06 May 2016
Main changes in financial results vs. previous year were two-fold: from one side the company tried to reshuffle its operating activity against a background of negative business environment, on another side – in last reporting period Milkiland was concentrated on write-down of bad assets, which led to significant formal decrease of Equity, but more transparent balance sheet structure.
As for operating and financial performance, total revenues in EUR terms declined by 34% vs. previous year and made EUR 191.4M, driven by import ban on Ukrainian and EU dairy production imposed by Russian government since mid-2014 and devaluation of both countries national currencies. Ban on export of cheese in Russia, which, basing on our estimations, in Y2013 made close to EUR 70.0M, had significant impact on revenues of the company. Also these operations were the most profitable for Milkiland, so mentioned ban made significant negative impact on profitability.
To mitigate impact of Russian ban, the group started to focus on domestic realization – WMP products in Russia and Cheese&Butter sales in Ukraine. According to report, in Y2015 WMP realization in natural terms decreased by 10% (vs. Y2014), basing on report, mainly due to decline in Ukrainian WMP sales, but we also see some decrease of realization in natural terms in Russia, as reported sales increase of Milkiland’s Ostankino Dairy (WMP producer) in RUB terms is 4%, while average RUB-denominated price (according to report) grew by 14%. In money terms WMP sales declined by 23% (to EUR 105.1 mln), also (apart from decline of realization in natural terms) driven by RUB devaluation.
As for cheese&butter sales, on the group level they declined by 37% (to EUR 65.7M) driven by both decrease of realization in natural terms by 22% (in Russia – by 40%, due to ban of Ukrainian production import) and decline in EUR-denominated realization price due to RUB and UAH devaluation. Ingredients sales decreased by 55%, main reason – downturn in world dairy products prices, which depressed export of this category products from Ukraine.
Profitability of Milkiland operations remains subdued (EBITDA margin at 5% in Y2015), though this figure can still be manipulated by the company in a view of 1) uncertainty related to ongoing restructuring negotiations with lenders; 2) reported increase of final products realization prices in both RUB and UAH in Y2015 (for instance, +14% for WMP price in Russia, +30% for cheese in Ukraine) exceeded reported growth of raw milk price (+5-10% in both Ukraine&Russia), while the share of raw materials in total costs structure remained the same at about 75%.
On write-down of bad assets, in Y2015 it mainly related to 1) write-down of EUR 8.2M cash deposit in one of Ukrainian bankrupted bank (which can be somehow related to owner of Milkiland), and 2) receivables write-down in amount of approximately EUR 15M (total “bad” receivables value was close to EUR 35M, Milkiland reported that it settled the debt with some assets with fair value of EUR 20M, currently reported as Investment property). Cash deposit write-down was already reported in 9m2015 financials, while receivables write-down not (though it was anticipated by us).
As a result of mentioned write-downs, Equity of the company decreased from EUR 94M as of 31.12.14 to EUR 47.8M as of 30.09.15 and EUR 34.6M as of 31.12.15 (also anticipated ). Along with it, as of 31/12/15 balance sheet structure became much more transparent (main questionable items are fair value of fixed assets and EUR 15M of trade payables).
Key issue for future operations of Milkiland is ongoing debt restructuring (debt burden is huge at EUR 112M (including unpaid interest), taking into account current business volumes and profitability of operations).