Reinwardtstraat 232, 1093HP Amsterdam
+(7495) 648-6429
+(38044) 369-5200

Office 303, 9 Boryspilska Street, 02099, P. O. Box 150, Kyiv, Ukraine.
News/Media Centre

Milkiland publishes the results for first quater of 2016

14.05.2016

Interim Statement

Results of the first quarter 2016

Milkiland N.V. hereby publishes the Group’s results of the first three months of 2016.

Highlights of the 1st quarter 2016

Operational results
        

  • In first quarter of 2016 Russian market remains closed for Ukrainian and the EU dairy producers, thus putting additional pressure in the EU and Ukrainian dairy markets. As a result of trade barriers, Ukraine faced slight oversupply of raw milk in the domestic market, however, the Q1 2016 raw milk price remains very high y-o-y (+31%) in hryvnia terms, mainly due to inflation trigger. In Russia, raw milk prices remained almost stable over the period and only demonstrated slight decrease in terms of price by c.3% y-o-y in rouble terms.

  • Additional factor that tightened a competition in the Ukrainian dairy market in Q1 2016 was implementation of Free trade zone agreement between Ukraine and EU since January 1, 2016. At the same time, possibilities for import of EU made dairy to Ukrainian market were limited due to continuous devaluation of Ukrainian hryvnia.       

  • During the first quarter of 2016 the Group has followed its strategy of growing local competence in the markets of its operations. In particular, our largest, Russian division concentrated on gaining a new market share in the traditional cheese and whole-milk products segments. Moreover, Russian subsidiary Rylsk cheese almost tripled its cheese production for the period.

  • In Q1 2016, the Group decreased its overall output by 16% y-o-y following its strategy to focus on production of higher value added products in its key markets. The Group prioritized preserving its profitability rather than lowering products prices. In particular, Milkiland decreased cheese production volumes in Ukraine, but increased them in Russia capitalizing on import substitution after trade barriers implementation. Ostankino Dairy Combine capitalized on the higher demand for value‑added fresh dairy products in line with the substitution of imported EU and Ukrainian made dairy.

  • Milkiland EU and Milkiland Intermarket decreased their dry milk products sales to third countries by c. 25% in volume terms in Q1 2016 due to unfavorable global market pricing conditions.

Financial results

  •   Absence of cheese exports from Ukraine and Poland to Russia, unfavorable pricing for dry milk products in the global dairy market, as well as further Ukrainian hryvnia and Russian rouble devaluation resulted in a c. 22% drop in the consolidated revenues of the Group in Q1 2016 to EUR 36.5 million.
  •   In order partly offset a downward pressure on the Group’s revenues, in the first quarter of 2016 Milkiland increased its product prices in Russian and Ukrainian markets in line with general markets trends.

  •   On the back of lower top-line and 21% reduction in costs, gross profit of the Group declined by c. 30% and stood at EUR 5.2 million, while gross margin decreased from 15.7% in Q1 2015 to 14.1% in Q1 2016.

  •   A significant cut in the S&D (-32% y-o-y) and administrative expenses (-23% y-o-y) slightly improved the Group’s EBITDA from c. EUR 1.9 in Q1 2015 to c. EUR 2.0 million in Q1 2016, implying EBITDA margin of 5.6%, up 1.5 pp y-o-y.

  • Non-cash foreign exchange loss triggered by further Russian rouble and Ukrainian hryvnia devaluation was less significant in the first quarter of 2016 and amounted to c. EUR 13.2 million vs c. EUR 33.6 million in the same period of 2015. But, it remained the key contributor to the Group’s net loss of EUR 16.4 million in Q1 2016 compared to net loss of EUR 35.2 million in Q1 2015.

  • A further local currencies devaluation in the Group’s key markets contributed to a c.8% decrease in the balance value of PPE in the euro terms.


Overview of the Group’s sales and profitability by geographical segments

While the highly profitable Russian market remained closed for the Ukrainian cheese makers, the Ukrainian dairy market faced tightening competition also on the back of implementation of FTZ agreement with the EU. Moreover, Russia’s trade barriers led to some oversupply in the EU market thus limiting the possibilities for exports of dairy products from Ukraine to EU countries.

In macroeconomic environment, Russian rouble depreciated against EUR 19% y-o-y in Q1 2016, while hryvnia lost 11% y-o-y over the period, thus depressing the Group’s top-line in EUR terms. In order partly to offset the devaluation effect, Milkiland in Q1 2016 managed to increase the  prices to finished dairy in Ukraine and in Russia in line with general trends in these markets.

On the positive side, the closure of the Russian market for dairy imports from EU and Ukraine resulted in an increased demand for a high-quality substitution of previously imported products. To cover this demand, Ostankino Dairy Combine decreased volume sales of low-marginal dairy and reoriented towards higher value-added products. As the result, whole milk products volume sales by the Combine declined by 12% on y-o-y basis. More important, cheese volumes produced by Rylsk cheese almost tripled over the period and contributed to an almost 90% increase in the Group’s overall cheese volume sales and 57% increase in cheese value sales in Russia.

All the positive factors mentioned above were not enough to offset the influence of further depreciation of Russian rouble reinforced by increased operating expenses of Ostankino, mainly triggered by the higher land taxation in Moscow. This led to decline of the Russian segment revenue by c.12% to EUR 24.8 million and decrease of its EBITDA by one-third to c. EUR 1.9 million in Q1 2016 in comparison with the same period of 2015.           

Tightened completion and limited possibilities for exports resulted in the Group’s volume and value drop in cheese segment in Ukraine in Q1 2016. Milkiland focused on lowering cheese output and increasing price, thus preserving the segment’s Q1 2016 profitability. As the result, despite c. 33% decline in the Ukrainian segment’s revenue to EUR 9.2 million due to lower sales volumes and depreciation of Ukrainian hryvnia, segment’s EBITDA stood at positive EUR 0.4 million in comparison with the same, but negative, amount of EBITDA generated in Q1 2015.  

Steady production and sales of cheese in Q1 2016 together with the development of the distribution network for this product in Poland, as well as finding of new distribution channels for Polish made dry-milk products in EU, including Baltic states, brought a profitability of the Polish segment in the reporting period to positive territory.           

Overview of the Group sales and profitability by business segments

Whole-milk dairy was the largest segment in terms of revenue and business segments EBITDA[1] providing for 61% of revenue (59% in Q1 2015) and being the largest EBITDA-generating segment in Q1 2016. The segment revenue declined 19% to EUR 22.3 million on a back of key operational currencies devaluation, while segment EBITDA fell 48% from EUR 2.7 million to EUR 1.4 million, reflecting a drop in profitability of the Russian division. The segment’s Q1 2016 EBITDA margin reached 6.3%, down 3.5 pp y-o-y.

Cheese & butter segment contributed approximately 31% to the Group’s total revenue (the same in Q1 2015). Segment revenue decreased by c. 22% to EUR 11.2 million due to both volume contraction and operational currencies devaluation. On a positive side, segment generated a positive EBITDA of EUR 0.7 million compared to negative result reported in Q1 2015, implying Q1 2016 segment’s EBITDA margin of 6.6%.

In Ingredients and other products segment, revenue decreased by 40% to EUR 2.9 million on the back of lower prices and unfavorable international market conjuncture. However, the segment reported positive EBITDA of EUR 0.1 million with EBITDA margin of 4.8% in Q1 2016 reflecting and improvement of Milkiland EU subsidiary’s profitability compared to negative result of EUR 0.2 million in Q1 2015.

Key Financial results

Cost of sales and gross profit

Cost of sales decreased 21% y-o-y (or slightly slower than revenues) to EUR 31.2 million, due to lower raw milk prices in Poland and currency devaluation in Ukraine and Russia.

As a result of the top-line decline, the Group’s gross profit was 30% lower and constituted EUR 5.2 million. The gross margin declined from 15.7% to 14.1%.

Operating result and EBITDA

The Group’s Q1 2016 selling and distribution expenses decreased 32% compared to Q1 2015, to EUR 3.0 million, outperforming overall revenues decline as well as Ukrainian hryvnia and Russian rouble devaluation. The effective cost management significantly reduced marketing costs in Ukraine over the reporting period.

The Group’s administrative expenses decreased in line with revenues by 23% on y-o-y basis to EUR 3.0 million reflecting lower labor costs due to Ukrainian hryvnia and Russian rouble depreciation.

The Group’s other income increased significantly y-o-y in Q1 2016 to EUR 0.8 million compared to almost zero net operating expenses reported in Q1 2015 due to higher gain on disposal of non-current assets.

Decline in the gross profit led to almost zero operating profit of the Group in Q1 2016 in comparison with the negative operating profit in Q1 2015 in the amount of c. EUR 1.0 million. The Group’s EBITDA increased by 6.7% to c. EUR 2.0 million in Q1 2016.

Loss before tax and net loss

A further depreciation of Ukrainian hryvnia and Russian rouble led to a one-off non-cash financial currency translation loss of EUR 13.2 million. This factor mainly contributed to a loss before tax of c. EUR 16.2 million and net loss of the Group amounted c. EUR 16.4 million.




[1] Business segments EBITDA is calculated net of other segments EBITDA, namely EBITDA contribution of Milkiland N.V., the holding company of the Group.