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