HOW TO SUCCEED IN A TURBULENT BUSINESS ENVIRONMENT The experience - PowerPoint PPT Presentation

HOW TO SUCCEED IN A TURBULENT BUSINESS ENVIRONMENT The experience of Valio in trading with Russia in dairy sector Raul Lönnström for EESC seminar 7 July, 2015

VALIO IS THE BEST IN FINNISH Valio company was founded in 1905 as a cooperative group to export best quality Finnish butter. Valio still mean the best quality to the present time. In all countries and markets. Raul Lönnström 07.07.2015 2

VALIO IN FIGURES Turnover of EUR 1,950 mln. Milk intake is 1 900 million 2 000 1,900 one third of revenue derived litres from abroad The number of employees is Valio processes 80% of all milk 4400, 1000 of them abroad 4 400 80% produced in Finland Company is owned by 17 There are 15 plants in Finland, 2 7 100 18 cooperatives in Estonia, and 1 in Russia 7 100 Finnish milk farmers 1905 1955 1992 1998 2009 Raul Lönnström 07.07.2015 3

VALIO GROUP’S TURNOVER AND PERSONNEL Turnover*, Average Employees, € million number of 31 Dec 2014 employees Valio Oy 1,714 3,734 3,570 Valio Russia 258 475 354 Valio Baltics 92 371 371 Valio Sweden 97 51 50 Valio USA 58 24 23 Valio China 48 7 7 Valio Group total 1,950 4,662 4,375 *) Turnover of Valio Oy and the subsidiaries include sales within the Group. Raul Lönnström 07.07.2015 4

VALIO IN RUSSIA Valio operates in Russia since 1908. Head office is in St.-Petersburg. Personnel: 400 + Key markets: Moscow, St.- Petersburg, “million+” cities, premium segments in CIS. Oltermanni is # 1 cheese Market leader in Moscow and Viola is the most reliable brand in processed cheese brand in Russia St.-Petersburg Since 1908 Raul Lönnström 07.07.2015 5 Since 1956

Non-dairy products Valio quality, Russian plant and raw milk Valio quality, Russian Own production in Lactose-free plant and raw milk Moscow region products ??? Raul Lönnström 07.07.2015 6

VALIO WORKS ON MILK QUALITY ON RUSSIAN FARMS TO GET E-CLASS MILK DEMANDED FOR VALIO PRODUCTS The same quality standards that in Finland (higher than the highest class in Russia, Regular audits of contracted milk producers, More parameters than Russian milk plants demands, Own attestation of milk producers by Valio, Milk producers education in Finland. We are ready to buy the best Russian milk on higher price! Raul Lönnström 07.07.2015 7

VALIO AUDITS PRODUCTION. ONLY THE BEST PLANT CAN PRODUCE VALIO PRODUCTS Obligatory audits by Valio quality Management System team Most modern production facilities International QMS (ISO, HACCP) Sanitary norms and allergens control Raw martials standards Regular quality control of each batch by Valio specialists Best plants! Raul Lönnström 07.07.2015 8

10000 20000 30000 40000 50000 60000 0 1990 42452 55715 1991 51886 38333 1992 47236 32167 1993 29896 46524 1994 25287 42176 PRODUCTION RUSSIAN DAIRY SECTOR – MILK 1995 39241 22413 1996 19020 35819 1997 17496 34136 1998 16662 33255 Raul Lönnström 07.07.2015 Milk production in Russia, Mkg 1999 15676 32274 2000 15271 32259 2001 15524 32874 2002 15963 33462 2003 15390 33316 2004 14375 31861 2005 14001 31070 2006 14135 31339 2007 14163 31988 2008 14246 32363 2009 14495 32570 2010 14313 31847 2011 14395 31646 2012 14752 31756 Only data from large 2013 14047 30529 farms is reliable NOTE! (suurtilat) Maatalousyritykset Kaikki tuottajat (large farms) Agriculture companies All producers 9

RUSSIAN DAIRY SECTOR – CHEESE CHEESE CONSUMPTION, PRODUCTION AND IMPORTS 900 High dependency on imports! 800 700 Effects from Russian 1.000 tons/a import ban are seen in 600 2014 figures 500 Cheese import from EU 400 to Russia in 2013 was 300 257 ktons and in 2014 only 133 ktons (-48%). 200 Valio´s share was about 100 15 % in both years. 0 2009 2010 2011 2012 2013 2014 Consumption 690 780 759 789 782 668 Production 400 438 425 446 430 450 Imports 310 353 344 356 364 230 Source: USDA FAS http://apps.fas.usda.gov/psdonline/ps Raul Lönnström 07.07.2015 10 dHome.aspx

RUSSIAN DAIRY SECTOR – BUTTER BUTTER CONSUMPTION, PRODUCTION AND IMPORTS 400 350 High dependency on 300 imports! 1.000 tons 250 Russia was the biggest export destination for EU 200 butter. From EU to Russia 150 was exported 30 ktons butter in 2013 and in 100 2014 c. 21 ktons (-30%), more than half of EU´s 50 export was a Finnish butter 0 2009 2010 2011 2012 2013 2014 Production 246 207 217 216 219 235 Imports 107 118 120 124 144 130 Consumption 349 324 334 340 361 363 Source: USDA FAS http://apps.fas.usda.gov/psdonline/ps Raul Lönnström 07.07.2015 11 dHome.aspx

RUSSIA: GOVERNMENT EFFORTS Due to deficit of local milk production the aim is to support local milk production and development of dairy industry. The dairy market is dominated by international companies, e.g. Pepsi, Danone, Valio, Lactalis. Locally owned companies are more like regional players. The government has already for a long time supported local milk production and processing with no significant effect to decrease imports. The quality of raw milk is generally lower than in EU. Embargo supports the development of the Russian dairy sector. The new Minister of Agriculture Mr. Alexander Tkachev is encouraging companies to invest, increase milk production and processing. Raul Lönnström 07.07.2015 12

RUSSIAN EMBARGO Embargo implemented 7 August 2014 for one year. 25 June one-year extension of the ban. Countries involved: United States of America, the EU member countries, Canada, Australia and the Kingdom of Norway Includes dairy products with the exception of baby foods and lactose free products. Due to the ban additional measures has been raised to control the imports: on the border quality control performed by the customs and Rosselkhoznadzor (Federal Service for Veterinary and Phytosanitary Surveillance). Recently also necessity to register the allowed products to Rospotrebnadzor (Russian Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing) as special dietary products Raul Lönnström 07.07.2015 13

IMPACT OF THE EMBARGO The world market balance has been affected: strong drop in commodity prices world wide. Increasing imports from Belorussia, South America, Switzerland, New Zealand etc • capacity in Belorussia in good use, raw material flow in from Poland and Baltics • new countries approved by Rosselkhoznadzor e.g. Egypt, Turkey Availability of consumer products have changed, impact of especially cheese and butter. Government has embargo also big concerns about falsified products. Source: Eurostat until 2009,EWPA, GDT USD-rate previous month/week Increase of the consumer prices in Russia by 25 … 30 %. The consumption of cheese has declined by 25 % and the dairy products in general 10 … 15 %. Raul Lönnström 07.07.2015 14

IMPACT ON VALIO GROUP Most of the products sold in Russia were imported from Finland and Estonia. Russian sales dropped from 8.000 tons/month to current 2.000 tons/month, which is now mainly local production. Only minor volumes of water, juices etc are imported to Russia. In Finland immediate redirection of production from consumer products to industrial. Personnel reductions in Russia and in Finland so far totally c. 700 persons. Due to the basic principles of Valio all milk from the owners has to be processed. The Russian export has been replaced by industrial butter and powder sales to industrial markets. The milk price for the producers has dropped by 25 %!! Raul Lönnström 07.07.2015 15

IMPACT ON VALIO RUSSIA Embargo started August 2014 and still continues most likely until August 2016. At first stage autumn 2014, getting prepared: • a recovery plan was created impact of • stocks already in country to be sold to regular clients embarg o • decision to increase capacity in Moscow plant • agreement with existing co-packer to increase production • negotiations with potential suppliers in Russia and Belarus. • planning of personnel reductions Second stage autumn and winter 2014/2015, implementation: • slower sales of existing stocks • investment to additional capacity in Moscow plant • planning of new launches and stating of sales in January 2015 • implementing of personnel reductions Third stage winter 2014/2015 and spring 2015, new start: • adjusting the and reorganizing resources • sales increase to recover back the position on the shelves Raul Lönnström 07.07.2015 16

RUSSIA IS STILL AN OPPORTUNITY FOR VALIO There has been crisis before: 1998, 2009 and now 2014. Valio has earlier survived on the market; lost some sales but always recovered. Valio has a great reputation in Russia. In the informational environment the company is mentioned in positive manner more often than all foreign dairy companies in Russia combined! In longer run the balance between production in Russia and EU to be reconsidered by the owners: • before embargo: EU 90 % - RUS 10 % • now RUS 90 % - EU 10 % • after embargo new balance: EU xx % - RUS yy % Continuation of embargo will strengthen the volume of local production as the government is expecting. At the same time increase of our local production keeps the shelves reserved also for Valio. This will smoothen the comeback of Valio’s imported products after embargo, when ever it is over … Raul Lönnström 07.07.2015 17