Russia: Baltika Breweries releases first quarter 2006 results

Baltika Breweries reported on 12 May its financial results for Q1 2006 in accordance with International Financial Reporting Standards (IFRS).

According to the figures, despite the restructuring of the distribution system that is nearing completion and is related to the merger of the companies Baltika, Pikra, Vena, and Yarpivo, and notwithstanding a temporary fall in sales volume, Baltika remains the undisputed leader on the market and continues to deliver high financial performance.

Total sales volume: 4.1 million hectoliters, -1.7%;
Net sales: 188.2 million EURO, +13.8%;
Gross profit: 96.6 million EURO, +23.2%;
EBITDA: 50.2 million EURO, +11.7%;
EBIT: 32.2 million EURO, +9.4%;

Baltika continues to be the leader on the Russian beer market with a market share of 23% during Q1 2006. In March the Company's shareholders approved the merger of Baltika with the other BBH Group companies in Russia - Vena, Pikra and Yarpivo. The aggregate market share of all the merged companies was about 35% in Q1. The overall sales volume of the group companies amounted to approximately 6.2 million hectoliters in the reporting period.

The slight decline in the Company's sales volume during Q1 compared to the same period last year was expected and is due to the active process of integrating the four companies of the Group, and in particular due to unification of the distribution systems of the companies, a change in the system of sales, a shift over to unified price models and rotation of sales staff. This kind of restructuring of the system of sales traditionally leads to a temporary fall-off in sales, but pay off in the longer term. The general level of sales was influenced by the severe winter temperatures this year which caused a sharp reduction in demand during January 2006.

In the first quarter, the market grew by 2% while the Company's sales fell by 1.7% and its market share came to 23%. According to data from Rosstat, the growth of beer production during the reporting period considerably exceeded the rate of growth of consumption. This was due to the bitterly cold weather in January and the building of seasonal reserve stock by producers in preparation for the summer season.

During Q1, the Company managed an integrated portfolio of brands which includes all brands of the four companies. Thanks to such an unbeatable portfolio of brands, the Company leads in all price segments of the market other than licensed beer.

The two most popular Russian brands, Baltika and Arsenalnoye, are now joined with other successful Russian brands that have shown excellent growth in sales volume during Q1: e.g. Nevskoye (sales growth of 37%) and Tuborg, the leader in the licensed beer segment (sales growth of 47%).

In the spring of 2006, the Company launched a new brand called Baltika Cooler which occupies a worthy place in the mainstream segment and is specially brewed for young adult consumers who lead an active life style. This stands alongside other innovations launched in the quarter that will enable Baltika to strengthen its leadership position on the market.

During the first quarter of 2006 the average price increase of the Company's products in rubles was 6.2% in comparison to the comparable period in 2005. The Company increased its share in the premium segments of the market: in premium its market share is 29.7% and in licensed beer it has 7.6% of the market.

In 2006 the Company has continued to successfully develop its export activities. The export sales volume during Q1 2006 was 11% higher than in Q1 2005.

During Q1 the Company began producing Baltika beers under license in the Ukraine for the first time. Baltika concluded a license agreement with the brewing company Slavutich for production of beer varieties under the Baltika brand up to the year 2010. Including the license production of Baltika beers at Slavutich, the international sales volume of the company's brands amounted to 0.3 mln hl, which is 20% higher than in the Q1 2005.

Baltika's share of all Russian beer exports was in excess of 70%.

The Company demonstrated high financial performance in Q1 2006:

Gross profit, MEUR 96,6 +23,2%
Gross margin 51,3 % +3,9%-pts.
EBITDA margin 26,7 % -0, %-pts
EBIT, MEUR 32,2 +9,4%
EBIT margin 17,1 % -0,7%-pts.
Net profit, MEUR 24,0 +3,0 %
Net profit, margin 12,8 % -1.3%-pts.

It has to be mentioned that comparative analysis of both absolute and relative indicators of the Company's profitability is complicated by the current status of the merger process. By the end of the year, the Company plans to finish the shift over to reporting on the entire group of BBH companies in Russia on a consolidated basis in which we will present completely comparable information on the financial results. Preliminary estimations over the consolidated results do not show a negative trend for the operational margin of the consolidated Company.

However, it is already possible to confirm that the substantial growth in gross profit adjusted for the influence of ruble appreciation relative to the Euro was the result of synergies in production.

The growth in commercial expenses follows the general tendency in the market, that is characterized by increased investments in the promotion of products under the conditions of stricter limitations for beer advertising. In addition, this increase was partly caused by the fact that the phase of integration now underway focused on consolidating the system of sales and marketing of the entire Group on the base of Baltika.

The rise in the Company's administrative expenses during Q1 2006 compared to Q1 2005 was besides inflation due mainly to additional expenditures related to restructuring as well as to the creation of necessary reserves.


On March 7, 2006, the Extraordinary General Shareholder Meeting of Baltika Breweries voted in favour of the merger with the companies Vena, Pikra and Yarpivo. During the course of 2006, Baltika will continue the integration processes with the other Russian companies of BBH and it plans to complete the legal merger of the companies by the year end.

Commenting the results, Baltika President ánton Artemiev stated: «In Q1 2006 a major event shaping the future success of Baltika took place: the shareholders approved the merger of the four companies and the creation of one large entity having splendid prospects for development. We are pleased with this decision and we are continuing to work at the integration processes. We now possess a strong brand portfolio and an extensive system of sales and distribution as well as the best specialists. We believe that with such a team Baltika will be able to achieve the goals that have been set for us».

Baltika Breweries has been the leader on the Russian beer market since 1996. The Company owns Russia's two leading brands, Baltika and Arsenalnoye. The Company comprises 5 plants: St Petersburg, Rostov-on-Don, Tula, Samara, and Khabarovsk. It has a malt plant in Tula and 32 sales subdivisions. The Company's products are exported to 38 countries both along its borders and around the world.

Baltika Breweries is presently merging with the companies Vena, Pikra and Yarpivo. It is expected that the merger process will be completed by the end of 2006. As a result of the merger, Baltika will have 10 brewery plants and 4 malt houses in 9 regions of Russia, the most powerful portfolio of brands and more than 11,000 employees.
BBH is a company that is 50:50 owned by Carlsberg A/S and Scottish & Newcastle plc.

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