Comment by Anatoliy Yurkevych, CEO, Milkiland N.V.:
“We spent the year 2015 in the situation when several unfavourable factors, including further deterioration of macro-economic conditions in Ukraine, as well as stagnation of the Russian economy, existing conflict between Russia and Ukraine, fall of global dairy prices had a significant pressure on the Group’s performance and financial results.
In particular, in the last year continued devaluation of the Ukrainian Hryvnia and weakening Russian Rouble, the Group’s two major operational currencies, noticeably depressed the top-line of Milkiland’s subsidiaries in these countries in EUR terms.
Оn the positive side, the Russian segment of the Group’s business demonstrated steady development on the back of substitution of different types of fresh dairy products previously imported to Russia from the EU, as well as growing volumes of domestic cheese production and sales. In Ukraine Milkiland strengthened its positions as one of the leaders of the cheese segment of dairy market.
We believe that in the year 2015 our team managed to maintain and develop our business in the extremely difficult external environment. We feel ourselves confident to continue the history of Milkiland as the unique multinational business, which unites the shareholding interests of Kazakh, Polish, other EU, Ukrainian and US investors.”
Operating developments in 2015
Volume sales and revenues
In 2015, Milkiland Group’s revenues contracted by more than one third in EUR terms on y-o-y basis. This contraction was mainly triggered by further local currencies depreciation in the Groups’ core operational markets of Ukraine and Russia (by 35% and 59%, respectively) against the presentation currency, namely EUR, on the back of deterioration of macro-economic situation in Ukraine and continuing economic stagnation in Russia. Russian dairy import limitations which were still in place in 2015 also affected the Group’s revenues, in particular, by elimination of the cheese supplies from Ukraine to Russia.
Milkiland’s 2015 whole-milk products volume sales decreased by 10%, mainly on the back of decline of those products sales in Ukraine. A drop in the cheese sales in volume terms by c. 22% on y-o-y basis was mainly triggered by c. 40% decline in cheese sales volumes in Russia due to Russian dairy import restrictions. In order partly to offset them, the Group concentrated on further localization of cheese production in this country. As the result, the Group’s Russian subsidiary Milkiland RU trough Rylsk Syrodel division of LLC “Kursk milk” managed to increase the volume of cheese production by more than one third on y-o-y basis to c. 5.0 thousand tons.
The most significant drop of sales Milkiland pencilled in in dry milk products segment (-36% y-o-y) due to weak international demand during 2015. Global prices for these products, in particular, dry milk powder and skimmed milk powder, kept declining throughout 2015, which led to noticeable decline of sales in this segment in value terms. Thus, because of low profitability of these products, the Group reduced their output to minimum over the reported year.
In 2015 Milkiland continued a policy aimed at searching of new markets and geographical diversification of sales. In line with this policy, Milkiland Intermarket subsidiary managed to maintain the volume of cheese export sales but decreased of sales of dry milk products. Kazakhstan accounted for over 56% of its revenues in the reported year.
Since getting of clearance for dairy export to China by several production subsidiaries of Milkiland Ukraine in November 2015, the Group concentrated its efforts on development of distribution channels in this country, primarily targeting on the supplies of dry milk products.
Geographical segments performance
On the subsidiaries level, Ostankino, the Group’s main subsidiary in Russia, experienced moderate advance in sales in local currencies terms by 4% y-o-y in RUB terms (‑22% y-o-y in EUR terms due to RUB devaluation effect). This facility holds the position of main revenue contributor of the Group in 2015, delivering over 50% of sales in value terms. Ostankino also delivered highest profitability among other Group’s subsidiaries with 2015 EBITDA margin of 8.5% (+1.8pp y-o-y). Better pricing for fresh dairy products in Russia triggered by Russian import limitations together with selling additional volumes of higher value added products stood behind this result.
Revenues of Milkiland Ukraine decreased by c. 30% in UAH terms (-55% y-o-y in EUR terms due to UAH devaluation effect), mainly on the back of lower whole-milk products sales volumes triggered by shrinking purchasing power of population (real wages in Ukraine in 11 months of 2015 decreased by 21,1% on y-o-y basis).
Milkiland EU 2015 revenues declined by 48% y-o-y in EUR terms (by the same number in PLN terms). The main reasons behind that were valid embargo, introduced by Russian Federation in 2014, followed by market pressure on prices in the local market, as well as significant downfall in prices for dry whey products in the EU market. To remind, in 2014, the Group targeted the marginal Russian cheese export market from Poland, obtaining the export permission to Russia for its Ostrowia cheese making plant and trying to fill the existing distribution channels in Russia by Polish-made cheese. This process was successfully developing in June-July 2014 but then was disrupted by Russian sanctions against the EU in the beginning of August 2014.
Falling under the influence of this external factor beyond its control, Milkiland EU was forced to switch to the operations in the domestic Polish market with a primary focus on the development of local distribution network. Thus, revenues from local Polish market contributed 89% of Milkiland’s EU revenues in 2015, while export sales of the subsidiary amounted 11% of total, mainly hard cheese exports within the Group. Local market revenues were split between dry whey products – 69% distributed in B2B channel, sales of curd cheese – 15%, hard cheese – 13% and other products 3%.
Impact of devaluation on revenues and costs
On the positive side of devaluation, the Group benefited from a drop in the average effective raw milk price by over 10% in the EUR terms, mainly triggered by a significant correction of the average effective milk price in Ukraine. At the same time, the consumers’ purchasing power was not enough to fully cover the depreciation effect and the Group’s average selling price in 2015 decreased by c. 12% y-o-y in EUR terms.
Restructuring of the Group’s indebtedness
In December 2015 “Deloitte & Touche” Ltd., a member firm of Deloitte Touche Tohmatsu Limited, finalized the Group’s Business Review and review of short-term liquidity forecast, which were delivered for consideration of the main creditors of Milkiland, namely, UniCredit Bank Austria AG and AO Raiffeisenbank. On the basis of Deloitte’s findings the Group are now continuing the negotiations with the creditors aimed at the restructuring of debt under Syndicated Loan Facility Agreement provided by the above mentioned banks.
The revenue of the Group in 2015 decreased by c. 34% to EUR 191 million* in comparison with 2014, mainly depressed by Ukrainian Hryvnia and Russian Rouble devaluation, as well as restricted access to the Group’s traditional main export market of Russia.
EBITDA was depressed to EUR 9.6 million* (down 44% y-o-y), while EBITDA margin declined to 5% (-0.9pp y-o-y) mainly on the back of depressed top-line of Milkiland’s business.
Outlook for 2016
In 2016 the Group continues the policy aimed at growing competence in the markets of our operations, as well as searching for new markets for Milkiland’s business. In this regard, in the current year the Group’s management will follow the next strategic priorities:
Milkiland Ukraine will support further expansion in the domestic market of Ukraine by means of:
Ostankino and Milkiland RU will support further expansion in the domestic market of Russia by means of:
Milkiland EU will focus on delivering a sales growth in the domestic market of Poland and looking for new export opportunities by means of:
Comment by Anatoliy Yurkevych, CEO, Milkiland N.V.:
“In 2016, our management focuses on further development of the Group’s business, including through using of the new opportunities for Ukrainian and Polish segments after the implementation of Free Trade Zone Agreement between Ukraine and European Union.
We also put additional efforts aimed at reaching of the agreement with the Group’s creditors on restructuring of Milkiland indebtedness, including of debt under Syndicated Loan Facility Agreement provided by UniCredit Bank Austria AG and AO Raiffeisenbank”.
*The financial figures for the year 2015 stated above are preliminary and unaudited
About Milkiland N.V.
Milkiland is an international dairy producer operating in Russia, Ukraine and Poland, offering a wide range of dairy products such as fresh dairy, cheese and butter, to satisfy consumers in their everyday needs for healthy and tasty foods.
In Russia, the Group produces fresh dairy products at Moscow-based OJSC “Ostankino Milk Combine” and sells them under Ostankinskaya brand and produces cheese under brand TM Dobryana on Rylsk Syrodel division of LLC “Kursk milk” in Kursk region.
In Ukraine, the Group operates 10 plants and offers wide range of fresh dairy, cheese and butter under Dobryana and Kolyada brands.
In Poland Milkiland controls “Ostrowia” cheese plant in the city of Ostrów Mazowiecka and sells its products locally under Ostrowia brand.
Milkiland exports dairy products from Ukraine to over 30 countries.
Shares of Milkiland N.V. – the Dutch holding company of the Group has been listed on the Warsaw Stock Exchange since December 6, 2010.
For additional information please contact:
CFO, Milkiland N.V.,