and it provides a stable platform for future business activities and settlement. As part of the plan, maximum focus was given to improving EBITDA, stabilization of business and ensuring liquidity, as well as to the importance of the summer season and regaining the market’s trust. Developing of Agrokor’s plan represented significant challenges such as working with unreliable and inconsistent information, since PwC was conducting an audit parallel to the development of these plans, and also because of the fact that the claims process still was not completed and the settlement was not defined.

In 2016 Agrokor Group generated revenue higher than EUR 6 billion with significant consolidation effects across the entire Agrokor Group and EBITDA of EUR 230 million in core businesses. In total, the markets where Agrokor is doing business have strong growth projections and positive trends in the area of distribution in general. The revenue of strategic businesses that are the Group’s core business is expected to fall by 5%, while between 2016 and 2012 it is planned to double the EBITDA. It is expected that the strategic businesses that are the Group’s core business will generate more than EUR 1.4 billion of free cash flow in the period until 2021.

In the segment of the Viability plan for Retail sector (includes Mercator, Konzum, Velpro, Tisak, Konzum BIH) it is highlighted that more than 75% of revenue of Agrokor’s retail sector comes from Slovenia and Croatia. Agrokor’s retail in the region is operating from more than 2,800 locations and 1.1 million square meters of space and it is providing services for a population of 17.5 million. In the past, the focus was directed at increasing revenue in combination with high level of capital investments. A large infrastructure of high base costs was implemented with a series of unfavorable commercial and monetizing arrangements (such as “sale as leaseback”) that reduced profit. Furthermore, Tisak and Velpro have been operating non-profitable secondary activities in the past (mostly transport and distribution) that are now removed and the entire business sector is displaying the need for a significant cost reduction. The strategies of retail activities vary in various companies, but mutual themes encompass “right-sizing” the companies, eliminating of all surpluses and maximum focus on increasing EBITDA that significantly differs from the industry standard.

Food business sector consists of 4 segments (drinks, frozen food, oil and meat) and 21 companies (Jamnica, Roto Dinamic, Sarajevski Kiseljak, Fonyodi, Nova sloga, Mg Mivela, Jamnica Maribor, Ledo, Ledo Čitluk, Frikom,  Zvijezda, Dijamant and PIK Vrbovec). The significance of this sector is best illustrated by the fact that it realized as much as 64% of total Agrokor’s core businesses EBITDA realization in 2016 in the amount of EUR 230 million. Food business sector surpasses the combined industry standard of 10% EBITDA margin by 2 percentage points, which is based on high market shares, brand value and strong distribution platforms. Companies and brands from this business group have market shares ranging from high to dominant in primary product categories with proven historical results that surpass the competition and maintain revenue growth and high profitability. Agrokor has leading brands in businesses of mineral and aromatized water / ice cream /edible oil, margarine and mayonnaise in the Adria region and in fresh meat and meat products business in Croatia. These companies have a great development potential as well as potential to provide innovative products and the ability to open the markets to additional and completely new product categories, and there is also a significant potential in rationalization of production processes between producing companies in different countries. It is expected for the Food sector to generate EUR 470 million of free cash flow between 2018 and 2021.

Agriculture business sector (Belje, PIK Vinkovci, Vupik, Agrokor trgovina, Agrolaguna and Mladina) is the leading agricultural business in Croatia and one of the largest agricultural subjects in the region. Main agricultural activities are located in three operative companies who combined control of more than 32,000 ha of arable land in the east of Croatia. The agriculture sector will reap the fruits from capital investments in previous years with productivity yields well above the national average and strong operational leverage and fully integrated “from field to table”, tradition and know-how that go beyond just financial metrics. It is expected that this business sector will generate EUR 155 million of free cash flow between 2018 and 2021. Revenue of the sector will reduce in the future due to Agrokor trgovina’s exit from 3rd party trading activities, but EBITDA margin for the entire sector is expected to double from 6% in 2016 to 12%, which will be achieved by consolidating business activities and further improving productivity.

Agrokor portfolio holdings consists of 80 legal subjects and 201 real-estate (and two movable assets) that include 21,609 m2 of office space, 3,376 m2 of commercial space, 5,077 m2 of residential property, 30,341 m2 of industrial property and 160 ha of land, that are not part of Agrokor’s core business. Some of the largest companies are, Karisma Hotels Adriatic, Zagreb plakat, Projektgradnja, Kikindski mlin, Solana Pag, Poliklinika Aviva… The focus of Agrokor portfolio holding is on minimizing cash drain and on generating value. Key initiatives include the sale of subsidiaries and real estate which is expected to generate EUR 40 million of cash over a period of four years according to a conservative scenario, as well as a reduction of rent costs and termination of unfavorable rents.

Agrokor d.d. as the parent company, will become more focused in order to simplify the structure of Agrokor Group. The planning and management functions will continue to be conducted in Agrokor d.d. for now. Although it is planned that these activities will eventually be transferred or developed in operating companies. The number of employees and the associated costs will be reduced over time, and Agrokor d.d. will become a reporting and planning service for a much smaller part of its business activities, which will also reduce the costs of individual companies with the aim of simultaneously building relevant functions in individual companies and creating certain reserves.

As a result, the above-mentioned basic conclusions of this extensive sustainability plan are funneled to significant restructuring of Retail and continued growth and optimization of EBITDA effects in the Food business group. Agriculture business sector will reap the fruits of capital investment from the past, while at the same time the assets of other activities will be sold, and employees of Agrokor d.d. will be transferred to operational activities. This sustainability plan will enable long-term survival of most Agrokor companies and improve profitability and other key business indicators in all business segments, which will also ensure maintaining employment levels and further positive impact on the Croatian economy as well as the economy of the region.