Baltika's Unaudited Financial Results, 2 quarter 2011

On the whole, Baltika Group’s performance in the second quarter of 2011 corresponded to the company’s expectations. The focus of the period was on improving efficiency by restructuring the Group’s retail network and streamlining the internal processes. Throughout the first half-year, the company continued to enhance its collections creation process, upgrade inventory and discount management, aim its marketing efforts more directly at the brands’ target customers and improve customer service at the stores. Thanks to determined streamlining, in the second quarter sales per square metre grew by 10%, and even more in local currencies. At the same time, store operating expenses were almost 10% smaller and costs per square metre dropped by 1.4%.

Second quarter gross margin rose to 58% (Q2 2010: 56%) and discount rates improved significantly; the average discount rate for the second quarter was 5 percentage points smaller than a year ago. Inventory turnover increased and although the world market saw an upsurge in raw materials prices (particularly cotton) and cost inflation in China was substantial, the Group succeeded in maintaining its cost to sales price ratio stable.  

Sales level with the second quarter of 2010 were achieved on an 9% smaller sales area while gross profit grew by 4% and operating expenses (distribution and administrative expenses) declined by 6%. In the second quarter, the Group’s profit centres considerably improved their performance, all brands and continuing retail markets generated a profit and total profit of the retail system grew by 57% year-over-year.

Operating loss for the second quarter of 2011 was 99 thousand euros compared with an operating loss of 511 thousand euros for the second quarter of 2010. The current year second quarter figure includes a foreign exchange loss of 94 thousand euros while in the comparative period the Group earned foreign exchange gain of 304 thousand euros. The second quarter of 2011 ended in a net loss of 444 thousand euros against a net loss of 886 thousand euros for the second quarter of 2010.

Second quarter highlights:

• The Group continued to monitor all underperforming stores and closed its Evropeysky store in Moscow. This will lower operating expenses in Russia and will increase the profitability of the retail system. At the same time, the Group opened a store in a shopping centre in Odessa, Ukraine.
• The Group reinforced management of the Russian market by hiring a professional with over 15 years of retailing experience.
• The sannual general meeting that convened on 11 May 2011 decided to increase the share capital of AS Baltika by issuing 3,150,000 additional shares with an issue price of 1 euro each. As a sufficient quantity of shares was not subscribed for, the company cancelled the issue. On 27 June 2011 the supervisory council resolved to increase the share capital of AS Baltika by the issue of 4,300,000 additional registered shares with an issue price of 0.70 euros each. The new shares are being offered to existing and new shareholders through a public offering and can be subscribed for from 19 July to 2 August. The shareholder KJK Fund Sicav-SIF has signed the obligation to subscribe for 2,142,857 shares, the shareholder E.Miroglio S.A. for 2,157,142 shares and the shareholder East Capital Baltic Fund for 333,000 shares.

The ongoing share issue is designed to support implementation of Baltika’s adopted strategy:

• Sales will be increased, mainly by improving the efficiency of existing stores, opening new stores and making more active use of additional sales channels. For this, the company will complete a refresh of the visual identities and retail concepts of the Monton and Mosaic brands, a project undertaken in partnership with the creative agency Dan Pearlman, and will begin gradual refurbishment of the stores. The new retail concepts will be applied in at least one new store in Ukraine and one in Latvia and three stores that will be taken over from a Russian wholesale partner in the Siberia region in Russia. In addition, the company will continue preparations for launching the Monton e-shop (testing has been scheduled for the fourth quarter of this year) and making new wholesale and franchise offers (the first contracts should be signed in the first half of 2012). Baltika will exit the Polish market in the third quarter of 2011 and associated sales will be discontinued in august. 
• To improve management efficiency and product development and better utilise the sales resources, a new and more effective brand and sales management structure will be implemented in the third quarter of 2011. Baltika will continue to operate with four brands but will centralise a number of activities that used to be brand-based and will streamline its matrix management structure by reducing management levels and specifying responsibilities.
• To raise the efficiency of its manufacturing operations, the Group will develop a strategic development plan for its factories. This will be done in the third quarter. Options include complete integration of the product development and manufacturing operations and transformation of the factories into an independent profit centre freely competing in the market. The purpose of both options is to continue lowering the cost of conversion. 

The Group anticipates current growth to continue in the following quarters and management’s target is to achieve a positive net result for the second half-year.

REVENUE

Baltika Group ended the first half of 2011 with revenue of 24,413 thousand euros, a 3% improvement year-over-year. Second quarter revenue was 12,642 thousand euros, a figure similar to the one achieved a year ago.

Revenue by activity

Retail

Retail revenue for the first half-year was 22,847 thousand euros, a 4% increase year-over-year. In the first half of 2011, sales grew in Latvia (17%), Estonia (13%) and Russia (5%).

Second quarter retail revenue amounted to 12,092 thousand euros, 1% up on the second quarter of 2010. In the second quarter of 2011, sales grew in Estonia and Latvia. Sales contraction in Lithuania, Ukraine, Russia and Poland is attributable to a substantial decrease in sales area and in Ukraine also the impact of movements in foreign exchange rates. In local currency, second quarter Ukrainian revenues dropped by 5% while in euros the contraction was 17% on a year-over-year basis.

Retail sales by market

Stores and sales area

As at the end of the first half of 2011, Baltika had 116 stores in six countries with a total sales area of 23,582 square metres, which is 12 stores and 2,148 square metres less than at the end of the first half of 2010. In the first half of 2011 one new store was opened in Ukraine and five stores were closed: two in Lithuania and Russia and one in Ukraine.

Stores by market

The number of stores and the sales area have decreased on account of restructuring undertaken in the retail system with a view to improving operating efficiency. The Group continues to monitor underperforming stores and will improve their results by various activities. However, to date the store network has in all material respects been streamlined and no major closures are planned (except for the closure of four stores in Poland). 

The efficiency of the retail system is reflected by sales per square metre. The indicator has improved notably across all markets except Poland where the closure of four stores is coming to an end. The strongest growth was achieved in the Lithuanian market that was hit by the downturn after the other Baltic markets and also regained growth later than the others. Estonia and Latvia are posting stable growth figures and second quarter growth in Ukraine and Russia (15% and 8% in local currency respectively) may also be considered satisfactory. However, due to unfavourable fluctuations in foreign exchange rates, euro-based growth rates are considerably smaller.  

Sales efficiency by market

* In local currency, second quarter sales efficiency grew by 8% in Russia and 15% in Ukraine while the respective figures for the first half-year were 8% and 16%.

Brands

In terms of brands, the largest share of Baltika’s retail revenue is generated by Monton whose retail sales for the first half-year accounted for 53% of the Group’s retail revenue for the first half-year. Mosaic contributed 32% , Baltman 8% and Ivo Nikkolo 7%.  

Retail revenue by brand

Monton and Batman continued to post strong growth figures: their second quarter growth rates were 5% and 10% respectively. Second quarter sales of  Ivo Nikkolo and Mosaic decreased year-over-year but mainly because of the closure of stores, i.e. shrinkage in sales area. All brands improved their efficiency indicators compared with the previous year, which may be attributed to stabilisation in the economic environment and consumer demand as well as effective streamlining of the retail system.

Sales efficiency and change in average sales area by brand

Thanks to a successful spring-summer collection, active marketing and improved visual communication, Monton, which is the largest brand in terms of revenue, was able to improve its second quarter sales efficiency by a strong 14% (on a year-over-year basis). 

The second-largest brand, Mosaic, posted a 1% improvement in sales efficiency. The figure is smaller because target customer spending in Ukraine and Russia recovered more slowly than expected and movements in foreign exchange rates were unfavourable. The purchasing behaviour of Mosaic’s target customers becomes more active during periods of special offers and discounts. This is particularly true about Ukraine but also Russia. In the Baltic countries, the impact of discounts is the strongest in Lithuania. Nevertheless, the discount rates of the second quarter and consequently the first half-year improved considerably.  

In the second quarter, Mosaic’s menswear collection posted excellent sales figures. This as well as Baltman’s strong performance was achieved thanks to improvement of the collection creation process and affirms men’s return to the stores and a rise in their purchasing activity.

Baltman’s second quarter sales per square metre grew by 28% year-over-year, reflecting the success of the collection, better planning and the economic recovery of the markets (particularly in Estonia and Latvia). The spring and summer of 2011 have been a tough time for selling men’s outerwear because spring was very short. However, this was counterbalanced by outstanding results in Baltman’s primary clothing categories - suits, jackets and shirts.

Strong results were also achieved in the sale of Baltman’s special-order suits that generated revenue of 28 thousand euros, a roughly three-fold improvement on the previous year. Thus, special-order sales accounted for 3% of the brand’s total retail revenue, which corresponds to the brand’s long-term strategic objectives.

Ivo Nikkolo performed well in the first half-year. In the second quarter, sales per square metre grew by 11%. Due to the main focus of the collection – business and outerwear – in the second half of the season demand decreased somewhat and growth remained below the exceptionally high figure achieved in the first quarter.

Wholesale

Baltika’s wholesale revenue for the first half-year amounted to 1,266 thousand euros, 15% down from the first half of 2010. At the same time, wholesale revenue to comparable customers grew by 18%. In the first half of 2010, 28% of the Group’s wholesale revenue was generated by the products of AS Virulane whose brands have to date been divested.

The largest sales growth was achieved in Western and Eastern European markets in connection with the acceptance of the Group’s products to an increasing number of Peek & Cloppenburg department stores. If in the beginning  of 2010 Mosaic was represented at 30 Peek & Cloppenburg department stores, to date the brand has penetrated a further 10 department stores and two new markets – the Netherlands and Romania. Previously Mosaic was already represented at selected Peek & Cloppenburg department stores in Germany, Austria, Poland, Slovakia, Slovenia, Hungary, the Czech Republic and Croatia. In the Austrian and Polish markets, the brand is represented in most of the chain’s department stores. Peek & Cloppenburg is one of the leading European department store chains that has more than 80 department stores in Germany and over 100 department stores across Europe. 

Wholesale to Stockmann has increased in connection with the opening of Stockmann’s new stores in the Russian market (particularly the flagship store in St Petersburg).

FINANCIAL PERFORMANCE

Distribution expenses for the second quarter decreased by 8% to 6,535 thousand euros. The retail system’s store operating expenses were almost 10% smaller than in the previous year and costs per square metre decreased by around 1.4%. The positive trend in cost development results from the restructuring of the store network, particularly the closure of Europeysky, the Group’s flagship store in Moscow, at the beginning of April.  Comparable market and store operating expenses have grown somewhat because in the previous year several lease contracts were granted crisis-induced price concessions which to date have expired. Economic recovery in Baltika’s target markets has increased pressure on lease and labour expenses but the Group considers cost control a priority and continues to scrutinise its expenses.

Administrative and general expenses for the second quarter have grown compared with the second quarter of 2010 mostly because of a rise in salary expenses (the Group has hired some new professionals with long-term international experience including the manager of retail operations and visual merchandising) and banking charges. Other operating income and other operating expenses for the second quarter were influenced by unfavourable movements in foreign exchange rates. Other operating income and other operating expenses for the second quarter of 2011 include a foreign exchange loss of 94 thousand euros whereas in the first quarter of 2010 the items included foreign exchange gain of 304 thousand euros.

The Group’s gross profit for the second quarter of 2011 was 7,315 thousand euros, a 4% increase year-over-year on a sales area that was 8% smaller on average.  The vigorous growth may be attributed to a higher gross margin. The Group’s gross margin for the second quarter was 58% (Q2 2010: 56%).

Second quarter operating loss from the core business was 99 thousand euros compared with 511 thousand euros incurred in the second quarter of 2010.

Operating loss for the first half-year was 2,194 thousand euros compared with 2,514 thousand euros for the first half of 2010. The figure for the previous year was improved by the divestment in the first quarter of the MasCara and Herold brands of AS Virulane and the sale of some items of property, plant and equipment that yielded 256 thousand euros. In addition, in the first half of 2010 movements in foreign exchange rates had a positive impact and Baltika Group earned foreign exchange gain of 840 thousand euros in contrast to a foreign exchange loss of 269 thousand euros incurred in the first half of 2011.

The Group’s finance costs for the second quarter of 2011 were 332 thousand euros, a 10% decrease year-over-year. The largest finance cost item was interest expense. At the end of the second quarter of 2011, the weighted average loan interest rate for the Group’s loan portfolio was 6.40% (Q2 2010: 5.66%).

Baltika Group ended the second quarter of 2011 with a net loss of 444 thousand euros. The net loss for the second quarter of 2010 was 886 thousand euros.

FINANCIAL POSITION

At 30 June 2011, Baltika Group had total assets of 39,867 thousand euros, 1% up on 31 December 2010.

Trade and other receivables remained stable compared with the previous year-end, totalling 2,963 thousand euros at the end of the quarter. Trade receivables decreased by 5% to 1,194 thousand euros. The net amount of trade receivables includes the allowance for doubtful receivables of 34 thousand euros.

At the end of the second quarter, inventories totalled 12,887 thousand euros, an increase of 2,083 thousand euros, i.e. 19% compared with the previous year-end. Above all, the Group has increased purchases of fabric and other materials so as to be able to respond flexibly to customer expectations and prepare for larger sales in the third quarter. Inventory turnover rate has also improved compared with the previous year.

Trade payables as at the end of the second quarter totalled 9,538 thousand euros, an increase of 2,557 thousand euros on the year-end figure. The rise is attributable to growth in inventory purchases.

At the end of the second quarter, the Group’s net debt (interest-bearing liabilities less cash and bank balances) was 19,654 thousand euros. The net debt to equity ratio was 201%. The Group’s equity as at 30 June 2011 amounted to 9,773 thousand euros.

INVESTMENT

Baltika Group did not make any major investments in the second quarter of 2011.

PEOPLE

At 30 June 2011, Baltika Group employed a total of 1,420 people (31 December 2010: 1,419): 808 (799) in the retail system, 432 (442) in manufacturing and 180 (178) at the head office and logistics centre. The period’s average number of staff was 1,406 (6M 2010: 1,602).

Employee remuneration expenses for the first half of 2011 totalled 5,258 thousand euros (6M 2010: 5,238 thousand euros). The remuneration of the members of the supervisory council and management board totalled 154 thousand euros (6M 2010: 152 thousand euros). 

ANNUAL GENERAL MEETING

The annual general meeting of the shareholders of AS Baltika that convened on 11 May 2011 approved the company’s annual report for 2010 and decided to pay the holders of preference shares dividends as provided in the articles of association. In addition, the general meeting decided to cancel four million preference shares and to replace them with registered ordinary shares and to increase share capital by 40,000 thousand kroons.

Preference shares were cancelled and registered ordinary shares were issued in accordance with Section 12 Subsection 2 Clause 3 of the Securities Market Act to the following investors:

                ING LUXEMBOURG S.A.                                               2,346,990   ordinary shares;

                AS Genteel                                                                        977,837   ordinary shares;

                OÜ Renum Invest                                                             400,000   ordinary shares;

                OÜ BMIG                                                                           125,173   ordinary shares;

                TENLION OÜ                                                                     150,000   ordinary shares;

                TOTAL                                                                            4,000,000   ordinary shares.

The annual general meeting decided to change the articles of association so that it would be possible to convert share capital and the par value of the shares from kroons to euros and to increase share capital in connection with this without making any additional contributions (through a bonus issue) by 1,917,518 euros. The conversion of the capital to euros does not affect the rights attaching to the shares or the ratio of the par values of the shares to share capital.

The change in share capital was registered in the Commercial Register on 30 May 2011. The new amount of share capital is 22,046,395 euros. The company has registered ordinary shares of one class with a par value of 0.70 euros each. 

The annual general meeting appointed PricewaterhouseCoopers as the auditor of the company’s financial statements for 2011.

In addition, the annual general meeting decided to increase  the share capital of AS Baltika by issuing 3,150,000 additional registered ordinary shares with a par value of 0.70 euros and an issue price of one euro each. Share premium was to amount to 0.30 euros per share. The new shares were offered to existing and new investors through a public offering. As investors did not subscribe for a sufficient quantity of shares, the company cancelled the share issue. 

On 27 June the supervisory council decided to increase the share capital of AS Baltika by the issue of 4,300,000 registered ordinary shares with a par value of 0.70 euros and an issue price of 0.70 euros each. The new shares are being offered to existing and new investors through a public offering and they can be subscribed for from 19 July to 2 August.

KEY FIGURES OF THE GROUP (H1 2011)

Definitions of key ratios

Gross margin = (Revenue-Cost of goods sold)/Revenue

Operating margin = Operating profit/Revenue

EBT margin = Profit before income tax/Revenue

Net margin = Net profit (attributable to parent)/Revenue

Current ratio = Current assets/Current liabilities

Inventory turnover = Revenue/Average inventories*

Debt to equity ratio = Interest-bearing liabilities/Equity

Return on equity (ROE) = Net profit (attributable to parent)/Average equity*

Return on assets (ROA) = Net profit (attributable to parent)/Average total assets*

*Based on 12-month average

Consolidated statement of financial position

Consolidated statement of comprehensive income

Maigi Pärnik

CFO, Member of the Management Board

+372 630 2731

maigi.parnik@baltikagroup.com