Zito Luks AD Skopje - Annual report...

Zito Luks AD Skopje - Annual report 2018

ZITO LUKS AD SKOPJE

ANNUAL REPORT

OF THE COMPANY OPERATIONS IN 2018

SKOPJE,MARCH 2019


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Contents

1. Economic and business environment ............................................................................... 3

2. Realized financial results ...................................................................................................... 4

3. Investments and bank financing ....................................................................................... 6

4. Risk management.................................................................................................................... 6

5. Marketing & promotional activities .................................................................................. 9

6. Corporate social responsibility ......................................................................................... 10

7. Research and Development of new products ............................................................. 11

8. Human resources ................................................................................................................... 12

9. Corporate governance ......................................................................................................... 12

10. Summary ................................................................................................................................ 15


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1. Economic and business environment

The new reforms in 2018 have made some progress in maintenance of the political

stability,that also had an impact on the improvement of the economy activity.

Gross domestic product in the first quarter was 0.9%, in second quarter 3%, in third also remain 3% and in fourth quarter it reached 3.7%. When analyzed by sectors, growth is led by wholesale and retail trade, construction, art entertainment and transport.In the fourth quarter of 2018, there was an increase in export by 23%, while in import there was decerase of 21.5%.1 The average inflation rate for period January – December 2018 was 1.5%. The projected inflation rate for 2019 is expected to be 2.0%.The increased inflation rate is coming mostly from increased consumer prices of food and beverages. The banking sector is well capitalized, liquid and profitable. In the context of favorable movements in the foreign exchange market, strong deposit growth and moderate inflation, the NBRM cuts the basic interest rate from 3.25% at the beginning of the year to 2.5% in December 2018. Regarding the interest rates in deposit banks, in January 2018 total interest rate on credits was 5.72%, while in December 2018 it was reduced to 5.33%. The reduction of interest rates is the basis for further favorable movements on the foreign exchange market, which point to a solid external position and stable expectations of the economic entities.2 S & P are expecting economic growth to be strengthened to 3% by 2019, driven by investment, both in the private and public sectors, after improving of political stability. In addition, they expect better dynamics of net exports, as a result of favorable external trade conditions and the gradual diversification of the export basket in Macedonia.

1 http://www.stat.gov.mk/PrikaziSoopstenie.aspx?id=31&rbr=2899 2 http://www.nbrm.mk

http://www.stat.gov.mk/PrikaziSoopstenie.aspx?id=31&rbr=2899

http://www.nbrm.mk/ns-newsarticle-soopstenie-na-nbrm-12122018.nspx


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2. Realized financial results

In 2018, the company achieved Profit after tax in amount of 5,8 million denars, continuing the positive trend from 2017.

Revenues from sales decreases by 1%,mainly coming from delisted low margin consumer categories.

Cost of sold products increased by 5 %, due to higher wheat price by 6,2% as well as utilities 17,4%, that leaded to lower Gross profit by 12%. Administrative expenses are decreased by 5%, while Sales and marketing expenses are decreased by 2%. Higher other operating income in 2018 is coming from written off liabilities, capital gain from sold assets. During the year the company made impairment of bad debts and non-current assets held for sale in amount of 34.3 million denars. Loans were increased by 28 million denars, which also reflected lower interest expense by

7,6 million denars or -25% vs last year.

Statement of profit and loss for the year ended 31 December:

In thousands of denars Note 2018 2017

Revenue 7 1,109,103 1,121,751

Cost of sales (780,509) (746,930)

Gross profit 328,594 374,821

Other income 8 50,533 16,095

Selling and distribution expenses (250,751) (256,045)

Administrative expenses (62,099) (65,447)

Other expenses 9 (34,652) (34,906)

Result from operating activities 31,625 34,518

Finance income 107 376

Finance costs (22,968) (33,599)

Net finance costs 12 (22,861) (30,223)


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Profit/(Loss) before income tax 8,764 4,295

Income tax expense 13 (2,954) (3,079)

Profit/(Loss) for the year 5,810 1,216

Statement of cash flow for the year ended 31 December

In thousands of denars Note 2018 2017 Operating activities Cash receipts from customers 1,050,673 1,040,243 Cash paid to suppliers and employees (988,727) (962,873)

Cash generated from operations 61,946 77,370

Income tax paid (3,072) (1,859) Interest paid (21,532) (29,508)

Net cash from operating activities 37,342 46,003 Investing activities Proceeds from sale of PPE and non-current

assets held for sale

64,974

1,320 Purchases of PPE and intangibles (22,290) (34,552) Deposits in banks (31,977) -

Net cash used in investing activities 10.707 (33,232) Financing activities Proceeds from loans and borrowings 578,332 610,819 Repayment of loans and borrowings (606,315) (628,559)

Net cash used in financing activities (27,983) (17,740)

Net changes in cash and cash equivalents 20,066 (4,969) Cash and cash equivalents at beginning of year 2,244 7,213

Cash and cash equivalents at end of year 22 22,310 2,244

The company succeeded to generate surplus from operating activities in amount of 37,3

million denars and used them for decreasing the loan balances and investing in fixed assets.


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3. Investments and bank financing

a) Investments

Investments in 2018 reached 21.474 thousand denars, mainly toward improving the production capacity and upgrading IT software. The investments split by group of assets are as follows: (amounts in ‘000 MKD)

Intangible assets Buildings Equipment Vehicles Total investments

2.224 1.070 17.586 594 21.474

As a more significant investment in equipment during 2018, we can highlight the improvement in tost line. Benefits from the line include: stable and controllable good quality as well as savings in the production cost (labour and gas).

b) Bank financing

Bank borrowings as at 31.12.2018 are decreased by 28 million denars compared to last year, while the interest rates applicable on the Company’s borrowings in 2018 are moving from 3.20% to 4.85% (2017: 5.25%-6.75%). Bank borrowings in the amount of MKD 362,776 thousand denars (2017: MKD 390,666 thousand denars) are secured with a registered mortgage over property (including investment property), plant and equipment, pledged inventories and secured deposit from Stopanska Banka AD Skopje in amount of 31.977 thousand denars with fixed annual interest rate of 1%.

The borrowings balances as of 31/12/2018, presented by bank are as follows:

amount in ‘000 denars 31.12.2018

Komercijalna Banka 165,204 Stopanska Banka 160,100

Ohridska Banka 37,472 Total 362,776

390.664

The Company’s borrowings breakdown based on the contractual repayment dates at the financial position dates is as follows:

2018 2017

amount in ‘000 denars

Up to 12 months 332.691 368.765 Between 1 and 2 years 5.097 21.628

Over 2 years 24.988 273

362.776 390.666


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4. Risk management

The Company has exposure to the following risks from its use of financial instruments:

credit risk

liquidity risk

market risk

This part of the report presents information about the Company’s exposure to each of the above risks, the Company’s objectives, polices and processes for measuring and managing risk and the Company’s management of capital.

The Management Board has overall responsibility for the establishment and oversight of the Company’s risk management framework.

Company’s risk management is established in order to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls and monitor risks and adherence to limits.

(a) Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company’s receivables from customers, as well as investments in banks i.e. bank deposits, cash and cash equivalents.

(i) Trade and other receivables

Company’s exposure to credit risk is influenced by the individual characteristics of each customer.

The Company’s management has established a credit policy under which each new customer is analysed individually and then terms and conditions for payments are offered. Sales department implements the credit policy of the Company and monitors the exposure of the credit risk for each customer. The Company requires bank guarantees from major customers. There are customers that have to pay in advance before delivery of goods.

The Company recognises allowance for bad and doubtful debts that represents the best estimate for the losses on trade and other receivables. An allowance for impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. Objective evidence for financial difficulties of the debtor represents the probability that the debtor will face bankruptcy or financial re-organisation, default in payments etc. Impairment losses on trade receivables are presented in profit or loss as other expenses.

(ii) Cash and cash equivalents

The Company limits its exposure to credit risk by investing cash in well-known banks.


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(b) Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due.

As at 31 December 2018 the Company’s current liabilities exceed its current assets by MKD 167,815 thousand. Part of the current liabilities is to related parties and represents 10% of current liabilities, or MKD 56,625 thousand. Loans are utilized in working capital financing under a revolving pattern. Technically, they are considered as short-term, however the continuation of the renewals conveys a long term structure. During 2018 the Company has reduced the balance of the loans and borrowings by MKD 28,633 thousands denars.

The Company’s approach in managing liquidity is to ensure as far as possible, always to have enough cash to pay its due liabilities.

The management of the Company has prepared a five year business plan, covering the period 2017-2021, including investment plan, statement of comprehensive income, statement of financial position and statement of cash flows.

Basic Assumptions of the five year plan:

Focus on profitable products. Sales of these products are planned to grow steadily over the next years.

Launching of new products will further boost Zito Luks sales and gross profits

Production cost efficiencies coming from processes and purchase prices will keep production cost at lower levels compared to the sales increase

Costs will further take advantage of economies of scale

The Company expects to have positive earnings before tax during the whole forecasted

period

Loans are planned to be reduced by 26% in the next 3 years.

The plan for next year is prepared on a monthly basis where the Company’s liquidity and the ability to maintain the liquidity are also monitored, as well as the possibility for achievement of the determined level of investments.

The Company prepares monthly cash flow plan and monitors its implementation on a daily basis. During the period the Company did not experience difficulties in realizing its cash flow plan.

As at 31 December 2018 the Company has available funds from revolving frame loans in the amount of MKD 247.372 thousand which are subject to pre-approval. The banks have continued their support of the Company by approving short-term loans in total amount of MKD 125.000 thousand in 2019 from the existing frames as at 31 December 2018. The Company does not expect to have difficulties in the payment of its current liabilities.

If additional funds are required, the Company may request financial support from the banks.


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(c) Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposure within acceptable parameters, while optimising the return.

(i) Currency risk

The Company is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than MKD. The currencies giving rise to this risk are primarily EUR and USD.

The trend of EUR exchange rate during the year has been relatively stable and the Company expects that this trend will continue in the future. The volume of transactions that the Company has made in USD is very small and possible exchange rate fluctuations during the year, should not have significant effect on the financial results of the Company.

(ii) Interest rate risk

The Company does not have financial assets and liabilities with variable interest rate, and accordingly the Company is not influenced by the changes of the market interest rates.

(d) Capital management

The Company policy is to maintain stability of capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Company monitors the return on capital, which the Company defines as net operating income divided by total equity.

There were no changes in the Company’s approach to capital management during the year.

The Company is not subject to externally imposed capital requirements.

5. Marketing & promotional activities

The company continuously works on the development of new products and entering into new product categories. The previous year the production was enriched with new breads within the nutritional category. Two new variants were introduced on the market: 100% rye bread and “Kaymak” toast bread. Furthermore, we have improved some existing recipes: we add prebiotics in the 100% whole-meal bread in order to enrich its nutritional value, especially the content of digestive fiber. In addition, we have relaunched our Diet bread in new format and new image, under the new name FIT bread.

We also decided to refresh the nutritional category with new packaging look, that will give better uniformity of the category, visual presentation of the benefits and will enable easier consumer navigation on shelf.


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Except for the nutritional bread category, we also renew the traditional bread, by introducing new packaging design in line with the core values of the category and differentiated from the competition.

The biggest category, flour where Zito Luks is the leader on the Macedonian market this year was supported with regular promotions especially during the festive periods of the year. However, we have also launched new promotional concept – rewarding game for consumers. Namely, with every purchase of our Extra white T-400 flour, consumers will become potential winners of a golden coin. The inspiration for this promo is coming from our tradition of making bread with coin for the day before Christmas eve. The game was communicated through special packaging design and other POS materials.

Toast bread category was supported with TV campaign several times throughout the year. We also implemented special CSR campaign – from every sale of toast, we were donating means in the pediatric departments of the hospitals in the country.

The toast category had new festive design around new year, made to boost the holiday feeling. Also, the category sales were boosted trough several consumer promotions.

In June the indulgent biscuits category has been relaunched under a new brand Just2Good. The relaunch was supported with integrated Marketing communication. TV commercial, Internet and Social Media activities took place in order to introduce the novelty to the consumers.

After the summer the Nutritional biscuits line was also refreshed with new packaging. The communication for the consumers was generally distributed trough the digital media and POSMs.

Most of the campaigns were supported with relevant marketing campaign on TV, radio, and internet. The internet is a media whose significance as a media is becoming more important for our company on a daily basis. The presence and availability of the social media is very important because it enables the interaction with the consumers. Through this network they are more easily informed about our novelties and promotions. Also, the relationship we have created and continuing to build is becoming more intense, consumers receive serving suggestions and consumption for our products that are part of their everyday life.

6. Corporate social responsibility

Corporate social responsibility is part of the corporate culture of Zito Luks, and investing back in the community in which we operate is our long-term commitment. Supporting the organizations that work with marginalized group of people or socially impaired families and individuals as well as supporting the youngsters by including our brands in the activities of the student’s organizations.


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This year we committed to a donation for the Citizen’s Association for helping homeless people, socially endangered families and individuals, called Ljubeznost, Skopje. On a weekly basis we are donating 100 breads for this purpose.

Now, for a fifth year in a row Zito Luks is donating fresh bread for the foundation RETO nadez whose mission is to secure help to the people with drug and alcohol addiction in their strive to change their lives and integrate in the society.

Zito Luks is a company that is always open and every year gives the opportunity to students from different ages to visit the company and educate themselves on the production process. The educational tours are a way to invest in the education of the young population that are part of our community and strengthen the bond with the current and future consumers.

7. Research and Development of new products

During 2018, Zito Luks worked on several projects:

- Enlargement of the assortment of functional toast products (development of new and modification of exsisting ones)

- Development of a new flavor in the category of standard toast breads - Development two new daily products.

One of the innovative products for 2018 is 100% Rye toast bread as part of the functional toast range, which has high nutritional value based on the main raw ingredient- the rye flour. The rye flour is rich in fibers and several vitamins and minerals, which are important for our health and the normal functioning of the metabolism,moderate glucose absorption, and finally, provides a longer feeling of satiety throughout the day.

The Fit toast bread and 100% wholemeal toast bread with prebiotic are modifications of existing products, with improved recipes. The Fit toast bread has a specific recipe, without added fat, nor sugar. The recipe is enriched with wheat brans, bean protein and pea fibers, providing a balanced product that perfectly meets the principles of healthy and balanced nutrition, with pleasant softness and freshness. The 100% wholemal toast bread is enriched with addition of the prebiotic- acacia gum. This vegetable fiber allows the maintenance of a normal intestinal microflora that is important for the health of the digestive tract and improves the general well-being.

Following the needs of the market, two new flavors have been developed, the toast bread with Kajmak and Bakery bread with sesame, which have a specific aroma and flavour, for every day enjoyment.


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8. Human resources The company employed a staff of 355 employees as of 31.12.2018 with the following qualification structure:

The total staff costs for year 2018 amounted to 153.938 thousands denars as depicted below: 2018 2017 amount in ‘000 denars

Salaries and other short term benefits 104.651 104.915

Personal tax and contributions 47.186 48.165 Termination benefits 639 641

Other 1.462 4.280

153.938 158.001

9. Corporate governance

In the reporting year, the company has performed its activities with three bodies: Shareholders Assembly, Management Board and Supervisory Board. Shareholder Assembly held one General meeting on 09 May 2018, on which the shareholders voted for and approved the financial statements revised by an authorized audit company with Opinion, annual account and annual operating report for the business year 2017, they adopted the decision for allocation of profit from 2017, decision for appointing authorized auditor for financial statements for 2018, decision for adopting the Annual report of the Internal audit department for 2017, they approved the proposed reports and decisions for operating of the Management Board and Supervisory Board for 2017, defining the monthly fee for 2018 for Supervisory board members, decisions for revoking and election of members of the Supervisory Board and decision for ascqusition own shares by repurchase.

Qualification structure

31.12.2018

Master degree (VII2) 7 University degree (VII1) Seventh degree 61 Two years University degree (VI) Sixth degree 3 High school (IV) Fourth degree high school 144 Qualified (III) Third degree occupations 103 Semi qualified (II) Second degree occupations 5 Not qualified (I) Primary school 32 Total 355


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The Supervisory Board has performed its duties according to the Trade Company Law and the Statute of the Company. During 2018, the Supervisory Board held 15 sessions and it performed its functions in the following constitution: 1. Mrs. Natasa Trpenoska Trencevska - President - (Attorney at Law, a founder and managing partner of TRPENOSKI Law Firm); 2. Mrs. Irene Pateras -Vice-president - (R&D Director at ELBISCO SA); 3. Mr. Stavros Bozikas - member – (Organization Advisor, Board member at ELBISCO SA); 4. Mr. Risto Hagi-Mishev – member – (Economist); 5. Mr. Evangelos Rizos – member – (Attorney at Law). The Management Board operated according to the Trade Company Law, the Statute and the General Collective agreement, held regularly sessions and undertook all necessary activities for providing unlimited operating of the Company. During 2018, the Management Board held 16 sessions. From the beginning of year 2018, the Management Board operated in the following constitution: 1. Mr. Ramantanis Dimosthenis – President of the Management Board - (Managing Director of Zito Luks AD Skopje/CEO of ELBISCO SA); 2. Mr. Georgios Nikiforidis - Vice-president of the Management Board and Deputy General Manager of Zito Luks AD Skopje; 4. Mr. Georgios Vasilakis - member of the Management Board – (CFO of ELBISCO SA); 3. Mr. Theodoros Gkoutzios - member of the Management Board responsible for Marketing and Business development issues in Zito Luks AD Skopje; 5. Mrs. Katerina Davidovska - member of the Management Board responsible for Legal issues in Zito Luks AD Skopje; 6. Mrs. Natasa Cerekovic – member of the Management Board responsible for commercial and technical issues in Zito Luks AD Skopje; 7. Mr. Vaisleios Birmpilis - member of the Management Board responsible for Sector Production in Zito Luks AD Skopje. At the end of year 2018, the Management Board operated in the following constitution: 1. Mr. Nikolaos Voudouris - President of the Management Board - (Managing Director of Zito Luks AD Skopje/CEO of ELBISCO SA); 2. Mrs. Natasha Cherekovich – acting Vice-president of the Management Board and Deputy General Manager of Zito Luks AD Skopje; 4. Mrs. Christine Angela Papandreou - member of the Management Board – (CFO of ELBISCO SA); 3. Mr. Dimitrios Raptis - member of the Management Board (CBDO in ELBISCO SA); 5. Mrs. Katerina Davidovska - member of the Management Board responsible for Legal issues in Zito Luks AD Skopje; 6. Mr. Ioannis Poulios - member of the Management Board; 7. Mrs. Lidija Trajkovska-Ristovska - member of the Management Board responsible for Marketing issues in Zito Luks AD Skopje. The compensations to the Management and Supervisory Board members composed of


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salaries and other short term benefits amounted to 9,719 thousands denars (2017: 13.341 thousands denars). According the decision brought by the Supervisory Board, the monthly fee for the Management Board Members is 12.000,00 denars. According the decision brought on the Annual Assembly, the monthly fee for the Supervisory Board Members is 300 Euros per month in denar counter value applying the average exchange rate of NBRM at the payment day. In 2018 the Company did not conclude contracts that according to the Law on trade companies are considered as major transaction. In 2018 the Company did not conclude transactions with interested parties from which a conflict of interest might arise.


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10. Summary

Last year, 2018 was the year of many changes. A year of new beginnings, new solid decisions. Certainly, Zito Luks remains committed to his mission and to his core values. We remain focused on building a company with which all our shareholders and employees will be proud of. Relying on the tradition as our solid foundation, we remain the same in some things: the daily creation of high quality products and the daily commitment of our consumers. In 2018, Zito Luks continued to invest in enriching its range of high quality products by meeting the most specific needs of consumers. We also implemented a new, refreshed visual identity of almost all products from our portfolio. In addition, social responsibility is of great importance to us. The company allocates funds each year for projects with aim to improve the conditions in those areas most in need. And of course, we constantly strive to improve our operations by investing in equipment, as well as constantly following the quality standards. In front of us is a new year with new challenges. We plan to continue growing in our business, expanding the opportunities for our employees, offering our consumers a wide range of products that will meet their needs and increasing the value in the interest of our shareholders. In order to achieve a steady growth in the future, consumers remain at the center of our attention, by striving to respond appropriately to their needs. We have adopted a strategy of growth and we are working on its implementation. We will increasingly focus on new business opportunities that will enable us to generate sustainable profitable growth of the company.The fact is that the GDP growth is expected to increase to 3.2% in 2019 and even 3.6% in 2020 (supported by improved domestic demand, declining unemployment, infrastructure projects and private investments in free zones). This will positively affect our work. Additionally, the industrial production index in the beginning of 2019 is increased , as a result of the increased production in several sectors, including the production of food products. The company's management continues its efforts to maintain a positive performance result, as well as further improvement of operating profit and working capital.

Management Board_________________________

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