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UKRPRODUCT ANNOUNCES UNAUDITED INTERIM FINANCIAL RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2010: Latest news

08 September 2010

Kyiv, Ukraine – 8 September, 2010 – Ukrproduct Group Limited (`Ukrproduct`, the `Company` or, together with its subsidiaries, the `Group`) (AIM: UKR), one of the leading producers and distributors of branded dairy products in Ukraine, today announces its unaudited interim consolidated IFRS financial results for the six months ended June 30, 2010.

KEY FIGURES

(Figures in brackets are for the six months ended or as at 30 June, 2009)

  • Total revenue declined by 5.3% year on year to GBP 20.7 million (GBP 21.8 million), however revenues remained stable year on year in local currency
  • Decline of gross margin to 15.4% (18.0%) led to a decrease in gross profit to GBP 3.2 million (GBP 3.9 million)
  • Revenue in skimmed milk powder (“SMP”) segment increased by 11% year on year to GBP 5.9 million (GBP 5.3 million)
  • Gross profit for SMP increased to GBP 0.8 million with gross margin of 13.1%, compared to GBP 0.02 million loss in prior period
  • Revenue in branded products segment declined by 12.8% year on year to GBP 13.7 million (GBP 15.7 million)
  • Gross profit for branded products decreased by 41.8% year on year to GBP 2.2 million (GBP 3.9 million) with gross margin of 16.4% (24.6%) as a result of margin pressure from consumer preferences shift to the mass market segment
  • Earnings per share of 1.0 pence (1.5 pence)
  • Positive cash flow with cash balance standing at GBP 1.6 million (GBP 2.2 million)

Sergey Evlanchik, CEO of Ukrproduct, commented: “Consumer preferences shifted further to the price sensitive mass market away from Ukrproduct’s strong position in the premium middle market segment, impacting our profitability. Ukrproduct continued to adapt its product mix to suit changing consumer preferences, with the intention of improving profitability. Implementation of these plans will be assisted by the recently announced strengthening of the senior management team.”

CEO`S REPORT

During the first half of 2010 Ukrproduct has witnessed a further decrease in the purchasing power of the local population, which resulted in a continued switch in consumer preferences from the middle to the mass market segment. At the same time growth in input prices outpaced the rise in consumer prices. Domestic processed cheese prices have declined by 15% on average from January 2010 and have reached July 2009 levels, driven by aggressive pricing by local producers at the low end of the market. Prices for packaged butter were up by 25% year-on-year on average which has partially compensated for the increased cost of raw materials.

Ukrproduct continued to maintain a leading market share of packaged butter. The Group came under competitive pressure in the processed cheese market in the first six months of 2010, however, its market position started to recover following an improving adjustment of its product range and the introduction of competitively priced processed cheese products and spreads in the lower end of the market in June.

Overall, the Group experienced a significant reduction in its trading volumes in the first half of 2010. Ukrproduct gross margins came under pressure from competitive pricing and input cost increases, particularly in raw milk prices, which were up over 60% year on year.

Ukrproduct did benefit from a favourable pricing environment in SMP in the first half of 2010, and as a result, the profitability of this segment improved significantly, compared to the first half of last year. Though, as previously announced, trading volumes of SMP were affected by the Ukrainian government decision to issue bonds in exchange for its VAT obligations to exporters, which undermined their confidence.

The Group`s cash situation is sufficient with balances of GBP 1.6 million backed by additional banking facilities into next year.

Despite the cash position, business circumstances dictate prudency and conserving cash. The Board is therefore forgoing the payment of an interim dividend in respect of the first six months ended 30 June 2010.

OUTLOOK

Ukrproduct sees a more stable outlook for the economy under the new government, however, consumer budgets continue to be pressured inducing a further shift to the mass market. The Company now has an improved product offering for this segment with more products to come in the short term. We witnessed some improvement in sales in May and June, which continued into the second half of the year. However, in July and August, input costs have risen prematurely, following drought, which forced local cheese producers exporting to Russia to increase their production. Such volatility in the business and trading conditions makes predictions difficult.

Nevertheless Ukrproduct has defined plans for profit improvement. These include the recent re-launch of hard cheese production and the commencement of distribution of the soft drink, kvass. Additionally, Ukrproduct made necessary provisions during the summer months for the forward storage of milk and milk derivatives to achieve its production targets in processed cheese and butter in the second half of 2010. The implementation of these plans will be aided by an overhaul of the senior management team. This has led to the appointment of a new CFO, Olena Yakovenko, and heads of Sales and Marketing departments.

FINANCIAL REVIEW

(GBP thousands) (UAH thousands)
  Jan-Jun
2010
Jan-Jun
2009
Year on
Year
Change
Jan-Jun
2010
Jan-Jun
2009
Year on
Year
Change
Revenue 20,653 21,799 (5.3%) 250,457 249,345 0.5%
Gross Profit 3,183 3,934 (19.1%) 38,600 44,998 (14.2%)
EBITDA 1,148 1,669 (31.2%) 13,925 19,093 (27.1%)
Profit after tax 415 629 (34.0%) 5,033 7,183 (29.9%)
Basic earnings per share (pence) 1.0 1.5 (33.3%) - - -

(GBP thousands) (UAH thousands)
  Jan-Jun
2010
Jan-Jun
2009
Year on
Year
Change
Jan-Jun
2010
Jan-Jun
2009
Year on
Year
Change
Revenue            
  - Branded 13,679 15,692 (12.8%) 165,884 179,487 (7.6%)
  - SMP 5,920 5,332 11.0% 71,791 60,989 17.7%
  - Other 1,054 775 36.0% 12,782 8,865 44.1%
Gross Profit            
  - Branded 2,243 3,853 (41.8%) 27,200 44,059 (38.6%)
  - SMP 776 (22) - 9,410 (252) -
  - Other 164 100 64.0% 1,989 1,149 73.1%

Ukrproduct`s consolidated revenues decreased by 5.3% year on year in the first half of 2010. The branded products segment continued to account for the majority of the Group`s revenues, representing 66.2% of total revenues in the reporting period (72.0% in the first half of 2009). Branded products segment revenues declined 12.8% year on year as a result of competitive pressure experienced in the processed cheese market in the first six months of 2010, as well as the increase of raw milk prices outpacing the rise in retail prices of butter. Skimmed milk powder (“SMP”) revenues increased by 11.0% year on year during the same period, following the continued recovery in global soft commodities markets and a favourable pricing environment domestically and abroad.

The Group experienced a significant reduction in its trading volumes in the first half of 2010 in both the branded products segment and in sales of skimmed milk powder. As previously disclosed, trading volumes of SMP were primarily affected by the issuance of bonds by the Ukrainian government in exchange for its VAT obligations to exporters. As a result, management decided to forgo additional sales of third party SMP in the absence of clarity with regard to VAT refunds. Ukrproduct`s volumes of branded products declined due to continued shift in consumer preferences to mass market products from Ukrproduct`s strong position in the premium middle market segment.

The Group`s gross profit declined by 19.1% year on year with gross profit margin of 15.4% in the first half of 2010, compared to 18.0% in the corresponding period of 2009, as a result of the margin pressure in the branded products segment. Ukrproduct continued to benefit from a favourable pricing environment in SMP in the first half of 2010, and as a result the profitability of this segment was significantly above the first half of last year. The SMP segment delivered gross profit margin of 13.1%, compared to a loss in the prior period. The branded products segment gross profit margin declined from 24.6% in the first half of 2009 to 16.4% in the reporting period, largely as a result of reduction in gross profit margins for butter following the rise in raw milk prices and the strengthening of government policy on regulation of retail prices. The Group’s gross profit margin was further impacted by an 11% year on year rise in electricity costs and a 20% increase in packaging costs.

Group EBITDA decreased 31.2% year on year in the first half of 2010 with an EBITDA margin of 5.5%, compared to 7.6% in the previous period.

Depreciation and amortisation expense decreased by 31.3% year on year from GBP 0.8 million in the first half of 2009 to GBP 0.5 million.

The Group`s Selling, Distribution and Administrative expenses decreased by 8.9% year on year from GBP 2.8 million in the first half of 2009 to GBP 2.6 million in the reporting period due to cost optimisation measures. The Group`s reduced its leasing costs for warehouse and office space, as well as logistics and advertising expenses.

Profit after tax decreased by 33.9% year on year to GBP 0.4 million in the first half of 2010 (GBP 0.6 million). The Group’s basic earnings per share (EPS) declined 33.3% year on year from 1.5 pence to 1.0 pence in the first half of 2010.

Net cash generated by operating activities totalled GBP 1.8 million in the first half of 2010 (GBP 3.7 million).

Net cash used in investing activities totalled GBP 0.4 million in the first half of 2010 (GBP 0.3 million) with GBP 0.4 million spent on capital expenditure (GBP 0.3 million). During the reporting period Ukrproduct upgraded the production of spreads and purchased 3 new transport vehicles.

Net cash received from financing activities amounted to GBP 0.003 million in the first half of 2010, compared to net cash used in financing activities of GBP 1.5 million in the prior period.

The Group`s cash balances stood at GBP 1.6 million as at 30 June 2010, compared to GBP 2.2 million as at 30 June 2009. The Group`s net debt was GBP 0.3 million as at 30 June 2010, compared to net cash of GBP 0.2 million as at 30 June 2009. The Group maintained a working capital facility in Ukrainian Hryvnia with OTP Bank equivalent to up to GBP 3.2 million (GBP 3.2 million). As at 30 June 2010, Ukrproduct had drawn down GBP 1.9 million of the available facility (2009: GBP 1.6 million). Ukrproduct also has available additional overdraft facilities for up to GBP 0.6 million. The Group`s cash levels are sufficient to meet current debt obligations in the short and medium term.

Conference call information
Ukrproduct management will host a conference call today at 10.30 am (London time) / 11.30 pm (CET) / 12.30 pm (Kiev Time) to present and discuss the unaudited interim results.

The dial-in numbers for the conference call are:
UK/International: +44 20 7190 1530

A replay will then be available for 7 days after the conference call. To access the replay, please dial:

UK/International: +44 20 7154 2833

PIN number: 4359119#

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