AnalysisoftheCompanysFinancialStrategy

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especially with the infusion of sliced-melted-cheese production line at their

Ershovo’s factory. They were also going to increase the production amount of dairy products at the partners’ plants.

The second company which quite good financial capability was Belebeevsky, JSC which cemented their market share at yellow cheese segment. Not only their equity-to-total-assets ratio increased (due to equity growth), but also working capital turnover. That was the reason for leverage drop which means that the company became much more stable and a little more independent from creditors. Ostanlinsky showed satisficing the results as the equity decreased insignificantly, but the dependence from creditors is quite high. Other companies showed uncertain results. As for Lactalis which is the owner of “President” and “Galbani” trademarks fell back on additional borrowing which decreased the equity share and increased financial leverage. Financial conditions of Ecomilk, LLC can be considered as the high dependent from creditors as their financial leverage is higher than 137, equity-to- total-assets and working capital turnover ratios are 0.01. It means that the company almost has nothing of their own equity and all the financing is external (banks or the parent company in France)38. I should also admit that Ecomilk is butter market leader with the biggest share (12.3% of all sales within Russia). Another company which highly depend on creditors is Elansky JSC, Univita LLC and Umalat JSC. The worst financial results belonged to Savyshkin Product which is quite surprising as after the sanctions were imposed in 2014, Belarusian production captivated unstuck by European products shells of Russian dairy market. Shareholders’ equity was negative which led to negative equity-to-total-assets ratio, financial leverage and working capital turnover. Beside this, the company is highly depended from

38 5.Abdul-Hadi, H. (2018, March 1). The Impact of Working Capital Management On The Profitability Of Financial Listed Firms in Palestine. Plekhanovsky Barometer, 1(13), 53-57. Retrieved from https://www.researchgate.net/publication/325093661. Available at SSRN: https://ssrn.com/abstract=3180725

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creditors according to debt-to-equity ratio. Moreover, compared to 2014 this meaning increased in 33.06. The most probable reason for unsatisfying financial results is constant predatory pricing for Russian dairy market occupation.

The best financial coefficients belonged to Valio (Table 2.2.1.4). The company could easily discharge current liabilities with working capital, highly liquid capital, monetary assets and short-term financial investments. Among the companies with strong liquidity I admitted Ostankinsky JSC and Lactalis LLC. 2 of 3 coefficients are within acceptable meaning, especially quick ratio. This is one of the most crucial coefficients as it indicates the share of short-term liabilities that may be covered with short-term funds, debtors’ payments and monetary assets. Belebeevsky also has this coefficient within normal limits. Beyond average are the coefficietns of Umalat, Savyshkin, Elansky and Univita. The coefficients of Ecomilk must be also admitted as in 2015 they strengthened their ability to pay back short-term liabilities with highly liquid and monetary assets.

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Belebeevsky and Ostankinsky have the highest profitability coefficients. All these coefficients are not only higher than the branch average ones, but also increased in 2015 compared to 2014 (Table 2.2.1.5).

Table 2.2.1.5

Profitability coefficients of Russian dairy companies foods in 2014-2015, %

•Each invested in sales ruble brought Belebeevsky 15.5 kopeks (4.4% growth), in equity – 47.7 kopeks (13.4% growth), assets – 25.7 kopeks (9.97% growth), capital employed – 59.3 kopeks (15.88%).

•Each invested in sales ruble brought Ostankinsky 12 kopeks (1% growth), in equity – 18.1 kopeks (2.6% growth), assets – 7.6 kopeks (1.08% growth),

capital employed – 20.5 kopeks (4.14%).

Umalat had similar tendency despite the equity profitability: in 2015 it dropped in 163.17% and instead of 3.04 rubles it brought 1.4 rubles.

Ecomilk showed satisfying financial results: 2 out of 4 results were above normal limits (ROE, ROCE), 2 were lower (ROA, ROS). The financial results of Elansky increased too. The sales profitability increased in 1.1% due to the revenue growth, the profitability of ROCE increased in 6% as the equity grew and long-term liabilities dropped.

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The most obvious fall was up to Valio: in 2015. All the results were lower beyond the normal limits. Moreover, the drop of equity profitability and profit in ROCE compared to 2014 was more than 40%., assets – more than 30%. These results are unsurprising as Valio was among the most damaged by sanctions and lost the significant market share in yellow cheese segment after the prohibition on wellknown “Oltermani” brand import. Most of their production capability were lost too so they were forced to fall back on partners contract manufacturing such as Galaktika, LLC.

Lactalis strengthen products’ profitability, yet the assets, equity and capital employed dropped so ROA and ROE were low that the branch average.

The drop of accounts receivable turnover (normal branch limits are 61 days and lower) can highlight companies’ insolvency and other realization issues. It can also be connected with the switch of the company to much softer debtors ‘policy for market share expansion. Within this, the payments are generally delayed longer. The lower accounts receivable is, the higher the necessity in working capital for realization amount is.

Increase of accounts receivable turnover in 2015 compared to 2014 is indicative for Valio, Belebeevsky, Savyshkin, Ekomilk (Table 2.2.1.6). Meanwhile, Lactalis, Elansky, Ostankinsky and Umalat showed decreased values. Increase of accounts receivable turnover witnesses the precipitation of income debtors’ payments. The decrease of this value, in contrast, testifies the problems with solvency and liabilities recovery. Nevertheless, it can also indicate more effective interactions with suppliers providing more profitable and cost-efficient postponed payment system without interest on the credit. Decrease of accounts payable turnover was illustrative of all the companies except for Umalat and Ecomilk.

Assets turnover ratio is a value provides information about all the assets’ usage effectiveness regardless of formation sources. Besides, the meaning clearly

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shows the profitability on each invested in assets ruble. Financial performance and conditions are straightly and strongly depending on invested facilities turnover, exactly as solvency and liquidity is.

The drop-in assets’ turnover in 2015 compared to 2014 is illustrative of Belebeevsky, Elansky, Ostankinsky. The growth of the coefficient was in Valio, Lactalis, Savyshkin, Umalat and Ecomilk.

Inventory turnover ratio. The normal limits for the coefficient are 23 days and less. It shows how many times the company used the mean inventory amount within analyzed period. This coefficient indicates about commodity quality and their managing efficiency. It also allows identifying the remaining of old, unused and expired inventories. The importance of this indicator may be described as follows. The profit occurs with each commodity turnover or with each production usage

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(operation cycle). The higher commodity turnover is, the more effective production is and the less the necessity in working capital is39.

Within normal limits the inventory turnover ratios are for Lactalis, Ostankinsly, Savyshkin, Umalat, Ekomilk. Beyond the limits the ratios were for Valio, Belebeevsky and Elansky. The drop of the coefficient was illustrative for Elansky and Ostankinsky. Valio, Belebeyevsky, Savyshkin, Umalat and Ecomilk had increasing values.

To sum up, the financial results are halved. Some of them illustrate the financial improvements and other part indicates deterioration. The last one inheres in companies which had the predominant share of imported products and which experienced imposed embargo in the full (Valio, Lactalis). The most unexpected results were shown by Savushkin taking into consideration their significant dairy market share.

In order to evaluate the impact of imposed in 2014 embargo and also analyze the result of Russian subsidiaries in terms of present conjuncture I opted for the company who has maximally similar business structure as FrieslandCampina and the same OKVED code (46.33.1 Wholesale of dairy products).

All in all, for conducting the analysis, I chose FrieslandCampina main competitor within yellow cheese market well-known company Valio which imported products share in the middle of 2014 was over 90% and which had the highest yellow cheese market share40.

The high dependence from the imported products led to the fact that both companies were among the most damaged from sanctions due to products’ line

3955.Yue, W., & Hanxiong, Z. (2011). Analysis of Enterprise Development Strategies Based on the Features of Different Stages in Enterprise Life Cycle. Proceedings of the 8th International Conference on Innovation & Management, 802-806.

4023.Delas, V., Nosova, E., & Yafinovych, O. (2015). Financial Security of Enterprises. Procedia Economics and Finance, 248 – 266 . doi: 10.1016/S2212-5671(15)00998-3

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reduction. They were forced urgently to ramp up the production and replace imported goods with native ones through the manufacturing at partners’ plants. This action prevented them from financial disaster and bankruptcy as a consequence. I must admit that both companies apprehend impending storm, set up manufacturing of certain items within Russia.

Valio have their own plant at Ershov in Moscow Region. Having their yogurts under prohibition, Valio was forced to set up their production in Russia as they brought the biggest revenue. They are now dealing with Galaktika, one of the most famous Russian producers of cultured milk products such as « Bolshaya Kruzhka » settled in Gatchina, Leningrad Region.

In 2014, Valio opted for Erhmann as a manufacturing partner for producing their famous and highly demanded Valio Clean Label yogurts, cream cheese and cottage cheese. They also set up the butter manufacturing with Kokhmaster RUS, one of the biggest Russian butter suppliers.

FrieslandCampina have a presence in the following dairy branch segments: cheese (yellow, white and cream for HoReCa), butter and milk (lactose-free). Valio have a presence within a little more segments: yellow cheese, butter, milk, melted cheese, yogurts, dairy desserts, cream cheese, drinks/water, cottage cheese. The main stress (according to the product line and market research) the company has on cultured milk products and melted cheese (the last is connected with the high popularity and recognition of trade mark «Viola»).

In 2014, Valio was the leader of yellow cheese market. The sales amount of the most popular and well-known cheese brand «Oltermani» had a constant growth. However, after the embargo was imposed, the importation of cheese ended and due to that, the company lost their market share and, as a consequence, the hugest source of incomes. According to market research (AC Nielsen, the sample – 16 cities with million plus population), nowadays the company do not rank among the best-sellers

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brand of yellow cheese segment. Despite this, they were able to catch retailers’ shells and got the 6th place on the basis of sales amount. However, in 2017 the company is about to conquer that market again as their most famous brand «Oltermani» is going to get back. The company set up its’ production at the Ershovo plant, where they also produce melted cheese Viola and slice their cheese. The «Oltermani» comeback may be a serious threat for FrieslandCampina.

Table 2.2.1.7

Valio balance sheet analysis

In 2015, Valio share of non-current assets was 1.41% while the current ones had 98.7%. This structure is normal for sale companies as at the current assets are mostly from inventories which are realized then. Financial results in 2015 do not differ significantly from 2014 ones, yet the tendency for current assets share decrease is obvious. In 2015 fixed assets decreased in 13,811,000 rubles which witnesses they sold some facilities. According to the public data, Valio was going not only to strengthen and ramp up the production at their own plant but also at the partners’ ones. The zero meaning of «Other non-current assets» balance sheet item means that the company did not have any investment programs. In 2015, compared to 2014, accounts receivable increased in 166,002,000 in absolute terms and in 7.9% in relative ones. As these funds are beyond company’s usage, the growth of this coefficient can be a danger zone with high level of risk. Another remarkable change was the drop of monetary assets in 62,365,000 rubles or 5.8% compared to 2014. The liabilities analysis showed that equity held the prevailing share with 61.1%, yet it must be noticed that this share dropped in 2.24% compared to 2014. Taking into

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account the equity growth in 37,876,000 rubles and the absence of long-term liabilities, the drop of equity share was caused by short-term liabilities increase in 72,221,000 rubles. The last one was, in turn, caused by accounts payable growth in 66% (207,840,000 rubles). According to previous financial analysis of Valio, this fact does not mean they have problems with solvency and unable to cover their liabilities, especially with decreased accounts payable turnover. I must admit that this coefficient went down from 45 to 34 days. However, the share of short-term liabilities increased from 65.3% in 2014 to 94.4% in 2015. This was also caused loan capital decrease. It must be admitted that the accounts payable in 2014 and 2015 much lower than in 2011-2013. It witnesses that the company paid back all the financial support for imported products they got from parent company.

Table 2.2.1.8

Valio income statement analysis

Income statement analysis. The first negative factor which is hard to ignore is total revenue decrease in more than 66.5% (over 8.7 billion rubles). It was mainly caused by product line huge narrowing. However, taking into consideration the fact that in 2013 and 2014 products were imported, the comparison of absolute value is incorrect. Despite this, I analyzed its’ shares in revenue. According to the financial report, the production costs share in 2013 was 82.3%, in 2014 78.72% and in 2015 73.8%. Taking into consideration the fact that raw milk in EU countries is cheaper than in Russia, I can tell that was due to cheaper milk purchasing. In 2015, commercial costs were decreased in twice compared to 2013 and 2014, yet due to revenue drop the share of it increase 8.11%. Considering the whole costs structure commercial costs share was 98.12% versus 97.82% in 2014, managerial 1.88 versus

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2.18 in 2014 which is close to 2013 (before-recession year). Finally, the sales profit drop is also obvious in 94% (596,273,000 rubles). The sales profit share cropped in 3.97%. In 2014, the share of profit in revenue was 4.8%, in 2015 0.83%. «Other incomes and expenditures» balance item consisted information about insignificant interest receivable increase and significant grow of interest payable. But the most captivating was the notable grow of other incomes in more than 15 times and their expenses in 6 times. The first one can be explained with the assignment for temporary use, the second with the expired of claim limitation period for unpaid accounts receivable. The share of net profit was 0.86% which was 2.45% lower compared to 2014 and 0.61% lower compared to 2013. I must also highlight the supremacy of 2014 net profit over 2013 one. The final drop of this indicator was 91.3% (398,964,000 rubles).

The amount of equity in 2015 increased in 4.57% due to net profit increase and, as a result, retained net profit. Both in 2014 and 2015 net balance of cash flows were negative. The reason was the excess of negative operational cash flow over the financial and investment ones. The growth of other incomes must also be admitted as it can indicate about insurance payments or damage etc. In 2015, 79.6% of all the payments were on the raw material suppliers which is lower than the same indicator in 2014 in 6.9%, 6.86% on personnel costs (versus 3.24% of 2014), less than 1% profit tax and interest on debenture, 13.4% on other payments (share increase in 4.9%). The drop-in personnel costs in 38.2% can witnesses the staff reduction due to the recession. Just after the embargo was imposed, the CEO of Russian Valio stated that each forth employee, unfortunately, would get laid off. The net balance of operational cash flow both in 2014 and 2015 was negative, yet the increase was more than 3 times. This was caused by other incomes increase and other payments drop. The net balance of ICF rocketed more than 4 times due to incomes from dividends, incomes from interest in other companies and also decrease of payments

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