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Dear Shareholders,
You are holding the business report of Adris grupa documenting, sine ira et studio, another successful business year of our companies, our strategic business units and the system as a whole.
In 2008, it has been ten years since our Company (Adris grupa since 2003) began a new development cycle. This period has been characterised by several important acquisitions, diversification of our business operations, consolidation and restructuring of the companies, new investments, new staff, new markets and market growth, and other improvements in our business activities. The list is quite long, and I have been reporting on our progress throughout the past years. I have also been pointing to many obstacles and threats in our business environment, simultaneously expressing my belief in the strength of our business system.
Concurrently with the great changes within our company, the international and national business environments have also changed substantially. It is a well known fact that signs of a global financial crisis appeared a year ago. The crisis culminated overnight in the United States in September 2008, which today has turned into an international financial, economic and even moral crisis, with severe social and political consequences.
Due to their global insignificance, the Croatian economy and society in general, have contributed little or nothing to the causes and outbreak of the crisis. Nevertheless, the crisis is ultimately spilling over into our economy as well, merging with and deepening our own crises. A more extensive and detailed presentation of impacts of the global and national financial and economic crises and the many anti-recession measures taken within our companies will be included in the next annual report, but the effects of the global crisis were already evident at the end of the 2008 tourist season and on some tobacco products export markets.
In addition to the global recession, there are several other international developments that marked the year 2008 and affected performance of the Adris tobacco division. On the international level, there was further concentration of multinational companies (JTI taking over Gallaher, and ITG taking over Altadis). Thus, the remaining four global tobacco companies now control all relevant global markets except, of course, China. For example, the share of those companies in the most important European market, Germany, is 95 percent of the total consumption. Nevertheless, it is noteworthy that the above-mentioned acquisitions were approved by the European antitrust agencies, although serious critics of the present global economic crisis see its causes, among others, in former approvals of similar concentrations in many industries. Such global oligopoly market structures are actually contrary to the principles of market competition and theories of the well-functioning capitalist economy. It is just plain hypocrisy to point to the Croatian tobacco industry for its alleged monopoly.
On the national level, a completely inappropriate smoking ban legislation has been passed. It is inappropriate because it ignores our circumstances and needs, as well as possible co-existence of smokers and non-smokers that can be seen in some European countries (Austria, Spain, and even Brussels itself!). It is also inappropriate because in Croatia as a tourist country, the Smoking Ban Law ignores demands and needs of almost one and a half million Croatian citizens, and visitors, and precludes the consumers and hospitality businessmen from having a free choice.
Another economically extremely important development is related to the modifications in the systematic economic legislation – the Law on Special Taxes on Tobacco Products. The modifications began in 2008 and are already binding on us. This change in the taxation system has two aspects. Firstly, the sudden jumps in excise taxes on tobacco products, in our case only on mid-price and lower-price cigarettes. Sudden jumps in excise taxes belong to rather frequent and unreasonable moves of some governments. They cause inadmissible stratification of a market and introduce a set of illegal and economically and morally damaging and unacceptable behaviour patterns of market players and consumers. The increase in excise taxes must be gradual, because the excise tax is the tax on consumption which is necessarily reflected in product prices and consumers' standard of living. Secondly, these modifications abolish - suddenly and on a one-off basis, with no adaptation period - different rates of excise taxes on different types of tobacco products, which had been centuries old practice in this area. This has been done, they tell us, under the pressure of the European bureaucrats and the lobbying pressure from already mentioned multinational companies that dominate the EU markets. With our previous taxation system, their imported products were allegedly discriminated against on the Croatian market.
Dear shareholders, I would like to note in this report that the Croatian laws, regulations and practices have never applied tax discrimination against imported products, and that such an accusation is absolutely legally unfounded, as documented in writing and explained verbally to the European Commission. Croatia should have resolutely rejected such claims and demands to modify the legislation, at least until the time of its full membership in the EU or until the time limit that the EU offered to Croatia (the beginning of 2010). After all, Croatia was admitted to the World Trade Organisation with such taxation system, with the approval of all present EU Member States. We can comprehend that in the negotiations with the EU Croatia is being blocked and blackmailed on account of vital economic or political interests of individual Member States. It is, however, incomprehensible that one sovereign country is blackmailed because of the interests of one or two multinational companies that do not even have head offices in the EU Member States. In support of this allegation, we can mention that simultaneously with Croatia's acceptance of demanded repeal of our „discriminating“ taxation system, our responsible ministries registered and classified an imported brand of a multinational company at the same „discriminating“ excise tax bracket as the cigarettes of similar type produced in Croatia. We are sure the registration was carried out because the importer finally condescended to abide by all the relevant legislation and procedures that apply equally to both domestic and imported products. This case shows that the only „discrimination“ against the importer included in our legislation, regulations and practice is that the importer was supposed to observe the relevant Croatian legislation.
What a preposterous requirement from such a small country?!
In this report, I will often mention this systematic economic law, because its adoption means worse market conditions for more affordable types of domestic cigarettes, and considerably better market conditions for the so-called global brands. TDR has proved several times – on individual foreign markets, in international competition, under different and unfavourable taxation systems – that it knows how to enter a market, how to be competitive and how to achieve market growth. This is, however, a matter of important principle and so far unnoted and unrecorded instance of sudden introduction of a new taxation system which, together with the mentioned increase in excise taxes, additionally destabilizes the market and disorientates consumers in their evaluation of market supply. The new Law also encourages, for no apparent reason, the import of non-standardized types of products, the import of global brands, and also introduces additional tax burden and increased tax unfairness to lower-income consumers. It also has detrimental effects on the government budget, the entire tobacco industry and tobacco-related sector of the national economy. Besides, the excise tax burden in Croatia has now reached the level that the states from the last EU enlargement round have still not reached. And they have not reached that level because they fought for transitional periods to protect their consumers and companies.
We have always believed that Adris grupa, as well as other domestic companies of similar standing, with regard to the nature of its business divisions, is an important partner to responsible government departments. This belief is based exclusively on the fact that Adris is a substantial contributor to the government budget, that it invests all its profits earned on home and foreign markets in domestic development, generating large-scale direct and indirect employment in the countryside, in trade, construction industry, and cooperation with many domestic suppliers. And finally, because it is a Croatian company. Does all this not suffice to listen to and accept the arguments of such domestic economic sector?! We are not asking for an inappropriate protection of the national economy, but we oppose to changes which directly encourage the import and do great damage to the national economic interests. We have notified this to all the departments and decision-makers in numerous communications, tax models and scenarios, supported with documents and arguments, so that nobody may say they were unaware of the economic damage and other consequences. The issue, however, remains open: what and whose interests are more important in this country than the interests of the national economy, employment, even interests of domestic consumers? Who, and on what basis, determined that it is in the interest of Croatia to submit overnight one traditional industrial branch to most rigorous European conditions of doing business, instead of ensuring it a several year long adaptation period – like the old and new EU Member States did? I believe that you as shareholders, i.e. co-owners of our company, and citizens of Croatia, are asking similar question and seeking answers, particularly considering that the two above-mentioned laws are inducing the crisis in our country, whereas other countries are taking various protectionist measures to encourage growth and consumption. Need I mention the measures in France, Germany, Hungary and the decisions of their respective parliaments?!
Towards the end of the last year, we witnessed a more-or-less linear decline on international equity markets and, consequently, on our national market, caused by the global financial crisis. Our business performance shows that such developments are based neither on the so-called business fundaments, nor on the next year's business expectations. The developments on the equity market only confirm that our decision to focus Adris' strategy on long-term sustainable development, and not on a short-term growth of equity market value, is correct. Such a stance has also been supported in many recent discussions on this issue in respectable business press („It was a stupid idea to focus on a short-term growth of profits and equity value of a company“; „equity value is a result, not the strategic goal“, said Jack Welch, a visiting lecturer at our Adris Business Forum).
Despite substantial investments made in the reporting period, Adris grupa has pursued – although criticized - the appropriate and conservative policy of non-speculative and non-risky investments. Owing to such policy, Adris grupa can more easily overcome the approaching financial crisis, credit restrictions and increased loan costs. What is more, even in times like these, the company is capable and willing to invest in the domestic financial sector, energy production and food-processing industry. However, the current economic policy neither creates nor encourages such opportunities, although, we believe, this could and should be one of important counter crisis measures.
We have also continued our planned investment cycle in tourism to the extent allowed by the urban planning legislation. A new five-star hotel has been completed– Monte Mulini – that is important for further development of Maistra, for Rovinj and Croatian tourism at large. We have acquired and placed at Maistra's disposal the island of Sveta Katarina, a symbol of tourism in Rovinj and a famous Rovinj sight, which had been sold to a foreign owner in late 1990s. The planned investments in Vrsar (Belvedere, Petalon, Blesička) have also been completed. Additionally, Adris has also taken over considerable Croatian mariculture facilities.
In the tobacco division, we have continued numerous smaller investments. There have been intensive improvements in and rationalization of business operations that have brought in savings exceeding 60 million kunas. It is particularly noteworthy that the Tobacco Business Unit, in its relation with the traders and consumers, and in some of its companies such as Hrvatski duhani and Istragrafika, raised the level of competitiveness and increased the penetrating power of the entire strategic business unit. This is certainly supported by the introduction and empowerment of our own distribution company Adista, and acquisition of 25 percent share in the leading Serbian distribution company - Veletabak. The first exports to the markets of Iran, Germany and Italy are also worth mentioning.
Finally, the present business operations of Adris grupa are profiled in accordance with demands of end-consumers of tobacco products, consumers of hotel and tourism services, and consumers of fish products, as well as our trade service users. Adris grupa is servicing more than 2.5 million national and international consumers. Consequently, it will continue its development as a consumer first company. All the participants and shareholders of the Company should bear this in mind and contribute to it. There is no doubt that under the changed conditions we shall continue to nurture and develop harmonious relations with our employees and our business partners, demand ethical conduct of the management and socially responsible behaviour of the Company and its organisations towards our local and wider communities. We shall also ensure the appropriate reward for our shareholders. To make it all happen, it is necessary to pursue the strategy and business policy that provide for long-term sustainability of the system and appropriate earning power at every single profit point.
With our business performance and traditional loyalty of our employees, and with new knowhow and innovative corporate culture, I am convinced, dear shareholders, that Adris grupa will overcome this period of crisis and uncertainty without severe stress.
Ante Vlahović, M. Sc.
President of the Management Board of Adris Grupa d.d.
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Ante Vlahović |
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