Rakvere Lihakombinaat         FINANCIAL RESULTS                 02/25/2004



FINANCIAL RESULTS 2003



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 1326 in 2003 

(1267 in 2002). The parent company is located and registered in Estonia, 

County of Lääne-Virumaa, Sõmeru , Roodevälja Village.



The Group companies as at 31 December 2003:

                            Country      Participation   Participation 

                            of location	   31.12.03        31.12.02

AS Rakvere Lihakombinaat 

(the parent company)	      Estonia	

AS Ekseko                     Estonia        98,4%          98.2%

  AS Ekseko’s subsidiaries:

    OÜ Kurika Seafarm         Estonia         100%           100%

    OÜ Põlva Peekon           Estonia         100%           100%

    OÜ Viiratsi Söödatehas    Estonia         100%           100%

    OÜ Viiratsi Peekon        Estonia         100%             0%

    OÜ Lutsu Seafarm          Estonia         100%             0%

AS Linnulihatooted            Estonia          76%            76%

OÜ RLK Kinnisvarahalduse      Estonia           0%           100%

AS Rigas Miesnieks            Latvia          93.82%        92,47%

OÜ Klaipedos Maisto Produktai Lithuania        100%          100%

    OÜ Klaipedos Maisto Produktai subsidiaries:

    OÜ Pentinuotis            Lithuania        100%          100%

    OÜ Klaipedos Maisto Prekyba  Lithuania     100%            0%			





2. GENERAL ECONOMIC ENVIRONMENT AND ITS EFFECT ON THE COMPANY



The Baltic States’ resolution to join the European Union can be considered 

to be the most significant economic event of 2003. Although such goal had 

been set long before the referendum, the positive results of the 

referendum attested to the conclusiveness of the accession. The outcome 

of the accession talks that ended in 2003 was not surprising.



In the course of the accession talks, the Baltic States stated that no 

transition period needs to be established for the meat industry upon the 

accession to the EU. This means that, after 1 May 2004, all meat 

processing companies operating in the Baltic region will fully comply 

with the requirements established by the European Union. The EU 

accession forced the companies to make major investments, especially 

as regards to bringing the production hygiene and good manufacturing 

practices into the line with the European laws.



The companies had duly and widely took advantage of the opportunity to 

apply for aid from the corresponding support funds to finance their 

investments. With the help of EU-supported investments, the companies 

launched a markedly bigger-than-average number of new products and 

packaging to the market. This tightened the competition on the meat 

market. EU support funds also granted aid to the Rakvere Meat Processing 

Plant Group (hereinafter RLK Group) companies, Rigas Miesnieks and Ekseko.



The import of low-price Polish government-subsidised pork had a big 

effect on the Baltic meat market throughout 2003. With the help of 

state export subsidies, Polish companies could sell pork at a price 

lower than the cost price paid by the Baltic pig farmers. This 

considerably lowered the market price for pork, and rendered the 

conditions for local manufacturers very difficult. The local 

manufacturers insisted that the Estonian and Latvian governments apply 

protective measures for restricting the import of subsidised products. 

To protect the local manufacturers, the Estonian government  imposed 

protective customs duties on the import of Polish pork, while the Latvian 

government established, in June 2003, a comprehensive 0.267 LVL/kg import 

tariff for pork, irrespective of the country of origin. Lithuania applied 

national protective measures as well. Still, due to the subsidy volume, 

the restrictions established by the governments proved insufficient.



Latvia’s decision had a material effect on the operations and financial 

results of the RLK Group, since the Rakvere Meat Processing Plant 

(hereinafter RLK) supplies pork to all of Rigas Miesnieks. After the 

entry into force of the government regulation, Rigas Miesnieks was forced 

to pay import tariffs on most of the raw materials. This increased the 

cost price of the products. In October, the Latvian government established 

customs duty-free pork import quotas for Latvian meat processing companies. 

This covered most of the needs of Rigas Miesnieks.



The tense situation on the meat market also had an effect on other trade 

operations in the Baltic countries. Free trade movement across the borders 

of the Baltic States was often hindered for various reasons. In the 

beginning of May, the State Food and Veterinary Service of the Republic 

of Lithuania temporarily banned the import of meat products manufactured 

by the RLK due to RLK’s alleged labelling failure to comply with the 

regulations established for product. The temporary ban was upheld for a 

total of six weeks and caused major production problems in the subsidiary 

Klaipedos Maistas Produktai, which, in turn, resulted in a sudden drop in 

the company’s market share and a deterioration in the financial results.



Irrespective of the problems in the meat sector, the economies of the Baltic 

States continued to show positive development trends. Lithuania showed the 

fastest economic growth in 2003. Positive economic growth was largely based 

on a rapid increase in consumption by the private sector. In addition to 

the growth in general consumption, the consumption of meat and meat products 

increased nearly 2-3% during the year. The most rapid growth could be seen 

in poultry consumption. Pork consumption (per capita) remained more or less 

on the same level, and beef consumption dropped significantly. The decrease 

in veal consumption (together with the increase in milk production), 

especially in Lithuania and Estonia, led to the oversupply of beef which 

lead to a subsequent price drop in the second half of 2003.



In 2003, the competition also tightened in the retail trade sector. Retail 

chains, which are mostly based on foreign capital, made investments in 

hypermarkets and supermarkets in big cities. Since the product price 

remains customers’ main consideration for their purchases, the retail 

trade’s price pressure also had a growing effect on the meat industry. The 

tightened competition on the meat market, caused by major investments as 

well as the retail companies’ pressure, caused the prices of meat products 

to drop by nearly 6-8% in all Baltic countries. The price drop in meat 

products had a significant role in the low level of the consumer price 

index in the Baltic region in 2003.



3. HIGHLIGHTS IN 2003



January - Rakvere launched a new and improved trademark on the market.

        - Lloyd’s Register issued ISO9001/2000 and ISO14000/1996 quality 

             certificates to RLK.

	- Continuous invasion of the low-priced Polish government-subsidised 

            pork to the Baltic markets.



February  RLK launched a series of fresh meat in consumer package.



June	- The State Veterinary and Food Service of the Republic of 

          Lithuania banned the import of RLK’s meat products for six weeks.

	- The third farm was completed in co-operation with Lõpe Agro 

           within the framework of the contractual pig farming project.



July	The Government of the Republic of Latvia imposed protective 

          customs duties on pork import in the amount of 0.267 LVL/kg.



August	The Supervisory Board of Klaipedos Maistas Produktai removed the 

         Chairman of the Management Board Dimitri Chudakov, and appointed 

         Saulius Masalskis as the new Chairman of the Management Board.



September - The Ministry of Agriculture of the Republic of Latvia 

            established, for the 4th quarter, customs duty-free quotas on 

            the import of pork from various countries (including Estonia).

          - The Supervisory Board of RLK was appointed at the Extraordinary 

            Shareholder’s Meeting on 16 September 2003: Simo Palokangas, 

            Matti Perkonoja and Olli Antniemi.



October	 RLK was entered in the list of EU-approved companies.



November Rigas Miesnieks completed the reconstruction of its meat 

          dumpling plant to meet the EU requirements.



December In addition to the existing ISO9001/2000 quality certificate, 

          Lloyd’s Register issued to Ekseko the ISO14000/1996 quality 

          certificate.



4. FINANCIAL RESULTS



Compared to the unexpectedly favourable 2002, the financial results of the 

RLK Group remained quite modest in 2003 as regards to profit and sales 

increase. At the same time, production volume continued to grow and the 

company continued its planned development irrespective of the complicated 

market situation. The cyclical nature of the business branch has a 

significant effect on the economic activities of the RLK Group, which is a 

vertically integrated company involved in both primary production and 

product processing.



The consolidated net sales of the RLK Group totalled 74 543 thousand 

euros - a decrease of 3 846 thousand euros (4.9%), compared to 2002. 

This decrease was triggered, first and foremost, by the drop in sales 

prices, which, in turn, was conditioned by the low raw material price 

level and tightened competition on the meat market.



The total production output (including the by-products) amounted to 

41,044 tons - an increase of 1,175 tons (3%) compared to 2002. Growth 

in production volume slowed down in the second half-year since the company 

was forced to significantly reduce the purchase volumes of pork as a 

result of protective import tariffs established by Latvia.



                       Rakvere Lihakombinaat    Rakvere Lihakombinaat

                       Group                    Parent company

                         2003   2002  Diff.%    2003   2002   Diff.%

Net sales (th. euros)  74 543  78 389  -4.9%   60 112  62 444   -3.7%

Operating profit 

(th. euros)             3 222   5 669   -43%    3 088   2 998   +3.0%

Net profit (th. euros)  2 546   4 814   -47%    2 546   4 814    -47%

The average number of 

employees               1 326   1 267  +4.7%      779     736   +5.8%

Investments (th. euros) 5 734   4 713   +22%    1 771   1 672   +5.7%



The share of current assets in the balance sheet structure of RLK Group 

Rakvere has continually increased. Current assets made up 39% of the 

total balance sheet volume in 2003. Non-current assets, which made up 

67-68% of the balance sheet volume between 1998 and 2000, dropped to 61%. 

At the same time, the share of external funding has decreased in the 

company. In the end of 1998, external funding amounted to 54% of the 

company’s balance sheet. By the end of 2003, however, external funding 

only amounted to 32%. This is the result of the profitability of the 

company, and a decrease in the loan burden in recent years.



In 2003, net cash flow from operating activities amounted to 6 852 thousand 

euros. In addition to the operating profit and depreciation, cash flow was 

also affected by decrease in inventories and increase in operating 

liabilities. The inventories decreased by 430 thousand euros in 2003 as 

a result of improved stock management. Total change in cash flow after the 

offsetting of cash flow from investing activities and cash flow from 

financing activities was also positive, amounting to 1 136 thousand euros 

(222 thousand euros in 2002).





5. MAJOR INVESTMENTS AND DEVELOPMENT PROJECTS



Total investments in the RLK Group companies amounted to 5 734 thousand 

euros in 2003. RLK is already an EU-approved company, major investments 

were made in bringing Rigas Miesnieks into line with the EU requirements. 

Since these investments constitute capital investments, a majority of them 

will not be implemented until the beginning of 2004. Major single 

investments included the reconstruction of the dumplings plant and the 

launch of construction of the new logistics centre (which should be 

completed by the spring of 2004) in Riga.



Investments in the parent company RLK totalled 1 771 thousand euros. Most 

of this amount was spent on replacing equipment so as to increase 

efficiency. The most significant innovation was the launch of 

consumer-packaged meat products in accordance with Rakvere’s long-term 

fresh meat strategy.



Investments in Ekseko amounted to 1 871 thousand euros. These 

investments were used for improving production efficiency, reconstructing 

old buildings and equipment, and enhancing the environmental-friendliness 

of the company. Major single investments included the continued 

reconstruction of the farrowing stables, replacement of the windows of 

the fattening unit, launch of reconstruction of insemination sections 

and construction of the liquid manure storage facility.



Major development projects included the renewal of the Rakvere trademark 

at the beginning of the year, and the "Estonian Pig" campaign in the 

autumn. The trademark renewal and the change of the packaging concept 

was a carefully planned strategic project. The main objective of this 

transformation was to communicate new values and tie them to the company’s 

development. The new symbol of Rakvere - the oak tree - is a strong and 

hardy tree with a long lifespan. The oak is a continually growing and 

maturing tree which produces new acorns every year. The goal of the 

"Estonian Pig" campaign was to acknowledge the high-quality pork produced 

by Ekseko, and meet the customers’ expectations as regards to the local 

raw material. The campaign was well received by the consumers and 

customers, and achieved its goal.



On 10 September 2003, the Standing Committee on the Food Chain and Animal 

Health in Brussels unanimously decided to grant EU approval to RLK. Only 

those companies that meet the hygiene and structural requirements 

established for the common market of the European Union are approved by 

the Committee. RLK applied for the approval of its fresh meat, and is 

currently the only meat processing company in Estonia that has the honour 

of being approved by the Committee. RLK is thus among those approved 

third countries that have been authorised to export their products to the 

EU market.



RLK brought its production into accordance with the EU requirements 

already by 1 June 2002, after having invested over 40 million kroons 

in production modernisation. The approval of the Committee means that 

RLK can start exporting its pork to other EU countries. The company made 

its first actual sales transaction in January 2004. EU sales constitute 

a new, highly perspective business for the company.



In 2003, the RLK Group companies continued developing and implementing 

the quality systems. The ISO 9001/2000 quality certificate has already 

been issued to the parent company RLK, Ekseko and Rigas Miesnieks. In 

addition, the ISO14000/1996 environment certificate has been issued to 

the parent company RLK and Ekseko, Ekseko being the first agricultural 

company in Estonia to be granted such a certificate. Both companies 

have implemented internal inspection systems and HACCP quality systems 

within the company in accordance with the specific regulations on food 

processing companies such as RLK and Rigas Miesnieks. These systems are 

supervised by the corresponding authorities. The Balanced Scorecard 

continues to be used as a management tool in the RLK Group companies.





6. FUTURE PROSPECTS



The situation on the Baltic meat market will probably remain volatile 

until accession to the European Union on 1 May 2004. Enforcement of 

market protection measures, which hinder normal competition, will 

remain a possibility until that time. While the Estonian market has 

already been opened for competitors abroad, Latvia’s and Lithuania’s 

import duties and restrictions on meat and several meat products still 

apply. The above restrictions on EU goods will be abandoned after 1 

May 2004, and the competition will become even tighter. Lithuania will 

see the harshest battles for market shares.



Competition will also tighten between local meat processing companies. 

The pressure from retail will increase and the role of the company’s 

internal efficiency in ensuring profitability will also increase. 

The RLK management has initiated several projects in order to improve 

the co-operation between the group companies, and achieve a higher 

efficiency rate through mutual synergy. These projects mainly involve 

specialisation of the RLK Group companies in the manufacturing of 

certain product groups, as well as the improvement of the logistical 

co-operation between the RLK Group companies so as to increase cost 

efficiency. For instance, the company plans to centralise meat cutting 

and sliced product manufacturing in the parent company RLK. Negotiations 

on possible co-operation in the Baltic States are currently ongoing with 

Tallegg, a company owned by the owner of RLK. Considering the losses 

made by the subsidiary Klaipedos Maistas Produktai, and the failure to 

achieve the set goals, major structural changes have been planned for 

the subsidiary. However, these changes cannot be introduced until the 

accession to the EU, and the abandonment of trade restrictions between 

the Baltic States.



Opening of the EU markets will provide a range of new prospects for 

the RLK Group companies. In the first instance, the company plans to 

launch the export of cut and frozen parts of pork to countries with a 

higher price level.



The chief objective of the company is to maintain and strengthen the 

position of the company as the leader in the Baltic meat market. 

Irrespective of the potential hindrances and problems at the beginning 

of the year, we believe that the projects we have launched will help us 

ensure continued growth.







RAKVERE LIHAKOMBINAAT GROUP 				

BALANCE SHEET 				

(in thousands of euros)				

				

                           Group                 Parent company	

ASSETS                     31.12.2003 31.12.2002 31.12.2003 31.12.2002

                                       *adjusted             *adjusted

Current assets				

Cash and bank                   2 111        975      1 958        184

Trade receivables               5 543      5 705      4 029      3 908

Tax receivables                   546        355         24        124

Other short-term receivables      309        396      2 528      2 265

Inventories                     5 627      6 409      3 567      4 361

Biological assets               4 178      3 828          0          0

Total current assets           18 315     17 667     12 107     10 842

				

Non-current assets				

Long-term receivables              62        290          5        224

Investments in subsidiaries         0          0     11 312     10 104

Tangible fixed assets          27 976     26 570     15 055     15 087

Other intangible assets           211        130         46         66

Goodwill                           53          0          0          0

Total non-current assets       28 301     26 989     26 416     25 482

				

T OT A L  A S S E T S:         46 616     44 656     38 523     36 324

				

LIABILITIES AND OWNERS’ EQUITY				

				

Current liabilities				

Loans and lease payables          278        177         13         12

Supplier payables               4 553      4 381      2 380      2 860

Tax payables                      647        756        368        356

Deferred tax                      109          0          0          0

Other current liabilities       1 395      1 025      2 533      1 300

Total current liabilities       6 982      6 339      5 294      4 528

				

Long-term loans and 

lease payable                   7 947      9 128      1 821      2 834

Pension liabilities                47          0          0          0

Total liabilities              14 976     15 467      7 115      7 362

				

Minority interest                 232        227          0          0

				

Owners’ equity				

Share capital                  24 108     24 108     24 108     24 108

Mandatory legal reserve           622        380        622        380

Retained earnings               6 728      4 424      6 728      4 424

Unrealised translation 

differences                       -50         49        -50         49

Total owners’ equity           31 408     28 962     31 408     28 962

				

TOTAL LIABILITIES AND 

OWNERS’ EQUITY :               46 616     44 656     38 523	 36 324





RAKVERE LIHAKOMBINAAT GROUP				

INCOME STATEMENT				

(in thousands of euros)	

				

                                      Group             Parent company	

REVENUE	                              2003     2002     2003    2002

                                             *adjusted       *adjusted

				

Net sales                           74 543   78 389    60 112   62 444

Other revenue                          549      353       210      171

Total revenue                       75 093   78 742    60 324   62 616

				

Change in work-in-progress 

and finished goods                    -295       55      -245        2

Change in fair value of

biological assets                      351      -92         0        0

Materials, consumables and 

supplies                           -47 098  -49 656   -43 651  -46 987

Other operating expenses           -11 052   -9 930    -5 342   -5 231

Personnel expenses                 -10 034   -9 723    -5 985   -5 677

Depreciation and write-downs of 

non-current assets                  -3 358   -3 113    -1 748   -1 590

Other expenses                        -384     -613      -264     -136

				

Operating profit                     3 222    5 669     3 088    2 998

				

Financial income/expenses				

Net foreign exchange gain/loss         -81     -127       -47      -77

Net gain/loss from shares of 

subsidiaries                             0        0      -612    1 848

Interest and other financial income 

and expenses                          -508     -706       117       44

Total financial income/expenses       -589     -833      -542    1 815

				

Profit before taxes                  2 633    4 836     2 546    4 814

Income tax                            -110        0         0        0

Minority interest                       24      -22         0        0

				

Net profit                           2 546    4 814     2 546    4 814

				

Earnings per share                   0,067    0,128     0,067    0,128





Olle Horm

Chairman of the Board

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