Baltika Brewery’s comments on its financial results for the nine months of  2003

In the course of the first 9 months of  2003 Baltika sold  12,8 million hectoliters of beer.  In this same period the Company’s share of the beer market in Russia reached 20,8%. Export sales rose by 7%  compared with results of the 9 months of  2002 , reaching  796 thousand hectoliters. For the second year in a row Baltika has been acknowledged by the Ministry of Economic Development of the Russian Federation as the ‘best exporter’ in Russia.

The following table shows the basic economic indicators for the Company’s performance in the 9 months of 2003.

The Company’s gross sales volume rose by 1% compared to the same period in 2002. Net sales fell by 1%, mainly due to the sharp increase in excise tax at the start of 2003, which led to a slowdown in the rate of growth in the market for nonalcoholic beer products and to the reduction of sales volumes.

All the fundamental indicators demonstrate an improved performance over the first half year results. For example, whereas sales in the first half of 2003 were down by 4% on 2002 results, the 9 month results for 2003 are up by 1%. And whereas operating profit in the first half year of  2003 was 23% lower than in 2002, the new 9 month figures show the percentage decline has been cut in half to -11%. Net profit was down by 10.6% at the half year and now at 9 months it has been cut by two thirds and stands at -3%. In this way during the third quarter the Company largely succeeded in recovering of the forward development in the first quarter of the year.

Looking now at the composition of sales, we note that during 9 months of 2003 there was a significant increase in the share of beer sold in plastic bottles, which rose from 31% to 36%. The higher material cost of this type of beer production compared to glass bottles has been a factor in the decreased operating margins of the Company in 2003. The percentage share of canned product has remained essentially unchanged at 17%. In the autumn there will be major promotional campaigns to stimulate sales with prize awards.

The two new Baltika factories in Samara and Khabarovsk, which were commissioned at the start of the year, are successfully operating at levels comparable to other affiliated units and produce high quality products.  The ‘Samara’ brand has been accorded the status of a ‘Golden Brand’ in the Samara Oblast during 2003, while ‘DV Classic’ received the gold medal at the Amur Trade and Commerce Fair.

There is an ongoing reorganization of Sales with a view to achieving optimal contact with consumers and better control of product distribution and pricing. The Company was forced to revise its timetable for completing the reorganization of the trade network and added some further measures to raise the network’s efficiency. In several dozen of the largest cities in Russia commercial representations are being created. These are entrusted with the task of ensuring effective and mutually advantageous contact with consumers across the entire territory of the Russian Federation. Recruitment of commercial representatives for these offices is proceeding. Over the past six months we can see the results of this work in the constant growth of monthly sales volumes compared to like periods last year.  In September 2003 Baltika Brewery’s sales volume exceeded volume for the same month in 2002 by 10%, and October sales were 7% higher than a year ago. In September Baltika held the first national conference of its distributors. The conference set the tasks for the immediate future and reconfirmed the commitment of all parties to a constructive cooperation.

A significant factor in the Company’s reduced profitability in 2003 has been the rise in depreciation write-offs relating to large capital investments over the course of the last year, as well as the growth in the cost of energy (which constituted 15% to 30%). The Company’s production costs remained at former levels. The rise in distribution costs may be attributed to a 12% hike in railway transportation fees, given that the Company continues to assist in the transportation of its products out to the regions, as well as to the recruitment of many new sales staff.

Baltika has managed to improve on its financial performance for the half year and once again maintains a high financial efficiency.  The profit margin on operations amounted to 26.7%

Baltika Brewery

Public Relations Department

tel./fax:  +7 (812) 326 66 37    +7 (812) 326 66 73

 pr@baltika.ru   www.baltika.ru