Exclusive interview with DANONE Ukraine COO Taras Pilipets to Interfax Ukraine COO of DANONE Ukraine: We plan to get back to the market with Ukrainian products of Tyoma TM

Question: You were appointed to the position of COO last year in October, how do you feel about the new position, what objectives are set before you?

Answer: The position is high capacious itself. And this is a responsibility for, so to say, "the spine" of our business in Ukraine: for all production, for all logistics at the company. The challenges lie in delivering products at two factories in time, provide the high-quality distribution and, consequently, new-made goods to stores in today's uneasy times. Previously I had experience of working with one manufacturing site, now I manage the work of two factories.

Question: What financial and manufacturing results has the company demonstrated last year, and what are the plans for the next one?

Answer: As you see, the consumer purchasing power is going down at the moment. Last year, we all saw that there was a way of translating the prices in the circumstances of the unstable economic situation in the country as an effort to protect the profitability of the companies. At bottom, this financial crisis is not our first one. It's the second one in time of my work in the company. Using the experience of 2008, last year we chose a strategy of not protecting the profitability of the company. We are a large international company, a part of this company being in Ukraine, so we feel more than confidently. We have colleagues who can support us, from other parts of the world where there wasn't a revolution, there aren't such currency exchange value rises and falls and such a crazy inflation process. As a consequence, if we take a look at the strategy of the last year, and it lied in the maximum provision of consumers with goods, not focusing on profit, for the most part it was successful. Yes, the market of Crimea, a part of the East have been lost, everyone lost in this case, and those crimps of products that reach those territories are incomparable with the amount of goods these regions have consumed before.

Question: So, the sales have gone down in 2014?

Answer: Our task was to concentrate on the market, which we now call "the rest of the country" where we could show a considerable volume boost, and where sales of the last year were on the double digit (more than 10%) level. With this strategy we went through 2014, and it was an important factor that we have fixed prices last year for half a year (from May till November), providing the Ukrainian consumer with the affordable price of our product. If we check on a consumer right now, the initial shock reaction on the market changes has gone. A consumer is recovering, adapting to the new reality of where he lives. The situation is difficult but not disastrous. In 2015 we chose a strategy of saving the volumes on the territory defined, and at the same time the improvement of financial results. I'm not sure that this year we will achieve double digit. It's not a goal. This year we aim to sustain certain capacities, to achieve the index of the small profit, even the break-even. You will be surprised, but by the results of the monthly planning cycle in May we see an opportunity to reach the volumes of year 2013, not even 2014.

Question: What is allowing such growth?

Answer: You see, one of the principles of the break-even is the translation of inflation into the price. It's simple: if you had the price increased by 20 kopiykas, you increase the price by 20 kopiykas, or by 25, if you are foxy. Surely, it does not happen this way because an average Ukrainian has not got his salary increased. We monitor the situation, if there was a salary review on the market, it did not make up more than 10%. With increasing of prices for raw materials up to 30-40% or more, can we really talk about translation of prices for a consumer? For the company of our level this is not interesting. That is why what we did was work on our efficiency growth. We have sufficiently improved our distribution process. We optimize the energy consumption. For instance, I can say with confidence that our factory in Kherson shows the best energy consumption figures in the whole history of working inside DANONE Company. We save on the expensive gas by implementing modern technologies, effective schedules of energy consumption.

One more factor that allows us to speak of this growth is decreasing the reliability on the currency exchange value wavering. It's interesting to observe that when the first crisis of 2008 broke out, we relied on the currency value for around 70%, today it's lower than 35%, and we work actively in this direction.

Question: How did you decrease the currency factor influence in your portfolio?

Answer: Take a look at our project in Losyatyn. Strawberry for yogurts is grown and collected by Ukrainians. And strawberry yoghurt is the product number one in the total range of yogurts from the volumes side. Besides that, I'll demonstrate one more example. Here is a Ukrainian sitting next to you, the COO who does not require to be paid in foreign currency. This is also one of the steps that allow decreasing the currency value risks. In other words, we take a look at all components, and the only goal is to provide Ukrainians with our product for the affordable, reasonable and competitive price.

Question: Has the company already finished transferring the production assets from the Galakton Kiev city milk plant?

Answer: At the moment all assets are relocated to our factories in Kherson and Kremenchug. 80% of the assets are transferred to the factory at Kremenchug and 20% – at Kherson. One of the projects of the transfer is baby food, and we are finishing with it. Actually, we are in the active phase of this transfer. And we plan to return to the Ukrainian market with the products under Tyoma brand mark this winter already.

Question: Do you regret this decision today?

Answer: If we consider this question from the strategic development point of view, this is an absolutely right step for the company, and it has been planned long before the process of transfer itself has been initiated. And during its implementation we once again became convinced that this was the right decision. Go to the Marina Raskova street in Kyiv today, take a look at those huge new buildings hanging over the Galakton factory. A part of these new buildings is constructed with violations of industrial standards and rules which still exist in our country regarding the industrial objects, especially if those are enterprises with elevated risks, as a really dangerous element has been contained there – ammonia. Respectively, the bigger part of these living premises should not have appeared there at all. Anyway, they did and they won't be destroyed. Once these were distant industrial suburbs, the city developed and gradually had crossed its borders. Having a powerful processing plant that works 7 days per week, processes more than a hundred trucks in 24 hours – such traffic is not to be held inside the city. In the end, neither the company, nor the city will win. Besides that, when you relocate something, you do it under the newest standards, and such step gave us an opportunity to improve the quality and food safety at our place in Kremenchug where we have now got the most modern farm cheese production department that meets the requirements of not only Ukrainian legislation but also European.

Question: How much are the capacities of the factory loaded?

Answer: It depends on the type of the product, but I can surely say that our farm cheese department, which I talked about earlier, is loaded at 90%. We thought this would happen in a mid-term perspective. It's really pleasant to already achieve such results. In total, our capacities load makes up from 67% up to 90%.

Question: We'll continue with a question that is bothering Ukrainian manufacturers each year in spring: the prices drop. Many farmers say that big processers intentionally decrease the price of the milk, is it so?

Answer: Many different factors influence that. On the one side, milk producers wait for the price growth for the raw, and processers wait when it alternatively drops.

Market forms the price. Getting ready to the meeting with you, I have re-read the Milk Market bulletin by Infargo analytical agency regarding the prices. There they have forecasted the price drop this month from 30 to 50 kopiykas on each liter. However, there is no such drop, no 30 kopiykas, if we have 16, that's good. Today we have to understand that in Ukraine there is the price seasonality – the drop down in summer, and we also want the price to be forecasted and stable.

These constant wavering when a) it drops, we benefit fast, b) it grows – "oh-oh-oh, we have lost" – it's a bit Middle Ages, to my mind. The reason is that we have a large segment at the household production market that drops the price when they have excesses. It's not the first year we are working to stabilize that price. We see that there is a parallel process, and the State statistical recording confirms the reduction of milk producing by households in the first quarter. It's a well-known fact that keeping one or two cows is economically disadvantageous. And according to this, there is growth in production at farms that can treat the question by a schedule. It's important to understand that if someone produces high-quality milk, it is purchased by a very good price today. We'd like to see a civilized and organized market. It would be really good if our idea of cooperatives and family farms have found the further development. Today we have around 20 cooperatives. They work more than one year and we find this model successful. But cooperatives are not a cure-all-solution, it's a transitional stage. It's a way when people unite and understand what the collective production of milk is. It's the process that has its own efficiency measurements. We can't say that today I bought a cow and benefited from it. There is a certain part of retention. The production of milk is on the break-even when the owner starts keeping at least 5 cows, the optimal profitable model of the family farm is at least 10 cows. Today we have a certain number of family farms. This year, despite all the convulsions, we plan to increase their number to 60 new, which is a substantial step. We are ready to invest into this because we see that is the future of our market. We work for a perspective, we believe that we, as well as other processors, will receive the opportunity to work with a more civilized sector, and later – the market tells the price.

Question: Can farmers change a processing company after your funding of the family farm or the cooperative?

Answer: I think they can. On the stage when we have organized some financial aid this system is not that flexible. But the financial aid is not eternal. At the beginning, when investments are needed, we help to receive the borrowed proceeds way cheaper. We do not give our personal money in particular, but we work with different organizations that help villagers to receive money quickly, effectively and cheap. This should be not a subsidized but a profitable model that will help villagers to earn money. Then villagers decide whom to collaborate with, on their own.

I can tell that 5-7 years ago the milk market in Ukraine has been quite a "wild wild west," there were companies that came and took milk from people and then disappeared leaving people with no milk or money. There were companies that paid in half a year or a year. The thing is, the villagers have no rights here, and they don't have the "stranglehold" on market re-sellers. In the context of those, companies that buy transparently, pay regularly and the rules of working with them are transparent (these aren't only us) – they always win.

Question: However even though you play regularly, some cooperatives in Kherson region declined to collaborate with you?

Answer: I'll dwell on an issue: everybody make their own choice. This is the market. The market means that today you can sell for 5 hryvnias with a risk that you will receive them tomorrow or even in a month, or you won't receive them at all; or you can sell for 3 hryvnias guaranteed. If you want to hit the jackpot, you need to understand that the high price is where risks are high. There is a really interesting situation in Ukraine when Russia officially blocks product delivery but informally buys the raw milk from Kherson region. Does it help Crimea? No, because it is not even able to provide itself with the milk products. Even if we had "poured" all milk from the south of Ukraine into Crimea, it would not have been enough. There is a lack of processing capacities in Crimea. This is not a model that has future, and those who now jump into milk delivery to Crimea should be aware. One should understand that we also diversify our risks and also replace them. They have left us, we found others and then, after some time, if they want to return, not a fact that we will be interested.

Question: Were there other mechanisms of support of your suppliers besides funding projects on development of milk cooperatives and family farms?

Answer: In each particular case with every supplier we work with as much flexibility as it is possible to. With today's money price on the market of 30%, it's hard to speak of any sufficient prepayments. As I know, yes, we met the needs of some of our partners but we review each particular case. It was not a sufficient help, it was of the pinpoint nature, according to the situation.

Question: Today there goes a reform of the monitoring bodies in the field of safety and quality of foods in Ukraine, do you feel its influence?

Answer: There are some work issues, we collaborate closely with monitoring bodies even when it is on the stage of re-organization and there is no leader of the new administration in the matter of safety of foods and consumer rights protection.

We can work on the level of regional departments as well but we are responsible for what we produce. The quality and food safety of our products is the fundamental basis of our business. It has been really sad when we had to compete with not really good manufacturers that offered products that weren't of much quality.

We support the idea of the government to unify product quality standards and advocate the necessity of the further food products safety system restructuring in Ukraine to make it fall under European standards. For us as a company that has implemented those standards a while ago it's big advantage. For the seamless operation of the system of state control, including in the point of view of our European partners, there is certainly also a need to immediately consider the question of the new body starting to work – National consumption committee – and the appointment of the administration of this body.

Question: Why DG SANKO European commission has not inspected your factories?

Answer: We were those who arranged the first seminar held by representatives of DG SANKO for our veterinarians. When we learned the market condition, we understood that at this moment we are not interested in it and made a step back. For today we have not gone through any such type of auditing for one reason: we don't find a great perspective in this step since our focus is distinctly Ukrainian market and we aim to work this way. DANONE's import share in Ukraine makes up 3% in total. At the same time we are an international company that works in all neighboring countries of Ukraine: in Poland, Romania, Czech Republic, Hungary, Russia, Belarus. This way, exporting to the EU is not our priority.

Question: Which directions will be in priority for investment this year?

Answer: Investment plans are not frozen. We believe in Ukraine, we are here for serious and for long, and we see perspectives of growth. We invest gradually into it. For today it's cooperatives and family farms, the other direction is the launch of baby food project in Kremenchug. This project has been launched a year ago, and today we are mounting the equipment. In winter, we plan to bring the Ukraine-manufactured product under Tyoma TM to the stores. It's a significant investment calculated in millions of euro.

Question: What kind of trends do you observe on the fermented milk products market today in Ukraine?

Answer: In our segment today we see the refocus on kefir, sour cream, milk, products which are more traditional for consumption. And it's easy to understand, the prime cost of yoghurt manufacturing is more expensive, you have to deliver those pineapples or passion fruits from somewhere and pay in the foreign currency for them. Anyway, even taking a look at the yoghurt share of the market, we see the growth of the share of products in big packing. I think the big packing and traditional fermented milk products shares will grow.