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UKRPRODUCT ANNOUNCES UNAUDITED INTERIM FINANCIAL RESULTS: Latest news

30 September 2015

Kyiv, Ukraine – September 29, 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 unaudited interim consolidated IFRS financial results for the six months ended 30 June 2015.

KEY FIGURES
(Figures in brackets are for the six months ended and as at 30 June 2014 when the exchange rate was 16.99 UAH/GBP compared to 32.41 UAH/GBP in this reporting period)

• Total revenues decreased by 43% year on year to GBP 9.8 m (GBP 17.2 m), however in Ukrainian Hryvna the sales revenues increased by up 7.7%
• Gross profit margin decreased to 11.5% (22.7%) resulting in gross profit decrease by 71.3% to GBP 1.1 m (GBP 3.9m) which in Ukrainian Hryvna translated into a 45.1% decrease
• Revenues in dairy branded products segment decreased by 44% year on year to GBP 6.3 m (GBP 11.3 m) and the gross profit decreased by 72% year on year to GBP 0.6 m (GBP 2.1 m)
• In kvass the revenues decreased by 37% year on year to GBP 0.5 m (GBP 0.7 m) and gross profit down by 38% year-on-year
• Skimmed Milk Powder (SMP) revenues decreased by 48% to GBP 2.4 million (GBP 4.7 m) and gross profit decreased to GBP 0.2 m (GBP 1.3 m)
• EBITDA decreased to GBP 66 k (GBP 1.8 m)
• Operating loss amounted to GBP 221 k (profit of GBP 1.3 m)
• The negative effect of currency exchange differences amounted to GBP 0.5 million (GBP 2.8 m)
• Cash balance as at June 30, 2015 stood at GBP 50 k (GBP 0.4 million).

CEO’s REPORT
During the first six months of FY2015 Ukrproduct has faced significant headwinds. The Ukrainian economy continued to decline mostly owing to the continuing unrest in the East of the country and the pressured state of Ukrainian economy overall. This is reflected in the devaluation of the hryvna, deterioration of consumer confidence and the shrinking domestic market. Furthermore the closure of the Russian market exerted further pressure causing an oversupply of dairy products on the Ukrainian market.
The Company sought to defy the increasing challenges of the business environment by revising the regional sales focus, enhancing its sales and operating efficiency as well as adjusting the sales mix in view of changing consumer preferences. This turnaround programme designed to focus on maintaining profit margins, improve working capital and reducing costs has been implemented in consultation with the European Bank of Reconstruction and Development.

In dairy domestic market demand shrunk across the Company’s key product categories leading to fiercer competition. At the same time, raw milk prices showed a year-on-year increase of circa 12% prompted by the tighter competition for supply on the back of even higher price increases for imported dairy ingredients.
Branded dairy products showed a 8% increase in revenue in hryvna terms not least as the result of an increasing shift of sales focus from the occupied Eastern regions to other highly populated areas as well as the consumer price increases where achievable.
The comprehensive marketing campaign for the Company’s “Our Dairyman” brand launched at the end of 2014 continued in 2015 and largely contributed to an improvement of Ukrproduct’s packaged butter and processed cheese sales. Over the first half of 2015, packaged butter and processed cheese segments showed an increase in sales revenues of 3% and 14% respectively in hryvna terms. At the same time, the Company’s market share in packaged butter has increased whilst the market share in processed cheese showed a slight decrease. This was due to the Company’s decision to focus on only profitable products going forward and to eliminate some private label projects which were barely break-even.
Domestic sales of hard cheese were impacted by the ban on exports to Russia. Thus the Company strove to expand its geography of sales and successfully resumed sales to Crimea via a distributor. As a result sales of hard cheese showed good progress compared to the first half of 2014 in both volume and revenue terms increasing by 34% and 60% respectively.
At a gross profit level the contracting effective average wages made it very difficult to increase the consumer prices to fully offset the sharp rise in input costs namely energy and dairy ingredients, not least milk. As a result, gross profit of branded dairy products decreased by 48% in hryvna terms (72% in GBP terms) mostly owing to the packaged butter and processed cheese categories.
The sales of kvass showed a 24% increase in H1’2015 in sales denominated in Ukrainian Hryvna compared to the same period last year due to the successful sales promotion in the Southern Regions excluding Crimea and other large cities.
Skimmed Milk Powder (SMP) segment showed a considerable decline following the global dairy commodities prices contraction accentuated by the Russian embargo. Thus revenues and the gross profit in GBP Terms have decreased by 48% and 83% respectively. However in September the dairy commodities price trend reversed and the Company expects improvement in the SMP gross profit margins going forward.
Meanwhile the Company continued to improve the efficiency of its production capacities utilization via placement of the third party orders for skimmed milk. As a result the revenues and the gross profit of the third party services showed a healthy increase year on year.

Finances – Hryvna revenues overall grew by 9%. Exports accounted for approximately 27% of sales, with domestic sales being split principally between regional distributors, national retail chains and wholesale suppliers to other producers (such as Danone and Kraft).
Gross profit showed a very significant contraction of 45%. Therefore EBITDA while remaining positive fell similarly. This decline was further accentuated by negative exchange differences resulting in the expected overall loss of GBP 1.1 m.
There has been a focus to reduce overdue receivables in order to improve cash generation and reduce finance costs. New operating procedures and incentives have been introduced across the sales and marketing and finance function resulting in average cash collection period falling from 45 to 39 days. As at the date of this announcement, Ukrproduct continues its negotiations with the European Bank for Reconstruction and Development to restructure the loan repayment and expects the process to be completed in the second half of 2015. Meanwhile the Company’s payments of interest on the loan are up-to-date.
The Group’s cash levels are sufficient to meet current debt interest obligations in the short and medium term.

Outlook – The Company is adapting to this most challenging business environment and is working to restore profitability according to a programme. Sales and marketing activities are orientated to the non-occupied regions with sales geared to cash and not just revenue. Productivity improving efficiencies and cost eliminations are being achieved and more are targeted. In this volatile trading environment, working capital is subject to most strict control with cash creation the focus of all these initiatives.

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