(UKR) Ukrproduct Group

FOR IMMEDIATE RELEASE                                                         

7 September, 2011                                                                   

UKRPRODUCT ANNOUNCES UNAUDITED INTERIM FINANCIAL RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2011

Kyiv, Ukraine - 7 September 2011 - Ukrproduct Group Limited ("Ukrproduct" or the "Group") (AIM: UKR), one of the leading producers and distributors of branded dairy products and third party products in Ukraine, today announces its unaudited interim consolidated IFRS financial results for the six months ended 30 June 2011.

FINANCIAL HIGHLIGHTS

(Figures in brackets are for the six months ended or as at 30 June 2010)

·        Total revenue up 21.1% year-on-year to GBP 25.0 million (GBP 20.7 million), with revenue in local currency up 28.5% year-on-year

·        Gross profit increased by 13.7% to GBP 3.4 million (GBP 3.0 million), despite a decline in gross profit margin to 13.5% (14.4%)

·        Branded/own label products and distribution services for third party products performed strongly, with gross profit growth of 39.9% and 231% respectively year-on-year

·        Skimmed Milk Powder (SMP) saw significant declines in revenue and gross profit as a result of a weak domestic market

·        EBITDA unchanged from 2010 at GBP 1.15 million

·        Profit before taxation up 19.0% year-on-year to GBP 0.52 million (GBP 0.44 million)

·        Tax increased substantially to GBP 0.215 million (GBP 0.025 million) following the introduction of the new Ukrainian Tax Code as of 1 April 2011.

·        Cash balance standing at GBP 0.4 million (GBP 1.6 million)

·        Earnings per share decreased to 0.8 pence (1.0 pence) - due to the increased tax charge

Sergey Evlanchik, CEO of Ukrproduct, commented: "In the first half of 2011 the Group achieved a significant increase in sales volumes and revenues, led by branded/own label products and distribution services for third party products. Margins came under pressure, not least from changes to the milk subsidy regime in Ukraine. SMP revenues fell due to market conditions. Overall, Ukrproduct saw strong growth in operating profit. It was therefore disappointing that this improved operating performance was undermined by the imposition of the stringent new Tax Code."

CEO'S REPORT

The Ukrainian business environment has become more challenging following the introduction of the new Tax Code, effective April 1, 2011 and pressure from the tax authorities. The dairy sector was also affected by a new milk subsidy regime which led to an increase in raw milk prices of approximately 20% for all processors.

Ukrproduct achieved strong increases in both sales volumes and revenues, driven by a new sales and marketing strategy led by a new management team. Revenue in GBP in H1 2011 was up 21.1% year-on-year, mostly driven by sales of branded products, Ukrproduct's core offering.

The Group strengthened its leading position in the overall butter segment, increasing market share by 1.5 percentage points (9.2% in H1 2011 compared to 7.7% in H2 2010)¹. The Group also added 1.1 percentage points to market share for bulk and packaged spreads. Sales of packaged butter and spreads increased by 28% in H1 2011, with gross profit up 68%.

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There was extreme price competition at the lower end of the processed cheese market as consumer demand switched to lower priced goods and the market contracted in H1 2011. Ukrproduct's revenues in this segment fell 15% year-on-year, with a gross profit fall of 10%.  Encouragingly, the Group did recover its leading position with 17.5% market share in H1 2011 (15.6% at year-end 2010).

The profitability of the SMP segment in H1 2011 was adversely affected by higher raw milk prices and excess stocks of SMP from 2010 in Ukraine, which resulted in an unexpected price decrease on the domestic market. The Group limited production of SMP and as a result broke even in this segment in H1 2011. Difficult market conditions are expected to continue for the rest of the year.

The distribution of kvass (a traditional brewed drink) showed a considerable improvement both in terms of sales volumes and profitability, contributing significantly to the Group's gross profit.

Furthermore, the Group started construction work to modernize the plant at Starokostantyniv within the framework of a project financed by the European Bank for Reconstruction and Development (EBRD). The upgrade of the plant will bring substantial cost savings, particularly due to increased energy efficiency. Benefits are expected to accrue as from mid-2012.

Business circumstances dictate prudence and the conservation of cash. The Board has therefore decided not to pay an interim dividend in respect of the first six months ended 30 June 2011 (six months ended 30 June 2010: Nil).

OUTLOOK

In the second half of 2011 the Group aims to further increase the sales of branded/own label products with trade marketing campaigns and further adaptation of the product portfolio to meet new market requirements, including the launch of new products. Sales of distribution services for third party products are also expected to improve. The SMP market is expected to remain subdued.

Margin pressure will continue given the new milk subsidy regime. The Group also expects a seasonal increase in raw milk prices as well as further increases in fuel and other input costs. In addition to increasing sales, Ukrproduct will therefore be focused on cost-cutting measures to sustain profitability.

The onerous new tax situation will require effective planning to offset its impact on the expected improvements in operating profit.

FINANCIAL REVIEW

Ukrproduct's consolidated revenues increased by 21.1% year-on-year in the first half of 2011. The Branded products segment continued to account for the majority of the Group's revenues, representing 63.9% of total revenues (66.2% in the first half of 2010). Branded products segment revenues increased by 16.9% year-on-year, while the revenue of the Non-branded products segment (SMP) declined by 36.9% year-on-year due to the decision of management to minimize the loss from SMP sales  caused by high input costs  and weak domestic SMP prices.

The Group's gross profit increased by 13.7% from GBP 3.0 million in H1 2010 to GBP 3.4 million in H1 2011 with a gross profit margin of 13.5% in the first half of 2011 compared to 14.4% in the corresponding period of 2010. The fall in gross profit margin was mainly due to the increased price of milk and decreased profitability of SMP.  

The Non-branded products segment delivered a gross profit margin of - 0.2% compared to 13.1% in the previous period. The Branded products segment's gross profit margin increased from 14.8% to 17.7% year-on-year, largely due to increased sales volumes and stronger pricing.

Group EBITDA in H1 2011 was consistent with H1 2010 at GBP 1.15 million.

Depreciation and amortisation expenses decreased by 14.7% year-on-year from GBP 0.53 million in the first half of 2010 to GBP 0.45 million following a change in the depreciation method from the reducing balance method to the straight-line method. This new method has been applied from 1 January 2011.

The Group's Administrative and Selling & Distribution expenses increased by 18.4% year-on-year to GBP 2.7 from GBP 2.3 million. This was due to increases in fuel costs and in salaries of the sales people, which, in turn, increased due to higher sales volumes. 

Profit before taxation increased 19.0% year-on-year to GBP 0.52 million in H1 2011 compared to H1 2010 (GBP 0.44 million). Profit after tax decreased by 25.6% year-on-year to GBP 0.31 million in H1 2011 (GBP 0.42 million) due to the newly introduced Tax Code. The Group's basic earnings per share (EPS) declined 21.4% year-on-year from 1.0 pence to 0.8 pence in the first half of 2011.

Net cash generated by operating activities totalled GBP 0.3 million in the first half of 2011 (GBP 1.7 million), reflecting increased trade and other accounts receivables in line with increased sales, and a one-time sale of equipment. 

The Group's cash balances stood at GBP 0.40 million as at 30 June 2011, compared to GBP 1.6 million as at 30 June 2010. The Group's net debt was GBP 2.7 million as of 30 June 2011, compared to net debt of GBP 1.9 million as at 30 June 2010. As at 30 June 2011, the Group had a credit facility in Ukrainian Hryvnia with OTP Bank equivalent to up to GBP 2.7 million (GBP 2.9 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 am (CET) / 12.30 pm (Kiev Time) to present and discuss the unaudited interim results. A presentation for investors is available here: http://www.ukrproduct.com/en/140/155.html.

UK dial-in (toll-free): 0800 368 1950

Ukraine dial-in (toll-free): 0800 500 684

International dial-in: +44 (0)20 3140 0668

The participant passcode is: 160008#

A replay will then be available for 30 days after the conference call. To access the replay, please dial:

UK playback: +44 (0) 20 3140 0698 or 0800 368 1890

US/International playback: +1 877 846 3918

The playback code is: 379439#

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For further information, please visit www.ukrproduct.com or contact: 

WH Ireland Limited                                                            Metropol (UK) Limited

Robin Gwyn                                                                       Natalia Pastukhova

Tel: +44 161 832 2174                                                      Tel. +44 (0) 20 7439 6880

Ukrproduct Group Ltd is one of the leading Ukrainian producers and distributors of branded dairy products. The Group's product portfolio includes processed and hard cheese, skimmed milk powder (SMP) and butter. Ukrproduct has built a range of recognisable product brands ("Our Dairyman", "People's Product", "Creamy Valley", Molendam", "Farmer's") that are well known and highly regarded by consumers. The Group has modern production facilities that comprise four dairy plants in western and central regions of Ukraine (Zhytomyr, Starokonstantyniv, Krasyliv and Letychiv) with a total annual integrated capacity of approximately 60,000 tons of dairy products. With its own fleet of more than 125 vehicles, Ukrproduct has one of the largest logistics and distribution networks in Ukraine which covers the country's eight major cities. The Group reported total assets of approximately GBP 26.7 million as at June 30, 2011 and consolidated revenues of approximately GBP 25.0 million for the first six months of 2011. Ukrproduct's securities are traded under the symbol "UKR" on AIM, a market operated by the London Stock Exchange.

Some of the information in this press release may contain projections or other forward-looking statements regarding future events or the future financial performance of the Group. You can identify forward looking statements by terms such as "expect," "believe," "anticipate," "estimate," "intend," "will," "could," "may" or "might" the negative of such terms or other similar expressions. These statements are only predictions and they may differ materially from the actual events or results. We do not intend to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Many factors could cause the actual results to differ materially from those contained in such projections or forward-looking statements, including, among others, general economic conditions, our competitive environment, risks associated with operating in Ukraine, rapid technological and market change in our industry, as well as many other risks specifically related to the Group and its operations.