RAKVERE LIHAKOMBINAAT            FINANCIAL RESULTS                    25.02.2005



MANAGEMENT REPORT OF RAKVERE LIHAKOMBINAAT GROUP AND PARENT COMPANY

 

1.PREFACE



AS Rakvere Lihakombinaat is the largest meat processing company in the Baltics. 

The average number of employees of the Group was 1236 in 2004 (1326 in 2003). 

The parent company is located and registered in Estonia, County of Lääne-Virumaa, 

Sõmeru , Roodevälja Village.



The Group companies as at 31 December 2004:

                                          Country   Participation  Participation 

                                        of location    31.12.04     31.12.03

AS Rakvere Lihakombinaat(the parent company)Estonia	

AS Ekseko                                   Estonia       98,75%       98,4%

        AS Ekseko subsidiaries:

        OÜ Kurika Seafarm                   Estonia         100%        100%

        OÜ Põlva Peekon                     Estonia         100%        100%

AS Linnulihatooted                          Estonia          76%         76%

AS Rigas Miesnieks                          Latvia        93,82%      93,82%

AS Rigas Miesnieks subsidiary:

        AS Tallat                           Latvia          100%          0%

OÜ Klaipedos  maisto mesos produktai        Lithuania       100%          0%

        OÜ Klaipedos maisto mesos produktai subsidiary:

        OÜ Klaipedos Maisto Produktai       Lithuania       100%        100%

        OÜ Klaipedos Maisto Produktai subsidiaries:

          OÜ Pentinuotis                    Lithuania       100%        100%	

          OÜ Klaipedos maisto prekyba       Lithuania       100%        100%



2. THE ECONOMIC ENVIRONMENT AT LARGE AND ITS EFFECT ON THE COMPANY



On 1 May, the Baltic States joined the European Union. For the meat industry, 

accession without a transition period meant an end to the long and complicated 

period of preparation. Most industries had been preparing for years and making 

noteworthy investments to bring their manufacturing operations to the level 

required by the European Union. In the case of Rakvere Lihakombinaat and its 

subsidiary Rigas Miesnieks, investments rose to an estimated 80 million kroons 

over three years.



At the beginning of 2004, before accession to the European Union, numerous 

restrictions affecting the meat market were in effect. Latvia’s protective 

tariffs on pork imports and Poland’s subsidization of cheap pork exports to 

the Baltics had a negative effect on RLK operations at the beginning of the year.



After accession, there ceased to be restrictions on the free movement of goods. 

Customs formalities on the border were also scrapped, which made the company’s 

work much easier. Simultaneously, export to the European Union market became 

possible. At the end of the year, after market studies and sample shipments of 

products, the company’s export to what is known as the “old” European Union began 

to grow.



In the second half of the year, the prices of the company’s main raw 

ingredients—pork and beef—began rising. In the case of pork, it was conditioned 

by a prices increase throughout Europe. The marked rise in beef prices was caused 

by standardization of price levels with the EU, where the price of beef is higher 

than in the Baltic States. The company is forecasting a slow price rise for beef 

to continue.



The meat industry’s economic results were significantly affected by the 

extraordinarily poor summer of 2004, one of the primary periods of highest 

consumption. Despite the fact that summer products did not sell as well as 

forecasted, results clearly exceeded the sales volumes of 2003. In the course 

of 2004, pork and beef consumption rose slightly, while consumption of poultry 

grew faster, similarly to previous years.



Above all it is rapid growth in private consumption in the Baltics that is to be 

considered the reason behind 2004’s positive economic results. Above all, it has 

grown retail chain turnover. Large investments into the construction of new 

shopping areas and continuously growing competition between chains has kept the 

prices of meat in a pattern of gentle decline in spite of the constant increase 

of the meat industry’s expenses. The demands of commerce on industry are growing, 

and companies will have to raise their internal effectiveness to retain 

profitability. The rapid growth of commercial chains has reduced the turnover of 

marketplaces and smaller wholesalers.



 

3. ECONOMIC RESULTS



Compared to 2003, the economic results posted by Rakvere Lihakombinaat Group were 

positive. Company turnover, profits and production volumes all grew. Since the 

group is a vertically integrated enterprise—active in both basic production and 

processing—the cyclical nature of the field of activity has a significant effect 

on the group’s economic activity. In the second half of the year, which saw a rise 

in the price of pork, Ekseko’s role in shaping the firm’s profits grew markedly.



The consolidated net sales of the RLK Group totalled 1,267 million kroons (80 995 

thousand euros) – a increase of 101 million kroons (6 452 thousand euros) or 8,7%, 

compared to 2003. 

The total production output (including the by-products) amounted to 44,446 tons – 

an increase of 3 402 tons (8,3%) compared to 2003.

Even though a slow decline in the price of products persisted in 2004, the firm’s 

turnover grew a little faster than production volumes. This fact is can be 

attributed to changes in the product portfolio, especially the growth in the 

share of products marketed under the Rakvere brand name.



Rakvere Lihakombinaat 

GROUP (thousand euros)

                            2004       2003    Difference%

Net sales                 80 995     74 543     8,7%

Operating profit           6 601      3 222   104,9%

Net profit                 6 211      2 546   144,0%

The average number 

of employees               1 236      1 326    -6,8%

Investments                8 979      5 734    56,6%



PARENT COMPANY (thousand euros)

                            2004       2003    Difference%

Net sales                 63 372     60 112     5,4%

Operating profit           3 760      3 087    21,8%

Net profit                 6 211      2 546   144,0%

The average number 

of employees                 789        779     1,3%

Investments                2 346      1 771    32,5%

 



The size of the balance sheet for Rakvere Lihakombinaat Group grew by nearly 200 

million kroons (12 746 thousand euros) in 2004. Current assets and fixed assets 

grew in equal measure. Net working capital was 165 million kroons ( 10 535 

thousand euros) as of 31 Dec 2004, which is 14 million kroons (906 thousand euros) 

less than at the end of 2003. The share of external finance has grown a bit, 

making up 36% of the balance sheet (32% at the end of 2003). The rate of growth 

of the firm’s sales clearly outstripped the rise in expenses. That fact, along 

with the relatively low raw ingredient prices of the first half of the year, is 

the primary reason for the rapid growth of profits. 



RLK and its subsidiaries employed an average of 1,236 people in 2004 (1,326 in 

2003). The members of the Supervisory Board of the company received remuneration 

in the total amount of 42 thousand kroons or 2,7 thousand euros. As a rule, the 

members of the Management Board of the company form a part of the management of 

the company, and no separate remuneration is paid to them. Personnel expenses 

(wages and social security expenses) totalled 150 million kroons or 9 585 

thousand euros in 2004 (157 million kroons  or 10 034 thousand euros in 2003). 

The management of the parent company RLK received wages and salaries in the total 

amount of 5,1  million kroons or 328 thousand euros.







4. MARKET OVERVIEW, MAJOR INVESTMENTS AND DEVELOPMENT PROJECTS



Two main watchwords characterize the meat and processed meat market in the Baltics 

in 2004—increasing competition in retail and a constant growth in product 

selection, which represents a victory for the end consumer: there is no more 

room for retail price rises, and the diverse assortment offered by various 

manufacturers allows consumers to favour only the best products. To a certain 

extent, a standardization of the good selection can be seen throughout the 

Baltics. Despite the fact that there is very high loyalty to domestic goods in 

each Baltic state—80-90%—the biggest manufacturers have begun to make good on 

previous investments into production and have started to market their products 

much more actively in neighbouring states.



Retail commercial chains also contribute to standardization of the selection of 

goods; such chains are expanding across the Baltics desiring to standardize the 

portfolio of products, enabling a good outcome for producers at the same time.



The main marketing objectives for Rakvere Grupp companies in 2004 was innovation 

in the product line and cooperation with major retail chains. In Estonia, we 

introduced a new series of sliced products, which in five months made Rakvere 

the ham market leader in Estonia with 20%. In addition to sliced products, the 

line of grill sausages and wieners was overhauled almost entirely, the greatest 

hit being Rakvere grill wieners above all. The assortment of marinated meat was 

fleshed out with a trendy line of stir-frying meat. 



To sum up, Rakvere Lihakombinaat is still the clear market leader in Estonia, 

enjoying a market share in ready-to-eat products of 33.7% in October-November 

2004. The priority of advertising and other promotional activity was increased 

in 2004 in the biggest retail chains, impacting the most important phase of 

consumer decision-making by the offering of innovative solutions. 



At Rigas Miesnieks, we focused on developing the biggest product groups—cold cuts 

and wieners (market shares 19.8% and 44.8%, respectively). The sale of summer 

barbecue meat also went well. The market share of ready-to-eat products in October 

and November 2004 was 15.2%. 



One of the key activities in the last year was the creation of a new packaging 

and advertising concept, which in the longer term should ensure the strengthening 

of the Rigas Miesnieks brand name and the market position of products. There were 

many changes in the administration of Rigas Miesnieks in the second half of the 

year, with a large part of the marketing team being replaced as well. The primary 

goals of the new team are carrying out the packaging changes and increasing the 

market share in 2005.



The primary focus of Klaipedos Maisto Produktai’s sales and marketing team in 

2004 was designing and marketing the new bulk products—cold cuts, wieners and 

smoked sausages. A new packaging concept was also worked out, which reached store 

shelves at the beginning of 2005. The market share of Klaipedos Maisto Produktai 

ready-to-eat products was 2.8% in October and November 2004.



Investments in Rakvere Lihakombinaat Group comprised a record 140 million kroons 

(8 979 thousand euros) in 2004. The largest investments were channelled to Ekseko 

and Rigas Miesnieks. Harmonization of manufacturing conditions with European Union 

requirements continued at Rigas Miesnieks. The largest investment for Ekseko was 

the construction of Tsooru weanling pig farm and expansion with a view to raising 

a herd of sows. The renovation of farrowing sties was significant as well. 

European Union assistance funds played a significant role in the investments. 



In addition to the new line of sliced products mentioned above, the other major 

development project for AS Rakvere Lihakombinaat in 2004 was the development of 

meat cutting. By management decision, meat cutting operations were shut down at 

Rigas Miesnieks at the beginning of 2004 and the operations were moved to Rakvere. 

Extensive investment were also made around this time into pork cutting in the 

parent company, with streamlining principles being applied to the system. The 

change in the cutting system in turn led to changes in personnel. The cutting line 

reached full capacity only at the end of the year after the administration of an 

extensive training program. 



As a result of the new cutting system the meat cutting figures for pork grew 2.5 

times from the year before. The transition from sales of meat mass to cut meat 

allows the company to be more flexible and plan meat supply better. The seasonal 

nature of meat sale will be less of a factor and profitability will grow.



Use and development of quality and environmental control systems based on ISO 

9000/14000 continues. Balanced Scorecard logic continues to be used as a control 

instrument. 





5. CHANGE IN MANAGEMENT STRUCTURE AND COOPERATION WITH AS TALLEGG.



In 2004, Rakvere Lihakombinaat Group launched strategic cooperation with AS 

Tallegg, which has the same owner. Both companies are active in a similar field 

in all three Baltic states. With an aim to saving on expenses and raising 

effectiveness, overlapping activity began to be mapped and consolidated into the 

structure of one company. As a result of many transactions, the AS Tallegg 

subsidiary Klaipedos maisto mesos produkati (UAB Selingas) was merged with the 

Rakvere Lihakombinaat Group company Klaipedos Maisto Produktai. Tallegg AS sold 

its shares in its Latvian subsidiary AS Tallat to AS Rigas Miesnieks. In the near 

future, it is planned to merge the latter two companies. As a result of the 

transactions described, AS Tallegg no longer owns subsidiaries in Latvia and 

Lithuania, and the sale and distribution of products will start going through the 

companies owned by Rakvere Lihakombinaat Grupp.



In September, the chairman of the AS Tallegg management board Kalvar Kase stepped 

down. Chairman of AS Rakvere Lihakombinaat management board Olle Horm and AS 

Ekseko chairman of the management board Teet Soorm were named new members of 

the management board in his stead. With that move, the management of AS Tallegg 

was effectively united with the management of Rakvere Lihakombinaat Group. The 

main goal of this decision is the implementation of synergy between all companies 

and growth in effectiveness as a result of merging similar support functions. In 

the near future, both companies will continue as independent legal persons, with 

a more detailed plan to shore up cooperation currently being worked out.  

 



6. FUTURE PROSPECTS



The company’s management believes that the Baltic region will see continued 

positive economic growth, and based on the latter, growth in consumption. The 

anticipated rise in meat consumption will give the company the opportunity to 

increase supply. Competition between meat industries persists, while a host of 

new products will be introduced on the basis of new equipment purchased with 

European Union aid.



The rapid growth of the influence of retail chains continues. Demands on suppliers 

will become even stricter than they are now. Manufacturers from other countries 

will find it easier to get access to all markets though retail chains covering the 

whole of the Baltic states. Demands on suppliers will become standardized from 

country to country.



The management believes that the prices of the company’s primary raw 

ingredient—pork and beef—will be higher than last year, with especial pressure on 

beef prices. With higher prices, the importance of Ekseko, a member of the group, 

will grow with regard to forming profits. The marketing of quality pork 

throughout the European Union will in turn afford the opportunity to find a 

better price level.

The primary goal of the company is to preserve and consolidate the market leader 

position on the Baltic states’ meat market. Changes in the structure of the 

company together with a continuing rise in internal effectiveness will give the 

company the opportunity to preserve profitability in the most difficult of 

conditions.





RAKVERE LIHAKOMBINAAT GROUP 				

BALANCE SHEET 				

(in thousands of euros)				

				

                                 Group                    Parent company	

ASSETS                         31.12.2004  31.12.2003   31.12.2004   31.12.2003

				

Current assets				

Cash and bank                       1 871     2 111       1 414      1 958

Trade receivables                   7 735     5 543       3 100      4 029

Tax receivables                       336       546          11         24

Other short-term receivables        2 392       309       5 640      2 528

Inventories                         7 680     5 627       3 974      3 567

Biological assets                   5 346     4 178           0          0

Total current assets               25 360    18 314      14 139     12 107

				

Non-current assets				

Long-term receivables               2 254        62          17          5

Investments in subsidiaries             0         0      15 825     11 312

Tangible fixed assets              31 499    27 976      15 278     15 055

Intangible assets                     249       211          84         46

Goodwill                                0        53           0          0

Total non-current assets           34 002    28 302      31 204     26 416

				

TOTAL ASSETS:                      59 362    46 616	 45 343     38 523

				

LIABILITIES AND OWNERS’ EQUITY				

				

Current liabilities				

Loans and lease payables            3 917       278           0         13

Supplier payables                   5 915     4 552       3 917      2 379

Tax payables                          926       647         457        368

Other current liabilities           4 066     1 395       3 363      2 533

Total current liabilities          14 824     6 872       7 737      5 293

				

Deferred tax                           40       109           0          0

Non-current loans and lease payable 6 628     7 947           0      1 821

Pension liabilities                    49        47           0          0

Total non-current liabilities       6 717     8 102           0      1 821   

Total liabilities                  21 541    14 975       7 737      7 114

				

Minority interest                     215       232           0          0

				

Owners’ equity				

Share capital                      24 109    24 109      24 109     24 109

Mandatory legal reserve               749       622         749        622

Retained earnings                  12 812     6 728      12 812      6 728

Unrealised translation differences    -64       -50         -63        -50

Total owners’ equity               37 606    31 409      37 605     31 409

				

TOTAL LIABILITIES 

AND OWNERS’ EQUITY:                59 362    46 616      45 343     38 523





RAKVERE LIHAKOMBINAAT GROUP				

INCOME STATEMENT				

(in thousands of euros)

				

                                       Group              Parent company	

Revenue                                2 004    2 003     2 004    2 003

				

				

Net sales                              80 995   74 543    63 372   60 112

Other revenue                             526      549       441      210

Total revenue                          81 521   75 092    63 813   60 322

				

Change in work-in-progress and 

finished goods                            660     -295       520     -245

Change in fair value of 

biological assets                       1 168	   351         0        0

Materials, consumables and supplies   -51 780  -47 098   -46 659  -43 651

Other operating expenses              -11 095  -11 052    -5 461   -5 343

Personnel expenses                     -9 585  -10 034    -6 185   -5 985

Depreciation and write-downs 

of non-current assets                  -3 777   -3 358    -1 875   -1 748

Other expenses                           -511     -384      -393     -264

				

Operating profit                        6 601    3 222     3 760    3 087

				

Financial income/expenses				

Net foreign exchange gain/loss            -95      -81       -11      -46

Net gain/loss from shares of subsidiaries   0        0     2 287     -612

Interest and other financial 

income and expenses                      -354     -508       175      117

Total financial income/expenses          -449     -589     2 451     -541

				

Profit before taxes                     6 152    2 633     6 211    2 546

Income tax                                 67     -110         0        0

Minority interest                          -8       24         0        0

				

Net profit                              6 211    2 546     6 211    2 546

				

Earnings per share (in euros)           0,165    0,067     0,165    0,067