•  2013 loss of GBP704,000 compared to 2012 profit of GBP852,000
  •  Operating profit falls 59% to GBP817,000 
  •  Sales drop 19% to GBP52.2m

Ukraine dairy group Ukrproduct has booked a drop in 2013 profits on lower sales and margins.

The company said that its performance reflected "weak demand" and the "uncertain political situation in the Ukraine".

However, the company said that trading is now improving, with sales recovering "across all product categories". 

The bottom line was also hit by higher interest charges and finance expenses, Ukrproduct said.

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FINAL RESULTS FOR THE FINANCIAL YEAR ENDING 31 DECEMBER 2013: Latest news

 

30 April 2014

 

Ukrproduct Group Limited (AIM: UKR), one of the leading producers and distributors of branded dairy products and beverages (kvass) in Ukraine announces its audited consolidated IFRS final results for the twelve months ending 31 December, 2013.  
The full text of the 2013 Annual Report, incorporating the 2013 Audited Financial Statements, is available here.  
A summary of the Audited Financial Statements follows in this announcement.  Shareholders are advised to read the full text of the 2013 Annual Report in its entirety.

Chairman and Chief Executive Officer’s Report:

The economic environment during 2013 continued to be challenging due to weak demand and an uncertain political situation in Ukraine. At the same time the dairy sector was mainly marked by the significant increase in raw milk prices across both domestic and global markets and shortage of raw milk supply in Ukraine. Within this context, Ukrproduct has continued to pursue its strategies of business development.
Branded Dairy Products
In terms of sales, the major branded dairy product groups have performed well resulting in an aggregated revenue increase of 13% year-on-year. The profitability however was negatively affected by the escalation of raw milk prices rising approximately 24% compared to the previous year average price. The reason behind the price increase were the shortage of raw milk and consequently stricter competition for supply caused, among other factors, by the active exports to Russia from the hard cheese producers. During this time the competitive market environment did not allow to fully off-set the pressure of the rising costs on the margins by lifting the consumer prices. 
The Company sustained its leading position in its core categories of packaged butter and processed cheese with the market shares of 20.8% and 23.2% respectively (Source: expert estimates based on the data from State Statistics Committee of Ukraine. 
The category of packaged butter was the most affected by the increase in the price of raw milk which constitutes a very substantial proportion of this product’s unit cost. Thus despite the 5% increase in revenues the gross profit has decreased by 55% year-on-year.
Processed cheese showed an encouraging increase in sales in both revenues and volumes due to securing new clients and increasing selling prices in line with the market trends. As result the revenues increased by 28% year-on-year. However the quickly rising input costs did not allow a similar increase in gross profit which made up only 3% compared to the previous year.
Hard cheese category benefitted from the further penetration into the profitable retail chains and has shown a 27% increase in revenues along with reaching a 13% gross profitability compared to the zero profitability in the previous year.
Skimmed Milk Powder 
The segment of skimmed milk powder showed a strong recovery in profitability from the previous year benefitting from higher domestic and export demand together with higher prices. However the shortage of raw milk supply constrained the sales volumes. As result the sales have declined by an average 10% year-on-year whilst the gross profit [margin] achieved was an average of 9% compared to the negative profitability in the previous year.
Beverages
Kvass was further supported by the sales and marketing initiative and improvement in geographical coverage. As result the brand of this unique fresh product was significantly strengthened and the market share improved. However at the same time the sales were affected by the short high season caused by poor weather in the summer. Consequently both the revenue and gross profit declined by 12% and 14% respectively. Ukrproduct is currently holding the 5th position on the market of kvass with the market share of 4.9% (Source: expert estimates based on the data from State Statistics Committee of Ukraine). 
Distribution Services
The Company continued to provide distribution services to third parties but with the focus on growing a quality-driven business with sustainable margins. Sales of products becoming commoditized and cash consuming have been reduced.  As the issues with VAT refund on export persisted, the Company has concentrated on domestic operations.
Operational highlights
In 2013 the Group has received a further Euro 1.3 million loan from the European Bank of Reconstruction and Development (“EBRD”) for the second stage of modernization project at Starokostiantyniv Dairy Plant. This is focused on upgrading the production platform for butter and spreads improving both quality and costs. This part of the project is scheduled to be launched into operations with an effective start in  mid  2014. Additionally the Company performed  structural reorganizations of the Group aimed at increasing the operational efficiencies and reducing costs.

Financial overview
Financial results for the year reflect the sensitivity of dairy business margins to the ongoing high raw milk prices. The previously buoyant butter category was affected substantially with margins reduced by half. Effectively this alone pushed Ukrproduct Group into the overall loss.
Such margin pressure was mitigated by improving branded dairy sales, the resumption of profitability in the skimmed milk powder category and reduction in Group overheads. EBITDA margin fell a percentage point resulting in EBITDA of GBP 2.2 m (2012: GBP 3.2 m). The operational profit was negated by the increase in interest charges arising from the EBRD loan. This was compounded by an exchange difference charge of GBP 361,000 and a tax charge, net loss notwithstanding, imposed by the Ukrainian tax regime.
Operating cash flow was positive. The Group started to repay the EBRD loan on schedule making the first instalment of Euro 437,000 in December 2013. The Company believes that it will have further support from EBRD should any rescheduling of repayments be necessary. Other banking facilities remain in place for working capital requirements.
Ukrproduct Group is substantially a hryvna business and a sustained devaluation will affect translation in other currencies.    

Outlook
The unstable political and economic situation, as to be expected, has had an adverse effect on businesses throughout Ukraine including Ukrproduct Group. 
In the early year the Company revenues in hryvna were below expectations as consumer confidence fell, a range of open markets servicing mass and mid-market closed and a number of agents in other sales channels withdrew from the market not least for the reason of bad debt risk. Sales were also adversely affected as higher unit costs due to a currency devaluation of the hryvna and sustained high raw milk prices has necessitated the consumer price increases.
Trading has now improved. Sales are recovering across all product categories. At the same time hryvna devaluation is having a positive influence on the export revenues thus Ukrproduct will aim to grow its export oriented sales. More positively margins are increasing with the declining milk prices. This follows on an increase in milk availability given the constraints on exports to Russia.
Plans internal to the Company are little affected as Ukrproduct has been engaged in restructuring - simplify and modernize – its operations to improve cost, quality and speed of its supply chain. This embraces site consolidation, outsourcing of distribution, boosting sales force efficiency and overheads elimination. This program is fundamental to the Company turnaround plans. Progress has been made and the benefits will be are expected to be evident throughout the year ahead.
In summary Ukraine has been facing political and economical challenges. Within the context of such headwinds, Ukrproduct has adjusted its business model to allow viable progress through the current turbulent environment so far as it can be assessed successfully.

Original source: Ukrproduct Group Limited