Business results For PTA Group the past financial year was one of pivotal change. Our traditional business segment - manufacturing and distribution of women's apparel started generating a profit thanks to streamlining and a change in strategy and we expanded to the Lithuanian, Ukrainian and Russian retail markets. In October 2006 we acquired a 100% stake in Silvano Fashion Group AS, a multinational holding company, and diversified into a new business segment - lingerie manufacturing and distribution. The transaction created significant intra-Group synergies. From now on, our manufacturing entities are going to focus on manufacturing our own-brand products and the subsidiaries which are engaged in distribution are going to focus on distributing those products in the markets in which they operate. The vertically integrated Group will retain up to two thirds of the end-price of the lingerie and apparel produced by the Group. Profit PTA Group ended 2006 with consolidated net sales of 422.7 million kroons, an almost 3.7-fold improvement on the prior financial year. Operating results were significantly enhanced by the consolidation of SFG from 1 October 2006 - approximately 68% of our year-on-year sales growth may be attributed to the consolidation of SFG. In addition, results were positively impacted by rapid growth in the Baltic and Russian lingerie and women's apparel markets, which are our primary sales markets. Consolidated operating profit surged to 79.0 million kroons, a 4.7-fold increase on 2005. The acquisition of SFG boosted the Group's operating profit by 69.6 million kroons. Consolidated operating margin improved from 14.7% to 18.7%. Consolidated net profit amounted to 45.0 million kroons against 10.7 million kroons in 2005 and the period's net margin was 10.6% (2005: 9.3%). In terms of segments, 36.9 million kroons of net profit resulted from lingerie sales and 8.1 million kroons from the sales of women's apparel and subcontracting services. Balance sheet In 2006 consolidated assets grew 15.6 times to 812.1 million kroons. Both assets and liabilities increased mainly on account of the acquisition of SFG although expansion to new markets also played a role. Trade receivables remained at an ordinary level, considering that SFG's subsidiaries Milavitsa and Lauma Lingerie sell their products mostly on a credit basis. Inventories experienced a 9-fold increase. Compared to the prior year-end, at 31 December 2006 inventories of women's apparel and lingerie were approximately 30% and 17% larger respectively. Inventory growth results primarily from expansion to new markets - year-end inventory balances include the stocks manufactured for new stores which were opened at the beginning of 2007. In connection with the expansion of the retail network, the Group made rental prepayments for store premises which increased other receivables and prepayments. Property, plant and equipment and intangible assets increased by 171.7 million kroons, mostly in connection with the acquisition of SFG. Current liabilities increased approximately 4.8 times compared to the end of 2005. At 31 December 2006 trade payables were slightly below the ordinary level. Substantial growth in tax liabilities and other payables including payables to employees results from the consolidation of SFG, but remain on an expected level. Current and non-current loans and borrowings increased by 24.0 million kroons. Loans received and loans repaid during the period amounted to 32.0 million kroons and 29.5 million kroons respectively. The figures for loans received and repaid include the transformation of two non- current loans received at the beginning of 2006 into a short-term loan of 7.6 million kroons. In connection with the acquisition of SFG, year-end loans and borrowings increased by 24.7 million kroons. The figure includes finance lease liabilities of 16.2 million kroons and other loans and borrowings of 8.5 million kroons. Equity increased more than 40-fold, surpassing the 631.6 million kroon threshold. As a result of a share issue, share capital increased by 360.0 million kroons and share premium by 42.0 million kroons. Sales by business segments In millions of kroons 2006 2005 Change Women's apparel 111.1 89.2 +24.6% Lingerie 270.2 0 - Subcontracting services 41.4 25.3 +63.6% and other sales Total 422.7 114.5 +269.2% In connection with the acquisition of SFG, the Group acquired a new business segment - lingerie which accounted for 64% of consolidated net sales in 2006. Sales by markets In 2006 our main markets and sales volumes changed considerably. If previously the principal markets were the Baltic countries and Finland, the acquisition of SFG supplemented them with Belarus and Russia. In 2006 the economic environment was favourable in all our primary markets. The fastest economic growth was posted by the Baltic countries: Lithuania 7.4%, Estonia 11.4% and Latvia 11.7%. Although triggered largely by strong domestic demand, economic growth has increased the customers' purchasing power. In 2006 our sales in the Baltics grew by 65%, 46% of this resulting from growth in the sales of women's apparel and 54% from diversification into the lingerie business in the fourth quarter of 2006. Rapid economic growth continued also in Russia (6.7%) and Ukraine (7.0%). If for PTA Group penetration of the Russian market at the end of 2006 was a new experience, for the subsidiaries of SFG Russia has been the main market for a long time. In 2006 sales growth in the new markets stemmed from growth in lingerie sales. Retail operations In the reporting period retail sales grew by 95% to 124.5 million kroons; 76% of the growth is attributable to the addition of lingerie sales and 24% to the sales of women's apparel. In connection with expansion, one of the priorities is to improve retail sales of lingerie and women's apparel in Russia and other CIS countries. As a result of the acquisition of SFG, since the fourth quarter of 2006 the Group has been operating not only the women's fashion chain PTA but also lingerie chains Oblicie, Splendo, Lauma and Milavitsa. We have retail premises in Estonia, Latvia, Russia, Belarus and Poland. At the end of 2006, PTA and Oblicie were preparing for penetration of the Lithuanian and Ukrainian retail markets. In 2006 the relative importance of retail markets changed considerably. The proportions of Estonia and Latvia declined on account of the addition of Belarus although retail sales in Estonia grew by 26% and in Latvia by 38%. At the end of 2006 we had 51 retail outlets with a total area of 6,705 square metres. During the year the number of stores increased by 40 and sales space grew 2.5 times. We opened 15 new stores with a total sales area of 1,745 square metres and acquired 25 stores with a total of 2,272 square metres through business combinations. Market PTA Oblicie Other Total Sales stores stores stores area, sq m Estonia 7 - - 7 1,738 Latvia 4 - 2 6 1,142 Poland - - 7 7 307 Belarus - - 16 16 1,773 Russia 2 13 - 15 1,745 Total 13 13 25 51 6,705 Sales by the PTA chain totalled 78.2 million kroons, 22% up on 2005. By the year-end the PTA chain comprised 13 stores with total retail premises of 3,020 square metres (31 December 2005: 2,646 square metres). At the end of the reporting period, we opened our first two PTA fashion stores in Russia. At the year-end, the Oblicie chain had 13 stores in Russia. The chain's total retail area is 1,313 square metres and the first store was opened in May 2006. Fourth- quarter lingerie sales in Russia totalled 4.3 million kroons. In November 2006 SFG expanded to Poland where it acquired the Splendo lingerie chain. The Splendo chain comprises 7 stores with a total retail area of 307 square metres. In 2006 PTA chain's like-for-like sales grew by 28%. Like- for-like sales are sales generated by premises which were open and had the same sales space both in the reporting and a comparable preceding period. The growth in retail sales was facilitated by new collections, a successful launch of the loyal customer programme and a general rise in consumption. Year-end sales were enhanced by thriving sales of women's eveningwear and well-timed marketing campaigns. In 2006 PTA chain's sales efficiency (sales per square metre) improved by 10%. However, compared to the prior year, the rise in sales efficiency decelerated due to the penetration of new markets and the opening of new stores. In the period of launch, the sales efficiency of a store is lower than that of a well established one. During a period of active expansion, raising the efficiency of a store opened in a new market to an acceptable level may take a year or a year and a half. Information on other chains' like-for-like sales and efficiency trends is not available because Oblicie began operating in 2006 and other chains have not gathered similar prior period data. The strong results of the women's apparel segment are based on successful sales of well-received collections. Compared to prior periods, the collections of 2006 included a considerably larger proportion of casual garments whose sales have improved substantially. The impact of the sales of casual garments was especially notable during the summer months. On the other hand, the autumn collection was also warmly received and its sales were not hindered by unusually warm and good weather in the third quarter. Well-timed and -designed discounts improved sales and did not have any major effect on the segment's operating results. The loyal customer programme, which was launched in the first quarter, exceeded expectations - by the year-end over 22,000 people had joined. In addition to developing loyalty, the programme serves as an effective direct marketing channel and allows measuring the efficiency of our marketing campaigns. To improve the image and international success of the chain, in the second half of the year a new interior design concept was developed for PTA stores in association with the British company Brand Projects Ltd. The new concept will first be implemented in the PTA stores which will be opened at the beginning of 2007 in Lithuania, Ukraine and Russia Developments in the lingerie segment are discussed in the section Brief overview of new group companies. Wholesale operations In 2006, wholesale trade accounted for approximately 61% of consolidated sales revenue, contributing 256.8 million kroons. The abrupt upswing in wholesale revenue results from the acquisition of lingerie wholesalers. Historically, the main sales channel of lingerie manufacturers Milavitsa and Lauma Lingerie has been wholesaling. Milavitsa performs its wholesale operations through subsidiaries in Russia and Lauma Lingerie has long-standing relations with wholesale intermediaries. Wholesale of women's apparel grew 34%. Growth was significantly facilitated by association with the Finnish retail company Anttila OY. In terms of markets, the largest growth was attained in the Finnish market (2.5 times up) although the growth achieved in the Estonian market was considerable as well (60% up). Investment In 2006 PTA Group's capital expenditures totalled 29.5 million kroons (2005: 2.2 million kroons). In connection with the acquisition of SFG, the Group acquired non- current assets of 160.7 million kroons. Acquisitions of equipment and fixtures accounted for 52% of capital investments, majority of which was for retail premises development. Plant and equipment for manufacturing facilities accounted for 30% of capital investments. Investments in the acquisition and development of software grew substantially. In 2006 the parent reached the final phase in the implementation of new software. The Group expects to connect subsidiaries which are engaged in the sales of women's apparel in its uniform system in 2007. Milavitsa is planning to implement financial accounting software Axapta in 2007. Personnel At 31 December 2006 the Group employed 2,909 people (31 December 2005: 414 people): 2,551 in manufacturing operations (31 December 2005: 276), 177 in retail operations (31 December 2005: 64) and 181 in administration (31 December 2005: 74). During the year the number of employees increased 7 times, primarily in connection with the acquisition of SFG. At the year-end the largest number of people was working at the Group's manufacturing entities: 1,976 at Milavitsa, 476 at Lauma Lingerie and 243 at Klementi. Employee wages and salaries totalled 71.0 million kroons (2005: 33.1 million kroons). The remuneration of the members of the Group's management board amounted to 1.8 million kroons (2005: 0.8 million kroons). Outlook for 2007 The Group's overall strategy foresees simultaneous expansion of retail operations and development of lingerie and apparel manufacturing operations. The Group has adopted an expansion plan for the next four years according to which development efforts will be focused on the two main retail chains - Oblicie to market lingerie and PTA to market women's apparel. In addition, the Group will continue operating retail stores under the Lauma, Milavitsa and Splendo brand names. In the next four years we intend to expand our retail operations above all in the Russian, Belarusian, Baltic and Ukrainian markets. In 2007 we expect to: · double the number of our stores from 51 to 100; · increase our sales space more than two-fold by opening new stores: from 6,705 square metres to 15,000 square metres; and · begin implementing a new interior design concept at our existing stores. Other important objectives include improving the stores' retail sales efficiency by enhancing brand awareness and recognition, supplementing our collections, and performing consumer campaigns and other marketing events. Most of the period's capital expenditures will be directed at developing retail operations. According to plan, capital investments will amount to 31 million kroons. Our manufacturing entities will focus on manufacturing our own brand products. Sales of subcontracting services will decline in connection with an increase in own needs. Selected financial data The Group's operating results are best summarised in the following figures and ratios: 2006 2005 Change Key figures and ratios Sales revenue, in thousands of 422,682 114,524 308,158 kroons Revenue, in thousands of kroons 435,460 146,185 289,275 EBITDA, in thousands of kroons 90,676 23,600 67,076 EBIT, in thousands of kroons 79,007 16,814 62,193 Operating margin, % 18.7% 14.7% - Profit / loss for the period, in 44,990 10,661 34,329 thousands of kroons Net margin, % 10.6% 9.3% - ROA, % 10.4% 13.5% - ROE, % 19.3% 64.1% - EPS, in kroons 4.08 5.51 -1.43 Current ratio 3.63 0.95 - Quick ratio 2.28 0.24 - Inventory turnover ratio 3.31 4.26 - Underlying formulas: Operating margin = operating profit / sales revenue Net margin = net profit attributable to equity holders of the parent / sales revenue ROA (return on assets) = net profit attributable to equity holders of the parent / average total assets ROE (return on equity) = net profit attributable to equity holders of the parent / average equity EPS (earnings per share) = net profit attributable to equity holders of the parent / weighted average number of ordinary shares Current ratio = current assets / current liabilities Quick ratio = (current assets - inventories) / current liabilities Inventory turnover ratio = sales revenue / period's average inventories Consolidated balance sheet As at 31 December In thousands of kroons 2006 2005 ASSETS Current assets Cash and cash equivalents 200,460 2,831 Trade receivables 111,729 3,052 Other receivables and 45,094 2,589 prepayments Prepaid taxes 31,568 25 Inventories 230,255 25,496 Total current assets 619,106 33,993 Non-current assets Investments in equity accounted investees 78 0 Available-for-sale financial assets 1,772 0 Other receivables 2,349 750 Property, plant and equipment 172,281 10,536 Intangible assets 16,551 6,622 Total non-current assets 193,031 17,908 TOTAL ASSETS 812,137 51,901 LIABILITIES AND EQUITY Current liabilities Loans and borrowings 29,907 15,294 Trade payables 87,534 12,573 Corporate income tax liability 5,976 294 Other tax liabilities 19,369 2,476 Other payables 27,815 5,178 Provisions 12 12 Total current liabilities 170,613 35,827 Non-current liabilities Loans and borrowings 9,544 134 Deferred tax liabilities 201 66 Other liabilities 0 173 Provisions 139 143 Total non-current liabilities 9,884 516 Total liabilities 180,497 36,343 Equity Share capital at par value 379,472 19,469 Share premium 83,011 40,994 Statutory capital reserve 1,046 1,046 Translation reserve -10,710 26 Accumulated losses -987 -45,977 Total equity attributable to equity holders of the parent 451,832 15,558 Minority interest 179,808 0 Total equity 631,640 15,558 TOTAL LIABILITIES AND EQUITY 812,137 51,901 Consolidated income statement In thousands of kroons 2006 2005 Revenue Sales revenue 422,682 114,524 Other income 12,778 31,661 Total revenue 435,460 146,185 Changes in inventories of finished goods and work in progress 8,214 -5,849 Materials, consumables and services used -190,600 -41,674 Other operating expenses -68,591 -29,412 Personnel expenses -91,864 -44,037 Depreciation and amortisation -11,669 -6,786 expense Other expenses -1,943 -1,613 Total expenses -356,453 -129,371 Operating profit 79,007 16,814 Financial income and expenses Financial income 3,858 184 Financial expenses -1,371 -5,977 Net financial items 2,487 -5,793 Share of profit of equity accounted investees 44 0 Profit before tax 81,538 11,021 Income tax expense -19,362 -360 Profit for the period 62,176 10,661 Attributable to Equity holders of the parent 44,990 10,661 Minority interest 17,186 0 Earnings per share Basic earnings per share (in 4.08 5.51 kroons) Diluted earnings per share 4.08 5.51 (in kroons) Peeter Larin Chairman of the Management Board Tel + 372 6 710 700