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Baltika Brewery

March 16, 2006

Baltika Breweries: 2005 annual results

ST PETERSBURG, 16 March 2006– The Company’s financial results for the year 2005 reported in accordance with International Financial Reporting Standards (IFRS) are as follows:

 

RECORD ANNUAL SALES AND THE INTEGRATION PROCESSES ENSURED GOOD PROFIT GROWTH

 The Company has demonstrated high financial and operational performance in its 2005 annual results.

  • Sales by volume: 22.7 million hectoliters,   + 13.8%
  • Sales of beer by volume: 22.4 million hectoliters,  +13.1%
  • Net sales:  977.2 million EURO, +22.2%
  • Gross profit:  507.5 million EURO, + 33.1%
  • EBITDA: 302.9 million EURO, +37.6%
  • EBIT:  233.0 million EURO, +44.4%

 

The 2005 results show that even in conditions of increasing competition and consolidation of the market Baltika has noticeably strengthened its position.

CONFIDENT LEADERSHIP ON THE MARKET

 

The sales volume of all the products of the Company grew by 13.8%compared to 2004, while sales growth of beer amounted to 13.1 %. The Company’s growth was more than twice that of the Russian beer market, which stood at 6%. Baltika accounted for almost 50% of the growth of the Russian market.

 

Baltika’s share of the Russian market grew to 24.1%, a rise in share of 5.7 percentage points compared to 2004.  The combined volume of the Company sales reached 22.7 million hectoliters.

 

Growth in sales volume of beer

 

                                     2005                          H1 2005           H2 2005

Baltika Breweries           +13.1%                       +22%              +6.2%

Russian beer market       +6%                           +3.7%             +8.2%

 

The Company’s sales growth in the second half of 2005 was slower than in the first, as was expected, due to very high comparisons during the corresponding period of 2004, and due to necessary changes in the sales and distribution systems.

In terms of cash revenue, Baltika Breweries’ 2005 sales grew by 22.2% and amounted to 977.2 million Euro.  The growth in profit was due, on the one hand, to increased sales volumes(+13.8%), and on the other hand to the integration processes underway among companies of the BBH Group in Russia and the related synergy effects.


 

BRANDS

 

Thanks to innovative marketing communications and successfully executed strategies for promoting its brands, during 2005 Baltika Breweries continued to strengthen its position in the key market segments.

 

The Company owns the two most popular Russian brands – Baltika and Arsenalnoye, whose shares of the Russian market amounted to 10.9% and 5.4% respectively, according to the Company data.  Sales of the Baltika brand grew by 11.5% in 2005 compared to 2004, reaching 10.6 million hectoliters.

 

Positive tendencies were shown by key sub-brands under the Baltika umbrella. Sales of Baltika ?7 Export beer, the leader in the premium segment, grew by 29%, assisted by restyling of the brand and introduction of new premium quality glass bottles including bottles with twist-off caps.  Another premium sub-brand, Baltika ?5 Gold, also produced excellent results, with sales rising by 55%. The leader of the mainstrean segment, Baltika ?3 Classic, maintained a positive growth trend and continues to be the most popular beer sort in Russia.

 

The Arsenalnoye brand, which since 2004 is the second largest selling beer in Russia, grew during the reporting period by 6.2%. Arsenalnoye’s growth is all the more remarkable given that in 2005 the economy segment of which this brand is the leader showed no substantial growth. Arsenalnoye’s success was assisted by the restyling of the brand in the spring of 2005 and the launch of a new sort called Arsenalnoye Zakalennoye, which is the first beer in the history of the Russian brewing industry to use chili extract.

 

2005 was a successful year for the regional brands. The leader of the market in the Far East, the brand DV, grew by 35%, while the beer Samara continued to strengthen its position in the Volga region, with growth of 17.5% during the reporting period,  Leningradskoye brand increased sales by 49%.

 

During 2005, the Company strengthened its position in all segments of the Russian market:

· Baltika Breweries’ market share rose to 24.1%

· its share of the licensed beer segment amounted to 8.2 %

· share in the premium segment its share exceeded 30%

· share in the mainstream segment it reached 36%

· share in the lower mainstream segment its share exceeded 29%

· share in the discount segment its share rose to 13%

 

 

PRICES/PACKAGING

 

During 2005 the average price increase of the Company’s products in rubles came to 8.5% and matched inflation in the market for food and beverage. The reasons for the rise in prices were the level of inflation and significant investments in improving and updating packaging. 

 

The Company increased its share in all packaging segments on the market, including the most profitable segments – cans and bottles, where its share amounted to 41.4% and 29.9% respectively. In the fast-growing PET packaging segment, the Company’s share amounted to nearly one-quarter. Its share in the segment of draught beer also grew compared to 2004, reaching 16.7%.

 

EXPORT

 

In  2005 the Company continued to successfully develop its export sales. The volume of export sales during  2005 came to 13.9 million dal, which was 23% higher than in  2004. Shipments were begun to Norway, Finland, Ireland and direct shipments were started to Holland and France.

 

In 2005 the geographic spread of export sales increased to  38 countries, including all the countries of the CIS, as well as other countries around the world such as the USA, Great Britain, Canada, Israel, Greece and the Baltic states. Baltika products account for more than 70% of all Russian beer exports.

 

 

FINANCIAL RESULTS

 

During 2005 the Company demonstrated high financial performance.

 

Gross margin

51.9 %

+4.2 p.p.

EBITDA margin

31.0 %

+3.5 p.p.

EBIT margin

23.8 %

+3.7 p.p.

Net margin

19.5 %

+5.7 p.p.

 

 

In 2005 the Company carried out a number of measures aimed at raising the attractiveness of its products and developing sales and distribution, which enabled it to achieve significant revenue results.

 

The Company’s efforts and a number of objective factors facilitated reduction of production costs and expenditures on raw materials. This had a positive impact on the annual results and led to a decrease of cost of sales by 1.3% per hectoliter. The main factors which made it possible to achieve such a result were the increased share of malt which Baltika produced itself, the lower world prices for hops, an improved purchasing policy on packaging and the lower exchange rate of the Euro.

 

In the course of the reporting year, the Company demonstrated growth of operating margin during all four quarters compared to the same periods in 2004. The achievement of these results was helped by effective marketing support and containment of costs of distribution, growth in the Company’s sales volumes and growth in prices of goods. The improvement in operating margin results also was due to strict control of the Company’s administrative expenses, which made it possible to reduce unit administrative expenditures in 2005 by 5.4%.

 

In order to reach the goals set for increasing market share and growth in sales volumes, the Company had to make substantial investments in developing distribution and the sales system. The share of the Company’s diatribution expenses in 2005 grew by 12.2% per hectolitre of product compared to 2004.

 

 

MERGER WITH COMPANIES OF THE BBH GROUP

 

The success of Baltika in 2005 is largely due to integration processes affecting companies of the BBH Group in Russia – Baltika, VENA and Pikra.

Today, when an absolute majority of the participants of the Baltika extraordinary general shareholder meeting on 7 March 2006 supported the proposal for merger with the companies Vena, Pikra and Yarpivo, it is already clear that following the completion of this transaction Baltika will become the unconditional leader on the Russian beer market.

Up to the end of  2006, Baltika will continue the integration processes with the other Russian companies of the BBH for the sake of maximising the synergy effect. The merger process should be completed by the end of 2006.

 

In his comments on the 2005 annual results, Baltika President  Anton Artemiev stated:

«2005 results gave Baltika Breweries nearly one quarter of the Russian beer market. Despite rising competition, Baltika not only preserved but actually strengthened its leadership. Without a doubt, we can see here the positive effect of operational merger with other companies of the BBH – VENA and Pikra, as well as of investments in developing the brands, innovative marketing communications and an effective distribution system.

 

 

 

Now that the shareholders of Baltika Breweries have said yes to the merger with the other companies of the holding, we have a unique opportunity to create a world class company possessing an unbeatable portfolio of brands, the most advanced production, the widest geographic reach and an effective system of distribution.

 

The success of 2005 confirms the correctness of the strategy that has been chosen, the merger with VENA, Yarpivo and Pikra. We confidently look to the future and intend to proceed in the chosen direction during 2006 as well».

 

 

************

 

Ever since 1996, Baltika Brewerieshas been the leader on the Russian beer market. The Company holds Russia’s two leading brands, Baltika and Arsenalnoye.   The Company comprises 5 plants: in St Petersburg, Rostov-on-Don, Tula, Samara, and Khabarovsk. It has a malt plant in Tula and 31 sales subdivisions. The Company’s products are exported to  38 countries both along its borders and around the world.

Baltika Breweries has since 2005 been in a stage of operational merger with the companies Vena and Pikra and during 2006 Yarpivo also is joining in this process. 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 in 9 regions of Russia, the most powerful portfolio of brands and more than 11,000 employees.

Since 1993 the largest shareholder of Baltika Breweries has been ?altic Beverages Holding AB (??H).  BBH is a company that is 50:50 owned  by  Carlsberg A/S and Scottish & Newcastle plc.

 

 

************

 


The Company’s Key Financial Results for the year 2005

 

(According to the Company’s financial reports prepared under IFRS)

Indicator

2005

2004

% change

Sales volume, mln hl

22.7

19.9

13.8%

Net sales, MEUR

977.2

799.7

22.2%

Gross profit, MEUR

507.5

381.3

33.1%

Gross margin

51.9%

47.7%

 

EBITDA, MEUR

302.9

220.1

37.6%

EBITDA margin

31.0%

27.5%

 

EBIT, MEUR

233.0

161.4

44.4%

EBIT margin

23.8%

20.2%

 

Net profit, MEUR

190.4

110.6

72.1%

Net margin

19.5%

13.8%

 

 

 

The results for 2004 which are used for comparison have been corrected with a view to changes resulting from the shift over to International Financial Reporting Standards (IFRS).

 

 

 

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