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FINAL RESULTS FOR THE FINANCIAL YEAR ENDING 31 DECEMBER 2014: Latest news

24 June 2015

Kyiv, Ukraine – June 24, 2015 – Ukrproduct Group Limited (“Ukrproduct” or the “Group”) (AIM: UKR), one of the leading Ukrainian producers and distributors of branded dairy foods and beverages (kvass), today announces its audited consolidated IFRS final results for the twelve months ending 31 December, 2014.

The full text of the 2014 Annual Report, incorporating the 2014 Audited Financial Statements, is available here and from the Company`s head office, 14th Floor, 39-14 Shota Rustaveli St., Kiev 01033, Ukraine.  Copies of the annual report are being posted to shareholders on June 30, 2015. 
A summary of the Audited Financial Statements follows in this announcement.  Shareholders are advised to read the full text of the 2014 Annual Report in its entirety.

Chairman and Chief Executive Officer`s Report

Over the year 2014 the highly unstable political and economic environment in Ukraine provided ongoing challenges for Ukrproduct Group. The most important macroeconomic factors affecting us were the very significant volatility and devaluation of the Hryvnia, escalating inflation and struggling consumption in the domestic market.

Furthermore, the tensions in the Eastern part of Ukraine and Crimea caused unstable supplies to these areas leading to a reduction of the actual market capacity. The Company has been addressing these issues by strengthening its sales strategy in the rest of Ukraine.

In the dairy market, whilst Ukrproduct has not itself supplied Russia, the ban on export of dairy products to Russia led to an oversupply of hard cheese in the domestic market whilst at the same time resulted in lower raw milk prices due to increased availability in the summer period. However, on an annual basis average raw milk prices in 2014 increased by approximately 8% y-o-y that coupled with the increased cost of imported raw materials and higher energy costs placed further pressure on unit costs.

BRANDED DAIRY PRODUCTS sales were challenged by the market situation and the limited purchasing power of the local population. However, profitability improved as consumer price increases compensated for rising input costs. Overall sales of branded products in local currency decreased by 5% in Hryvnia terms compared to the previous year with packaged butter and hard cheese categories being affected the most. On the positive side consumer price increases resulted in margins improvement thus gross profit in the branded products category grew by 21% in Hryvnia terms.In respect of its market share Ukrproduct Group has remained among the market leaders in its core categories of processed cheese and butter. The Company is also among top-five producers of kvass in Ukraine with 6.2% market share and is the only mass manufacturer of “fresh” Kvass in Ukraine.  
In the butter segment, the Company experienced a decrease in both volumes and revenues by 39% and 27% respectively, however margins improved substantially resulting in a gross profit increase of 67% in Hryvnia terms. In the second half of 2014, the Company launched a comprehensive advertising and promotion campaign for its flagship “Our Dairyman” brand. This initiative proved to be effective resulting in positive sales trends towards the end of the year.
The overall market of spreads in Ukraine grew as a result of consumers switching from traditional butter to more affordable substitutes. Thus Ukrproduct’s category of spreads showed a 17% y-o-y increase in sales, however profitability was reduced as result of increased input costs leading to an 83% fall in gross profit in Hryvnia terms.
Processed cheese showed a 5% decrease in revenues but as the contribution margin improved compared with the previous year this resulted in a 16% gross profit increase y-o-y in Hryvnia terms.
Hard cheese sales have been the most affected by the restrictions on exports to Russia with local dumping of product by our competitors. As a result year-on-year sales fell by 36% and the segment hardly broke-even on the gross profit level.
The Hryvnia devaluation prompted the increased focus on export sales of both branded products and skimmed milk powder and led to the significant improvement of the export revenues by 34% year-on-year. The advantageous trend in the Skimmed Milk Powder segment which largely contributed to the Group’s profits in the first half year reversed towards the end of 2014. Consequently, the Group actively sought third party orders in order to capitalise on the Company’s efficient milk protein processing facilities which were upgraded with funds provided by the EBRD. This initiative was successful with orders being received from multinationals such as Pepsico and Danone and increasing utilisation rates of the facility. On an annual basis this segment showed a robust 71% increase in sales and a more than 4 times increase in gross profit in Hryvna terms.

BEVERAGES - Kvass sales benefitted from the special focus of marketing and sales teams and showed a healthy 10% increase to the previous year, a good result particularly due to the challenging supply situation in Crimea that has accounted for a substantial part of summer kvass sales.  Gross profits declined by 4% compared to the previous year despite the increase in sales due to increased sugar and energy costs.

THIRD PARTY (DISTRIBUTION AND PRODUCTION) SERVICES were developed with the focus on growing quality business with sustainable margins. The Company has increased the efficiency of its production capacities utilization via placement of the third party orders for skimmed milk. As a result the revenues of the third party distribution and production increased by 35% y-o-y and their gross profitability increased by 52%.

FINANCES - Overall the Company saw a 43% year-on-year increase in EBITDA and a more than doubled operating profit for the full year 2014 in Hryvnia terms. Moreover, the operating cash-flow has been substantially improved during the year. However, the significant Hryvnia devaluation has offset such operating improvement via a negative foreign exchange difference charge. The effect of exchange rate led to the Group reporting a loss for FY2014. Ukrproduct Group is substantially a Hryvnia business and a sustained devaluation affects the translation of its financial performance in other currencies.
Ukrproduct Group has ensured sufficient bank facilities for working capital. As at the date of this announcement the Group is engaged in negotiations with the European Bank for Reconstruction and Development (“EBRD”) to restructure the loan repayment schedule taking into account significant Hryvnia devaluation which we anticipate completing in the second half of 2015.

On the operational side the second stage of modernization project with the European Bank for Reconstruction and Development is now being finalized. Meanwhile the Company is continuing to see the positive effect of the completed phases that has become even more relevant given the rise in energy costs. Additionally, the Company has been adjusting its business model including optimisation of sales and logistics structure. This has proved to be successful and has resulted in improved efficiency of operations. The financial outcomes of these initiatives are now being seen.

TRADING OUTLOOK – Given the volatile environment in parts of Eastern Ukraine and Crimea, Ukrproduct has been looking to recover sales volumes by adjusting its regional focus. To this end the Company invested in a comprehensive marketing program launched in Autumn 2014 for its flagship brand “Our Dairyman”. These initiatives resulted in positive sales trends for the last quarter of the financial year and have continued subsequently. Additionally, the Group has been optimising its product offering to become more relevant to the current market environment. Finally, all these efforts are underpinned by the further improvement in productivity.
The negotiations with EBRD with regards to restructuring of the loan repayment are constructive and we look forward to the approval of new terms adjusted to the current environment in the second half of 2015.

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Contact information

Address in Ukraine:
10th Floor, 39-41
Shota Rustaveli St.,
Kyiv 01033 Ukraine
Tel/fax +380 44 232 9602

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Jersey JE2 3RA Channel Islands
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