BALTIKA BREWERIES Contents LETTER OF THE PRESIDENT 5 INVESTMENT ACTIVITIES 34 MAIN PERFORMANCE INDICATORS OF 2005 6 FINANCIAL POSITION 36 ABOUT THE COMPANY 8 CORPORATE SOCIAL RESPONSIBILITY 40 Economic impact for the state 41 KEY FACTS AND EVENTS IN 2005 10 Care for employees 41 Charity 41 2005 – THE YEAR OF BALTIKA’S 15th Environmental projects 42 ANNIVERSARY 12 Work in the Union of Russian producers of beer and soft-drinks products 42 THE BEER MARKET 14 World Market 15 CORPORATE GOVERNANCE 44 Russia 15 Principles of corporate governance 45 Company Management 45 THE COMPANY’S POSITION ON THE MARKET 18 List of transactions completed Baltika is the market leader in Russia 19 by the Company 54 Baltika on the world market 22 The planned merger 55 COMPANY BRANDS 23 SECURITIES 56 Premium and licensed beer segments 24 The mainstream INFORMATION FOR SHAREHOLDERS and lower mainstream segments 25 AND INVESTORS 62 Discount segment 28 COMPANY PRODUCTS 64 SPONSORSHIP 29 USEFUL INFORMATION 76 ОPERATIONAL MANAGEMENT 30 Quality Assurance 31 Checking product quality 31 Company sales 32 Information technologies 33 Letter of the President Dear readers, The results of Baltika Breweries in the year 005 were extraordinary: we reached record sales and we were able to increase our market share while at the same time improving our financial results and profitability, and geographical coverage of our exports to 8 countries around the world. Remarkable is that the results were achieved during a very demanding year, with many external and internal challenges facing us: Changes in Russian legislation on advertising and places of consumption slowed down the positive market development and the move from strong alcohol towards lighter alcoholic beverages. Consequently the beer market grew by only 6%. However, thanks to our strong brands and favorable consumer preferences, Baltika was able to grow its volumes twice as fast. The Russian market, already now the fourth largest in the world, attracts international brewing giants, which has led to a con- solidation of the market, as well as an intensified competition. Internally Baltika has continued to renew itself. Last year the company has undergone major organizational changes triggered by the start of the integration process within the group of companies Baltika, Vena, Pikra and Yarpivo. The start of this closer co-operation and change of best practices influenced the results positively already in 005, and will continue to do so during the coming years. My greatest gratitude for the exceptional results goes to the employees of Baltika who have proved to be hard working, flexible and innovative – people that have a true mission and commitment to bring Baltika everywhere where Russia is. I am very proud of our dedicated employees who achieved these results under what were not the easiest of conditions. Particular joy is that the great results were achieved in a year when Baltika was celebrating its 15th anniversary. Baltika, founded in 1990, has in only 15 years grown from a local, small brewer to be a market leader. Baltika is a world-class company with an aim to be excellent in everything: in our products we are bringing to our consumers, with our processes and quality, as an employer and in our actions as a good corporate citizen of our five home regions and the whole country. As history shows, Baltika has been changing and developing dynamically throughout its history. The year 006 will be no exception. However changes in 006 will be remarkable in scale, as the merger with Pikra in Krasnoyarsk, the Vena breweries in Chelyabinsk and St. Petersburg, and Yarpivo Breweries in Yaroslavl and Voronezh will double the number of breweries to 10 and make Baltika a company with 11,000 employees, with a joint turnover of 1. billion euro in 005. This will make new Baltika by far the largest consumer goods producer in Russia. Year 006 will put very many challenges ahead of the management and the employees as integrating organization, all systems, operations and sales and distribution forces is a huge and demanding task. I wish all those employees involved patience, endur- ance and success in making the merger happen. Thank you also to our shareholders for their continued support for the merger and our business. Be proud of our beers and our company – Baltika is a worthy symbol of the Russian business success. Baltika – Where Russia is! Sincerely yours, Anton Artemiev President of Baltika Breweries Main performance indicators of 005 6 • The total volume of investments in the Company’s development since its founding exceeded $1 billion in 2005. • Baltika delivered high financial results, simultaneously increasing sales volumes and profit margins. • A programme approved by the shareholders in the spring of 2005 for im- proving operations is being implemented. Raw material costs have been cut, together with production and administrative expenses. This has contributed to growth in operating profit and profit margins. • Baltika continued improving the policy of financial risk management with a view to safeguarding the assets while reducing expenditure and ensuring effective use of available financial resources. • The year 2005 was notable for significant free cash flow, which made it possible to optimise the structure of liabilities by reducing the relative share of borrowed funds. In the course of the year, Baltika efficiently temporarily invested free cash using various bank instruments, and this had a positive influence on the net profitability. • Baltika’s market capitalisation rose above $ 4 billion for the first time ever in 2005. Key financial indicators 2005 2004 %, change Assets*, mln EUR 896. 1.6 0.9 Revenues*, mln EUR 9. 99. Current and non-current liabilities*, mln EUR 1.6 185.9 -. Market capitalisation (at end of year), $ bln . .1 100 Capital investments, mln EUR 66.8 96 -0. Total issued shares 10, 0, 680 10, 0, 680 - Dividend per ordinary share (RUR) 1.9 11.6 19.8 Dividend per preference share (RUR) 18.1 15.1 19.8 Ratios, % 2005 2004 %, change Current and non-current liabilities/Assets * 0.16 0.5 -6.5 Current and non-current liabilities/Revenues* 0.15 0. -. ROA 1. 1.9 6. ROE 5. 19.9 5. Оperational indicators 2005 2004 %, change Number of employees , 50 , 8 -.8 Total production capacity (mln dl) 0 5 .0 Sales volume (mln dl) 199 1.8 * According to the Company’s financial reports prepared under IFRS About the Company Baltika Breweries was founded in 1990. Today Baltika is: • The leader on the Russian market and one of the leading European beer producers • 5 factories: in St. Petersburg (the largest and most modern facility in Eastern Europe), Rostov-on-Don, Tula, Samara and Khabarovsk • The Baltika brand holds second place in Europe in terms of sales volume • Exports to 8 countries around the world • Baltika products are available in 9% of the points of sale around Russia • Has a market capitalization of more than $ billion • 7,500 employees Since 199, the majority shareholder of Baltika has been Baltic Beverages Holding AB (BBH), which is a joint venture company of Carlsberg (50%) and Scottish & Newcastle (50%). Baltika’s strategy is directed at producing beer of the highest quality, strengthening its leading position on the Russian market, active promotion of its products on export mar- kets and building up its reputation as a leading, world-class producer of beer. Baltika’s priority for development is to produce high quality beer and nonalcoholic beverages. We believe it is important that: • The consumer feels we are brewing the best beer for him • Society acknowledges Baltika’s activities to be useful • Baltika’s profits and the revenue of our shareholder value are growing • Our employees feel that they are important to the Company and that we value them and care for them. Prospects for future development Baltika is the leader on the market and intends to strengthen its position on the Russian beer market. Many different factors contribute to this: production of high quality beer; modern, geographically distributed production capacity; an excellent distribution network which encompasses 9% of the points of sale in Russia; efficient marketing communica- tions, high quality management; and the planned merger with brewing companies Vena, Pikra and Yarpivo. The Company performs its sales activity through subsidiaries in St. Petersburg, Moscow, Podolsk, Voronezh, Germany, the Ukraine, Belarus, Kazakhstan, Moldova and Kirghiz- stan, as well as representative offices in Latvia and China, as well as through 1 distribu- tion centers and 61 sales offices located on the territory of the Russian Federation. 8 Company structure Company Headquarters (St. Petersburg) Baltika Factory St. Petersburg One of the largest breweries in Europe; founded in 1990 Branch Baltika Rostov The largest brewery in the South of Russia; part of the Company since 1998 Branch Baltika Tula One of the largest breweries in the country; part of the Company since 000. In 00 Tula commissioned its own malt plant Branch Baltika Samara Operations began in 00 Branch Baltika Khabarovsk Operations began in 00 Branch Baltika-Pikra Opened in 005 Sales subdivisions Commercial representative offices in cities around Russia Leasing-Optimum Ltd Subsidiary in St. Petersburg Universalopttorg Ltd Subsidiary in Voronezh Terminal Podolsk Ltd Subsidiary in Podolsk (Moscow Region) Baltika Moscow Ltd Subsidiary in Moscow Baltika-Bel Ltd Subsidiary in Belarus ICS ‘BALTIKA’ SRL Subsidiary in Moldova Baltika-Almaty Ltd Subsidiary in Kazakhstan Baltika-Ukraina Ltd