Paving the Way for Recovery
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PAVING THE WAY FOR RECOVERY ANNUAL REPORT 2016 01 CONTENTS CONTENTS | continued 02 3 Important Developments in 2016 9 Highlights of company History 11 Our Assets 13 Our Products 15 Vertical Integration 17 Our Value Creation Model 23 Letter From CEO 25 Macroeconomic Overview 29 Market Overview 46 Mission, Strategic Vision, Goals 47 Operations Review 53 Financial Review 62 Risk Management 69 Sustainable Development Strategy 72 Corporate Governance Avis Poultry Complex 80 Consolidated Financial Statements Avangardco IPL is the largest Despite the political and economic producer of shell eggs and dry challenges faced by Ukrainian egg products in Ukraine and businesses in 2016, Avangardco Europe. Relations with investors, IPL retained its leading positions analysts, creditors, distributors, in the domestic and international suppliers, customers, consumers, markets increasing the share of government agencies and other sales through high-margin institutions play a vital role in the channels (exports and retail company’s eco-system. chains), whilst further diversifying the geography of exports and Avangardco IPL consistently attaining international quality adheres to high standards of certification for its products. product quality and biosecurity. AVANGARDCO IPL | ANNUAL REPORT 2016 AVANGARDCO IPL | ANNUAL REPORT 2016 03 IMPORTANT DEVELOPMENTS IN 2016 IMPORTANT DEVELOPMENTS IN 2016 | continued 04 First Signs of Recovery Give closing at 17% YOY 1 for the Government Doubles the A New Government Programme abolish the special VAT regime Rise to Cautious Optimism for year it was a major Minimum Wage to Boost to Support Agriculture Expected for agricultural producers in Ukraine's Economy Going improvement compared to Consumer Demand to Partially Offset VAT Subsidy 2017. The new programme is Forward the 2015 level of 83% YOY 2 ; Cutback expected to partially offset the Annual GDP Growth In December 2016, the negative impact from the latter 2016 became another difficult Macroeconomic revival is Government of Ukraine approved On December, 2016 the decision on the company's year for Ukraine's economy, in certainly very welcome news a crucial decision to increase the Parliament of Ukraine adopted a bottom line. many critical respects probably but it will only make a minimum wage from UAH 1,600 5-year programme to provide the most difficult year +2.3% YOY difference to the company's (~ USD 60 1) to UAH 3,200 (~ USD support to domestic agricultural Avangardco Retains Market economically since the military sales or bottom line when it 120 2) per month with effect from producers in the amount of 1% of Leadership Despite Unprece- conflict and annexation of translates into increased the 1st of January, 2017. the gross value of their output. dented Demand Contraction Crimea by Russia sent Ukraine's household income that gets and Increased Cost Inflation economy into a nosedive. But spent on company products. there's a glimmer of hope this Household income indeed Without exaggeration, 2016 has time around. got back on a growth track in Minimum Wage Increase Subsidy for the Farming been the worst year for the second half of 2016 and Industry in 2017 Ukraine's egg farming industry While consumer demand in even though this modest yet in the past three years. All the general and particularly demand Inflation Decelerated positive growth is mostly negative consequences of the for eggs continued to contract down to the low baseline ongoing recession finally under pressure from the effect it's very welcome I UAH 3,200 manifested themselves in full consequences of continued news indeed; taking a heavy toll on household economic recession throughout UAH 4bn income and home demand. 2016, macroeconomic fundamentals Retail trade also started to started showing cautious signs of | 13.9% YOY pick up during 2016 for the For the third consecutive year, improving: first time in three years egg consumption has been recording a growth rate of 4% contracting in absolute terms. In GDP was growing in each of YOY. In US dollar terms this may not 2016, total egg consumption the four consecutive seem like much but in relative decreased 8.6% YOY and that's quarters of 2016 producing a This is all excellent news of terms we are talking about a The programme, among other on top of a 10.5% YOY decline positive annual GDP growth course but it's important to bear twofold increase in the income elements, features a subsidy of the year before. of 2.3% YOY against a 9.8% in mind that macroeconomic of Ukraine's poorest families. UAH 4bn for the farming YOY GDP contraction the improvements do not translate This category has suffered a industry in 2017. Importantly, it's not just that year before; into fresh and solvent demand Retail Trade very severe loss of income from households keep winning over for company products the ongoing economic recession The subsidy will be distributed market share from industry. We Started to Pick Up Inflation decelerated to 13.9% overnight. cutting back on spending across automatically on a monthly are talking here about a net YOY and while it is still high the board. As a result, they've basis in proportion to the contraction in the consumption and mostly fuelled by built up substantial deferred amount of VAT paid within the of eggs coming from all sources, increasing utility prices and a demand for goods and services, allocated funds, whilst subsidy which may suggest that low- weaker local currency, it's including basic foodstuffs, such for poultry producers will be income families increasingly only a third of its 2015 level of +4% YOY as eggs. The increased minimum capped at 50% of its monthly abandon animal proteins from 48.7% YOY; wage has a strong potential for amount. their diets. In favourable converting the deferred demand Local currency depreciation into real solvent demand. This is very welcome news also slowed down substantially Avangardco is determined to indeed especially in view of 1, 2 Calculated at UAH/USD 1, 2 and while it failed to break Calculated at weighted claim its fair share of this another decision by the exchange rate as at 31 December out of double-digit territory average rate for the period. demand demand come 2017. Government to completely 2016. AVANGARDCO IPL | ANNUAL REPORT 2016 AVANGARDCO IPL | ANNUAL REPORT 2016 05 IMPORTANT DEVELOPMENTS IN 2016 | continued IMPORTANT DEVELOPMENTS IN 2016 | continued 06 economic circumstances, such a Share of Sales through Company's Share Sales through Retail Chains its shell egg output via the carefully maintained its own trend could indicate that Retail Chains in of Ukraine's Industrial Reach 60% of Sales Volume for so-called wholesalers, small portfolio of trusted wholesalers, consumers are upgrading from the First Time firms and sole traders acting as since 2009, the company has Total Egg Sales Egg Production eggs to more expensive options, intermediaries whose business been pursuing a strategy aimed e.g. poultry, pork and beef. That, Throughout 2016, Avangardco it is to buy eggs from the at reducing sales through however, is not the case. In continued to push ahead with its company and other industrial middlemen while expanding times of economic distress, this long-term strategy to increase producers and resell them to trade through supermarket implies a net contraction in the 31% the share of sales made in the end consumers. This sales chains. consumption of animal proteins domestic market through channel is inherently unstable as a category. I 60% established retail chains. and unpredictable in every Retailers are just another type of possible way. There are intermediary but unlike Cost inflation also peaked in In 2009, the company made a hundreds of those middlemen, wholesalers they are big, 2016 depleting producer bottom pivotal decision that would they come and go, they often established and a lot more lines and forcing most of them Company's Share of transform its sales profile and operate without assets of their predictable. into the red. During two Ukraine's Egg and Egg performance. Until that time own. And even though consecutive quarters (Q2 and Product Exports Avangardco sold up to 80% of Avangardco has built and In 2009, Avangardco was selling Q3) Avangardco was also selling at a loss. The company was Share of Exports in forced to do so by unprecedented Total Egg Sales demand contraction coupled with an oversupply situation in the home market created by households and further I 17% 65% aggravated by a decline in export volume occurring all at the same time. Avangardco responded to this This has helped the company new challenge by increasing the retain its industry leadership, share of sales made through preserve its assets and start Company's Share established retail chains, preparing for the revival of of Ukraine's Production processing a larger volume into demand expected from egg powder and directing more resumed GDP growth, increased of Dry Egg Products sales down the export channel. minimum wage and other positive developments of 2016 that have yet to produce a Shell Eggs Processed favourable impact on consumer into Egg Powder demand. 87% I 35% YOY Avangardco Shell Eggs at a Supermarket Shelf AVANGARDCO IPL | ANNUAL REPORT 2016 AVANGARDCO IPL | ANNUAL REPORT 2016 07 IMPORTANT DEVELOPMENTS IN 2016 | continued IMPORTANT DEVELOPMENTS IN 2016 | continued 08 a mere 2% through supermarket enhances an organisation’s ability chains. By the end of 2016, their to satisfy its customers and share of company sales reached provides a coherent foundation 60%. This is especially valuable for growth and sustained success. now, in the current distressed Avangardco Applies Strong Bio-Security Defences market circumstances aggravated ISO 9001:2015 is less prescriptive by the growing presence of a ISO 9001:2015 than its predecessor, focusing completely uncontrollable Certificate instead on performance.