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Baltika Brewery

March 26, 2004

The restructuring of the sales organization and cost reduction measures initiated in 2003 are the basis for the Baltika brewery confidence in its 2004 results

The year 2003 was a year in which the Baltika brewery introduced significant changes. We implemented an organizational restructuring, launched a process for reorganizing distribution, began to change the marketing policy of the Company, brought on line new production capacity, continued to build warehouse terminals and embarked on a project for construction of a malt making plant. All these processes required that spending be increased significantly and took place against a complex background of rising competition and sharp decline in the market's rate of growth. In this way preconditions were created which could slow the rate of sales growth and negatively influence the Company's operational results as well as cash flow. The first half of the year when the multifaceted restructuring of the system of sales began was most challenging, however in the third and fourth quarters the Company was able to break the negative tendencies and raised sales volume relative to the preceding year.  
Consequently the Baltika's financial results were better than those of 2002. Sales volume stood at 16.17 million hectoliters of beer, which is 0.7% greater than the sales volume of the year before. The fourth quarter of 2003 was especially successful as sales growth came close to the market's growth at 7% above the level of the fourth quarter of 2002. This was accomplished thanks to new marketing solutions (including the successfully implemented first nationwide promotional campaign «Join In!») and to the first positive contribution arising from the new distribution system.  
 
Basic financial indicators for 2003 look as follows (including recalculated data for like to like comparison 1 in mln. dollars):  
 

 
2003 results  
Comparable numbers for 2003  
2002 results  
Net sales (without VAT and excise)  
737  
710  
683  
Profit from operations  
168.5  
168.5  
191  
Profit margin from operations  
22.9%  
23.8%  
 
28%  
 
EBITDA  
227  
227  
234  
EBITDA margin  
30.8%  
32%  
34.2%  
Net profit  
123  
123  
137  

 
Despite the decline in earnings before taxes, depreciation and financing expenses (EBITDA), profit from operations and profit margins of the Company remain high and above average in the industry.  
The growth in expenditures at the Company was influenced by the following factors:  
  • A significant increase (from 31% to 36%) of the share of beer sold in PET bottles;  
  • Growth in depreciation (to $14.8 million.) due to the greater volume of capital investments in the course of the past year (34% above the level of the previous year),  
  • An increase in the cost of sales and distribution up to the final consumer due mainly to the increase in numbers of our own sales personnel, to the opening of the Company's own commercial representative offices in more than 70 cities around
    Russia, and to a rise in transportation tariffs by common carriers. At the same time the Company cut the distance to market by introducing two supplemental production centers in Samara and Khabarovsk.  
 
As in the past JSC «Baltika Brewery» is the undisputed leader in the Russian beer market. At the end of 2003 the Company held a 20.6% share of the market. A policy of actively promoting its products abroad and new marketing initiatives made it possible to increase export sales by 9% compared with 2002. Sales volume amounted to 1 million hectoliters. The sales volume of Baltika brand beer reached 8.5 million hectoliters and thanks to these results Baltika became one of the leading European brands. As a confirmation of the Company's success in achieving export sales, the Ministry of Economic Development and Trade of the Russian Federation has for the second year in a row designated the Company as Best Russian Exporter of the Year.  
These sales successes were supported by an expansion of production capacity through the start-up of new breweries in Samara and Khabarovsk which turn out high quality products.These two facilities carried out successful market introductions of two regional brands, Samara and DV, which won for themselves leading positions in their respective local markets in a short period of time. The Samara brand was designated the Golden Brand of Samara oblast for 2003 and became a leader on its regional market with a 12% market share. In the 9 months following its appearance on the Far Eastern regional market, the brand DV became the undisputed leader of that market with a 10% share. DV Klassicheskoye received the gold medal at the Amur Trade and Industry Fair. Together with the dynamic growth in sales of Carlsberg beer made under license, sales from new varieties of beer during their first year of sales reached 5.2% of the Company's overall sales for the year.  
The Company's main brands are market leaders in Russia: Baltika is brand N1, while Arsenalnoye figures among the top three. For the second year running Arsenalnoye occupies third place in Russia according to volume consumed. In 2003 its sales grew by 17% compared to the previous period, and its market share amounted to 5.9%.  
The Company's stable financial status and competitive advantages were acknowledged in the credit ratings which it has received. The «Rating Agency Interfax», which cooperates with Moody's Investors Service, has given OAO «Baltika Brewery» a long term credit rating of ??3 (rus) and a short term credit rating of RUS-1, while Dun & Bradstreet accorded the Company its highest credit rating of 5?2.  
 
The Company believes that all the projects launched in 2003 and new marketing initiatives will provide positive results in the course of 2004. During the first half of 2004 there are plans to complete the reorganization of the system of sales with a view to attaining 100% penetration in the retail sales network and strengthening its control over route to market and price formation. For the start of the beer season advertising and image support of the brands will be stepped up within the concept “The very best in contemporary Russia”. During the year we will update the packaging of the main brands, new varieties of beer will be put on the market, and the portfolio of all brands in the Company will be optimized. There are also plans for strengthening the Company's position in the premium segment by developing the Carlsberg and Parnas brands and significantly raising its share of the draught beer market.  
1 In the second half of 2003 the decision was taken to stop dealing separately with deposits on bottles and instead to include the bottles sold as product in general sales figures; in this new regime the purchase costs of packaging are included in the cost of goods sold. For 2003 and 2002 results to be comparable the influence of these changes has been eliminated.

Public Relations Department

???«Baltika Brewery»

+ 7 812 326 66 37     + 7 812 326 66 73

www.baltika.ru     pr@baltika.ru


 

 

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