Baltika Group’s 2016 results and plans for 2017

Maigi Pärnik, Meelis Milder23 March 2017

BALTIKA GROUP TODAY

• 89 years of fashion business experience

• Own Design, Production and Logistic Centre in Estonia, Tallinn

• Retail network 127 brand stores in 8 countries (incl. 33 franchise stores)

• Wholesale to EU and Russia

• E-shop Andmorefashion.com delivers to 44 countries

• 2016 revenue 47.0 million euros

www.andmorefashion.com

www.baltikagroup.com

Sourcing from 19+ countries

Sales to 30+ countries

Central warehouse and headquarters in Estonia

Ca 60% of production exported

BALTIKA’s BRANDS

5 brands: Monton, Mosaic, Baltman, Bastion, Ivo Nikkolo

PEOPLE OF BALTIKA

Over 1,000 employees

HIGHLIGHTS

Sale of Russian subsidiaries

On 22nd of February 2016 Baltika exited from Russian retail market and continues to sell its brands in Russia through franchise partner

8 of Russian former retail stores continue operating as franchise stores.

AS BALTIKA

SIA Baltika LatvijaRetail

Baltman OÜ (EST)Retail

Baltika Tailor OÜ (EST)

Production

UAB Baltika LietuvaRetail

100%100%

100% 100%

Baltika’s management structure:

Success of Monton’s Rio special collection

The Rio collection was Baltika’s most successful dedicated Olympic Games special collection in terms of both sales revenue and profit.

The collection earned praise from Estonian athletes, Monton’s retail, wholesale and e-shop customers, and international journalists.

Monton available in 25 Peek & Cloppenburg shopping centres in Europe

Monton was sold as the first brand from Eastern Europe in spring 2016 in three Peek & Cloppenburg department stores, with the number reaching 25 sales points by the end of that year – in Germany, Austria, Czech Republic, Poland, Hungary and Romania.

Baltika’s fashion brands in Riga and Washington fashion weeks

In September 2016 three of Baltka’s fashion brands – Baltman, Ivo Nikkolo and Monton, participated in the Washington DC Fashion Week

At the last week of October in Riga Fashion Week, which is the most influential fashion event in Baltics, Ivo Nikkolo presented its 2017 spring-summer collection. An overview of the collection was published in Vogue Russia and Elle Italy websites.

Baltman 25

In 2016 Baltman – the first men’s fashion brand in Estonia celebrated its 25th anniversary.

On 22nd of October in Tallinn Fashion Week Baltman presented its special collection to celebrate its 25th anniversary.

Baltika entered Serbian marketAt the beginning of October Baltika signed a franchise agreement with Serbian enterprise Victoria Elegans d.o.o., who opened the first Baltika’s brands represantingstore in Serbia.

At 8th of March 2017 Monton AndMore store was opened in Novi Sad in Serbia.

Monton AndMore is a Baltika’s new store concept to increase international sales and where in addition to Monton other Baltika’s brands are represented as well.

Refinancing the bonds issued in 2014

• In 2014 AS Baltika issued convertible bonds in the amount of 3 million euros with subscription

price 0.5 euros. The share subscription period is in July 2017.

• In case the Investors do not subscribe for the shares AS Baltika will repay the bonds together

with accrued interest, in total up to 3.6 million euros.

• On 22th of March 2017 the Supervisory Board of AS Baltika decided to propose to the Annual

General Meeting of shareholders, to issue convertible bonds with bondholder option in the

total amount of 4 to 4.5 million euros.

– The subscription price of the convertible bond will be an average stock price for the 20 days before the

Supervisory Board decision, which is 0.32 euros.

– These two-year convertible bonds will carry an annual interest rate of 6% and will be issued with public

offer.

– Detailed terms will be included with the Annual General Meeting proposed resolutions on 12th of April

2017.

• KJK Fund, Sicav-SIF, the largest shareholder of AS Baltika, is willing to subscribe the new bonds in

amount of 3.6 million euros.

2016 RESULTS

BALTIKA GROUP’s OBJECTIVES 2016

2015Exiting from unprofitable

Ukrainian and Russian markets

2016Back to profit

(177 thousand euros)

2017/2018

Profitable growth

• Growth in Baltic retail market sales and increase of profitability through improvement of gross profit margin

• Other sales channels (wholesale, franchise and e-store) development and increase in sales growth

• Better inventory management – higher inventory turnover• Operating efficiency improvement – decrease of head-office expense

2016 RESULTS

Profit 177 thousand euros (2015 continued operations: -844 teur)

– Decision to leave from unprofitable high risk retail markets in Ukraine and Russia and transfer these brand stores over to franchise partner.

– More effective gross profit margin management: better purchasing price and lower mark downs

– Decrease in distribution, administrative and general expense: more efficient processes in head office

Objectives of 2016 (1)• Growth in Baltic retail market sales and increase of profitability through

improvement of gross profit margin– Retail revenue was 39.7 million euros which is 7% less than in previous year

– Retail gross profit margin increased 2.7 percentage points from 52.7% to 55.4%.

• Other sales channels (wholesale, franchise and e-store) development and increase in sales growth– Wholesale and franchise revenue was 6 million euros, increase of 1 million euros i.e.

21%

– E-store revenue was 1.1 million euros, increase 9%• Improved functionality and speed in e-store

• New delivery system in a form of DPD courier

• Improved photo-language in e-store

Objectives of 2016 (2)• Better inventory management – higher inventory turnover

– Inventory turnover was 2.17, previous year comparative result was 2.16

– The gross profit and average inventory ratio has improved from 1.94 to 2.16

– The company has created new structures and tools for collection development and for inventory planning and realising.

• Operating efficiency improvement – decrease of head-office expense– Due to lack of qualified labour force the wage growth pressure is high on all Baltic states, thus

making head-office process more effective and decrease expenses is very important to Baltika

– In 2016 head-office expenses have decreased 0.5 million euros i.e. 6%.

2016 results

• Revenue 46,993 teur

– Growth of revenue -3.7%• Retail -7.1%

• Wholesale and franchise +21.2%

• E-store sales +9.0%

• Gross profit 23,497 teur

– Growth of gross profit +1.8%

– Gross profit margin 50.0% (2015: 47.3%)

Baltika’s brand stores network

• 22 March 2017: 127 stores in eight countries with sales area 23,606 m2

• 94 brand stores in Baltics

• 33 franchise stores

Stores as at 22 March 2017

Stores by brands Retail All Stores by markets Area

Monton 22 45 Estonia 43 7,597

Mosaic 24 30 Lithuania 29 5,541

Baltman 14 14 Latvia 22 4,003

Ivo Nikkolo 13 14 Russia* 11 2,353

Multibrand 10 12 Ukraine* 16 2,727

Bastion 9 9 Belarus* 2 350

Fashion Outlet 2 3 Spain* 3 549

Serbia* 1 485

Total 94 127 127 23,606

*Franchise stores

Estonia32%

Lithuania23%

Latvia17%

Russia*10%

Ukraine*12%

Belarus*2%

Spain*2%

Serbia*2%

Share of op.area

Retail revenue by retail markets and brands

• Monton still forms the largest part of

Baltika Group’s revenue, in 2016

Monton sales formed 43% of retail

revenue (2015: 41%). Monton is also

the most successful Estonian brand

on International level.

Share of retail revenue in Baltics Retail revenue by brands

Estonia47%

Lithuania27%

Latvia26%

Monton43%

Mosaic31%

Baltman12%

Ivo Nikkolo10%

Bastion4%

Wholesale and franchise revenue by markets and brands

• By countries • By brands

Monton59%

Mosaic31%

Baltman4%

Ivo Nikkolo4%

Bastion2%

RU26%

EE19%UA

19%

FI10%

DE7%

ES7%

LV6%

BY3%

AT2%

LT1%

2017 DIRECTIONS

BaltikaBalanced business model

Own retail in Baltics, which is complemented by other channels

• Recent years’ decisions to exit from Ukraine and Russia retail markets has significantly reduced the risks and allows to focus on Baltics retail markets

• Stable revenue and profit from Baltics• Baltika is in top 5 retailers in Baltics and has a market share

of 4%

Revenue growth through other channels is a source of additional profit, because it allows to grow sales võlumeand doesn’t increase fixed costs.

Maintaining and growing the Baltics retail sales volume and profit by offering better customer experience

• we pay more attention to original design features and collection quality

– nearly 45% of our collections are produced in Estonia by Baltika Group subsidiaries;

• better planned and managed outsourcing, which allows us to work with less inventory and lower mark downs;

• actively oriented customer communication with loyal customers of Baltika fashion brands in all three retail markets, through the AndMore customer programme;

• brand shop location planning in the best shopping centres in Estonia, Latvia and Lithuania;

• development of the e-store Andmorefashion.com;

• further development of multi-brand shops and creation of Andmore concept (e.g. Monton AndMore).

Developing and growing revenue in high potential wholesale, franchise and e-store channels

• 2013: first franchise agreement in Belarus

• 2014-2015: Baltika exiting from Ukraine and Russia retail markets and continuing operations in these markets through franchise partner.

Franchise stores March 2017Ukraine 16Belarus 2Spain 3Russia 11Serbia 1

Total 33

Sales area, m² 6,464

Monton76%

Mosaic20%

Baltman1%

Ivo Nikkolo2%

Bastion1%

Franchise revenue by brands

Objectives of 2017

• Successful company: increase profitability and improving gross profit and operating expense ratio;

• Content customer: increase in all sales channels through offering better customer experience;

• Motivated employee: to increase profitability it is important to maintain employees’ motivation and dedication.

8 most important fashion and retail business trends 2017 (1)

1 Seasonless fashion. Changes in customers’ consumption, people by more and more products without a classical season identification (T-shirts in summer or coats in winter). Products’, that can be worn regardless of the season, sales revenue has increased fast especially during recent seasons. Term „layering“ is being used a lot, which describes a trend of combining and wearing different types of products in layers.

2 Fast fashion segment competition increases. For example: Inditex/Zara has an objective to compete for increase of market share. This in turn means lower prices, more agressivecampaigns to eliminate „fast fashion“ inventory and bigger store formats.

3 Segmentation acceleration. New and rapidly developing niches with pursuant niche-collections. In a big picture this means partially returning to old values (products’ sustainability, quality, supply chain transparency, slow fashion).

4 Retail formats (sales areas and products’ amounts located there) divergence is accelerating: big are getting bigger and average are getting smaller; it will be harder to compete with average formats (350-500 m2).

8 olulisemat moeäri ja jaekaubanduse trendi 2017 (2)

5 Ongoing fast e-commerce growth and fashion business’ who use it need to choose

between omnichannel and multichannel.

6 With a pressure to mark ups i.e. margins the products’ input prices are increasing.

7 Fashion business sourcing (production) is looking for alternatives for China who is

getting more expensive and for unstable South-East Asia, moving partially (or at least closer) to sales markets is taking part.

8 In consumers wallets more and more other products and services are competing

with fashion products.

Thank you!

Meelis MilderMaigi Pärnik