Baltika’s Unaudited Financial Results, Fourth Quarter and 12 Months of 2019
Baltika Group ended the fourth quarter with the loss of 2,609 thousand euros which includes extraordinary impairment loss of 2,400 thousand euros related to Group’s lease contract for production units and restructuring plan and a negative impact of 119 thousand euros on the new accounting standard IFRS 16. Last year’s same period result was net loss in the amount of 3,450 thousand euros, including non-recurring costs in amount of 3,600 thousand euros (allowance for impairment, particularly for Eastern European franchise partners and non-recurring costs related with restructuring plan). Fourth quarter regular net results (excluding non-recurring costs and IFRS 16 impact) remained at last year's level, which was strongly driven by the decrease of sales which was offset by significant decrease in recurring fixed costs.
In the fourth quarter, Group’s sales revenue decreased 17% compared with the last year same period and was 10,139 thousand euros. Channel, with the biggest share (91%), retail, decreased 17% and was 9,294 thousand euros. Sales revenue decreased in all three Baltics market which was mainly driven by the sharp decrease of outerwear and knitwear sales due to warm winter and also due to the closure of Bastion brand.
The fourth quarter sales revenue of Baltika Group e-store Andmorefashion.com increased by 15% compared to the same period last year and was 542 thousand euros. The sales revenue of business customers decreased by 62% compared to the fourth quarter of last year and was 228 thousand euros. The sharp decline in business customers` sales was expected, as the gradual exit from business customer sales channel is part of Baltika Group's ongoing restructuring plan.
The Group's distribution expenses in the fourth quarter were 4,745 thousand euros decreasing by 22%, i.e 1 330 thousand euros compared to the same period last year. A consistent and significant reduction in distribution and administrative expenses is a part of Baltika Group's ongoing restructuring plan.
2019 12 months
Company ended the twelve months with the loss of 5,909 thousand euros, including non-recurring costs related to Baltika's ongoing restructuring plan in the amount of 2,700 thousand euros and negative impact of IFRS 16 in the amount of 408 thousand euros. Last year loss was 5,119 thousand euros.
In twelve months total, Baltika's sales decreased by 11% and was 39,630 thousand euros. E-commerce showed a 21% increase in sales, retail decreased by 7% and business customers sales decreased by 62%. The gross profit of the company was 19,191 thousand eurot, which is 2,345 thousand euros less than in 2018. The decline in gross profit in 2019 was due to the decrease in retail sales in the Baltics, especially in the fourth quarter, which was affected by the sharp decrease in demand for outerwear and knitwear due to the warmer winter. Gross profit was also negatively affected by the closure of Baltika's production company Baltika Tailor OÜ, which liquidation costs totalled to 675 thousand euros in 2019.
Baltika's distribution and administrative expenses (excluding non-recurring costs and the impact of IFRS 16) decreased for the twelve months by 1,708 thousand euros, of which majority i.e 900 thousand euros was driven by the decrease of recurring fixed costs in Baltika's head office. Baltika Group`s restructuring plan which was disclosed in March 2019 set out as one of its goals to reduce Baltika Group's fixed costs by 2 million euros by the end of 2020. The activities related with restructuring started in April-May and by the end of 2019 about 50% of the target was met. In 2020, fixed costs of 2 million euros will continue to be reduced according to the plan.
Non-recurring costs and IFRS 16 impact
The Group's non-recurring costs in 2019 were approximately 2,700 thousand euros, of which 1,363 thousand euros were non-recurring costs related to the implementation of the restructuring plan. During the termination of Baltika Tailor OÜ operations the number of employees was reduced by 336 and the non-recurring costs related with liquidation amounted to 675 thousand euros in 2019. In addition, operations at both headquarter and retail markets were restructured, resulting in a non-recurring costs of 688 thousand euros in 2019. During the year, the number of Group employees decreased by 446 people.
In addition, in the fourth quarter the extraordinary impairment loss of 1,330 thousand euros related to Group’s lease contract for production unit was made related to the discontinuation of production in the Group's Estonian units. As of 31 December 2019, the assets right of use and lease liabilities in the statement of financial position are recognized from 1st of January 2019 when IFRS 16 standard was first applied. Due to the closure of the production units, the Group no longer uses these assets for its own business activities, therefore the value of the assets has been estimated in accordance to the possible future uses.
As of 1 January 2019, IFRS 16, “Leases”, amended the recognition of lease contracts so that the rent payments for the remaining term of the lease period are recognized in the statement of financial position at their present value as both assets and liabilities, and period rent expenses are not recognized in income statement, instead of that the depreciation and interest expense are recognized in the income statement. As at 31.12.19, fixed assets (i.e all lease payments at their present value, up to the end of the contract term) increased by 16,040 thousand euros and at the same time short-term lease liabilities increased by 5,383 thousand euros and long-term lease liabilities by 12,396 thousand euros.
The impact of the mandatory new accounting standard IFRS 16 on the income statement is shown in the table below.
| 4Q 2019 | 2019 | |
| Decrease in rent expenses | 1,702 | 6,578 |
| Increase in depreciation | -1,601 | -6,149 |
| Increase in operating profit | 101 | 429 |
| Calculated interest expense on lease liabilities | -220 | -837 |
| Decrease in the net profit | -119 | -408 |
Equity
As of the end of the fourth quarter, the equity of the company does not comply with the requirements of the Commercial Code. At the end of the reporting period, the Group's equity was 1,203 thousand euros. In order to comply with the law, the equity should be at least 2,704 thousand euros. The Management of the Group is working on meeting the net asset requirement set out in the Commercial Code.
Highlights of the period until the date of release of this quarterly report
- On 1st of November 2019 AS Baltika, as the sole shareholder of OÜ Baltika Tailor, decided to dissolve the company and to start with the liquidation proceedings.
- On 16th of December 2019, an amendment to the loan agreement of AS Baltika and KJK Fund SICAV-SIF (under liquidation) was signed, according to which the loan in the amount of 2,045 thousand euros is non-interest bearing and has no fixed maturity date. The repayment date will be agreed by the parties but will not be earlier than May 2022.
- On January 2020 The Supervisory Board of AS Baltika meeting hold on 23th of January 2020 approved the plan to reorganise group structure. Part of the company`s restructuring plan is to change group management more efficient. In order to achieve that group structure will be changed more flat and lean. Supervisory Board decided to liquidate AS Baltika's subsidiary Baltika Sweden AB (dormant). In addition, it was decided that AS Baltika acquires 100% shareholding in OÜ Baltman, a subsidiary of OÜ Baltika Retail (holding company) for 0.15 million euros. OÜ Baltman manages the Baltics retail companies SIA Baltika Latvija and UAB Baltika Lietuva.
Consolidated statement of financial position
| 31 Dec 2019 | 31 Dec 2018 | |
| ASSETS | ||
| Current assets | ||
| Cash and cash equivalents | 264 | 428 |
| Trade and other receivables | 621 | 866 |
| Inventories | 7,644 | 10,707 |
| Assets classified as held for sale | 28 | 0 |
| Total current assets | 8,557 | 12,001 |
| Non-current assets | ||
| Deferred income tax asset | 281 | 286 |
| Other non-current assets | 222 | 287 |
| Property, plant and equipment | 1,683 | 1,878 |
| Right-of-use assets | 16,040 | 0 |
| Intangible assets | 536 | 543 |
| Total non-current assets | 18,762 | 2,994 |
| TOTAL ASSETS | 27,319 | 14,995 |
| LIABILITIES AND EQUITY | ||
| Current liabilities | ||
| Borrowings | 1,731 | 7,829 |
| Lease liabilities | 5,383 | 0 |
| Trade and other payables | 4,118 | 5,934 |
| Total current liabilities | 11,232 | 13,763 |
| Non-current liabilities | ||
| Borrowings | 2,488 | 1,165 |
| Lease liabilities | 12,396 | 0 |
| Total non-current liabilities | 14,884 | 1,165 |
| TOTAL LIABILITIES | 26,116 | 14,928 |
| EQUITY | ||
| Share capital at par value | 5,408 | 4,079 |
| Share premium | 0 | 0 |
| Reserves | 2,045 | 1,107 |
| Retained earnings | -341 | 0 |
| Net profit (loss) for the period | -5,909 | -5,119 |
| TOTAL EQUITY | 1,203 | 67 |
| TOTAL LIABILITIES AND EQUITY | 27,319 | 14,995 |
Consolidated statement of profit and loss and comprehensive income
| 4Q 2019 | 4Q 2018 | 2019 | 2018 | |
| Revenue | 10,139 | 12,281 | 39,630 | 44,691 |
| Client bonus provision | 81 | 0 | 81 | 0 |
| Revenue after client bonus provision | 10,220 | 12,281 | 39,711 | 44,691 |
| Cost of goods sold | -5,694 | -6,693 | -20,520 | -23,155 |
| Gross profit | 4,526 | 5,588 | 19,191 | 21,536 |
| Distribution costs | -4,745 | -6,075 | -19,588 | -21,579 |
| Administrative and general expenses | -644 | -642 | -2,672 | -2,375 |
| Impairment loss of trade receivables | -152 | -2,229 | -31 | -2,229 |
| Other operating income (-expense) | -1,267 | -40 | -1,412 | -16 |
| Operating profit (loss) | -2,282 | -3,398 | -4,512 | -4,663 |
| Finance costs | -321 | -149 | -1,391 | -553 |
| Profit (loss) before income tax | -2,603 | -3,547 | -5,903 | -5,216 |
| Income tax expense | -6 | 97 | -6 | 0 |
| Net profit (loss) for the period | -2,609 | -3,450 | -5,909 | -5,119 |
| Total comprehensive income (loss) for the period | -2,609 | -3,450 | -5,909 | -5,119 |
| Basic earnings per share from net loss for the period, EUR | -0.05 | -0.08 | -0.16 | -0.13 |
| Diluted earnings per share from net loss for the period, EUR | -0.05 | -0.08 | -0.16 | -0.13 |
Maigi Pärnik-Pernik
Member of the Management Board
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