Contents. Company Profile 1. Financial Highlights 2. Messages from the Board of Directors 4. Audit Committee's Report 6

Transcription

1 Contents Company Profile 1 Financial Highlights 2 Messages from the Board of Directors 4 Audit Committee's Report 6 Management Discussion and Analysis 7 Makro Cash and Carry 11 Makro Office Centres 14 Siam Food Services 16 Industry and Competitive Environment 17 Looking to the Future 19 Risk Factors 21 Corporate Achievements 23 Other Information 25 Report of the Board of Directors' 49 Responsibilities for Financial Statements Financial Statements 50 Makro and Makro Office Centers' Locations 85

2 Makro is a Cash and Carry selling quality Food and Non Food products providing the best buying conditions and solutions for our professional customers

3 Company Profile The principle business of is the operation of Wholesale Cash and Carry Trade Centres, registered under the name of "Makro" throughout Thailand. Currently, there are 29 Makro stores of varying sizes, 8 stores are located within the Greater Bangkok area and 21 stores are in the provinces. Each store is ideally positioned geographically to be easily accessible for all customers. Every store offers a product range and assortment, designed specifically for the customers' changing needs and expectations. With a registered customer base of over 1.8 million, the Company continues to successfully sell food and non-food products to a multitude of Clientele. The main focus being small to medium size businesses, predominantly small retailers, HoReCa (Hotels, Restaurants and Caterers), institutions, professionals and the service sector. The company has three 99.9% owned subsidiary businesses. Makro Office Centre is a uniquely structured business. By having two clearly defined business models, the 'category killer - niche retailer business' and the 'Contract Delivery' business, MOC is able to target all segments of its customer base as a "Single Source Solution Provider" for office products, supplies, and services. Siam Food Service, the business acquired by the Company in early 2005, is a leading provider of premium food products and logistic services to the food service industry that specialises in the nation-wide supply of value-added services and highly specific frozen and chilled meat, seafood, poultry, etc. Makro Properties Ltd. is a land investment company. A number of Makro stores are located on land owned by Makro Properties Ltd. is controlled by SHV group, a privately held Dutch group, which operates the Makro Cash and Carry business in Asia from a head office located in Bangkok. Makro Cash and Carry is currently trading within 5 Asian countries and has a total of 73 stores across the region. In Thailand, an experienced professional management team based at the head office in Bangkok manages the Company and is supported by a store management team at each of its stores. is listed on the Stock Exchange of Thailand and has a registered share capital of 240 million shares with a par value of Baht 10 each with a paid-up share capital - as of the 31st December of Baht 2,400 million. The total shareholders' equity, as of this time being Baht 8,839 million and the total revenues for the year end being Baht 52,295 million. The Net income for the year was Baht 1,136 million, an increase of 2.6% on the previous year. 1

4 Financial Highlights As at 31 December Unit : Baht Million Change (%) / /2003 Total assets 18,494 18,215 15, Total liabilities 9,655 8,893 7, Share capital 2,400 2,400 2, Shareholders' equity 8,839 9,323 8,756 (5.2) 6.5 Sales 48,393 43,490 38, Total revenues 50,456 45,290 39, Gross profit 2,616 2,566 2, Net profit for the year 1,136 1, Earnings per share for the year (Baht) Par value per share (Baht) Book value per share (Baht) (5.2) 6.5 Dividend per share (Baht) Net profit margin for the year (%) Return on equity (%) Return on total assets (%) Dividend pay out ratio (%) Remark : * Dividend per share include the followings. 1) Interim dividend of Baht 5.00 per share was fully paid in the fourth quarter of ) Proposed final dividend of Baht 4.00 per share for shareholders' approval on April 27, 2006 bringing total dividend for 2005 to Baht 9.00 per share. 2

5 and its subsidiaries Financial Highlights As at 31 December Unit : Baht Million Change (%) / /2003 Total assets 18,968 18,539 16, Total liabilities 10,129 9,216 7, Share capital 2,400 2,400 2, Shareholders' equity 8,839 9,323 8,756 (5.2) 6.5 Sales 50,418 44,670 39, Total revenues 52,295 46,258 40, Gross profit 3,022 2,813 2, Net profit for the year 1,136 1, Earnings per share for the year (Baht) Par value per share (Baht) Book value per share (Baht) (5.2) 6.5 Dividend per share (Baht) Net profit margin for the year (%) Return on equity (%) Return on total assets (%) Dividend pay out ratio (%) Remark : * Dividend per share include the followings. 1) Interim dividend of Baht 5.00 per share was fully paid in the fourth quarter of ) Proposed final dividend of Baht 4.00 per share for shareholders' approval on April 27, 2006 bringing total dividend for 2005 to Baht 9.00 per share. 3

6 Messages from the Board of Directors In 2005 we successfully achieved a sales growth of 12.9% despite the down turn within the retail industry in Thailand where sales growth has shown a slip in Makro has also been able to withstand the negative effects in the market, notably rising oil prices, severe droughts followed by flooding in the North and South of the country, unrest in the south and the continuing impacts from the Tsunami in During 2004 we conducted an intensive expansion plan; we increased the number of stores by 6 to give a total of 29 stores, 8 within Bangkok and 21 located within the provinces. We also successfully completed the re-modelling of 7 stores. In 2005 we continued with an aggressive action plan, with the re-modelling of a further 9 stores. However 2005 was dedicated to stabilising and consolidating the business after the extensive expansion programs of 2003 and Considerable effort was put into optimising and enhancing the current working methodologies operated in stores with emphasise on standard operating procedures and processes across the business. Investment in staff through numerous training programs was also a key activity for 2005 as well as a major review in terms of future business strategies in order to prepare Siam Makro for a successful In October of 2005, we hosted the first ever 'HoReCa Extravaganza' at the Impact Exhibition Centre in Muangthong Thani. This event gave Makro the unique opportunity of bringing specialised suppliers within the hotel, restaurant and catering arena together with our customers. More than 150 suppliers and industry experts participated in the event, offering to our customers' not only product information and future initiatives, but an HoReCa Advisory centre, cooking demonstrations, seminars on food hygiene and lots, lots more. This could not have been achieved without the dedication of our employees and the close partnerships that exists between Makro and its' suppliers. We, the board of directors would like to take this opportunity to thank all participants for making the first ever 'HoReCa Extravaganza' a success and we look forward to the next 'HoReCa Extravaganza' in The Company's trading subsidiaries have continued to perform well in 2005, with Makro Office Centre opening a further five stores. MOC have also introduced new initiatives into the market such as the 'Contract Delivery' business, which is a dependable and customised office supplies procurement solution for customers' to optimise efficiency and manage control. Operational efficiency has also continued to improve in conjunction with enhanced customer care and service. This year we also saw the successful integration of Siam Food Service, a leading provider of premium food products and logistic services to the food industry, this being strategically important to reinforce of our position within the food professionals market. Makro has always been and will continue to be fully committed to our responsibilities within the society. Throughout the year the Company together with its employees participated in a number of social activities. We have supported the tremendous efforts being made by the Khun Poom Foundation and in particular, the 'To Be Number 1' program. By allowing events to be held in our store car parking areas the foundation organisers are able to promote social awareness against drugs. The foundation also raises funds to foster the development of disadvantaged children and takes care of the autistic, to which we also donated funds. This is a highly successful joint venture which we will continue to support for many years. Sustaining our drug awareness activities of 2005, we introduced the 'Clean Factory' project, which ensures we do not employ drug addicts in our stores. Working closely with the Public Health Authority, random drug testing of our employees is carried out. If problems are detected, a program of treatment will be offered. 4

7 Messages from the Board of Directors The Company also continues to supports The 'Royal Project'. Our involvement is the countrywide distribution and sales in our stores, of organic fruits and vegetables from the 'Nong Marg Tao Integrated Farm' located in Sakon Nakorn and Muang Ngai. This is a special Agriculture Project, which is run under the royal patronage of HM The Queen. This project is designed to educate and promote agricultural techniques for poor rural people. For both locations together with our suppliers we have renovated and provided fully equipped Fruits & Vegetables preparation rooms. Future activities are also being pursued, especially within the product labelling of organic produce. For the Tsunami relief our directors, management and employees donated funds from the monies allocated for our annual staff events to HRH Princess Sirindhornthe. These donations were utilised initially for the purchase of medical equipment followed by a rehabilitation project. For this project we worked closely with our suppliers and collected donations for the purchase of household goods for the victims of the tsunami. We also feel it's extremely important to give back to the children. In conjunction with Hewlett-Packard (Thailand) Ltd. we were able to donate 80 computers to the 'School for Educational' program. We would like to thank the Board of Directors, employees, management, customers and suppliers for their continued support in making Siam Makro the leading Cash and Carry in Thailand. Mr. Arsa Sarasin Chairman Mrs. Suchada Ithijarukul President 5

8 Audit Committee's Report 's Audit Committee comprise of three Outside Directors who have the required qualifications and are independent in compliance with the SET's requirements. The members of the Audit Committee are Mr. Athaporn Khaimarn, Chairman, Mr. Chavalit Uttasart and Mr. Thira Wipuchanin. During the year 2005, the Audit Committee hold five meetings and the major matters discussed are as follows: 1. Review the Company's internal control systems and propose recommendations to the Company's management. 2. Review internal audit plan and audit findings for the year 2005 reported by Internal Audit Department. 3. Acknowledge the 2006 internal audit focus. 4. Select the Group external auditors and consider proposed audit fees together with the Company's Board of Directors. 5. Review the quarterly and annual financial statements and consolidated financial statements of the Company and its subsidiaries for the year 2005 by reviewing the reports and meeting with the external auditors, as well as receiving the clarifications from the company's management. 6. Review the Company's compliance with significant accounting policies and practices, which included procedures for preparation of the financial statements and disclosures. 7. Jointly with the external auditors, the internal auditor and the company's management, review material issues relating to internal controls and operations procedures of the company. The Committee is of the opinion that the financial statements have been prepared based on the Company's operations carried out according to the objectives and policies of the Board of Directors, with appropriate and necessary internal control systems. (Mr. Athaporn Khaimarn) Chairman of the Audit Committee 6

9 Management Discussion and Analysis Economics Environment The strong economic growth that followed the 1997/98 Asian Financial crisis, seeing the Thai economy grow substantially by 6.9% in 2003 and 6.2% in 2004 has slowed in 2005 to an estimated 4.5%. This downturn being attributed to the surge in oil prices, severe drought in rural regions, flooding the North and South of Thailand, tsunami-related declines in tourism and lower consumer confidence. However, the Thai economy performed well beginning third quarter of 2005 growing by 5.3%, a faster rate than 4.6% of the previous year and forecasted fourth quarterly results show a growth of 4.7%. For the first nine months of 2005, GDP stood at 4.4%. After seasonally adjustment, GDP posted the same growth rate for third quarter and second quarter of 2005 at 2.2%. This strong growth being driven by the Government's new economic measures to boost exports and increase income, thus resulting in higher exports, and increases in agricultural outputs after a decline for six consecutive quarters. During the last half of the year, domestic demand slowed whilst external demand showed a significant growth. Domestic demand sustained growth within private consumption and investment but there are signs for a continuing slow down. This can be attributed to potential high interest rates, which impacts to the lower spending within durable products and a slowdown in other products. Exports grew during the first nine months of However, prices accounted for 16% of the increase and volume just 5%, due to the drought and downturn in the electronics cycle. Exports are expected to continue to rise in 2006 with exports to partners of bilateral free trade agreements being accelerated. China, Japan, India and Africa are all forecasted for increases in Only Australia will see Thai imports slowing down - from 35% growth in 2005 to 30% in Headline consumer price inflation continued to rise, estimated at approximately 4.5% for the year, up from 2.7% in This increase mainly reflects rising oil prices and has had a negative effect towards private and government consumption, with growth in private consumption reducing to 4.4% compared to 5.9% in Private investment expenditure declined from 15% in 2004, to approximately 11% in 2005, this also being attributed to a number of facts such as, surges in oil prices, southern unrest, drought and the impact from the Tsunami. The Stock Exchange of Thailand's performance in 2005 was up on the prior year and the SET index ended the year at , up from at the end of the previous year. 52,295 40,619 46, ,107 1, Consolidated Total Revenues (Baht Million) Net Profit for the Year (Baht Million) 7

10 Management Discussion and Analysis Revenue Consolidated sales increased by almost 12.9% to Baht 50,418 million, up from Baht 44,670 million in the prior year. The continuing growth in like for like sales reflects the successful repositioning and business strategy. On an overall like for like basis, sales grew by 5.0% with a particularly strong performance in fresh and frozen food sales, which grew massively by 24.4%. This being attributed to the re-modelling of a further 9 stores in 2005 and the first full year of operating the six new stores that opened in In 2005, the Company has continued developing our core customers, HoReCa and small retailers of which their sales rose by 20.6% and 14.4% respectively. Non-food sales performed better in 2005, giving a 3.0% growth in sales. Service income grew to Baht 1,503 million up from Baht 1,282 million in the prior year, a 17.3% growth rate, representing some 2.9% of total revenues. Other income increased over the prior year, 22.3% up from Baht 306 million to Baht 374 million. Total consolidated revenues were Baht 52,295 million, up from Baht 46,258 million in the prior year, an increase of 13.1%. Thus reflecting the impact delivery of our strategy throughout our business. Gross Profit The absolute amount of gross profit margin rose by 7.4% from However, the percentage of gross profit margin to total sales reduced slightly from 6.3% to 6.0%, reflecting change in sales mix and increased participation from the lower margin food business in line with management's strategy to focus on a wholesale cash and carry business and a one-stop shop for food service. Selling and administrative expenses Overall the selling and administrative expenses increased by Baht 472 million to Baht 3,286 million up from Baht 2,814 million, representing 6.3% of total revenue compared to 6.1% in This being accounted to the re-modelling program of 9 Makro stores, first full year operating costs for the new stores, which opened in 2004, and the opening of 5 Makro Office Centres. However, the increase in selling and administrative expenses was held at a lower rate as selling and administrative expenses per store, both at the existing stores and at new stores, are tightly controlled. We will continue to make significant gains in productivity and efficiency and at the year-end, the Group employed 3,173 including the employees of Makro Office Centre and Siam Food Services. 2,516 2,814 3,286 2,545 2,911 3, Consolidated Selling and Administrative Expenses (Baht Million) No. of Employees of the Company and its Subsidiaries 8

11 Management Discussion and Analysis Net income Consolidated income before interest expenses and taxation was Baht 1,612 million, up Baht 26 million from Baht 1,586 million in 2005 representing an increase of 1.6%. Comparing to same basis without the special price received upon 2004 new store opening, the income before interest expenses and taxation was significantly ahead of the growth in underlying sales of 12.9%. Interest rates increased during the second half of the year improving the interest income, this positively impacts the Company, given its substantial cash position reflecting its business as a cash and carry operator. Income after taxation was Baht 1,136 million, up some Baht 29 million or 2.6% from Baht 1,107 million in Earnings per share Earnings per share were Baht 4.74 per share for 2005 compared to Baht 4.61 share in 2004, this reflecting the continuing improvement in net income for the year. Financial status The Company's financial status as of 31 December 2005 reflects it's strong trading position, positive cash inflows and managed investment program. Consolidated total assets have increased in 2005 to Baht 18,968 million from Baht 18,539 million in Primarily, reflecting the impact of the continuing store investment program, which included investment in property, plant and equipment amounting to some Baht 649 million, and increased goodwill resulted from an acquisition of Siam Food Services. Additions to property, plant and equipment being the cost of bringing 5 new Makro Office Centres into service and the continuation of the refurbishment and expansion of the food area within 9 existing Makro stores. The Company has maintained its traditional strong working capital position and holds cash and cash equivalent and current investments at the year-end of some Baht 4,363 million. The high cash and cash equivalent and current investments reflects the very strong trading performance achieved in Operating cash flows and existing cash flows funded the store investment program of Baht 649 million, the super dividend pay-out of some Baht 1,620 million, and the acquisition of Siam Food Service Limited. The high cash and cash equivalent and current investments at year end also reflects a higher balance of trade accounts payable, up from Baht 8,211 million at 2004 to Baht 9,068 million. The Company actively manages its trade payables as part of its overall working capital management program. Other current liabilities increased over the prior year, reflecting the underlying growth in the business, as current tax liabilities increased reflecting the increased tax arising on profits for the year, and a higher level of accruals reflecting the increased number of stores. Inventories have slightly increased from Baht 3,903 million to Baht 4,048 million. With the increased inventory from the acquisition of Siam Food Services and five new MOC stores being partly offset through reduced inventory levels at existing stores. We continue to tightly manage our inventory levels as lower value food inventory continues to become a more significant proportion of our total inventory. The Company is equity financed. There have been no increases in share capital during the year and share capital remains unchanged at 240 million shares with a par value of Baht 10 per share, fully paid up. The Group has adequate cash and short-term investment funding with which to fund future expansion and business acquisitions should appropriate opportunities be identified. 9

12 Management Discussion and Analysis Dividend A dividend in respect of 2004 of Baht 1.75 per share amounting to a total of Baht 420 million was approved at the Annual General Shareholders' Meeting on 25 April 2005 and was fully paid in the second quarter of A 2005 interim dividend of Baht 5 per share amounting to a total of Baht 1,200 million was approved at the Extraordinary General Shareholders' Meeting on 26 October 2005 and fully paid in the fourth quarter of At the Board of Directors' meeting of the Company on 22 February 2006, the Board of Directors unanimously resolved to propose to the Annual General Shareholders' Meeting for approval of the Company to declare final dividend payment for the year 2005, at the rate of Baht 4 per share bringing the total dividend to Baht 9 per share. The proposed dividends must be approved by the shareholders at their meeting. Share price The closing share price for the company at 31 December 2005 was Baht 69.50, significantly increased over last year of Baht 49. The Company was capitalized at Baht 16,680 million, up Baht 4,920 million from Baht 11,760 million at the previous year-end. Audit committee In accordance with the regulations of the Stock Exchange of Thailand the Company has formed an audit committee comprising three independent directors. The report of the audit committee is set out on page 6. Corporate Governance The Company is committed to the implementation of Good Corporate Governance practice, and a report on our application of the Principles of Good Corporate Governance is set out on page

13 Makro Cash and Carry Since 2001 Siam Makro PLC has undergone major restructuring. The aim has been to reposition the company back into its original wholesale cash and carry format, whilst at the same time taking into account the unique characteristics of the indigenous market. This was successfully achieved during 2004 by focusing more on professional customers and by ensuring the nature of the business was understood by all. During 2005 the extensive re-modelling program of 9 stores to the new format further developed and supported this strategy. The range of perishable goods was extended and given greater prominence in the stores and the new format has improved the selection and the displays for the target customer. The Customers Knowing who our customers are is essential to ensuring the repositioning within the market successfully continues. Only when we know who our customers are, we can clearly understand our customers' needs and expectations. This is a number one priority for Siam Makro PLC. The main focus area of 2005 was to increase the customer base within the HoReCa customer group. As part of this initiative, a number of stores went through a re-modelling program, which included widening the sales space for fresh foods and increasing the product range for the growing popularity of frozen products. This was also supported with a wider range of dry goods, beverages and related items such as disposable food packaging and tableware. Additionally, the offering of non-food products targeted especially for this specific market, such as household and electrical goods, has given Makro a greater opportunity to become a key player within the market share for this customer group. Makro is a 'One-Stop for Food Services' and as oil prices continue to increase, the one-stop experience is becoming more and more important for the customer's needs. There are currently 29 Makro stores within the Kingdom of Thailand with each store having its' own specific customer base. However, the needs of customers located within the Bangkok area and the needs of customers from the provinces are diverse. Therefore, the introduction of local buyers within stores to complement the strong head office commercial team has been a continuous activity throughout HoReCa Extravaganza - 'One-Stop for Food Service' 2005 was a highly successful year for introducing new initiatives into the Makro business. One of the finest achievements of the year was the hosting of a unique three-day event. The 'HoReCa Extravaganza' was held at the Impact Exhibition Center in Muangthong Thani, which offered an exhibition area of 5,000 square meters. This event gave Makro the unique opportunity of bringing specialised suppliers within the hotel, restaurant and catering arena together with its customers. More than 150 suppliers and industry experts participated in the event, offering to our customers' not only product information but future initiatives, an HoReCa Advisory center, cooking demonstrations, seminars on food hygiene and lots, lots more. Over the 3 days 50,000 people attended the event of which 60% were from the registered customer base. The remaining 40% of visitors were potentially new future customers for Makro. 11

14 Makro Cash and Carry The Initiatives of 2005 The Management of Inventory has always been a challenging hurdle to overcome within the Wholesale business. For example, if stock holding is too high the problem of aging stock will arise and if stock is too low then potentially sales are lost. To alleviate the problems of stock management a number of successful commercial initiatives were implemented within the commercial area of Food and Non-Food. By combining new working methodologies and new IT tools for the buying teams a significant drop in the company's stock holding value has been achieved. Also the introduction of a new 'Early Warning System', which identifies future problems within the management of stock, has given the buyers the opportunity to become more Pro-Active and less Re-Active. Throughout 2005 working practices and relationships with suppliers continued to be strengthened. By working closely, strong partnerships have been forged to obtain the best possible deals and opportunities for the customer. Quality supplier relationships also enabled Makro to address and incorporate factors such as food hygiene and safety into the supply chain operation. This being of great importance to our customers, as well as to their own customers. Makro are constantly exploring new value added supply sources, such as the use of auctions to achieve the best pricing for specific products. Collaboration with other Makro Asia operations and the identification of overseas sources has enables Makro to directly import certain fruits and vegetables, not widely grown in Thailand. The increasing number of bilateral trade agreements to which Thailand is party, further increases our opportunities in this area. Frozen food is a relatively new product range within the Thai market but is becoming more and more popular. In 2005 Makro introduced a new Frozen Food Catalogue and success has been achieved not only in terms of significant sales growth in 2005, but also in customer satisfaction. Makro always strives to adhere to the changing market trends and the demands of the customers. Assortment and Price Competitiveness Assortment is key to our ability to attract and retain our core customer base. Our customers must be satisfied that our stores will have the products that they want to buy, at the right price. Assortment represents not only the product range that we offer but also the choice within that range; for example choice in terms of packaging and sizing, own brand availability and the actual choice of brands available. Our target customer groups have special and differing buying needs - small retail shops may wish to sell certain products in small package sizes whilst our catering and hotel customers seek access to larger pack sizes in food categories. Through close observation of customer buying patterns, we are responsive to the different demands of our core customer base. As we expand more into the provinces, with our increased focus on food, we can adapt our product offering to the specific needs of the customers in each location. Price competitiveness is pivotal to our success and to our ability to attract and stay supplier of choice for our core customer base. The ability to price competitively is achieved through a variety of factors, not just the price at which we buy from our suppliers. Improved cost management benefits not only our shareholders through enhanced profitability, but also our customers through competitive pricing. 12

15 Makro Cash and Carry Moving Forward in Logistics Logistics is a fundamental part of Makros' business strategy and in 2004 two cross-docking distribution centres were opened. The first was temperature controlled fresh food DC in Wangnoi, just north of Bangkok. From this location Makro was able to accelerate the distribution of Fresh and frozen products to stores, whilst maintaining the highest quality freshness of products. The second DC was an ambient temperature DC, located near Navanakorn Industrial Estate, which handles dry food and non food products. This DC was later move to Klonglung Truck Terminal in early 2006 for more operating space and to be more efficient in managing the growth in volume passing through this DC. As a consequence, there are increased opportunities for obtaining handling and administrative cost advantages as well as co-ordinated transport, shared warehousing and distribution costs and lower inventory costs throughout the supply chain. These advantages can then be passed on to our customers by offering the best competitive prices in the market. Success comes through our People Makro prides itself on providing a meritocratic working environment by promoting on performance and results. Makro understands that people are the future and for continuing success, it is imperative to have employees properly trained. Actions were taken during 2005 to identifying training needs by introducing individual training plans for 'high' and 'young' potentials. In-house training programs supported by both Makro training personnel and external consultants have been utilised to enhance the skill base for employees. An extensive Customer Development Training Program was also introduced in 2005 and concentrated on all aspects of customer management, this initiative will pay subsequently great dividend within the stores and will continue into Promoting from within is extremely important to the success of any business and in 2005 a new extensive training program designed for potential Store General Managers was introduced for High Achievers. Outstanding performances and results from employees are always recognised and rewarded by means of performance-related rewards on an individually and team bases. 13

16 Makro Office Centres Makro Office Centre is a uniquely structured business. By having two clearly defined business models, the 'category killer - niche retailer business' and the 'Contract Delivery' business, MOC is able to target all segments of its customer base as a "Single Source Solution Provider" for office products, supplies, and services. MOC's retail stores provide a comprehensive range of office products specialising in office supplies, office automation, office furniture and business services. There are nineteen stores strategically located in Bangkok and the provincial areas of Thailand, which target small businesses and walk-in consumers. To further enhance the level of service to customers, credit facilities as well as delivery and mail order services are offered. Alternatively the 'Contract Delivery' business, targets medium and large businesses that typically do not buy their office supplies from a retail outlet. Once 'Contract customers' office supplies needs are identified, pricing is fixed over a defined period of time (i.e. 12 months) with payment terms and a convenient delivery service to the customers' doorsteps. Combine periodic spend analysis, web-based ordering and e-procurement (launch in 2006) and the result is a dependable and customised office supplies procurement solution for customers' to optimise efficiency and manage control. Corporate Account Managers and professionally trained Customer Service Executives are readily available to provide value-added services as a part of the single source solution. During 2005 the emphasis was on expansion as well as transition. In Bangkok five new stores were launched; Abdulrahim Place (January), SSP Tower 3 (March), Samsen (June), Ekkamai (November) and Phayathai in December. As this niche business continues to grow, so too does the specialist knowledge within the operation of site selection. New store sites are selected by an inhouse committee to identify strategically significant locations. In 2005, a number of significant management changes were made. The Company introduced clearly defined individual and company working scopes, empowered Area and Store General Managers and created a flat, accountable working environment. MOC also introduced a "back to basics" program and where applicable the working standards and processes from Siam Makro were adopted. Extensive training was conducted in 2005 with the introduction of three core training programs; Phase 1 of "Consultative Sales Training" program was introduced to the newly formed Contract Delivery sales team as well as the 'Key Success for the Retail Business' and 'Service the Market' training programs for the Stores. The 'Retail' programs cover all aspects of the business, from planning, marketing, merchandising, promotion, store operations and business analysis. Promoting from within is extremely important to the success of any business and in 2005 a new extensive training program designed for potential Store General Managers was introduced for High Achievers. Outstanding performances and results from employees are always recognised and rewarded by means of performance-related rewards or 'recognition programs' such as employee of the month. Communication with consumers is maintained via the monthly paged mailer, which is sent to all customers. Building awareness was a key strategy in 2005 and as a result, the number of targeted mailers and leaflets had increased. The annual catalogue remains the core of the mail order business and more variety in the assortment is continually added for the customer who prefers to purchase from his business or home. The catalogue offers some 260 pages, offering more than 8,000 articles with a distribution of 35,000 copies. Assortment and pricing is continuously reviewed and stores offer an extensive range of international brands as well as a comprehensive range of competitively priced "Office Centre" exclusive brands for supplies and furniture. Additionally many stores include a business centre providing copying, printing, laminating and binding service. 14

17 Makro Office Centres Performance in 2005 continued to improve with sales increasing by 13.6% for the year to Baht 1,343 million, giving a growth margin improvement of 19.1%. However underlying profitability was Baht 37.3 million, a decrease of 25%. Many factors contributed to this decrease, mainly increased running costs due to the five new store openings and the expansion of the Contract Delivery business. The number of employees increased by 54 during 2005, taking the total number to 247 as of 31 December MOC engages in several activities in aid of charitable organisations and local concerns within the society. In December 2005 all stores participated within a National campaign to donate clothing and blankets for the under privileged. Within each store donation boxes were provided so customers and employees could donate old clothing, blankets etc. Enough clothing and blankets to fill a large truck were collected and donated to Wat Seuan Kaew Temple located in Nonthaburi province will be a year of investment and consolidation in order to strengthen our foundation for growth. MOC will continue to expand the retail business by opening stores in Thailand. Major upgrading of the existing technical infrastructure will be undertaken to enable the successful implementation of a Customer Relationship Management system to manage the Contract Delivery business and enhancements to the existing web-based ordering system. The extensive training programs that were introduced in 2005 will continue, including the High Achievers program. The main focus in 2006 will be on the acquisition of major new accounts for the Contract Delivery business whilst maintaining successes within all other areas of the business thus allowing MOC to continue to be the leading Office Supplies provider for all segments of customers in Thailand. 15

18 Siam Food Services The food service industry in Thailand is a well-developed and competitive market with many international brands established in the kingdom. Thailand has a large population and a growing urbanisation, higher disposable incomes together with an affinity for trying new food experiences allow for continued market development. This year marked the successful integration of Siam Food Services Limited (SFS) following its acquisition. The company is a leading provider of premium food products and logistic services to the food service industry. SFS specialises in the nation-wide supply of value-added services and highly specific frozen and chilled meat, seafood, poultry, potato, dairy, bakery, ethnic food and beverage products. Principal customers are in the Full and Quick Service Restaurants, catering, lodging, healthcare, and retail sectors. These include all major independent and multi-national restaurant operations, hotels and contract food service operations. The acquisition of SFS is of strategic importance to Siam Makro Plc. (SML), as it provides the company with food service expertise, distribution capabilities, and access to previously untapped food service channels, particularly the high-end full service restaurant and hotel sector. In a drive to become the premier supplier to the industry, SFS's services, knowledge and portfolio can be the differential, adding value and helping to move away from commodity orientation. This is particularly relevant in an industry that is growing rapidly whilst leveraging buying power and placing increasing service demands on a fewer number of selected suppliers. In the face of adverse market conditions SFS continued to deliver strong top line growth across existing and new channels. During 2005 the business excelled in the seafood category and also performed strongly within the savoury and dairy categories. Bakery sales were disappointing and category reposition is currently being executed. Leveraging the combined strengths of SML and SFS further diversification towards dry groceries and new customers in catering and institutions was successfully executed. Significant capital investment was made within Information Technology with the objective to position the company for industry leadership in terms of Enterprise Resource Planning and Customer Relationship Management. The combat of margin erosion continued high on the agenda during the year particularly also in the face of rising distribution and finance costs. The management is confident regarding forward strengths on the basis of organic growth platforms and company initiatives. Through the addition of services, the dry groceries portfolio differentiation, leveraging the strengths of SML, the company is ideally positioned to capture market growth opportunities. Planned geographic expansion and productivity increases from Enterprise Resource Planning (ERP) and Customer Relationship Management (CRM) implementations will further help combat margin erosion. Performance in 2005 with sales of Baht 772 million before elimination of sales to and Baht 685 million after elimination of sales to, giving a growth sales improvement of 18.9% over last year. The underlying profitability was Baht 28 million, an increase of 12% from last year. 16

19 Industry and Competitive Environment Retail Market in Thailand There are two types of retail business operating in Thailand. One is the unique 'mom and pop' grocery store, traditionally located in every small community throughout the country. The other type is the modern trade store, which includes not only department stores, but also other retail outlets. The face of the Thai market has been changing for a number of years. Small traditional independent retailers are gradually being replaced with modern and often foreign-owned large retail operation chains. In 2005 the number of retail outlets was more than 4,910 of which over 4,400 were convenience stores, 160 discount stores, 90 supermarkets, 50 department stores and 210 category killers. New shopping experiences are also being introduced into the market such as, the Siam Paragon which opened in December of 2005, Central World Plaza development which is due to open mid 2006 and malls that are located underground. All of which are forcing the key players within the market to rethink their approaches. Key Players within the Retail Market Discount Sector In the discount (superstore/hypermarket) sector there are 3 major players, Tesco Lotus, Big C and Carrefour. This highly competitive sector does not include the cash-and-carry sector, as the sector has different operating characteristics to that of the hypermarket sector. Tesco Lotus opened 5 new stores and 2 value stores in 2005, bringing their total number of stores to 54 hypermarkets and 13 value stores. Tesco Lotus has also continued to diversify the store formats through which it does business, as opportunities for the development of large hypermarket store has been impacted by the zoning laws. They now operate through the Express store, Value store and supermarket formats and is currently trailing a new shop format known as 'Talad Lotus'. Big C being the second participant within the discount sector, has a total of 45 stores in Thailand. Like Tesco Lotus, Big C has also continued to explore variable store format opportunities, opening its first Big C "Compact" store in 2004 and a further 5 in The third major player is Carrefour, adding more 3 stores in 2005, bringing their total number of stores to 23, the majority of which are located in Bangkok. As the current zoning regulations continue to impact opportunities for new development, particularly of the larger size stores, it is anticipated that operators within this sector will continue in 2006, to explore opportunities through the diversification of their store format. Cash and Carry Sector The cash-and-carry sector does not focus on the end user, but on commercial business users, for whom buying is an integral business function. The cash-and-carry operators, who compete in the same market segment as the traditional wholesalers, experience slower growth than the hypermarkets, and compete for a different customer segment. Cash-and-carry operators do not necessarily target the same locations as the discount hypermarkets, as their core customer base is not the same. Furthermore, core customers to the cash-and-carry operators include the small retailers, the 'Mom and Pop' shops that actually represent competition to the discount hypermarkets. 17

20 Industry and Competitive Environment Supermarket sector The competitive supermarket sector is mainly concentrated in Bangkok where the higher levels of consumer income and sophisticated customer base supports this retail format. The major players are TOPS, Foodland and Villa Market. In 2004 Central Retail Corporation Ltd re-acquired 100% of its Tops Supermarket business. The Tops brand has strong recognition in the eyes of the Thai consumer and experienced strong growth in Foodland is Thailand's oldest supermarket chain and currently has 10 outlets and plans to continue opening more in the face of intensifying competition from foreign hypermarkets and Tops supermarket chain. Villa Market provides all household essentials as well as local and imported groceries, fresh fruits, vegetables, meat, poultry, fish, liquor, electrical, school and office supplies, local and imported magazines and a mini pharmacy. Targeting the premium market segment, most of its shops are located in affluent areas. Convenience sector The convenience store sector dominated by the 7-Eleven group, continued to see very rapid expansion, with 7-Eleven adding more stores, to exceed 3,300 stores. The second largest operator in this sector, Family Mart, also added additional stores in The convenience store sector has continued to focus on food and beverage sales in 2005, with 7-Eleven announcing an increased percentage of these sales in 2005 and a corresponding increase in sales area to support future growth. Department store sector The department store sector is dominated by two major players. 'Central' and 'The Mall' are owned by the Central Retail Corporation and The Mall Group Company Limited, respectively. Although continuing to face competition from the discount/ hypermarket stores, the different shopping environments, promotional campaigns and marketing activities of the department stores continue to retain a strong customer base and both operators saw sales growth in The Central Retail Corporation has been active in the development of speciality retail businesses, for example health and beauty, office products, and electrical goods. Both these major department store groups are involved in the significant new luxury retail outlets in central downtown Bangkok. A result of which should be the making of Rama 1/Ploenchit area of Bangkok a comparable retail experience to Singapore's Orchard Road. Now and the Future The Thai retail market experienced a decrease in sales growth in 2005 reflecting the negative effects of the surge in oil prices, severe drought in rural regions, flooding the North and South of Thailand, tsunami-related declines in tourism and lower consumer confidence. However, the retail market observed a distinct increase in new investments both by local and foreign companies. Investment forecasts for 2006 are set to be lower than 2005, since many retailers have upgraded or built their outlets ahead of their plans. New zoning laws have yet to be clarified forcing some retail chains. The competitive sectors in the Thai economy are much more clearly defined now and the modern retail trade has grown much stronger. The Thai consumer is more sophisticated, however both traditional and modern sectors of the retail trade continue to hold an important place in the buying habits of the Thai consumer. The modern consumer is selective, and uses various alternative retail outlets to satisfy their needs, for example combining monthly visits to the hypermarket with more frequent visits to the wet market and the convenience store. 18

21 Looking to the Future Siam Makro is a Cash and Carry Wholesaler with a strategy focused on consolidating the Company's position as the leading cash and carry wholesaler in Thailand. This means ensuring that the Company understands and delivers what the core customer group expects and ensuring customers, suppliers and other stakeholders understand the nature of the business and their part in it. S sustainable growth T team work O open for opportunity R risk taking M minimum hierarchy and bureaucracy The main focus of 2006 will be 'Growth Through Performance'. The company will endeavour to achieve this by taking advantage of and making the most of opportunities brought about by change. Siam Makro will continue to optimise the business and look for new opportunities whilst in parallel working as a team for better results keeping the hierarchy and bureaucracy to a minimum. Shareholders are not looking for "puffed up" quarterly or annual results, but for sustainable growth and shareholders accept the risks of new endeavours. Therefore, 2006 will be the year of the STORM for Siam Makro PLC. In 2006 we will continue to focus on meeting the customers' needs as a core area for development. We will review the services provided in stores, not just in terms of range, assortment and pricing but also in other areas, such as presentation and display. We will also review value-added services provided for customers. Although we are a wholesale cash and carry business, customer service is still an important element of the overall offering. To support this, an extensive training program was instigated in 2005, which concentrated on 'Customer Management Methodology'. This will continue throughout 2006 in conjunction with other specifically targeted customer training programs, such as customer relationship and marketing skills. Customer satisfaction is an important factor within the business and to measure this customer panels will be introduced within the business. We will continue to review the product range and focus on the development of own-brand ranges. This will include premium 'aro' brand for food service operators and the value 'savepak' brand. House-brand products are a good alternative at a time when energy prices are high and also provide customers with value for money whilst generating a positive impact on margin. This brand mix will ensure we are constantly adhering to our customers' needs and expectations. Continuing on from 2005, Siam Makro will actively target the professional customer group HoReCa (hotel, restaurants and catering) to enhance the number of active customers registered within this sector. This will be achieved by putting into practice Customer Management methodologies and continuing with specific business activities such as hosting the second 'HoReCa Extravaganza'. The store re-modelling program, which commenced in 2003 will be completed early 2006 with the remaining two stores, Ubonratchatani & Surin being re-modelled to the new format. Initiatives introduced during 2005 will continue throughout In particular the Stock Management methodology, which covers all aspects of stock control and stock management. Key areas such as, effective margin control, aging stocks and stock financing will be addressed during 2006 and practices enhanced where possible. The company will also continue to look for new and better value added supply sources to achieve the best pricing for specific products. 19