OREANDA-NEWS. September 29, 2014. Ukrproduct Group Limited (“Ukrproduct” or the “Group”) (AIM: UKR), one of the leading Ukrainian producers and distributors of branded dairy foods and beverages (kvass), announces its unaudited interim consolidated IFRS financial results for the six months ended 30 June 2014.

KEY FIGURES

(Figures in brackets are for the six months ended and as at 30 June 2013 when the exchange rate was the 12.33 UAH/GBP compared to 16.99 UAH/GBP in this reporting period)

Total revenues decreased by 30% year on year to GBP 17.2 m (GBP 24.7 m), however the decrease in national currency made up 5%

Gross profit margin improved to 22.7% (15.0%) resulting in gross profit increase by 5% to GBP 3.9 m (GBP 3.7m)

Revenues in dairy branded products segment decreased by 41% year on year to GBP 11.3 million (GBP 19.1 million) and gross profit decreased by 20% year on year to GBP 2.1 million (GBP 2.7 million)

In kvass the revenues decreased by 40% year on year to GBP 0.7 million (GBP 1.2 million) and gross profit down by 39% year-on-year

Skimmed Milk Powder (SMP) revenues increased by 36% to GBP 4.7 million (GBP 3.5 million) and gross profit increased to GBP 1.3 million (GBP 0.3 million)

EBITDA increased by 42% to GBP 1.8 million (GBP 1.3 million) year-on-year

Profit from operations more than doubled year on year reaching GBP 1.3 million (GBP 0.6 million)

Profit before FOREX increased to GBP 835 k (GBP 33 k)

The negative effect of currency exchange differences amounted to GBP 2.8 million

Cash balance of GBP 0.4 million (GBP 0.6 million).

CEO’S REPORT

As to be expected the unstable political and economic situation has provided a challenging business environment for all businesses in Ukraine. Consumer confidence has fallen and the population’s purchasing power has been reduced by rising costs including the very significant increase in fuel prices due to the deterioration of relations between Ukraine and Russia. The significant hryvna devaluation has further accentuated the management challenge. It has increased the cost of imported materials but potentially affords export opportunities.

In dairy the lack of exports to Russia led to an oversupply and some dumping on the domestic market. However and importantly it led to improved milk availability that was followed by a decline in raw milk prices. Branded dairy products experienced lower sales given the market conditions and also not least as the result of consumer price increases necessitated earlier in the year by the pressure on unit cost. At the same time more raw milk availability at lower prices coupled with the consumer price increase ensured a good improvement in the profit margins of branded dairy category. Thus despite the revenues decline the gross profit in H1’2014 has increased year-on-year.

In butter segment the Company saw the decrease in both volumes and revenues, however the margins improved substantially. The overall market of spreads in Ukraine continues to decline as consumers switch their preferences back to the traditional butter. Thus Ukrproduct’s category of spreads saw a decrease in both sales and profits. Processed cheese showed the decrease in revenues and gross profit despite the improvement in contribution margin. The hard cheese sales have been the most affected by the restrictions on exports to Russia and dumping of product and as result have reduced year-on-year.

With the hryvna devaluation vs US dollar of 47% in H1’2014 the Company aimed at increasing export revenues significantly improving its SMP export sales and exploring new export markets for its branded products.

Skimmed Milk Powder (SMP) - The SMP segment showed a significant year-on-year growth in H1’2014 benefitting from higher domestic and export demand and better prices given the exchange rate. Moreover the Company continued to enhance its reputation as the high quality and reliable supplier to the large multinational companies in Ukraine as planned following the upgrade of production facility within the scope of the EBRD financed project.

The sales of kvass showed a decrease in H1’2014 compared to the same period last year due to the summer weather colder than usual and difficulties selling into Crimea. However the Company expects the second half of the season to improve on sales not least due to an extensive marketing support and further development of geographical coverage.

Distribution services - Given the commoditization in this business segment the Company now operates at a lower level with focus on growing quality business allowing good profitability. As result although the revenues in this segment decreased in H1’2014 compared to the last year, the gross margin showed an improvement.

Finances - Overall the aforementioned factors resulted in the sizeable year-on-year increase in Company’s EBITDA and operating profit for the first half of 2014. Operating cash-flow was substantially improved during the period. The significant hryvna devaluation has offset such operating improvement via a negative exchange difference charge. The effect of exchange rate has led to the Group reporting a loss for H1’2014.

As previously announced the banking confidence in Ukraine has fallen and this is limiting credit facilities. Ukrproduct Group however has successfully renewed its bank facilities for working capital. Ukrproduct also benefited from further support of the European Bank for Reconstruction and Development (“EBRD”) which has restructured the loan repayment taking into account significant hryvna devaluation.

The Group’s cash levels and bank facilities are sufficient to meet current debt obligations in the short and medium term.

On the operational side the Company continued its progress implementing the second stage of modernization project with the European Bank for Reconstruction and Development. Meanwhile the Company is continuing to see the positive effect of the first stage of the project which has become even more relevant given the rise in energy costs.

Additionally the Company has adjusted its business model including change of sales and logistics structure. This proved to be successful and resulted in better efficiency of operations. The financial outcomes of these initiatives are now being seen.

Outlook – Within the context of the unstable environment, Ukrproduct will sustain its positive approach adapting to changes in opportunity with its trading partners and the consumer. In particular restoration of branded product volumes will receive focus underpinned by a strong marketing programme. The final stage of modernization project, EBRD supported, will become fully operational by the end of the year.