Volodymyr Avramenko: We overcame the difficulties and saved what we value most – our professionals, brand and business reputation
In his first interview in four years, the owner of confectionery company AVK Volodymyr Avramenko talks about his business, now 25 years old, and about the challenges of today’s adverse market conditions.
Despite all the problems, AVK is growing and developing along with its age mate – Ukraine. In recent years, the national confectioneries producer has upgraded its manufacturing lines, increased its volumes of export, and created new product segments. The one thing that hasn’t changes is the company’s commitment to quality.
– In your last interview four years ago, you said that AVK was your first business, and at that time you considered it as the most successful. Since then, the situation in the country has changed dramatically. How has this affected the company?
– You’re talking about three to four years ago – and then I felt warm inside, as though it was literally a breath of childhood. But that was another time, another country, another life. Since then, so many things have happened that my head is just spinning. First of all – a tragedy has occurred in the country. And as for AVK back then – it really was my first child (laughs). We put our soul into it. We had formed a team, attracted U.S. investors, we’d made great strides. Now the company is employing its third generation of staff, and this year we’re 25 years old. That happens once in a lifetime! We had been making great preparations for this event, but now it’s sad to see that things have not exactly turned out as we wanted.
In 2014, we lost the Russian market, and we had 6 percent of the chocolate products market in Russia. We have lost two thirds of our production facilities, in Donetsk and Luhansk. But despite all these catastrophic problems, we have survived. And now, year by year, we will recover our positions. Not in Russia, where we are now at zero, but in other countries (to which we export), of which there are already more than a hundred.
– What were the results of the company for the year 2015?
– Over the past two years (2014-2015 – Ed.) AVK produced 140,000 tons of confectionaries worth more than Hr 5.8 billion ($232 million).
– How big is your share of Ukrainian confectionery market now?
– The Ukrainian market collapsed because of the economic decline, the drop in demand, and (the public’s) low purchasing capacity. But my mother told me that even during the Great Patriotic War there was sweet candy available that was able to keep people’s spirits up. So today we’re offering people good quality but affordable sweets. Obviously, we’re trying to use more local raw materials, natural Ukrainian ingredients. Our share of confectionary market is about 7%. But we have always specialized mostly in chocolate manufacturing. In caramel and pastry we’re at practically zero. But if we take the most important segment, chocolate, we’ve got about 20% of the market.
– You have already mentioned that you lost two factories in the ATO area. What happening to them now? Have these assets been retained, or has the equipment been taken from there, and only empty buildings left?
– You’re asking complicated questions. You know that I myself came from Donetsk. I still own my parents’ apartment in Donetsk. I do not know if it is empty or if there’s someone living there, and what in general is going on there, or whether the building is even still standing. I haven’t been there for two-and-a-half years, and I get to know what is happening there only from the press or from television.
We invested lots of soul and money in our production capacity. Some very expensive European equipment was installed there. And since September 2014, we were cut out of the Russian market (The Russian Federation imposed an embargo on the supply of Ukrainian sweets – Ed.). Apparently, our Russian competitors couldn’t find any other way to compete with us, and they completely closed the border. And that was 70 percent of our income – an enormous figure. Then the ATO started, and since January 2015 an official ban on trading with the uncontrolled territories has been in force. We fired all of the employees who worked at AVK PJSC. And knowing that we cannot maintain financial and economic activities on those territories, we registered a new small company in Kyiv. In November it will be two years since our new Ukrainian company, AVK Confectionary LLC, was set up.
– What do you estimate to be the losses from the shutdown of the factories in the Donbas?
– In terms of money? You know, for me that’s not the most important loss.
– And what is most important?
– The most important things that you can lose are the people, the brand, and your business reputation. We have retained all that. As for the money… Over 23 years we only paid out dividends once: everything was being reinvested into the best production lines. But if you count it in money, we’ve lost around $150-200 million there. In addition, we lost working capital in form of finished products that remained in stock. I think everyone on the internet has seen mountains, piles of our products, just poured out onto the snow from trucks. And then everyone asks: what happens now?
– And in Russia? You had a powerful logistics operation there.
– In Russia we lost distribution centers, where the stock of finished products was worth about $20 million. You could imagine the volumes, given at that time we had a 6 percent market share in Russia.
– In the State Register of court decisions there is a dispute regarding the assets in Dnipro, between your new legal entity and the one that was liquidated earlier. In addition, there are a lot of creditors’ claims, in particular from Russian Sberbank and from Prominvestbank.
– AVK PJSC was a leading business in those glorious years before the war. When the Russian and Donbas markets closed, naturally, this legal entity could not meet its financial obligations. Although I want to emphasize that for 23 years before the war, AVK PJSC, speaking the banker’s language, had crystal-clear credit history. And then everything collapsed. During this time we didn’t go into hiding, we tried to reach out to our creditors, assuring them that we are responsible for the debts of AVK PJSC. Although we have a new legal entity, we’re not in hiding. Here I am, and here’s my reputation, that’s 25 years of quality history. Right now we’re engaged in disputes with the banks, but we have found some common ground and understanding with Sberbank of Russia. We agreed to play long and wait for everyone to set some perspective. There is a big question – whether the production facilities are alive and the collateral assets intact. God knows if it is alive or not. The main thing is that it is not cut up for scrap.
– What about Prominvest, which it was said intended to take over your business on account of its debts?
– It was difficult to communicate with Prominvestbank, because we couldn’t get through to the previous management. Thank God there are proper, professional people there today, Ukrainian managers. We struck a chord with them. We said, “here is a new legal entity, here is a business plan, we can take this many obligations and repay this much.” We’ve established a good, working relationship. I am sure that in the next few weeks we will close the books on the obligations and will continue to grow and develop together.
– There are reports that the Donetsk factory is still operating now, it is called Lakond and it manufactures products under the AVK brand. What do you know about it?
– I know as much as you, from the media. There were even some openly malicious, fraudulent articles claiming I have something to do with it. I want to say again that I have not been there for two-and-a-half years. We made a formal appeal to the authorities and issued a press release that stressed that we are not responsible for the actions of those people. It’s same situation is with my parents’ home: I have no idea who is there. Maybe people are being poisoned with these sweets, maybe something else.
Even if someone found there our packaging, our certificates, our recipes, we’ve openly stated – it’s not us. We are AVK Confectionary, which operates on non-occupied territory. At the same time, we’ve put orders into not only the Dnipro factory, but also into another three Ukrainian factories, as well as abroad – for example in the Czech Republic. Besides, we’ve nothing to do with what’s going on in the uncontrolled territories, no contacts and no engagements. Period.
– At the moment, are you the sole owner of AVK Confectionary? You had a partner, Valeriy Kravets. Tell us how he left the business?
– The fact is that in recent years he, as financial experts say, was a “sleeping partner” and he was residing on that territory. I have been living in Kyiv for 20 years now, my children went to first grade at school No. 25, and now they are over 30 (laughs). I have not talked to this shareholder for more than two years, I don’t see him and have no idea what he’s up to now.
– So he went out of business?
– We had three shareholders: apart from us there was the Western NIS Enterprise Fund, headed by Natalia Jaresko, who named us the best investment – we raised $9 million, and returned $45 million. In 2013 they left with that return. After that, we were left with the partner you mentioned. But he was not engaged in active business. And then the ATO started and we completely broke off communications. However, in 2014 a law was passed that prohibits changes in the register of enterprises registered in the ATO area for the duration of the anti-terrorist operation. Therefore, legally Mr. Kravets and I remain shareholders of AVK PJSC, and we cannot take any kind of legal action regarding the company at the moment. At the same time, I now own a private company, AVK Confectionary, through which I revived the AVK brand.
– Another unpleasant memory for AVK from that time is the court litigation with Russian producers regarding trademark rights.
– The Russians are another story. You know, I cannot bear to talk about it, because we put a lot of soul and energy into the Russian market, from Kaliningrad to Sakhalin. We used to compete fairly, and I had a good relationship with the top managers and shareholders of the chocolate companies in Russia. We used to find common ground. Yes, we had trademark disputes. A major Russian producer claimed all that is said to be the Soviet legacy. There were several brands that belonged to our Ukrainian enterprises, but were produced in Russia too. They tried to seize them by court action. And then there was the ATO. But from 2015 the legal disputes stopped, and they’ve not being considered to date.
– Have the Russians tried to persuade you to sell your confectionary business to enter the Ukrainian market? As we know, one of the Russian factories several times offered to buy the assets of Roshen – so far, however, only in Russia. And the company’s management has repeatedly claimed there have been attempts to seize the business in Russia.
– Over 23 years of work (before the war – Ed.) it happened a few times, and at a very high level – they reached out to our President through the Russian State Duma.
– To the ex-president?
– Yes, and the one before him. This happened more than once. But my decision was, as you can see, firm.
– What is AVK’s value today?
– You know, I could only tell you how much AVK was worth in 2013.
– So how much?
– We had offers from American Hershey, Turkish Ulker, there were offers from European companies, such as Nestle … But why do you want to know?
– Why didn’t you sell?
– I will explain. Firstly, we had three shareholders, who pursued their own goals. The American venture capital fund entered and went out. The strategists had other interests, and I had still others – to develop the company further. But the important thing is that everybody was fine with everything and the company was growing. The main thing was to find a reason to sell. We did not manage to find one, although the price was good. And I’m proud of the fact that we parted well with our American partners. And even if I had known there would be war, I would still have paid up. So, as for the company’s value today, I know as much as you do. I don’t know how much it’s worth now, but I’m sure that the knowledge, people, staff – are the most important. Money comes afterwards. Now there are no buyers at all.
– If there was a buyer, would you agree to sell the company?
– If it were sold into good hands and for good money, certainly. But there are no good hands and good money today.
– What’s the amount of investment into AVK for the current year?
– AVK has the task of increasing its capacity and evolving. But the resources are insufficient: 70 percent of our production capacity is lost. And while we previously relied on foreign equipment suppliers, we are now actively ordering from our domestic engineering firms – in Kharkiv and Dnipro. Four Ukrainian production lines are already working at our site. In total, the amount of investment over the year will not exceed $50 million. We can’t afford any more.
Author: Maria Brovinskaya
Original Source: LIGABusinessInform
