Russia: Baltika net profit grows 42.4% to 330.9 mil Euros in 2006

Baltika Breweries, one of the leaders on the Russian beer market, increased net profit 42.2% to 330.9 million euros in 2006, Interfax News Agency reported April 5.

A consensus forecast by analysts had put net profit at higher than 340.8 million euros.

Gross profit increased 29% to 931.8 million euros and operating profit rose 40.8% to 427.1 million euros, the company said in a statement.

Baltika had revenue of 1.74 billion euros in 2006, slightly lower than the forecast of 1.741 billion euros.

The merged company comprising the Baltika, Yarpivo, Vena and Pikra breweries sold 37.2 million hectoliters of products in 2006, up 10.3% from 2005. Beer sales accounted for 36.6 million hectoliters of sales, up 10.6% from the previous year. The company maintained its leading position on the Russian market at 36.4%.

Baltika sold 8.6 million hectoliters of products in the fourth quarter of 2006, up 16.8% from the same period of 2005. Beer sales grew 17.2% to 8.4 million hectoliters in the fourth quarter, and the company's share of the market was 36.9% in the quarter.

The company's leading brands were Baltika and Arsenalnoye in 2006. Baltika sales grew 10%, and the brand's share of the market rose to 10.9%.

Baltika had a 43.6% share of the premium beer segment in 2006 and a 22.5% share of the licensed segment.

Sales abroad, including licensed production, totaled 1.8 million hectoliters in 2006, up 27% from 2005, the statement says.

Baltika President Anton Artemiev told Interfax: The main result of the merger is that Baltika, despite certain risks that always exist in this process, managed to not only retain but strengthen its leading position of the market with a share of 36.4%.

On the whole, the merger worked out, but, of course, there are issues that can't be resolved in one year, above all this concerns the building of a unified corporate culture. However, the process is proceeding favorably, and we have We have the unified goal of further strengthening our leading position on the Russian market while maintaining high profit margins, he said. Moreover, the company is looking to increases sales of the Baltika brand in Europe, he said.

CIS and Baltic countries remain very important markets for the company, Artemiev said. We are considering various options or increasing our presence on European markets, including in licensed production, he said. Noting that Baltika began producing beer at Ukraine's Slavutych Brewery in 2006, he said Baltika sales in Ukraine, including licensed production, grew by more than 30% in 2006. The share of licensed beer accounts for two-thirds of Baltika's sales in Ukraine, he said.

Sales are picking up in Germany and Britain, and the company has begun supplying its products to Switzerland, he said. We are developing the Scandinavian markets - Finland and Norway, he said. Baltika sells its products in a total of 40 countries.

Artemiev said Baltika increased investment in the development of production and promotion 36% to 204 million euros in 2006 from 150million euros in 2005.

Baltika invested in an increase in production capacity as well as the development and promotion of new products in 2006, he said. The company is not disclosing its investment plan for 2007.

The company is completing a project that will increase production capacity at its brewery in Samara and is continuing construction on a brewery in Novosibirsk, in which 65 million euros have been invested, he said.

Artemiev said the company also recently completed the restyling of the premium label for the Baltika brand. The newly packaged products are already appearing on store shelves, he said. Baltika had a 43.6% share of the premium segment in 2006.

The company's investment program will be built on its own funds, he said. We don't have a need to borrow funds on financial markets right now, the company's financial standing is stable. Moreover, Baltika is paying off the loans of the companies it acquired, in particular Vena. Total borrowings currently stand at 100 million euros, he said.

Commenting on the company's plans for 2007, Artemiev said Baltika's main goal remains to grow faster than the market since this will allow for retaining high profit margins. The Russian beer market will likely grow by 3%-5% in the next few years, he said.
Active consolidation on the market will be slowing down in the near future since there are virtually no companies whose merger could alter the situation on the market, he said. At present, five companies control almost 90% of beer production in Russia.

But since almost all the companies working on the Russian market are connected to large international players, changes on the international market could theoretically affect Russia, too, he said.

Artemiev noted that the company is currently putting particular emphasis on beer production, however he did not rule out the possibility of expansion in the non-beer sector of the market, in particular mixes, low-alcoholic beverages and mineral water. At present, Vena and Pikra produce some non-alcoholic beverages.

The synergetic effect of the merger of Baltic Beverages Holding's (BBH) Russian assets could grow to $100 million in 2007, Artemiev said.

The synergetic effect of the merger amounted to $80 million in 2005- 2006, he said. "Reserves will increase it by another $20 million this year," he said.

Asked about the company's raw materials base, Artemiev said the situation was complicated since the cost of raw materials is always increasing. Baltika is carrying out a number of projects that will alleviate this situation. In particular, the company opened a malt house in Yaroslavl recently. In addition, a number of agricultural producers in the Central region of Russia are producing barley based on orders from the company. "We started this program with 10,000 tonnes of barley, brought it to 100,000 tonnes last year and are planning for 200,000 tonnes," he said.

Baltika is also planning to buy equipment for the production of its own PET bottles to lower its dependence on suppliers, he said.

Baltika unites ten breweries in nine Russian regions. Baltika merged with the Vena, Yarpivo and Pikra breweries in 2006. BalticBeverages Holding is the main shareholder in Baltika with 85.6% of the company's charter capital.

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