Market announcement

Title

Baltika's unaudited financial results, first quarter 2014

Message

Baltika’s first-quarter net loss from continuing operations amounted to 910
thousand euros compared with a loss of 439 thousand euros a year ago. The Group
considers the 10% retail sales growth in Baltics as a good result, but the
Group’s overall result from continuing operations was undermined by a 23% sales
decrease in the Russian market. 

Due to the complicated situation in Ukraine and Russia, reducing Eastern
European risks became a priority. The Group considered different scenarios for
Ukraine and decided to change its model of operation. Management began looking
for a partner with knowledge about the Ukrainian market to whom the current
Ukrainian retail business could be sold and with whom a long-term franchise
agreement could be signed for sustaining a presence in the region. In
connection with the intention of disposing of the entity, the assets of the
Ukrainian sales organisation, Baltika Retail Ukraina, were reclassified to
non-current assets held for sale. 

At 31 March 2013, the assets of Baltika Retail Ukraina totalled 1,095 thousand
euros, consisting of inventories, lease prepayments and non-current assets, and
liabilities approximately in the same value, consisting mainly of trade payable
to Baltika for merchandise. Because of the unstable situation in the region,
the Group wrote the subsidiary’s assets down by 1,095 thousand euros. 

In connection with Baltika’s exit from the Ukrainian retail business, which
represented a major line of business of the Group, the first-quarter results of
the Ukrainian entity are presented as discontinued operation. The results of
the discontinued operation are reported separately from continuing operations
to allow better assessment of the performance of continuing operations. For
comparability, the figures for 2013 have been adjusted accordingly. 

The first-quarter loss of the discontinued operation amounted to 1,572 thousand
euros, including the loss of 1,095 thousand euros resulting from the write-down
of its assets. Thus, the Group’s total first-quarter loss amounted to 2,482
thousand euros. 

The Group’s first-quarter revenue grew by 496 thousand euros or 4% year over
year. The largest sales growth, 67%, occurred in e-commerce, which is
consistent with the 2014 target of placing greater focus on the development of
other sales channels. Wholesale revenue grew by 15% and retail revenue by 3%. 

First-quarter retail sales growth in the Baltics (10%) met expectations. The
region’s growth driver was Latvia (16%), followed by Estonia (9%) and Lithuania
(8%). The Baltic region posted the past five years’ best first-quarter results,
including the strongest revenue, the highest sales efficiency and the largest
gross profit per square metre. 

While performance in the Baltics can be considered satisfactory, the Group’s
overall performance was weakened by its performance in Eastern Europe.
First-quarter retail sales in the Russian market dropped by 23%. Uncertainties
about the future of the Russian economy, the weakening of the rouble and
inflation have lessened consumer confidence and impeded recovery of the fashion
industry. 

Baltika’s first-quarter gross margin was 48.6%, 3.5 percentage points down from
a year ago. The slide in the margin is partly attributable to weak sales caused
by the problems prevailing in the Russian market, which have been magnified by
the weakening of the rouble against the euro. The gross margin for the Russian
market dropped by 5.5 percentage point year over year. In addition in the first
couple of months, the margin was also affected by weaker sales during the
autumn and winter season, which increased inventories that had to be disposed
of at steeper discounts. In the Baltic region, prices remain under strong
pressure due to heightening competition and growth in retail space. 

Highlights of the period until the date of release of this quarterly report

  -- NASDAQ OMX recognized in January Baltic listed companies with the best
     investor relations and where Baltika received the prize in two categories -
     best investor relationship on NASDAQ OMX Baltic market and the best Annual
     and Corporate Governance report. Third place was achieved in both
     categories.
  -- In February the spring-summer collections of Monton, Bastion, Mosaic, Ivo
     Nikkolo and Baltman were presented in Tallinn at Moelava. UK men’s fashion
     brand Blue Inc London, who is represented by Baltika in Baltics, also
     showed its new collection. Spring mood was completed with performance of
     singer Mari Pokinen. Colourful fashion show was broadcasted live in Delfi
     TV.
  -- Baltika signed a franchise agreement on 13th of March with Spanish
     enterprise Mirworld Organization, who will open the first Monton brand
     store in Tenerife, in August 2014. Spain is the second country that Baltika
     enters with its brand as franchisor. The first two Monton franchise stores
     were opened in Belarus last year.
  -- Council decided, on 26th of March 2014, to propose to the Annual General
     Meeting of shareholders, to issue convertible bonds with bondholder option
     in the total amount of 3 million euros. Proposal is for issuance of 600
     convertible bonds with issuance price of 5,000 euros.  The subscription for
     the bonds will take place from 14th to 28th of July 2014. The bond will
     bear 6.5% interest p.a. and each bond will give its owner the right to
     subscribe 10,000 AS Baltika shares of the company with subscription price
     0.5 euros.
  -- The Annual General Meeting of AS Baltika, held on 28 April 2014, decided to
     approve the Annual report for 2013 and profit allocation to retained
     earnings. Meeting elected the auditors for auditing the financial years
     2014-2016 to be AS PricewaterhouseCoopers. Annual General Meeting decided
     to conditionally increase the share capital of the Company and to issue
     convertible bonds according to the Terms and Conditions of J-Bonds
     presented by Council.
  -- On 29 April 2014 Baltika signed an agreement by which Baltika Retail
     Ukraina Ltd (BRU) was sold to OÜ Ellipse Group. The owner of the acquirer
     is Boriss Loifenfeld, the Baltika’s adviser in Eastern European matters.
     BRU will continue cooperation with Baltika as franchise partner, contract
     was signed in 29 April for next five years. BRU’s assets and liabilities
     were sold for a price close to carrying amount and as a result of the sales
     transaction Baltika will recognise a receivable from BRU in amount of 1.25
     million euros, for what the parties have agreed a five-year settlement
     schedule. The receivable is secured with BRU’s commercial assets.
     Collectability of this receivable depends on the development of the
     Ukrainian economy and improvements in the entity’s operating results.
     Baltika will keep the impairment made in the first quarter as alloeance
     reserve for BRU receivable.
  -- In January two shops were closed – Mosaic shop in Piramida shopping centre
     in Kiev, Ukraine and Monton in Planeta shopping centre in Krasnojarsk,
     Russia. Mosaic in Tsentraal shopping centre in Jõhvi, Estonia was moved to
     the better location and to bigger area and has received positive feedback
     from customers. In March three new stores were opened in Russia – two
     Mosaic shop-in-shop stores at partners’ multibrand stores in Mega shopping
     centres in Krasnodar and Jekaterinburg and Outlet store in Peterburg, in
     Varshavsky Express centre.  In Tallinn, Estonia two shops were closed –
     temporary Outlet store in Ülemiste centre and Monton store in Viru Keskus
     shopping centre.



Consolidated statement of financial position

                                  31 March 2014  31 Dec 2013
------------------------------------------------------------
ASSETS                                                      
Current assets                                              
Cash and cash equivalents                   458          852
Trade and other receivables               1,342        1,514
Inventories                              12,410       13,751
Total current assets                     14,210       16,117
Non-current assets                                          
Deferred income tax asset                   494          494
Other non-current assets                    843        1,013
Property, plant and equipment             2,809        3,023
Intangible assets                         3,598        3,693
Total non-current assets                  7,744        8,223
TOTAL ASSETS                             21,954       24,340
                                                            
EQUITY AND LIABILITIES                                      
Current liabilities                                         
Borrowings                                2,427        3,158
Trade and other payables                  6,989        7,503
Total current liabilities                 9,416       10,661
Non-current liabilities                                     
Borrowings                                3,707        2,171
Total non-current liabilities             3,707        2,171
TOTAL LIABILITIES                        13,123       12,832
                                                            
EQUITY                                                      
Share capital at par value                8,159        8,159
Share premium                               715          684
Reserves                                  1,182        1,182
Retained earnings                         2,573        2,471
Net profit (loss) for the period         -2,482          102
Currency translation differences         -1,316       -1,090
TOTAL EQUITY                              8,831       11,508
TOTAL LIABILITIES AND EQUITY             21,954       24,340



Consolidated statement of profit and loss

                                                      1 Q 2014  1 Q 2013
------------------------------------------------------------------------
                                                                        
Continuing operations                                                   
Revenue                                                 12,171    11,675
Cost of goods sold                                      -6,254    -5,594
Gross profit                                             5,917     6,081
                                                                        
Distribution costs                                      -5,954    -5,711
Administrative and general expenses                       -717      -735
Other operating income                                       2         9
Other operating expenses                                   -74        -7
Operating loss                                            -826      -363
                                                                        
Finance income                                               0        17
Finance costs                                              -79       -93
                                                                        
Loss before income tax                                    -905      -439
                                                                        
Income tax expense                                          -5         0
Net loss from continuing operations                       -910      -439
                                                                        
Net loss for the period from discontinued operations    -1,572      -164
                                                                        
Net loss for the period                                 -2,482      -603
                                                                        
Basic earnings per share, EUR                            -0.06     -0.02
Continuing operations                                    -0.02     -0.01
Discontinued operations                                  -0.04      0.00
                                                                        
Diluted earnings per share, EUR                          -0.06     -0.02
Continuing operations                                    -0.02     -0.01
Discontinued operations                                  -0.04      0.00