Profits continue to fall for Russian dairy giant Wimm-Bill-Dann, despite recording a healthy jump in sales for the first six months of the year. The company said that both gross margins and net income were hit by rising costs attributed to its rapid expansion in the last couple of years and the higher cost of milk.
During the first half of 2004, Wimm-Bill-Dann's sales rose 22.8 per cent compared to the same period last year to reach $580.4 million (€480m). Gross profit increased by 12.3 per cent year-on-year, while gross margins declined to 27.7 per cent from 30.3 per cent. Although adjusted EBITDA increased 14.4 per cent compared to the same period last year, net income was down from $17.7 million to $12.9 million, a fall of 27.1 per cent.
Commenting on the announcement, Sergei Plastinin, CEO of Wimm-Bill-Dann Foods OJSC said he was encouraged by the growth of dairy sales, which had grown by 33.4 per cent due to increased regional production, however he did also point out that mounting costs had impacted the bottom line.
"We remain committed to our regional expansion strategy and we are constantly widening our regional product offering as consumer spending is growing steadily in the regions," said Plastinin. "Profitability for the group is continuing to suffer from the higher cost of raw milk, increases in personnel and transportation costs and high depreciation charges. At the same time we are taking concrete steps to improve our margins and operational efficiency, including setting management targets linked to profit as opposed to volume, product range optimization and tight control over costs."
Sales in the dairy segment rose from $321.7 million in the first six months of 2003 to $429.2 million in the first six months of 2004, while the average selling price increased 17.9 per cent from $0.64 per 1 kg in the first of half 2003 to $0.75 per 1 kg in the first half of 2004. The company said that this increase was primarily driven by ruble price increase and change in the mix in favour of higher priced products. Gross margins in the Dairy Segment declined from 28.4 per cent in the first half of 2003 to 25.0 per cent in the first half of 2004. The company said that this was primarily caused by 19 per cent year-on-year increase in the average ruble price of raw milk as well as rising personnel costs and depreciation charges.
Sales in the juice segment slightly decreased from $150.6 million in the first half of 2003 to $149.7 million in the first half of 2004 while the average selling price increased 15.2 per cent to $0.65 per litre in the first six months of 2004. This increase was primarily due to ruble price increase, change in the product mix in favour of higher priced brands such as J-7 in PET bottles and 100% Gold, together with ruble appreciation.
The company reported that selling and distribution expenses remained flat as a percentage of sales, while in absolute terms they grew 22.4 per cent in the first six months of 2004 due to higher advertising and marketing costs, personnel and transportation expenditures as a consequence of rising transportation tariffs per ton.
Concerted efforts to help drive costs down have met with some success as general and administrative expenses decreased as a percentage of sales from 8.0 per cent during the first six months of 2003 to 7.6 per cent in the same period this year. However the company said that this final figure grew in absolute terms by 17.2 per cent as a result of the increased personnel costs and the repeal of the property tax privilege in the dairy segment due to changed legislation.
Financial expense in the first six months of 2004 totalled $7.1 million compared to $6.8 million in the first half of 2003. Interest expenses on loans rose from $9.5 million to $11.4 million and were partially offset by $4.3 million foreign currency gain compared to $2.6 million during the same period last year.
Though rising sales will be well received, the company's fight against rising costs is still on. Having expanded rapidly over the last couple of years, the inevitable rise in costs will certainly impact the company's ability to expand in the future without the help of outside investment. Although talks to secure future investment from French dairy giant Danone fell through at the end of last years, industry experts believe that the company is still actively looking for a partner.