Audited financial results for 2007
Operating environment
Legal environment
The legal environment of 2007 brought upheaval for Estonian beverage producers.
The industry's long-term strategic plans and the principles of the national
alcohol policy were disrupted by an unexpected change in the schedule for
increasing the national excise duty rates.
In 2008, the performance of Saku Õlletehase AS will be affected by the new
excise rates provided in the Alcohol, Tobacco, Fuel and Electricity Excise Duty
Act which took effect on 1 January 2008. With extremely short notice,
legislative amendments revoked the schedule for increasing the national excise
rates which had been adopted three years before, raising the Estonian excise
rate for beer among the highest in the EU.
Chaotic regional sales restrictions imposed with uncommonly short warning
hampered the industry's competitiveness, triggering beer market decline in the
second half of the year, a trend aggravated by the continuing rise of other
alcoholic beverages, especially strong alcohol.
In 2007, the Ministry of Economic Affairs and Communications drafted an
amendment to the Advertising Act which postpones the start time for beer
commercials by one hour but leaves the restrictions for strong alcohol
unchanged. The bill is currently in the Parliament.
Macroeconomic environment
In 2007, the development of the beverage industry was strongly affected by the
overall cooling of the Estonian economy in the second half of the year and
global price pressures, especially on raw materials.
Global price hikes prompted by a lack of capacities caused by rapid growth in
Asian markets have raised the prices of hop, malt, molasses and packaging. The
pressure on the prices of raw materials and an upsurge in national excise rates
generate inflation and price escalation. This, in turn, influences the domestic
consumers' brand preferences and subsequent years' market dynamics. According to
the projections of the central bank and several commercial banks, inflation will
slow down in the second half of 2008.
One of the factors that has led to the cooling of the macroeconomic environment
is the decrease in tourism which has driven the beer market since 2004 when
Estonia joined the EU. According to the Ministry of Finance, in the third
quarter of 2007 the number of foreign tourists staying in Estonia decreased by
5.5% and hotels' and restaurants' revenue growth decelerated while growth in
their operating expenses accelerated, bringing about a deterioration in
profitability indicators.
The bill prepared by the Finnish government which foresees an increase in
Finnish alcohol excise rates gives hope that the downward trend in purchases by
tourists may turn around.
Similarly to other sectors, in 2007 the fixed costs of the beverage industry
were materially affected by upward pressure on labour costs, resulting, among
other factors, from the opening of the Finnish labour market to the new member
states and the ensuing outflow of qualified labour as well as the rise of the
Estonian construction sector. The central bank does not expect a notable rise in
unemployment because labour needs in other countries will remain high. However,
we believe that the situation may be alleviated by the contraction of the real
estate and construction sector and the changes in several sectors of the
manufacturing industry, which may release a substantial number of qualified
workers.
Market and consumption
According to the Estonian Breweries' Association, in 2007 the Estonian beer
market shrank by 1.4% to 128 million litres. Compared with prior years, the beer
market seems to be stabilising against continuing rise of other alcoholic
beverages.
In the first half of the year, the beer market continued growing but the months
of the second half-year brought strong setbacks which left the overall volume at
the level of 2006. The shrinkage of the market may be explained by the overall
cooling of the economic environment, including a decrease in tourism which has
driven alcohol sales in Estonia since 2004 when Estonia joined the EU, as well
as chaotic regional sales restrictions which have caused a notable fall in the
sales of premium brands. Excise duty recovery statistics show that in 2007 sales
of vodka, wine and strong wine shot up by more than 10%.
Saku continues the leading role in Estonian beer market. According to market
research company ACNielsen, in 2007 the Estonian beer market broke down between
players as follows: Saku Õlletehase AS, the market leader, 46.3% (2006: 47.3%),
AleCoq 34.2% (2006: 33.0%), Viru Õlu 4.4% (2006: 6.2%) and private label 10.1%
(2006: 6.2%).
The largest increase was not achieved by any producer but the segment of
unbranded and supermarkets' own products or private labels whose share already
surpasses 10%, diminishing the value of the whole market. The main owners of
private labels are supermarket chains VP Market and Säästumarket.
Saku continues the leading role on quality beer market development by owning
approximately 60% share from premium and mainstream segment. According to
ACNielsen, in terms of value, the Estonian beer market of 2007 broke down as
follows: Saku Õlletehase AS, the driver of premium brands, 50.1%, AleCoq 34.8%,
Viru Õlu 3.3% and private label 5.3%.
Saku continues active expenditure on other beverages markets. During the period,
in other beverage markets, Saku production growth surpassed market general
growth. The Estonian water market expanded largely thanks to active development
of our flavoured Vichy Viva Fresh. If the market grew by 2%, sales of our water
line shot up by an exceptional 38%.
Although the cider market shrank due to the same reasons as the beer market (7%
contraction), Saku Õlletehase AS was able to increase cider sales thanks to
successful product development. While the long drink market grew by 8%
year-over-year, sales of Saku's products increased by a strong 35%.
The ice tea and energy drinks markets which are currently small and developing
continue growing. In 2007, the domestic energy drink market grew by 44% and ice
tea market by 67%. Saku entered those markets in the middle of 2007.
Highlights of 2007
Organisation:
We implemented a new corporate logo which combines Saku's brewing tradition with
the concept of product innovation and clearly positions Estonia's oldest brewery
as the leader of the local beverage industry.
We adjusted quickly to the macroeconomic and market changes of the second
half-year, achieving strong operating results in the context of less favourable
market dynamics.
Market position
We maintained our leading position in the beer market, the leading position in
the quality beer segment.
Saku's sales in other beverages market surpassed market growth and we gained the
leading position in the water market.
We remained committed to product and brand development.
In 2007, we extended our premium cocktail line Sin, launched Vichy Classique Ice
Tea and innovative long drink Zip Freezer, and supplemented our Kiss line with
strawberry and peach flavoured ciders. In addition, we launched domestic energy
drink Traffic, began producing international cider brand Strongbow Gold,
attained dramatic growth in the water market through strong sales of Vichy Viva
Fresh and re-launched Zip Grape which contains natural juice.
Exports and international relations
In the reporting period, we began exporting our premium beer Saku Kuld to the
Finnish market where it is carried in the product portfolio of the largest local
brewery Sinebrychoff.
We launched exports to Ireland and Germany and increased exports to Canada and
the USA.
We were the first in Estonia to be granted the right to produce an international
brand - Scottish & Newcastle awarded us the rights to produce international
cider brand Strongbow. In 2007, we developed and launched natural cider
Strongbow Gold.
Investments
Saku opened BBH's Baltic product development centre complete with lab equipment
and highly qualified experts, which has already yielded several product
innovations for Estonia, Latvia and Lithuania. The centre in Saku has developed
Sin cocktails, beer drink DLight, Vichy Ice Tea and Viva Fresh flavoured waters
whose sales are expanding in all Baltic countries.
Saku was the first in Estonia to implement new generation multi-pack technology
- the first plastic-based wrapping system for both cans and bottles.
Saku was the first in Estonia to implement new generation ring pull cap
technology for both beer and cider packaging.
We established a centre for the manufacture of new wine with a view to producing
ciders and other low alcohol beverages, and to ensure the availability of
natural ingredients for Strongbow Gold.
Total investments amounted to 88.3 million kroons (5.6 million euros), the main
investments were made in technology and quality development as described above.
Performance and results of operation
The management board of Saku Õlletehase AS gave a good assessment to the
business result of 2007. Compared to last year, Saku increased and diversified
its revenue base and developed its position in the beer and other beverages
market. Saku Õlletehase AS earned the highest ever operating profit in 2007,
compared to previous years.
Revenue growth was driven by a rise in the sales of premium brands and later by
above-market growth in the sales of other beverages. The increase in beer and
other beverage sales was achieved thanks to long-term strategic investment in
product and brand development. Besides good revenue growth, the business result
was affected by the improvement in operating efficiency which may be attributed
to rapid adjustment to changes in market dynamics and effective cost management
in the second half of the year. Expenses were affected by personnel, raw
material, packaging costs, which affected all domestic breweries. As the market
leader, the brewery has to uphold the value of the market in a long term
perspective by marketing activities focused on quality brands in spite of strong
and economy segment driven market in the second half of year.
Saku Õlletehase AS ended 2007 with revenue of 920.1 million kroons (58.8 million
euros), a 16% increase on 2006. Operating profit grew by 15% to 157.3 million
kroons (10.0 million euros). Revenue growth was driven by quality brand sales in
beer and other beverages market (mainly water and cider sales).
Our beverage sales totalled 92.7 million litres against 91.8 million litres in
2006. In the first half-year, beer sales were driven, first and fore most, by
premium brands which are Saku's priority and account for approximately 60% of
the premium beer market. The growth drivers included Saku Kuld, Saku on Ice,
Saku DLight and Saku Originaal. Sales were supported by innovative product and
packaging developments, especially the new generation ring pull cap and plastic
wrapping for bottles. In the third and fourth quarters, market dynamics changed.
The rise of premium brands levelled off while the sales of strong beer began
climbing.
According to market research company AC Nielsen, Saku Õlletehase AS is the
market leader in both quantitative and monetary terms. Our focus on premium
brands finds reflection in the value-based distribution of the market where our
share exceeds one half (ACNilesen: Saku Õlletehase AS 50.1%, the closest
competitor Tartu Õlletehas 34.8%).
The company was successful in exports. In 2007, exports soared by 21%,
accounting for 18% of quantitative sales. The main export markets were the other
Baltic countries. Premium beer Saku Kuld was exported to Finland where it was
distributed by the local market leader Sinebrychoff. In the third quarter, we
increased exports of Saku Kuld and Saku Originaal to Canada, the USA, and
Germany and began their export to Ireland.
Expenses increased because of sales growth. The largest rise occurred in the
cost of materials, consumables and services used, primarily on account of an
increase in the sales of goods distributed in one-way packaging. The period saw
an upswing in the prices of packaging, especially cans whose prices rose by 10%.
The growth in sales also boosted transport expenses. Raw materials costs
increased in connection with a global upsurge in related prices, a trend
affecting all European producers. Raw materials prices have rocketed because of
an upturn in beer production, led by Asian, especially the Chinese beer market.
The output of malt barley and hop does not meet the producers' needs. Increasing
demand has doubled the world market price for malt and almost doubled the price
for hop. In addition to limited capacities, barley supplies have been adversely
affected by previous year's poor crop. The rise in wheat prices has triggered a
10% increase in the price of molasses. As the rest of Estonian companies, the
company workforce expenses was higher compared to last year same period.
Net profit for 2007 amounted to 100.0 million kroons (6.4 million euros), 12%
down from 2006 due to larger first quarter divided tax expense. Dividends paid
for 2006 were the largest ever. As a result, the tax expense incurred was
approximately 50% larger than the one incurred in the same period of 2006.
Twenty-five percent of the company's shares are held by small shareholders,
mostly individuals residing in Estonia.
Fourth quarter revenue amounted to 197.3 million kroons (12.6 million euros), a
12% increase year-over-year. Operating profit for the fourth quarter amounted to
9.6 million kroons (617 000 euros) against 6.7 million kroons (0.4 m euros) for
the fourth quarter of 2006. The quarter ended in a net profit of 9.6 million
kroons (611 000 euros). The main revenue drivers were other beverages and the
main achievement maintaining the value-based share in the beer market regardless
of the overall shrinkage. The decrease in fourth quarter operating profit does
not stem from the period's operating results but the revaluation of assets
(packaging) by 20 million kroons (1.3 million euros) undertaken for financial
accounting purposes. The revaluation was based on the new Packaging Act, which
entered into force in autumn of 2005.
Future outlook
In 2008, the Estonian beverage industry and market will be influenced by a
general cooling of economy and a globally induced rise in input prices. In
addition, our beer industry will have to prepare for an abrupt increase in
excise rates, which will render the Estonian beer excise one of the highest in
Europe, and a slowdown in economic growth, which will present an additional
challenge for cost management.
The changes in market dynamics, triggered by economic downturn, challenge the
development of premium brands. The trends which became visible in the second
half of 2007 foster the rise of strong and cheap beers, a development evidenced
by an upsurge in the consumption of private label products. It is the
responsibility of Saku Õlletehase AS, as the market leader, to focus on the
development of premium products in order to help the market overcome the slump
and maintain its value and long-term development. Three years ago, when the
market was ravaged by the onslaught of Russian and Ukrainian beers distributed
in large plastic packaging, Saku helped restore the value and growth of the
market by consciously investing in the competitiveness of premium brands. As a
result, we were able to turn around the recession - the decline in value stopped
and market development resumed, delivering a positive impact on our performance.
As the oldest Estonian brewery, we have positioned ourselves as the leader of
the Estonian beer market both in terms of quality and product development. Our
long-term objective is to develop the whole market. For this, we intend to gain
and maintain the leading position in various categories of beer and different
types of packaging although our main focus will remain on the premium segment.
We will continue expansion in other beverage markets which are profitable for
us. To date, we have successfully penetrated and are strengthening our positions
in the cider, long drink, table water, energy drink and ice tea markets.
Although an environment characterised by cost hikes (excises, global price
pressures) and development restrictions (current and planned legislative
restraints) does not favour investment, we will continue investing in product
and quality development and will enhance our organisational capabilities through
various talent management programmes.
We are committed to balanced development. Our main goal is to achieve long-term
profitability in beer and beverage production through strong positions in our
strategic markets and a diverse revenue base both in terms of product types and
target markets.
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| BALANCE SHEET | | | | |
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| (In thousands) | EEK | | EUR | |
--------------------------------------------------------------------------------
| | | restated | | restated |
--------------------------------------------------------------------------------
| | 31 December | 31 | 31 December | 31 December |
| | 2007 | December | 2007 | 2006 |
| | | 2006 | | |
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| ASSETS | | | | |
--------------------------------------------------------------------------------
| Cash and cash | 15,746 | 118,876 | 1,006 | 7,597 |
| equivalents (note 2) | | | | |
--------------------------------------------------------------------------------
| Trade receivables | 88,951 | 71,944 | 5,685 | 4,598 |
| (note 3) | | | | |
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| Other receivables | 33,120 | 7,883 | 2,117 | 504 |
| and prepayments | | | | |
| (note 4) | | | | |
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| Inventories (note 5) | 57,257 | 58,771 | 3,659 | 3,756 |
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| TOTAL CURRENT ASSETS | 195,074 | 257,474 | 12,467 | 16,455 |
--------------------------------------------------------------------------------
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| Non-current assets | | | | |
--------------------------------------------------------------------------------
| Long-term | 6,100 | 7,740 | 390 | 495 |
| investments (note 6) | | | | |
--------------------------------------------------------------------------------
| Property, plant and | 280,552 | 277,788 | 17,931 | 17,754 |
| equipment (note 7) | | | | |
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| Intangible assets | 491 | 990 | 31 | 63 |
| (note 8) | | | | |
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| TOTAL NON-CURRENT | 287,143 | 286,518 | 18,352 | 18,312 |
| ASSETS | | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| TOTAL ASSETS | 482,217 | 543,992 | 30,819 | 34,767 |
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| LIABILITIES AND | | | | |
| EQUITY | | | | |
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| Current liabilities | | | | |
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| Lease liabilities | 110 | 131 | 7 | 8 |
| (note 9) | | | | |
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| Trade payables | 23,666 | 27,472 | 1,513 | 1,756 |
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| Other payables (note | 83,954 | 58,197 | 5,365 | 3,720 |
| 10) | | | | |
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| Packaging repurchase | 43,359 | 27,850 | 2,771 | 1,780 |
| provision (note 11) | | | | |
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| TOTAL CURRENT | 151,089 | 113,650 | 9,656 | 7,264 |
| LIABILITIES | | | | |
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
| Non-current | | | | |
| liabilities | | | | |
--------------------------------------------------------------------------------
| Finance lease | 239 | 376 | 16 | 24 |
| liabilities (note 9) | | | | |
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| TOTAL LIABILITIES | 151 328 | 114 026 | 9 672 | 7 288 |
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| Equity (note 12) | | | | |
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| Share capital | 80,000 | 80,000 | 5,113 | 5,113 |
--------------------------------------------------------------------------------
| Statutory capital | 8,000 | 8,000 | 511 | 511 |
| reserve | | | | |
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| Other reserves | | | | |
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| Retained earnings | 141,966 | 227,099 | 9,073 | 14,514 |
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| Profit for the | 100,923 | 114,867 | 6,450 | 7,341 |
| period | | | | |
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| TOTAL EQUITY | 330,889 | 429,966 | 21,147 | 27,479 |
--------------------------------------------------------------------------------
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| TOTAL LIABILITIES | 482,217 | 543,992 | 30,819 | 34,767 |
| AND EQUITY | | | | |
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| INCOME STATEMENT | | | | |
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| (In thousands) | EEK | EUR |
--------------------------------------------------------------------------------
| | | restated | | restated |
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| | 2007 | 2006 | 2007 | 2006 |
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| Sales revenue and other | | | | |
| income | | | | |
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| Sales revenue (note 14) | 911,685 | 770,133 | 58,267 | 49,220 |
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| Other income | 8,390 | 1,511 | 536 | 97 |
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| Total sales revenue and | 920,075 | 771,644 | 58,803 | 49,317 |
| other income | | | | |
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| Expenses | | | | |
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| Changes in work in progress | | | | |
| and | | | | |
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| finished goods inventories | -4,985 | -1,973 | -319 | -126 |
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| Cost of materials, | 360,471 | 307,321 | 23,038 | 19,642 |
| consumables and services | | | | |
| used (note 15) | | | | |
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| Other operating expenses | 252,404 | 182,063 | 16,132 | 11,636 |
| (note 15) | | | | |
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| Labour costs (note 15) | 96,149 | 85,354 | 6,145 | 5,455 |
--------------------------------------------------------------------------------
| Depreciation and | 56,415 | 58,590 | 3,606 | 3,745 |
| amortisation charges (notes | | | | |
| 7, 8) | | | | |
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| Other expenses (note 15) | 2,263 | 3,904 | 144 | 249 |
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| Total expenses | 762,717 | 635,259 | 48,746 | 40,601 |
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| OPERATING PROFIT | 157,358 | 136,385 | 10,057 | 8,716 |
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| Financial income (note 16) | 1,619 | 2,631 | 103 | 168 |
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| Financial expenses (note | 1 644 | 253 | 105 | 16 |
| 16) | | | | |
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| PROFIT BEFORE TAX | 157,333 | 138,763 | 10,055 | 8,868 |
--------------------------------------------------------------------------------
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| Income tax expense (note | 56,410 | 23,896 | 3,605 | 1,527 |
| 18) | | | | |
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| PROFIT FOR THE PERIOD | 100,923 | 114,867 | 6,450 | 7,341 |
--------------------------------------------------------------------------------
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| Basic earnings per share | 0.013 | 0.014 | 0.0008 | 0.0009 |
| (note 17) | | | | |
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| Diluted earnings per share | 0.013 | 0.014 | 0.0008 | 0.0009 |
| (note 17) | | | | |
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Additional information:
Kristina Seimann
Communication Manager
+372 6 508 400
Kristina.Seimann@pruul.ee