Börsiteade

Pealkiri

Baltika's Financial Results, 1 quarter 2011

Teade

On the whole, Baltika Group's performance in the first two months of the first
quarter of 2011 corresponded to the company's expectations while March proved a
disappointment. Although the third month of the year seems to have been a
failure for the fashion industry across Europe, we have to admit that growth in
the proportion of goods of the new season proved notably smaller than
anticipated, particularly in the retail markets of Eastern Europe where the
result fell 250 thousand euros short of expectations. Considerably smaller
sales of high-margin products, the weakening of the Ukrainian hryvna against
the euro and some non-recurring expenses of around 160 thousand euros caused a
result that was atypically poor for March, remaining 500 thousand euros below
target. 

According to management's estimates, the dramatic deterioration in the
achievement of operating targets will be limited to one month, March. Operating
results for April will again be in line with the company's expectations and
plans. 

The Group's sales and the profitability of its retail system continued to
improve in the first quarter of 2011. After a period of two years, this was the
second consecutive quarter of sales growth: compared with the first quarter of
the previous year the Group achieved 9% retail sales growth although the sales
area was 8% smaller on average. Strong sales growth coupled with increased
efficiency and an improved gross margin allowed ending the first quarter of
2011 with a 15% larger gross profit (5,891 thousand euros). 

The gross margin for the first quarter of 2011 was 50% (Q1 2010: 46%), which is
attributed to the recovery of consumer spending and better inventory and
discount management 

The Group's sales per square metre (sales efficiency) grew by 18%. The
indicator improved in all of the Group's retail markets, particularly in
Lithuania (up 23%) and Latvia and Ukraine (up 21%). At the level of the stores,
the Group's retail system generated a profit of 312 thousand euros compared
with a loss of 63 thousand euros incurred in the first quarter of the previous
year. 

Baltika ended the first quarter of 2011 with a net loss of 2,364 thousand
euros. Although the net loss for the first quarter of 2010 was 2,027 thousand
euros, on a comparative basis the result for the first quarter of 2011 is 602
thousands euros , i.e. 22% better. The figure for the previous year was
improved by the divestment 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. Moreover, in 2010 movements in foreign exchange rates had a
positive impact: in the first quarter of 2010 AS Baltika earned a foreign
exchange gain of 514 thousand euros in contrast to a foreign exchange loss of
169 thousand euros incurred in the first quarter of 2011. 

Although in general operating results are following a positive trend,
management has decided to adopt resolute measures in response to the negative
results for March: 

-It has been decided that the Group will discontinue its operations in the
Polish market as of 31 July 2011. A provision for the expenses that might be
incurred on closing the Polish operations was made already in 2010. Therefore,
the discontinuance of operations should have no one-off negative impact on the
Group's results; 

-During the period until the year-end, the management board will cut general
administrative and operating expenses by at least 320 thousand euros; 

-The stores that perform below expectations will remain under careful scrutiny.
In the first half of 2011, the Group will close five stores (four of them were
closed in the first quarter) and in the second half-year a further six
(including four in Poland). This will have a significant positive impact on the
profitability of the retail system; 

-Management of the Russian market will be strengthened;

-The Group's brand management processes will be analysed so as to find
additional opportunities for increasing revenue and cutting expenses. 

In the first quarter of 2011 the Group reinforced its top management: in
January the position of retail operations director was filled by Luke Dobbs who
has extensive industry experience from British retail chains and in February
the position of chief financial officer was taken over by Maigi Pärnik who has
a strong finance and IT background. The Group is also developing a centralised
visual merchandising function. 

With the assistance of the international consulting firm Roland Berger, in
summer 2010 Baltika developed its strategy until 2014. In the preliminary phase
in 2011 the Group will develop and implement the required strategic tools and a
development plan with a view to becoming a profitable growing international
clothing business by 2014. 

In the current year, Baltika will focus on the following projects:

-refreshing the Monton and Mosaic brands as well as their retail concepts in
partnership with the international creative agency Dan Pearlman and gradually
renovating the stores; 

-the test version of the Monton e-shop;

-discontinuing Mosaic's children's collection and increasing the brand's
ladieswear collection; 

-developing Baltman's special-order suit service - increasing the offering of
quality products aimed a specific customers in both Estonia and foreign
countries; 

-preparing for Ivo Nikkolo's international growth;

-multi-channelling or preparing for growth through different sales channels.

The company's management board has proposed to the shareholders that the
company issue an additional 3,150 thousand shares at an issue price of 1 euro
each. The funds raised through the share issue will be used as supplementary
financing for the Group's re-emerging growth. In cooperation with the
international creative agency Dan Pearlman, Baltika is refreshing its two
larger brands, Monton and Mosaic, and their retail concepts. The new concepts
will gradually be adopted on revamping the Group's existing stores as well as
opening new ones. The extra funds will also be used for financing some
development projects that are in their preparatory stage and making additional
purchases in response to growing sales. 

The company expects that in the next quarters of 2011 sales will continue
growing and efficiency will continue improving across all its markets.
According to management's estimates, the summarized result for the next nine
months of the year will be positive. 

REVENUE

Baltika Group ended the first quarter of 2011 with revenue of 11,771 thousand
euros, a 7% increase year-over-year. 

Revenue by business segment



                Q1 2011  Q1 2010   +/-
Retail           10,755    9,924    8%
Wholesale           845    1,028  -18%
Rent                110       85   29%
Subcontracting       54        0    0%
Other                 7       11  -36%
Total            11,771   11,048    7%

RETAIL

Retail revenue for the first quarter of 2011 amounted to 10,755 thousand euros,
a 8% increase year-over-year, growing for the second consecutive quarter (Q4
2010: +7%). In the first quarter of 2011 retail revenue grew in Latvia (25%),
Estonia and Russia (14%). In Lithuania, retail revenue remained stable compared
with the same period in 2010 and in Ukraine and Poland retail revenues
decreased somewhat. The latter developments are attributable to substantial
cutbacks in the sales area: due to the restructuring of the store network the
sales area has decreased by around 20% in both Lithuania and Ukraine and
roughly 16% in Poland. 

Retail sales by market



           Q1 2011  Q1 2010   +/-  Share, Q1 2011
Estonia      2,808    2,460   14%             26%
Russia       2,543    2,225   14%             24%
Lithuania    2,118    2,121    0%             20%
Ukraine      1,494    1,583   -6%             14%
Latvia       1,490    1,192   25%             14%
Poland         302      343  -12%              3%
Total       10,755    9,924    8%            100%

BRANDS

In terms of brands, the largest proportion of Baltika's retail revenue is
generated by Monton whose retail sales for the first quarter of 2011 accounted
for 52% of the Group's total retail revenue. Mosaic contributed 32%, and
Baltman and Ivo Nikkolo 8% each. 

The brands' sales results and efficiency indicators have improved
significantly, affirming that the economic environment and consumer sentiment
have stabilised and the improvements made to the Group's collection development
process and management of the retail system have been effective. The brands'
marketing activities have been reinforced with a strong focus on enhancing both
visual and customer communication by creating more attractive window displays,
being more active in using different communication channels, etc. 

In the first quarter of 2011, retail sales of Monton totalled 5,641 thousand
euros. Compared with the same period in 2010, sales grew by 8% while the sales
area contracted by 8%. 

Although Mosaic's target customer group has shown a slower recovery from the
crisis, Mosaic's sales and efficiency indicators have improved - retail sales
for the first quarter of 2011 amounted to 3,417 thousand euros, a 2% increase
year-over-year while the sales area shrank by 12% and sales per square metre
grew by 12%. 

Mosaic plays an important role in Baltika's wholesale operations. In the first
quarter of 2011 it contributed 69% to the Group's total wholesale revenue. The
continuously increasing pre-orders of Peek & Cloppenburg, one of the largest
European department store chains, have transformed Mosaic into an international
European clothing brand. In addition to Mosaic's brand stores in Estonia,
Latvia, Lithuania, Ukraine and Russia, the brand is on sale in 29 cities in ten
European countries. The Mosaic collection is carried by 11 Peek & Cloppenburg
department stores in Germany, ten in Austria, eight in Poland, three in
Slovakia, two in Slovenia and Croatia, and one in the Netherlands, the Czech
Republic, Hungary and Romania each. 

Baltman's retail revenue for the first quarter of 2011 was 810 thousand euros,
18% up year-over-year, achieved on a sales area that was 17% smaller than a
year ago. Baltman's sales efficiency has improved by 29%, reflecting recovery
of demand for men's fashion and more efficient management of the retail
business. The collection rejuvenation process started last year is yielding
good results. 

Baltman's special-order suit service launched in 2010 has already found loyal
clientele in Estonia and the brand will expand with the service to Latvia and
Lithuania. The special-order suit service offers the customer an opportunity to
obtain a suit made of specially ordered fabric according to the customer's own
specifications. 

Ivo Nikkolo sustained steady performance throughout the economic downturn,
posting strong growth also in the first quarter of 2011. The brand's retail
revenue rose to 882 thousand euros, a 43% improvement year-over-year, while the
sales area contracted by 5%. In the first quarter of 2011, the brand's sales
per square metre grew by 41% and comparable store sales by 27%
(year-over-year). 

STORES AND SALES AREA

At the end of the first quarter of 2011, Baltika had 116 stores in six
countries with a total sales area of 23,961 square metres, 15 stores and 2,217
square metres less than a year ago. In the first quarter of 2011, the Group
closed four stores: two in Lithuania, one in Ukraine and one in Russia. The
Group will continue monitoring the profitability of the stores and streamlining
its retail system. 

Stores by market



                       31.03.2011  31.03.2010
Estonia                        30          32
Lithuania                      29          36
Russia                         22          23
Ukraine                        16          20
Latvia                         15          15
Poland                          4           5
Total stores                  116         131
Total sales area, sqm      23,961      26,178

WHOLESALE

Baltika's wholesale revenue for the first quarter of 2011 amounted to 845
thousand euros, a 18% decrease from the first quarter of 2010. On the other
hand, wholesale revenue from sales to comparable customers grew by 39%. In the
first quarter of 2010, 41% of the Group's wholesale revenue was generated by
the products of AS Virulane; to date the brands of AS Virulane have been
divested. 

The most notable sales growth was achieved in the 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 first
quarter 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 growth has also been supported by the opening of Stockmann's new
stores in the Russian market (particularly the flagship store in St
Petersburg). 

FINANCIAL PERFORMANCE

Operating expenses will remain under careful scrutiny also in 2011 but the
Group does not expect further cost savings. Economic recovery in Baltika's
target markets has triggered a rise in lease and labour expenses and
preparations for a new growth cycle require additional expenditures and
investments. Distribution expenses for the period grew by 1% to 7,028 thousand
euros. In the retail system, lease expenses remained at the same level as in
the previous year but charges per square metre increased. In 2010 many leases
entailed temporary crisis-induced discounts which to date have ended. 

In the first quarter of 2011, Baltika earned a gross profit of 5,891 thousand
euros, a 15% increase year-over-year on a sales area that was 8% smaller on
average. The vigorous growth may be attributed to a significantly improved
gross margin. The Group's gross margin for the first quarter was 50% (Q1 2010:
46%). 

First quarter operating loss from the core business was 2,095 thousand euros
against 2,004 thousand euros for the first quarter of 2010. The figure for the
previous year was improved by the divestment 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 quarter of 2010 movements
in foreign exchange rates had a positive impact and AS Baltika earned foreign
exchange gain of 304 thousand euros in contrast to a foreign exchange loss of
189 thousnd euros incurred in the first quarter of 2011. Comparative operating
loss (excluding the effects of a non-recurring sales transaction and movements
in foreign exchange rates) for the first quarter of 2011 was 658 thousand
euros, i.e. 26% smaller than a year ago. 

The Group's finance costs for the first quarter of 2011 were 287 thousand
euros, 25% up year-over-year. The largest finance cost item was interest
expense. At the end of the first quarter of 2011, the weighted average loan
interest rate for the Group's loan portfolio was 6.13% (Q1 2010: 5.39%). 

Baltika Group ended the first quarter of 2011 with a net loss of 2,364 thousand
euros. The net loss for the first quarter of 2010 was 2,024 thousand euros.
Comparative net loss for the first quarter of 2011 (excluding the effect of a
non-recurring sales transaction and movements in foreign exchange rates) was
602 thousand euros, i.e. 22% smaller than a year ago. 

FINANCIAL POSITION

At 31 March 2011, Baltika Group had total assets of 37,636 thousand euros, a 5%
decrease compared with 31 December 2010. 

Trade and other receivables remained stable compared with the previous
year-end, totalling 3,120 thousand euros at the end of the first quarter. Trade
receivables decreased by 2% to 1,280 thousand euros. The net amount of trade
receivables includes the allowance for doubtful receivables of 34 thousand
euros. 

At the end of the first quarter, inventories totalled 10,209 thousand euros, a
decrease of 595 thousand euros, i.e. 6% compared with the previous year-end. 

Trade payables as at the end of the first quarter stood at 4,994 thousand
euros, a 640 thousand euro increase on the year-end figure. 

At the end of the first quarter, the Group's net debt (interest-bearing
liabilities less cash and bank balances) was 19,333 thousand euros. The
year-end net debt to equity ratio was 190%. The Group's equity as at 31 March
2011 amounted to 10,158 thousand euros. 

INVESTMENT

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

PEOPLE

At 31 March 2011, Baltika Group employed a total of 1,418 people (31 December
2010: 1,419): 801 (799) in the retail system, 433 (442) in manufacturing and
184 (178) at the head office and logistics centre. The period's average number
of staff was 1,400 (Q1 2010: 1,672) 

Employee remuneration expenses for the first quarter of 2011 totalled 2,614
thousand euros (Q1 2010: 2,708 thousand euros). The remuneration of the members
of the supervisory council and management board totalled 80 thousand euros (Q1
2010: 80 thousand euros). 

In the reporting period, the composition of the management board changed: Maigi
Pärnik-Pernik stepped up as chief financial officer and member of the
management board of AS Baltika on 30 March. Meelis Milder, Maire Milder, Boriss
Loifenfeld and Andrew James David Paterson continue as members of the
management board. The former chief financial officer and member of the
management board Ülle Järv has been appointed the internal auditor of AS
Baltika effective as of 1 May. 

KEY FIGURES OF THE GROUP (Q1 2011)



                                     31.03.2011  31.03.2010     +/-
Revenue                                  11,771      11,048    6.5%
Retail sales                             10,755       9,924    8.4%
Share of retail sales in revenue            91%         90%        
Number of stores                            116         131  -11.5%
Sales area (sqm)                         23,961      26,178   -8.5%
Number of employees (end of period)       1,418       1,647  -13.9%
Gross margin                              50.0%       46.4%        
Operating margin                         -17.8%      -18.1%        
EBT margin                               -20.1%      -18.3%        
Net margin                               -20.1%      -18.5%        
Current ratio                               1.4         0.8   76.0%
Inventory turnover                         6.03        3.99   51.1%
Debt to equity ratio                     192.9%      225.5%        
Return on equity                         -72.4%      -67.8%        
Return on assets                         -21.5%      -17.7%        



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 COMPREHENSIVE INCOME

(unaudited, thousand)



                                      Q1 2011  Q1 2010
                                                      
Revenue                                11,771   11,047
Cost of goods sold                     -5,880   -5,923
Gross profit                            5,891    5,124
                                                      
Distribution costs                     -7,028   -6,949
Administrative and general expenses      -743     -706
Other operating income                      6      587
Other operating expenses                 -221      -60
Operating loss                         -2,095   -2,004
                                                      
Finance income                             21      210
Finance costs                            -287     -230
                                                      
Loss before income tax                 -2,361   -2,024
                                                      
Income tax expense                         -3       -3
                                                      
Net loss                               -2,364   -2,027
Loss attributable to:                                 
Equity holders of the parent company   -2,364   -2,042
Non-controlling interest                    0       15
                                                      
                                                      
Other comprehensive income                            
Currency translation differences          133       29
                                                      
Total comprehensive loss               -2,231   -1,998
Comprehensive loss attributable to:                   
Equity holders of the parent company   -2,231   -2,013
Non-controlling interest                    0       15
                                                      
                                                      
Basic earnings per share                -0.09    -0.11
Diluted earnings per share              -0.09    -0.11





CONSOLIDATED STATEMENT OF FINANCIAL POSITION                                    
(unaudited, thousand)                                                           
                                                          31.03.2011  31.12.2010
ASSETS                                                                          
Current assets                                                                  
Cash and bank                                                    262         823
Trade and other receivables                                    3,120       3,119
Inventories                                                   10,209      10,804
Total current assets                                          13,591      14,746
Non-current assets                                                              
Deferred income tax asset                                        838         838
Other non-current assets                                         761         780
Investment property                                            7,069       7,069
Property, plant and equipment                                 11,539      12,121
Intangible assets                                              3,838       3,898
Total non-current assets                                      24,045      24,706
TOTAL ASSETS                                                  37,636      39,452
                                                                                
EQUITY AND LIABILITIES                                                          
Current liabilities                                                             
Borrowings                                                     2,067       2,125
Trade and other payables                                       7,588       6,981
Total current liabilities                                      9,655       9,106
Non-current liabilities                                                         
Borrowings                                                    17,819      17,953
Other liabilities                                                  4          37
Total non-current liabilities                                 17,823      17,990
TOTAL LIABILITIES                                             27,478      27,096
                                                                                
EQUITY                                                                          
Share capital at par value                                    20,129      20,129
Share premium                                                  1,366       1,332
Reserves                                                       2,784       2,784
Retained earnings                                            -11,305      -4,961
Net loss for the period                                       -2,364      -6,344
Currency translation differences                                -614        -746
Total equity attributable to equity holders of the             9,996      12,194
 parent                                                                         
Non-controlling interest                                         162         162
TOTAL EQUITY                                                  10,158      12,356
TOTAL LIABILITIES AND EQUITY                                  37,636      39,452



Maigi Pärnik

CFO, Member of the Management Board

+372 630 2731

[email protected]