Russia & Ukraine: BBH announced another year of strong volumes and profit growth

Baltic Beverages Holding AB (BBH) announced on February 14 its full year and fourth quarter 2005 results:

• Total volume growth of 12% to 4153 ML
• Russian market share of 36.3%, up 2.1%pts
• Net sales (EUR) up 21%
• EBIT (EUR) up 26%
• Progress on integration plans in Russia
• Dividend payout of 115MEUR (+15%)


CONFIDENCE IN CONTINUED PERFORMANCE IN 2006
The company said: “We expect the Russian market to grow at 3-5% in the medium term and we aim to gain value share within this market, while achieving price increases just below the local food and beverage price inflation. Having seen an outstanding margin improvement in 2005 we believe that margins in 2006 will be stable at around 20%. “

STRONG BEER VOLUME GROWTH THROUGHOUT THE GROUP

BBH significantly outperformed the Russian market in 2005, on average growing at twice the market rate and in doing so growing market share in Russia by 2.1%pts. BBH remains the clear market leader in Russia with strong positions across all market segments.

Improving trend in Ukraine
With market growth of 25%, Ukraine has further established itself as one of the largest and most vibrant European beer markets. It continues to grow strongly from a comparatively low per capita consumption level and represents an excellent growth opportunity for BBH.

In Ukraine BBH had experienced some volume and market share loss in the first half of 2005. Through the combination of continued re-organisation of the sales and distribution system and a fully operational new brewery, the second half of the year showed the reversal of the negative trend of the first half. For the full year BBH Ukraine sales volumes grew by 13% against market growth of 25%, resulting in market share of 19.1%.

Leadership in the Baltics maintained
All three Baltic State markets showed positive development in 2005: the Estonian market grew by 13%, Lithuanian by 8% and Latvian by 3%. In total, Baltic markets grew by 8% compared to 2004. BBH remains the clear market leader with combined share of 41.6%, despite a volumes increase slightly below the market. Our focus on brand development and margin growth has resulted in further profitability improvement.

Impressive growth in Kazakhstan continues
The Kazakhstan beer market continues its rapid growth showing +25% in 2005. BBH has significantly outperformed at twice the market rate in 2005 and reached a market share of 25.3%. BBH has maintained and extended its leadership in the market with a strong brand portfolio, wide distribution network and capable management team. We will double capacity in 2006.

PRICE/MIX
Price development was strong. BBH was able to grow prices per SKU by 8.2% in local currency. Mix development led to 1.5% reduction driven by the growth of the PET sector ahead of other packaging segments. It is important to note though that we have seen the packaging mix lessen as the year has progressed.

MARGINS
BBH’s EBIT margin has improved by 80 basis points across 2005 to 19.9% from 19.1%. Margin growth has been driven largely by improvements in administration and production, including best practice initiatives across the business. This is partly offset by investment in sales and distribution resource as part of our strategy to drive volume and market share gains in BBH’s markets.
“We are expecting margins to be stable at around 20% in 2006.”

RUSSIAN INTEGRATION PROPOSAL
BBH announced in January 2006 plans on the proposed legal integration of its Russian businesses. The purpose of the integration is very clear – to create full value for all our shareholders by bringing our businesses in Russia closer together to ensure we exploit our unrivalled scale and geographic footprint and benefit from best practice.

The merger is expected to generate annualised synergy savings of $60mln to $80mln in first full year after completion, mainly coming from best practice improvements and cost savings. Approximately one-third of this amount has already been achieved in 2005 and part of synergies to be reinvested in growth.

BBH has confirmed its commitment to the Russian beer market by reiterating that it will take shares in the enlarged Baltika in exchange for its shares in each of Pikra, Vena and Yarpivo rather than cash.

OUTLOOK

Christian Ramm-Schmidt, BBH Managing Director commented; ‘Excellent results of 2005 once again demonstrate the underlying strengths of our businesses, brands and business model. BBH has further improved its position and continued to be the undisputed leader in Russia, Baltics and Kazakhstan. Ukraine has been a very challenging market; and we remain committed to improving our position there in 2006.

We are glad to notice that at this early stage we have already seen the first benefits from the operational integration in Russia coming through and first synergies achieved. We will continue to build a National Champion in the coming year and are confident that the merger of Baltika, Vena, Yarpivo and Pikra will deliver clear benefits to all shareholders.

Overall, BBH sees good prospects for all its markets and believes that it is well positioned to continue its profitable growth in 2006.’

Baltic Beverages Holding AB (BBH) is a 50:50 owned joint venture between Carlsberg Breweries A/S and Scottish & Newcastle plc. BBH operates 18 breweries in six countries in Eastern Europe, including Russia where it is the market leader with a 36% market share.

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