SAKU ÕLLETEHAS

REPORT



ACTIVITY REPORT FOR 1999 YEAR



2.1. Operating Environment



In 1999, the following factors influenced the economic performance of the Saku

Brewery:

·     the  changes  in legislation, particularly the amendments  to  the  acts

 covering the handling and taxation of alcohol;

·     the  cooling  down  of  the  economy  and  a  simultaneous  increase  in

 competition as well as an active rise in consumption;

·    the regulatory reorganisation of the operating environment accompanied by

 a rise in forced liquidations and bankruptcies;

·     the stabilisation of the Estonian kroon and its interest rates during  a

 period of high volatility of the US dollar;

·    the activities of the Saku Brewery as the parent company in the group.



The following changes in legislation affected the Saku Brewery:

·     The  changes  in  the  Alcohol Excise Tax Act,  as  of  April  1,  1999,

 established  the  taxation rate at 0.55 kroons per volume per  cent  of  pure

 alcohol in one litre to replace the former excise that depended on the annual

 production  volume  and  on  differential treatment  of  beers  based  on  an

 allocation  into  different strength groups. To set off the  impacts  of  the

 discriminatory  taxation and to optimise the level of excise tax  before  the

 above  date,  in  the  first quarter of 1999, the Saku  Brewery  managed  the

 production  of  keg beer and canned beer in the total volume of  one  million

 litres in cooperation with the subsidiaries Saku Keldri OÜ and Saku Purgiõlle

 OÜ. Due to the above mentioned change in the legislation the subsidiaries  of

 Saku  Purgiõlle  OÜ  and Saku Õlu OÜ lost their economic rationale  and  were

 dissolved in October 1999.

·     On April 15, 1999 the Alcohol Act came into force. This act provides the

 general  principles  of alcohol production, imports and exports,  retail  and

 wholesale,  governmental supervision and responsibility for  violations.  The

 order of licensing changed, and the State Register of Alcohol was established.

 While  bringing  order into the system of alcohol handling  and  the  alcohol

 markets, the Act also brought new restrictions to the enterprises in  alcohol

 business   (the   licensing  requirements,  the  precondition   of   non-cash

 transactions  only, the prohibition on the outdoors trading in unpacked  beer

 and stronger beers, etc.). The Saku Brewery has adapted to the conditions set

 by  the Act; its influence on the economic activities of the Saku Brewery was

 insignificant (e.g. the average payment period – 14 days – remained the  same

 as in the previous year).

·     On  January  1,  2000  the  Food Act came into  force  establishing  the

 requirements  on  food handling, food quality and safety, and  providing  the

 basis  of the self-checking of a food business operator as well as the  state

 supervision and the liability for violations.

·     The changes in the Packaging Excise Act in December 1999 set the minimal

 reuse of packaging requirement at 60%. The fulfilment of this requirement  is

 well  handled by the Saku Brewery in cooperation with the transport operators

 and  salesmen; for imported production the services of specialised  companies

 are used.

·     The  enforcement  of  the provisions in the Commercial  Code  concerning

 business  organisations’  minimum  level  of  capitalisation  caused   forced

 liquidation for those entities unable to fulfil the requirements.

·     The enforcement of the Income Tax Act on January 1, 2000 influences  the

 undivided income of the previous periods and the performance indicators based

 on these.



The  consumer price index (CPI) of December 1999 exceeded the CPI of  December

1998 by 3.9% thus reflecting the condition of the Estonian economy.



To  achieve the best economic performance possible in the economic environment

of  the  period described, the Saku Brewery acted as a parent company  in  the

group.  Hence it is important that the results of the operations of the parent

company  and  the  subsidiaries  should  be  presented  and  assessed   in   a

consolidated way, eliminating the effect of the intra-group transactions.



In  1999,  the Saku Brewery acquired the other 50% of the shares  of  AS  Saku

Linnas  with  the aim of extension of the parent company’s activities  to  the

premises  of  the  subsidiary.  During the period  reported  the  majority  of

preparatory  tasks  were completed, particularly the demolishing  of  the  old

buildings and tiding up the territory to liquidate this subsidiary in 2000.



The  strong market position and the successful activities of the Saku  Brewery

have raised its share prices in the capital market.



To strengthen the position of the Saku Brewery in the beverages’ market and in

accordance with the agreement of the Baltic Beverages Holding (BBH), the  main

owner  of  the company, with PepsiCo, Inc. the Saku Brewery became responsible

for the sales of the PepsiCo beverages in Estonia from January 1, 2000.



2.2 Market and Consumption



In 1999, the estimated size of Estonia’s beer market was 88.6 million litres

which is by 29% bigger than in 1998 (68.9 million litres). The imported beers

accounted for about 8.7 million litres or about 10% of the total market.



As  for the packaging, in 1999, in Estonia’s markets the share of bottled  and

canned beers was the largest with 79.3 million litres or 90% of the total. The

draught beer sales were only 9.3 million litres. In 1999, the share of draught

beer  accounted  for 10% of the market. In comparison to 1998,  the  sales  of

bottled  and canned beer in Estonia grew by 34% whereas the sales  of  draught

beer decreased by 3%. The growth in the consumption of bottled and canned beer

was  caused by the warm summer and the increased investments of the  big  beer

producers  into  advertising of canned beer. The sales of  draught  beer  were

affected  mostly by the general cooling down of the economy and the relatively

higher price in comparison to bottled or canned beer.



In  1999, the market share of the Saku Brewery accounted for 50% of the  total

market of Estonia and hence exceeded the 1998 level by 3%. The market share of

the  enterprise  has  risen mainly due to the successful marketing  and  sales

activities. The early summer and autumn consumer campaigns for Saku  Originaal

gained  much public attention and considerably helped to increase  the  sales.

The  campaign  for the Rock Beer, first held in 1999 summer, also  added  many

consumers. A warm welcome was given to the new beer Saku on Ice too: with this

beer  the  Saku Brewery established a new segment of mild beers  in  Estonia’s

market  and won new beer consumers from the group of gin long drink and  cider

drinkers.



The  overall  growth  of  the  beer market was  stimulated  by  the  gradually

increasing competition, the more active marketing by many local beer producers

and the most warm and generously sunny summer.



The 1999 increase of beer consumption in Estonia is known to be the biggest in

the  history. In this period consumption per capita grew by 14 litres  or  30%

reaching the level of 61 litres.



In 1999, the total sales for the group accounted for 51.6 million litres which

is by 25% more than in 1998. The share of beers in the total sales constituted

47.5  million litres which is by 9.5 million litres or 25% more than in  1998.

In  1999, the sales of mineral water reached 3.9 million litres, reflecting  a

growth by 0.8 million litres or approximately 29% in comparison to 1998.



The  sales of original production of the enterprises of the group amounted  to

47.5  million litres or about 92% of the total sales (37.8 million  litres  in

1998).  The  exports of the original production of the group  in  1999  almost

reached  three  million  litres and accounted for 6% of  the  total  sales  of

original  production.  The enterprises exported their production  to  Finland,

Latvia,  Lithuania, and the United States. The main export  article  was  Saku

Originaal.



In  1999, the sales of imported products by the Saku Brewery amounted  to  4.2

million litres which marks a 24% increase (3.4 million litres in 1998).



2.3. Economic Activities and Results



The  net  sales of the group in 1999 amounted to 715 040 thousand kroons;  the

increase in comparison to 1998 was 173 187 thousand kroons, i.e. 32%. The  net

sales of the Saku Brewery were 720 694 thousand kroons which was by 20% or  by

120 492 thousand kroons bigger than in 1998. The biggest structural change  in

the  net  turnover was the increase of the share of the packaging by 3%  which

stems  from  the  increase  of the share of canned beer,  the  most  expensive

packaging, in the product portfolio.



The  group’s operating expenses in the sum of 641 054 thousand kroons grew  by

30% whereas the share of expenses in net sales accounted for 89%. The increase

of  the  operating expenses of the Saku Brewery was 17%, the share of expenses

in  sales  was  92%.  The changes in the structure of operating  expenses  are

partly  similar to the changes in net turnover—the unpredicted growth  of  the

packaging   expenses  by  3%,  and  partly  attributable  to  the  large-scale

demolition and repair works.



The  operating  income of the Saku Brewery grew by 24 073 thousand  kroons  or

46%,  reaching  76  081 thousand kroons. In 1999, the net profit  was  60  895

thousand kroons; compared to 1998, the increase was by 17 198 thousand  kroons

or 39%.



In  1999, the direct tax burden of the group was 208 412 thousand kroons;  the

parent company paid taxes worth 206 540 thousand kroons. In comparison to 1998

the  tax payments grew, respectively, by 56 623 thousand kroons or 37% and  by

72  500  thousand  kroons or 54%. The alcohol excise  payments  by  the  group

amounted to 137 886 thousand kroons which, in comparison to 1998, reflected an

increase  by  40  623 thousand kroons or 42%. The same by the  parent  company

reached  136  097  thousand kroons; the growth for the  period  being  53  952

thousand kroons or 66%. The alcohol excise paid by the group as well as by the

parent  company  constituted 66% of the total taxes  paid;  the  growth  being

respectively  by  2% and by 5% due to the differences in taxation  during  the

period reported.



Among  the  financial indicators reflecting the effectiveness of the  economic

activities  the  positive  tendency was reflected by practically  every  ratio

measured  against assets, owners’ equity, or net turnover. A relative increase

could  be  observed in the average consumer payment period and  the  liquidity

ratios  deteriorated. The net profit per share amounted to 7.63 kroons and  it

grew by 40%.



As  of  December 31, 1999, the enterprise employed 256 full time workers.  The

members  of the Management Board were not compensated for their activities  on

the  board  and,  during the period reported, the compensations  paid  to  the

members of the Council amounted to 50 thousand kroons.





2.4. Investments



In 1999, in the whole group the only investments were made in the Saku Brewery

where  the  increase  of  the tangible assets totalled  52.5  million  kroons.

Investments were financed solely from internal sources. Investments related to

production  in  the  amount of 10.2 million kroons  were  made  to  raise  the

effectiveness  of  the  bottling lines, to replace and  add  the  capacity  to

compressors,  and  to  renovate  the  yeast  storage  facility.  The   biggest

investment  in  the amount of 23.6 million kroons was made to build  a  modern

storage  facility  for export goods. 15 million kroons were used  to  purchase

marketing  and  sales support equipment and other equipment and  fixtures  for

long-term use. 3.7 million kroons were spent on the development of information

technology and on new cars.





Ruth Roht

Public Relations Manager

+372 6 508 303