(Extracted from Annual Report 2017)
Dear Valued Shareholder,
2017 continued to be a year of positive developments for Food Empire Holdings Limited ("Food Empire" or together with its subsidiaries, the "Group"). Over the past few years, we have worked relentlessly to overcome challenges in our operating environment, amid economic volatility and currency fluctuations. Our strategic response during this period focused on diversifying our key markets and driving upstream expansion along the Food & Beverage ("F&B") value chain, allowed us to weather the storm and went on to achieve revenue growth for the second consecutive year since 2015. On behalf of our Board of Directors, it is my pleasure to present our annual report for the financial year ended 31 December 2017 ("FY2017").
In FY2017, the Ukrainian Hryvnia weakened from 27.2 Hryvnia per US dollar on 31 December 2016 to 28.1 Hryvnia per US dollar on 31 December 2017. Over the same period, the Russian Ruble strengthened to 57.6 Ruble per US dollar on 31 December 2017, compared with 60.6 Ruble per US dollar on 31 December 2016.
We have seen some momentum in recovery with an 11.2% growth in revenue year-on-year ("yoy") to US$269.5 million in FY2017. While the Group's Russia market posted an increase in revenue of 8.1% yoy to US$116.7 million, sales in the Group's Ukraine market declined 7.0% yoy to US$21.8 million due to restructuring in the Group's distributorship. Sales in the Group's Kazakhstan and CIS markets increased 29.1% mainly due to higher sales volume, while the Group's Indochina market recorded lower sales yoy for FY2017. Sales in the Group's Other Markets increased by 33.1%, mainly due to higher sales contribution from the Group's non-dairy creamer plant and snacks manufacturing facility in Malaysia, and instant coffee plant in India.
For FY2017, net profit after tax was US$13.3 million as compared to a net profit after tax of US$13.8 million a year ago. This was after taking into account the one-off impairment charge of US$7.7 million in relation to investment in our associate, Caffe Bene Co., Ltd ("Caffebene"). Excluding the effects of impairment of Caffebene, the Group's net profit after tax would have been US$21.0 million.
STRENGTH IN GLOBAL MARKETS
Our foray into the Other Markets has proven fruitful over the last three years, with the market contributing 21.5% of the Group's total revenue. On the back of 28.6% CAGR revenue growth in our Other Markets between 2015 and 2017, sales momentum has started to accelerate. The market recorded 33.1% growth to US$57.9 million from US$43.5 million in FY2016. While the market has become more competitive, we will continue to step up efforts to grow our market presence in the coming quarters.
As for our other core markets, the gradual recovery of oil prices should lend more stability to the currencies and economies of these markets. With Food Empire commanding a leading market share in these regions, we believe the stabilising of these economies would help to boost the Group's bottom-line further.
DEVELOPMENTS IN PRIOR VENTURES
In 2017, the Group continued growing along the value chain with new investments in complementary businesses and additional developments in existing operations. Specifically on our joint venture with Cap Empire S.r.l. ("Cap Empire") in Italy, we successfully produced and marketed our own capsules for coffee and other beverages. Additionally, on 27 December 2017, the Group has invested in 101 Caffe S.r.l. ("101 Caffe"), a distributor of single serve coffee paraphernalia including pods, pads and capsules in Italy. The transaction was funded through internal resources for a cash consideration of Euro 2.5 million, giving the Group a 25% stake in the company. With the combination of these two Italian businesses, this should bring about better synergies for our Group and increase our utilisation of production. Despite this and our continued optimism of the persisting trend of coffee capsules consumption, we also recognise the transformation of the market with the emergence of competitive brand compatibles. Therefore it is crucial for us to adapt swiftly to the ever changing trends in the capsule coffee market and stay ahead of the curve.
As for our existing investment in our associate, Caffebene, one of South Korea's largest coffee house chain with about 600 stores in several countries, Caffebene has been suffering from financial difficulties due to excessive debts assumed prior to the investment made by the Group. Caffebene recently filed for a court-led corporate rehabilitation process for the business in January 2018. The filing was intended to provide relief from its creditors while giving Caffebene sufficient time to reorganise its business and return to profitability. As a result, we have decided to take a one-off impairment charge for our investment in Caffebene.
GROWTH IN BRAND EQUITY
At Food Empire, we continue to uphold our brand equity to ensure that we are able to foster lasting relationships between our customers and our products. Our commitment to do so is reflected in the numerous accolades and awards Food Empire has achieved over the years.
In January 2017, MacCoffee was honoured to be the Official Sponsor of the 2017 European Figure Skating Championships once again. The European Figure Skating Championships, held in Ostrava, Czech Republic, was widely anticipated and attracted thousands of spectators and supporters. This is a great way for us to increase brand awareness and foster brand loyalty as it is one of the most prestigious sports events in the world.
On 3 July 2017, our MacCoffee Arabica 3-in-1 was awarded the 2017 most Innovative Product International Award within the Coffee Beverages category in Russia, highlighting our continuous efforts towards product quality and innovation. Our MacCoffee also won an award for the annual Product of the Year 2017 National Award in Russia, again reflecting the highest form of acknowledgement from our consumers for our products. Moving forward into 2018, we strive to expand our intangible assets and brands to create greater enterprise value in our international markets and generate higher returns for our shareholders.
Oil prices continued their gradual recovery in 2017, after reaching an inflexion point in the first quarter of 2016. As a result, our Group witnessed stabilisation in the economies of our key markets with significant exposure to the commodity. Russia, Kazakhstan and CIS countries, for instance, all experienced greater sales on a year-on-year basis, with the largest growth in Kazakhstan and CIS markets at 29.1%.
Going forward, we remain cautiously optimistic. Oil prices are expected to continue their upwards trajectory, supported by supply curbs and rising global demand. Global major economies are slated to grow positively, with spill-over effects on consumerism. On the flipside, economic sanctions imposed upon Russia by the U.S. and the EU are likely to remain for a considerable time. Nonetheless, the overall effect would be a favourable impact upon our Group's key revenue drivers. We will continue to be vigilant in keeping a close watch on macroeconomic and geopolitical situations which may impact our businesses.
On the M&A front, we remain on the lookout for opportunities to strengthen our foothold in existing markets. Expansion into new geographies outside our core markets will also be a focus to provide a more diversified portfolio.
I would like to extend my heartfelt appreciation to our team of dedicated management and staff, who have worked tirelessly in FY2017 to achieve our results today. It is heartening to see the commitment and dedication displayed under the strategic oversight of our Board members. I am also grateful to our customers, business partners, distributors and shareholders for the integral role they have played in our company journey thus far. We are thankful for your continued support and the confidence you have in us. As we usher into the new fiscal year, let us look forward to a better 2018.