Ukrproduct Regulatory News (UKR)

23 Apr 2008 07:00

Ukrproduct Group Ltd23 April 2008 UKRPRODUCT GROUP LTD ('UKRPRODUCT' OR 'UKRPRODUCT GROUP') Preliminary Results for the year ended 31 December 2007 Ukrproduct Group Ltd is a leading Ukraine-based producer and distributor of branded dairy foods. Highlights (2006 - in brackets) • Sales: £48.1 million (£35.1 million) • EBITDA: £5.5 million (£2.8 million) • PBT: £3.7 million (£1.2 million) • Net profit: £3.3 million (£1.1 million) • Gross margin: 21.7% (20.7%) • Basic earnings per share: 7.8p (2.6p) • Proposed final dividend of 0.82p per share giving 1.4p for the full year (0.61p) • Business fully recovered in core product segments after the crisis in 2006 • Capacity utilisation improved, distribution network rationalised, milk collection system strengthened Numbers rounded up. For the complete numbers please refer to the FinancialStatements. Commenting on the 2007 results, Jack Rowell, Chairman of Ukrproduct Group Ltd.,said: "In the past year, the Group's operating strengths, agile decision-making by theexecutive team and favourable business environment have delivered the bestperformance on record to the shareholders. I am pleased to observe thecontinuing flexibility of the business and the strength of the Group's productportfolio. In a dynamically evolving environment of dairy sector of Ukraine sucha combination is a powerful portent for the soundness and vitality of theunderlying business model." For further information: Ukrproduct Group 23 April 2008 Sergey Evlanchik, CEO, and Dmitry Dragun, CFO +44 (0)778 646 6639 Thereafter +38 044 502 8014 WH Ireland Limited +44 (0)161 832 2174 David Youngman CHAIRMAN'S STATEMENT Results Against the background of robust domestic demand and the favourable situation onworld markets for skimmed milk powder, the Group reported sales of £48.1million, an increase of 37% on the previous year. EBITDA, calculated as profitfrom operations adding back depreciation and amortisation, grew from £2.8million in 2006 to £5.5 million, an increase of over 96%. An increase in grossmargins from 20.7% to 21.7% contributed to a three-fold increase in profitbefore tax from £1.2 million to £3.7 million. For the domestic business in Ukraine, 2007 was a period of full recovery inconsumer confidence which had been hit hard by the Russian embargo on the importof Ukrainian dairy products in early 2006. It is now obvious that the Group'sstrategy of refusing to buckle under the huge price pressure in 2006 paid wellin the current year as sales recovered and margins improved. The development ofthe product portfolio, while relatively minor, has helped to secure the broadpresence and recognition of products on the shelves of the fast-developingretailers. For the international business, the past year was exceptional. Nearlyall dairy products, skimmed milk powder in particular, experienced a surge indemand with prices adjusted upwards, accordingly. The Group managed tocapitalise on the opportunities presented with the timely installation of thenew skimmed milk dryer in December 2006; from January 2007 onwards the newequipment operated at a near full capacity and produced skimmed milk ofexcellent grade. As a result, both volumes and prices of skimmed milk powderhave been remarkably robust. Dividends It has been the Group's dividend policy to reward shareholders in line with thetrading performance of the business and financial results whilst maintaining thecash position of the business and supporting the balance between reinvestingprofits and dividend distributions. In view of the recovery in the Group's corebusiness in Ukraine and strong financials delivered by the business, the Boardis recommending a final dividend payment of 0.82 pence per ordinary share forthe year ended 31 December 2007 which would lead to 1.40 pence per ordinaryshare for the full year. If approved at the AGM, the final dividend will be paidon 30 June 2008 to the shareholders on record as at 6 June 2008. Strategy 2007 validated one of the central business principles of Ukrproduct Group, thatof the profitable retention of the Group's position in its core businesssegments. As before, these are soft (processed) cheese, butter, skimmed milkpowder and the most recent addition of hard cheese. While maintaining the marketposition in branded soft cheese, the Group also demonstrated an ability tocontinue to improve margins in the butter segment. In production, our strategy remains focused on manufacturing excellence withonly the newest and most advanced equipment installed in our plants and only themost up-to-date technical expertise contracted for the industrial work. Asignificant amount of capex, some £11 million in total, has been dedicated overthe last three years to upgrading our plants and supporting the Group'scompetitive position in Ukraine. This capex has resulted in our productionfacilities being one of our best assets, serving as the Group's manufacturingplatform and creating a significant barrier to entry to potential competitors. Brands, as we always believed, are our most treasured business resource. Theywithstood a number of business challenges, including competitive pressure,portfolio adjustment, price repositioning and changing habits of consumers.Today, as ever, we are convinced that our brands, led by "Nash Molochnik" (OurDairyman), are some of the most recognisable and profitable in Ukraine's dairysector. We are careful in preserving their integrity by conducting targetedin-store merchandising campaigns and adhering to a policy aimed at price andquality differentiation. Our distribution network, always the backbone of the business, has beenstrengthened and streamlined. The development of the modern retail formats inUkraine has seen the role of the Group's distribution network defined withgreater clarity. We envisage that the central warehouse facilities of thesupermarkets will play a bigger role in delivering the goods to customers in thefuture however the time of the full-cycle service delivery has not yet come. Inthis transitional period of three to five years, we are keen to support thecustomers, both at retail and distribution level, by providing all necessarylogistical support for the timely delivery of our products and associatedservices. Our export operation has seen substantial progress in the last year. Buoyed bynearly a two-fold increase in skimmed milk powder capacity and by significantquality improvement, Starkon Plant has enjoyed a close-to-capacity utilisationin 2007. While the situation on the world markets in 2007 has clearly beenexceptional, we believe that with the new equipment the opportunities tocapitalise on the favourable prices will be a material benefit for the Group inthe future. In early 2008, Ukraine's long-awaited accession to the WTO finally happened. Asthis report goes to print, the details of Ukraine's commitments are not yetknown in detail, neither is the potential impact of the accession toUkrproduct's business. We expect, however, that the new opportunities for ourbusiness will be significant, in particular, with respect to the opening of thehitherto closed export markets for skimmed milk powder. We intend to sustain thegrowth in the future by growing organically via construction of the new modernfacilities as high production and quality standards become vital for theUkrainian dairy producers to be able to comply with the WTO requirements. In onepotential area of growth in Ukraine, acquisitions, we will continue to screenthe appropriate quality targets as bolt-on additions to the Group's corebusinesses. Outlook Looking forward, the Board sees a number of opportunities to expand and improvethe business. Firstly, we are encouraged to see the continuing shift of consumerdemand in Ukraine towards quality products at a reasonable price. This is atrend which the Group has used to its advantage in the past and shall continueto employ in the future. The Group's brand portfolio is diversified yet focusedenough to withstand the competitive pressures. Improving recognition and salesof particular growth products, such as smoked sausage cheese, is the best wayforward for leveraging our industrial and commercial advantages. Secondly, weare convinced that consolidation in the dairy industry of Ukraine is inevitableand is slowly happening. While it is difficult to assess a direct financialimpact of this process on the Group, we nevertheless believe that thecompetitors are weakening and will gradually lose the ability to produce anddistribute dairy products. This bodes well, although indirectly, for the Group'strading performance. In addition, barriers to entry into a dairy business inUkraine of a commercially meaningful scale are very high and we believe thatthis barrier delivers a sizeable benefit to the Group. Finally, ourmanufacturing base is now working towards providing a major competitiveadvantage for the Group. At both of the Group's locations at Zhytomir andStarkon, we now have centres of flexible production capable of deliveringquality products at short notice. This manufacturing ability is increasinglyimportant in Ukraine as seasonal factors and shifts in consumer preferencesdemand greater flexibility from the leading dairy producers. It was a year of excellent achievements. I congratulate everyone at the Groupwith the success and look forward to a new exciting year. Jack RowellChairman 22 April 2008 CHIEF EXECUTIVE'S STATEMENT Background The year under review was the first year following the crisis in the dairyindustry of Ukraine inflicted by the Russian import ban in 2006. Without adoubt, 2007 was a period of full-scale recovery for Ukrproduct Group. Helped bythe encouraging trends in skimmed milk powder worldwide, the Group jump-starteda gradual recovery of the domestic volumes in processed cheese as well. Buttervolumes held up very well throughout the year, just as the management teamexpected at the outset. The margins on this product have improved, reflectingthe continuous effort by management to leverage the brands in the portfolio.Hard cheese, our new flagship product, started well and is now in production. Wenow have the requisite experience and inventories to carry on an introduction ofthe product to the shelves of supermarkets in Ukraine. Operating review The year started well with the rapid and significant increase in the exportprices for skimmed milk powder (SMP) on the world markets. The Group's increasedSMP capacity allowed for an immediate intake of new orders which resulted in thecapacity utilisation rate being close to 100% in April-June 2007. Throughoutthis period, the Group increased the supply of raw milk correspondingly to allowfor greater quality and quantity of the manufactured skimmed milk. By mid 2007,the price increase in SMP prices subsided and the prices remained at the highlevel. In the second half of the year, there was a gradual reduction in demandwith the accompanying drop in price. Overall for the year, an average sellingprice for a tonne of skimmed milk sold by the Group was some 83% higher than inthe previous year. Domestically, the sales of our main products, soft (processed) cheese andpackaged butter, continued a steady recovery albeit at slightly differentspeeds. In soft cheese, the price-depressing effects in the aftermath of theRussian import embargo continued to hamper the revival of volumes although theprice recovery went well. Competitive landscape in Ukraine remained chaotic andunpredictable to a large extent; a number of smaller and mid-tier playersdisplayed the signs of financial distress which they attempted to overcome bydiminishing quality and reducing prices. The Group's response to such attemptswas to keep a steady flow of good-quality products at reasonable prices and toensure the continuing presence of products on the shelves of supermarkets. Thisstrategy worked well, in our view, and by the end of the year the Group'svolumes in soft cheese experienced the dynamics not seen since 2004-2005. Thesmoked sausage cheese, in particular, has been a bright spot. A relatively newproduct for the Group, it now accounts for close to 30% of the total soft cheesesales and continues to grow. As a result, the Group's overall domestic saleshave grown and are expected to grow further due to the continuing expansion ofthe supermarkets. The new product category, hard cheese, was moving into production by the end ofthe year. The initial trials of the product were very encouraging as the qualitydifferentiated the Group's hard cheese from competitors' offerings. For thereasons of profit maximisation due to the extremely favourable world marketconditions for skimmed milk powder in 2007, it was decided to divert the supplyof raw milk to production of skimmed milk powder - the strategy that worked verywell for the company and investors. Starting from the beginning of 2008, weexpect milk volumes to rise substantially to provide increasing input for thevolumes of hard cheese. The quality of our hard cheese is now sufficient tosafeguard the Group's brand standards and to provide customers with afirst-class product. Our capex programme for the year was fully reflective of the recovery mode. Theemphasis was on the maintenance of capex, as well as on drawdown of thepre-committed expenditures for the year. The hard cheese plant at Starkon wascompleted in July, a new smoke room was deployed to Molochnik in August, and anew set of equipment for whey purification was installed at Starkon in November.In total, capital expenditure was materially lower in 2007 than in either of thelast two years. This approach safeguarded the Group's cash position and had thebenefit of helping the Group remain financially secure at a time of the creditmarkets turmoil. Our distribution system, while remaining the backbone of the Group's businessmodel, has had to adapt to the new requirements. The development of the modernretail formats in Ukraine is both an opportunity and a challenge. It is anopportunity because there is an on-going inevitable shift of consumers towardssupermarkets away from the open-air markets. The Group is keen to capitalise onthis opportunity by delivering good quality products and providing consistentservice to the emerging retail players. It is also a challenge because thecentralised distribution warehouses do not exist for a majority of supermarketsin Ukraine. Therefore, the Group is expected to provide retail customers withefficient yet economical distribution support. With this principle in mind, wehave determined that the distribution subsidiary in Ternopil, Western Ukrainehad to be closed. The closure did not affect the existing sales in the largerWestern Ukraine as the client lists have been transferred to the Lvivsubsidiary. In the future, we believe that a selective optimisation of thedistribution system will become a feature of the on-going corporaterationalisation programme. Our system for the supply of raw milk and raw milk ingredients proved itselfcapable of handling significantly larger quantities of input than a year before.We have been developing the milk collection system for over seven years now andwe believe that we have one of the best milk supply chains in the country. Beinga traditionally favourable region for milk production, Western Ukraine where ourmajor plants are located, offers significant opportunities for further expansionof the milk collection capacity of the Group in the future. Looking forward In the opinion of the Board, the Group's core domestic markets in Ukraine arestill offering attractive opportunities for business development. Ukraineremains a dynamically developing, vibrant economic environment with risingconsumer affluence and burgeoning interest in quality food products. It has beenthe Group's business to develop such products and bring them to the consumers,and we are hopeful to be able to continue our progress for every product segmentof our operations. In our traditional products, soft cheese and packaged butter,we remain the market leader and have full intent of being there for a long time.The major thrust of the management efforts in the near future will be directedat maximising the production capacities in these segments. In skimmed milkpowder, we are certain that the times of increased volatility will be succeededby times of excellent opportunities such as the year under review. Ourparticular emphasis in the coming years is the development and firmestablishment of our new product, hard cheese, in the Ukrainian marketspace. Theinitial steps are encouraging and we are looking forward to the continuation ofwork in this direction. In particular, our new upmarket brand "Molendam" will beintroduced to the consumers soon and leveraged in hard cheeses (for which it wasprimarily designed), as well as in processed cheese and butter. We anticipatethat this brand will improve margins considerably. I would like to express my gratitude to everyone at the Group who made the lastyear such a prominent success. Together, we are looking forward to the newexciting future of opportunities and growth. Iryna YevetsChief Executive Officer 22 April 2008 FINANCIAL REVIEW Results In 2007, the Group generated sales of £48.1 million (2006: £35.0 million), themain driving factor of the increase being skimmed milk powder. This productaccounted for an unusually high proportion of sales and gross profits: £20.4million (42%) and £3.8 million (36%) respectively (2006: £7.0 million and £0.9million). Other product segments have also done well. Packaged butter, ourlong-time solid performer, generated £13.0 million in sales and £3.5 million ingross profit (2006: £11.6 million and £2.9 million). Soft (processed) cheese,helped by an encouraging trend in smoked sausage cheese, posted sales of £12.2million and gross profit of £2.8 million (2006: £12.7 million and £3.1 million).The balance of sales and gross profits was made up by the distribution ofthird-party products and provision of transport services. EBITDA(1) for the year under review is reported at £5.5 million vs. £2.8 millionthe year earlier. Such a significant increase resulted mainly from the upside insales and margins delivered by skimmed milk powder, as well as from thestringent cost controls imposed in 2006 and continued throughout 2007. Profitbefore taxes (PBT) amounted to £3.7 million (2006: £1.2 million). One of thesubstantial items of expenditure last year was interest expense at £0.5 million(2006: £0.2 million). This was clearly a temporary situation, due to thenecessity to fund forward storage and complete the new hard cheese plant, andthe Group's borrowing requirement and leverage have always remainedconservative. Product segments The following table shows the gross and PBT margins for 2007 and 2006. Product / Year Butter Milk powders Soft (processed) cheese 2007 2006 2007 2006 2007 2006Gross margin, % 26.8 24.7 18.6 12.3 22.9 24.1PBT margin, % 13.3 10.1 16.6 9.2 5.5 5.0 Gross margins increased in butter and milk powders, but decreased in softcheese. In the first of these two categories, butter, there has been apronounced consumer shift towards quality. The Group, with its quality offeringof butters for every segment of the market, has been one of the principalbeneficiaries among the dairy processors in Ukraine. In milk powders, a runawaydemand for the product worldwide ensured that the margins increase accordingly,notwithstanding a seasonal increase in raw milk prices in Ukraine. In softcheese, the gross margin decreased slightly as a consequence of the increase inraw milk prices but the pre-tax margin increased reflecting the risingefficiencies in sales & distribution system of the Group. Cash flow and capital expenditure Net cash flow generated by the operating activities was reported at £3.5 million(2006: £4.1 million). The strong positive operating cash flow was a directresult of the improved profitability and management's efforts to control thecash flow by maintaining the stringent debt collection discipline. Although thebalance of inventories and trade receivables increased somewhat during the year,this was a normal consequence of the recovering sales and shift towardssupermarkets in distribution. Capital expenditure in the year came to £2.7million (2006: £4.5 million) - a return to a more normal pattern of maintenancecapex. The main investments were made in the hard cheese plant and thedevelopment of the milk collection areas surrounding the Group's plants. 1 EBITDA is calculated by adding depreciation and amortisation to the profitfrom operations. Bank facilities The Group has a working capital facility of up to £4.0 million (2006: £4.5million) provided by Ukraine OTP bank at interest rates fixed in both Hryvna andUS Dollar. As at 31 December 2007, £3.4 million of this facility was used (2006:£3.1 million). The facility is renewable in May 2008 and has various clausesprotecting the Group from the occurrence of unexpected events. Overdraftfacilities of up to £1.5 million are also available to the Group from variousbanks in Ukraine. As at 31 December 2007, none of these facilities was used(2006: nil). Further funding for working capital needs and project finance, ifnecessary, is available from either the principal bankers or other bankinginstitutions in Ukraine. Earnings per share The basic earnings per share (EPS) in the year was 7.8 pence as compared to 2.6pence in 2006. The basic EPS has been calculated by dividing net profitattributable to ordinary shareholders by the time-weighted average number ofshares in issue throughout the year. The diluted earnings per share was 7.5pence for the year versus 2.6 pence in 2006. Dividends In view of the Group's positive trading performance and strong cash generation,the Board is recommending a final dividend of 0.82 pence per ordinary share forthe year ended 31 December 2007 which would lead to 1.40 pence per ordinaryshare for the full year (2006: 0.61 pence). If approved at the AGM, the finaldividend will be paid on 30 June 2008 to shareholders on the register as at 6June 2008. Dmitry DragunChief Financial Officer 22 April 2008 CONSOLIDATED INCOME STATEMENT Year ended Year ended 31 December 2007 31 December 2006 £ '000 £ '000 Revenue 48,110 35,053 Cost of Sales (37,652) (27,805) Gross profit 10,458 7,248 Administrative expenses (2,770) (2,720)Selling and distribution expenses (2,919) (2,616)Other operating expenses (619) (477) Profit from operations 4,150 1,435 Finance income 20 -Finance expense (493) (237) Profit before taxation 3,677 1,198 Income tax expense (415) (119) Profit for the year 3,262 1,079 Attributable to:Equity holders 3,256 1,095Minority interest 6 (16) 3,262 1,079Earnings per share:Basic 7.8 2.6Diluted 7.5 2.6 CONSOLIDATED BALANCE SHEET As at As at 31 December 2007 31 December 2006 £ '000 £ '000AssetsNon-Current AssetsProperty, Plant and equipment 11,903 10,865Intangible assets 1,093 1,237Loans and receivables 108 244Deferred tax assets 51 42 Total non-current assets 13,155 12,388 Current assetsInventories 4,008 2,650Trade and other receivables 5,139 3,710Other financial assets 276 116Cash and cash equivalents 1,087 159 Total Current assets 10,510 6,635 Total assets 23,665 19,023 Equity and liabilitiesEquity attributable to equity holdersShare capital 4,164 4,121Other reserves 4,060 4,181Retained earnings 7,031 4,141 Total equity attributable to equity holders of the 15,255 12,443parentMinority interest 131 199 Total equity 15,386 12,642 LiabilitiesNon-Current LiabilitiesLong-term loans - 102Deferred tax liabilities 752 767 Total Non-Current Liabilities 752 869 Current LiabilitiesBank loans and overdrafts 3,407 3,146Trade and other payables 3,239 1,953Bonds 811 353Other short-term liabilities - 36Current income tax liabilities 70 24 Total Current Liabilities 7,527 5,512 Total equity and liabilities 23,665 19,023 These financial statements were approved and authorised for issue by the Boardof Directors on April 22, 2008. CONSOLIDATED CASH FLOW STATEMENT Year ended Year ended 31 December 2007 31 December 2006 £ '000 £ '000Cash flows from operating activitiesProfit for the year 3,262 1,079Adjustments for:Exchange difference 15 20Depreciation and amortisation 1,371 1,359Loss on disposal of non-current assets 64 16Interest expense 493 237Interest income (20) -Income tax expense 415 119Share based payments - 19(Increase) / decrease in inventories (1,444) 1,396(Increase) / decrease in trade and other receivables (1,884) 159Increase / (decrease) in trade and other payables 1,649 (577) Cash generated from operations 3,921 3,827 Interest received 20 -Income tax (refunded)/paid (384) 259 Net cash generated by operating activities 3,557 4,086 Cash flows from investing activitiesPayments for property, plant and equipment (2,712) (4,551)Purchase of loans and receivables (25) (169)Proceeds from sale of property, plant and equipment 28 35Proceeds from sale of loans and receivables 176 - Net cash used in investing activities (2,533) (4,685) Cash flows from financing activitiesGross repayments from long term borrowing (100) (34)Proceeds from issue of bonds net of issue costs 463 357Proceeds from issue of shares net of issue costs 241 -Dividends paid (459) (247)Interest paid (493) (237)Net proceeds from short-term borrowing 267 536 Net cash generated by/(used in) financing activities (81) 375 Net increase/(decrease) in cash and cash equivalents 943 (224) Effect of exchange rate changes and restatements on cash (15) (70)and cash equivalents Cash and cash equivalents at the beginning of the year 159 453Cash and cash equivalents at the end of the year 1,087 159 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Attributable to equity holders Total Mino-rity Total attributable interest Equity to equity Share Other Retained holders of the capital reserves earnings parent £ '000 £ '000 £ '000 £ '000 £ '000 £ '000 Balance at 1 January 2006 4,121 5,200 3,815 13,136 246 13,382Depreciation on revaluation of - (135) 137 2 - 2non-current assetsReduction of revaluation reserve - (4) - (4) - (4)Decrease of minority interest - 2 (2) - (2) (2)Exchange differences on - (900) (665) (1,565) (29) (1,594)translation to the presentationcurrency Net income (expense) recognised - (1,037) (530) (1567) (31) (1,598)directly in equityProfit for the year - - 1,095 1,095 (16) 1,079 Total recognised income and - (1,037) 565 (472) (47) (519)expense for the yearDividends paid - - (247) (247) - (247)Issue of shares - - - - - -Share based payments - 19 - 19 - 19Exclusion from Group - (1) 8 7 - 7 Balance at 31 December 2006 4,121 4,181 4,141 12,443 199 12,642Depreciation on revaluation of - (122) 122 - - -non-current assetsReduction of revaluation reserve - (2) - (2) - (2)Decrease of minority interest - - (10) (10) (70) (80)Exchange differences on - (124) (90) (214) (4) (218)translation to the presentationcurrency Net income (expense) recognised - (248) 22 (226) (74) (300)directly in equityProfit for the year - - 3,256 3,256 6 3,262 Total recognised income and - (248) 3,278 3,030 (68) 2,962expense for the yearDividends paid - - (459) (459) - (459)Issue of shares 43 198 - 241 - 241Reduction of options reserve - (71) 71 - - - Balance at 31 December 2007 4,164 4,060 7,031 15,255 131 15,386 1. Significant accounting policies The principal accounting policies adopted in the preparation of the financialinformation are set out below. The policies have been consistently applied toall the years presented, unless otherwise stated. (a) Basis of preparation These consolidated financial statements have been prepared in accordance withInternational Financial Reporting Standards, International Accounting Standardsand Interpretations (collectively IFRS) issued by the International AccountingStandards Board (IASB) as adopted by the European Union ("adopted IFRSs"). The majority of companies making up the Group maintain their accounting recordsin accordance with Ukrainian regulations. The financial information has beenprepared from those accounting records and adjusted as considered necessary inorder to comply with IFRS. Accounting records of the Operating Group aremaintained in Ukrainian Hryvna ("UAH"). The Hryvna has also been adopted as thefunctional currency for the purpose of the consolidated financial statements(see note 1(d)). Since the Ukrainian Hryvna is not a major convertible orrecognisable currency outside of Ukraine, and also because the Group's publicshareholder base has been located mostly in the UK, the financial informationhas been translated into British pounds sterling (hereinafter "GBP" or £) at therates given in note 1(o), as the Group's presentational currency. Thepreparation of financial statements in conformity with IFRS requires the use ofcertain critical accounting estimates. It also requires management to exerciseits judgment in the process of applying the Group's accounting policies. (b) Revenue recognition Revenues arising to the Group as a result of the sale of goods and the renderingof services are recognised in the period to which they relate and measured atthe fair value of the consideration received or receivable. Revenue comprisesthe invoiced value of sales of goods and services net of value added tax,rebates and discounts after eliminating sales within the Group. Revenue from thesale of goods is recognised when the significant risks and rewards of ownershipof the goods are transferred to the buyer. Revenues and expenses are recognisedon an accruals basis. (c) Principles of consolidation Where the company has the power, either directly or indirectly, to govern thefinancial and operating policies of another entity or business so as to obtainbenefits from its activities, it is classified as a subsidiary. The consolidatedfinancial statements present the results of the company and its subsidiaries("the Group") as if they formed a single entity. Intercompany transactions andbalances between Group companies are therefore eliminated in full. (d) Translation from functional to presentation currency Management has considered what would be the most appropriate functional andpresentational currencies for these financial statements. As a result of thisreview management has concluded that: (i) the Ukrainian Hryvna is the currency of the primary economic environment in which the Group operates. Consequently the Ukrainian Hryvna is the most appropriate functional currency for the Group; (ii) the Group should use British pounds sterling as the presentationalcurrency for its consolidated IFRS financial statements. Consequently, management has used the following basis for the translation ofUkrainian Hryvna figures to British pounds for presentation purposes: (i) for current year figures all assets and liabilities are translated atthe rate effective at the balance sheet date. Income and expense items aretranslated at rates approximating to those ruling when the transactions tookplace. (As there were no significant fluctuations of the exchange rate duringthe year, the average rate was used). (ii) for comparative figures all assets and liabilities are translated atthe closing rate existing at the relevant balance sheet date. Income and expenseitems are translated at rates approximating to those ruling when thetransactions took place. (As there were no significant fluctuations of theexchange rate during the year, the average rate was used). (iii) all exchange differences resulting from the application of thetranslation methods described above are recognised directly in equity as aseparate component of equity (IAS 21.39 (c)) Actual exchange rates applied in the translation are detailed in note 1(o)below. (e) Segment reporting A business segment is a group of assets and operations engaged in providingproducts or services that are subject to risks and returns that are differentfrom those of other business segments. A geographical segment is engaged inproviding products or services within a particular economic environment that aresubject to risks and returns different from those of segments operating in othereconomic environments. The Group has recognised business segments as primary format of segmentreporting. The secondary format was chosen to be the geographical segment. (f) Property, plant and equipment Figures calculated using Ukrainian statutory accounting rules, have been adoptedas deemed depreciated historical cost for property, plant and equipment as at 1January 2004. Subsequent additions have been recorded at cost. With effect from 1 January 2004, the Group adopted the revaluation model (asdefined in IAS 16: Property, Plant and Equipment) for all classes of assets. TheGroup's assets were revalued in January 2004. This change of accounting policywas made on the grounds that management believe that this policy provides morereliable and relevant financial information because it better reflects the valuein use of such assets to the Group. In accordance with the provisions of thatstandard, the revaluation model has not been applied retrospectively. All categories of property, plant and equipment are subsequently carried at fairvalue at the date of revaluation, less any subsequent accumulated depreciationand subsequent accumulated impairment losses. Changes in fair value arerecognised in equity (the "revaluation reserve"). An appropriate transfer ismade from the revaluation reserve to the retained earnings when freehold landand buildings are expensed through the income statement (e.g. throughdepreciation, impairment or sale). Depreciation is applied to all items of property, plant and equipment with theexception of land. Depreciation is calculated using the straight-line method toallocate their cost or revalued amounts to their residual values over theirestimated useful lives, as follows: Buildings 20-40 years;Plant and machinery 7-15 years;Equipment and motor vehicles 3-10 years. Gains and losses on disposals are determined by comparing proceeds with thecarrying amount and are included in operating profit. (g) Assets under construction Assets under construction are reported at their cost of construction includingcosts charged by third parties and the capitalisation of the Group's materialcosts incurred. No depreciation is charged on assets during construction. Uponthe completion, the group assess whether there is any indication that an assetmay be impaired. If any such indication exists, the group performs impairmenttesting as described in note 1(j). In case no indication exists that the assetmay be impaired, all accumulated costs of the asset are transferred to therelevant fixed asset category and depreciated at applicable rates from the timethe asset is completed and ready for use. (h) Intangible assets Acquired computer software licences are capitalised on the basis of the costsincurred to acquire and bring to use the specialised software. These costs areamortised over their estimated useful lives using the straight-line method. Theamortisation expense is included within administrative expenses in the IncomeStatement. Trademarks are shown at historical cost. Trademarks have finite useful lives andare carried at cost less accumulated amortisation. Amortisation is calculatedusing the straight-line method to allocate the cost of trademarks over theirestimated useful lives (20 years). The amortisation expense is included withinSelling & Distribution expenses in the Income Statement. Customer list is shown at fair value at the date of revaluation obtained byusing the estimates of the independent valuers, less any subsequent accumulateddepreciation and subsequent accumulated impairment losses. Amortisation iscalculated using the straight-line method to allocate the cost of the customerlist over its estimated useful lives (20 years). The amortisation expense isincluded within Other expenses in the Income Statement. (i) Goodwill Goodwill is excess of acquisition costs above the fair value of assets,liabilities and contingent liabilities acquired at the acquisition date.Goodwill is reported in intangible assets with any impairment being charged tothe Income Statement within administrative expenses. Goodwill is assessedannually with respect to the impairment of value and reported at cost net oftotal loss from impairment of value. Gains or losses on disposal of a subsidiaryinclude the carrying value of goodwill related to the subsidiary sold. (j) Impairment of assets Assets with indefinite useful life are not amortised and are annually assessedwith respect to the impairment of their value. Assets subject to amortisationare assessed with respect to the impairment of their value whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recovered. Whenever the carrying amount of an asset exceeds its recoverablevalue, an impairment loss is recognised in income. The recoverable amount is thehigher of an asset's net selling price and value in use. The net selling priceis the amount obtainable from the sale of an asset in an arm's lengthtransaction while value in use is the present discounted value of estimatedfuture cash flows expected to arise from the continuing use of an asset and fromits disposal after the end of its useful life. Recoverable amounts are estimatedfor individual assets or, if it is not possible, for a cash generating unit. Impairment charges are included in the administrative expenses line item in theIncome Statement, except to the extent they reverse gains previously recognisedin the Statement of Changes in Equity. (k) Inventories Inventories are stated at the lower of cost and net realisable value. Cost isdetermined using the first-in, first-out method. The cost of finished andunfinished goods comprises raw materials, direct labour, other direct costs andrelated production overheads (based on normal operating capacity) but excludesborrowing costs. (l) Cash and cash equivalents Cash and cash equivalents comprise cash on hand, deposits held at call withbanks and other short-term highly liquid investments with original maturities ofthree months or less. Bank overdrafts are included within borrowings in currentliabilities on the balance sheet. (m) Share-based payments Where share options are awarded to employees, the fair value of the options atthe date of grant is charged to the income statement over the vesting period.Where the terms and conditions of options are modified before they vest, theincrease in the fair value of the options, measured immediately before and afterthe modification, is also charged to the income statement over the remainingvesting period. Where equity instruments are granted to persons other thanemployees, the income statement is charged with the fair value of goods andservices received. Where fair value of goods and services received from personsother than employees is difficult to identify, the group the fair value of theinstruments granted is charged to income statement over the vesting period. (n) Income taxes Taxation has been provided for in the financial statements in accordance withrelevant legislation currently in force. The charge for taxation in the IncomeStatement for the year comprises current tax and changes in deferred tax.Current tax is calculated on the basis of the taxable profit for the year, usingthe tax rates in force at the balance sheet date. Taxes, other than on income,are recorded within operating expenses. Deferred income tax is provided, using the balance sheet liability method, forall temporary differences arising between the tax basis of assets andliabilities and their carrying values for financial reporting purposes exceptfor those difference permanently disallowed. A deferred tax asset is recordedonly to the extent that it is probable that taxable profit will be availableagainst which the deductible temporary differences can be utilised. Deferred taxassets and liabilities are measured at tax rates that are expected to apply tothe period when the asset is realised or the liability is settled, based on taxrates that have been enacted or substantively enacted at the balance sheet date. (o) Foreign currency translation Transactions denominated in currencies other than the Hryvna ("foreigncurrencies") are recorded in Hryvna at the exchange rate effective on thetransaction date. Exchange differences resulting from the settlement oftransactions denominated in foreign currency are included in the incomestatement using the effective exchange rate on that date. Monetary assets and liabilities denominated in foreign currency are translatedinto Hryvna at the official exchange rate at the balance sheet date. Foreigncurrency gains and losses arising from the translation of assets and liabilitiesare reflected in the Income Statement as foreign exchange translation gains andlosses. Income and expense figures have been converted to British pounds forpresentation purposes at rates approximating to those ruling when thetransactions took place. (As there were no significant fluctuations of theexchange rate during the year, the average rate was used). Assets andliabilities items have been converted to British Pounds (£) for presentationpurposes at the closing rate. The resulting exchange differences are recognisedas a separate component of equity. For translation of the financial data, the exchange rates of Ukrainian Hryvna toGBP and USD officially set by the National Bank of Ukraine were used. Theweighted average rate for the year was calculated based on the daily exchangerates officially set by the Bank of Ukraine. Hryvna for Hryvna for 1 GBP (£) 1 USD ($)Official rate as at December 31, 2007 10.0973 5.0500Official rate as at December 31, 2006 9.9045 5.0500Weighted average rate for 2007 10.1124 5.0500Weighted average rate for 2006 9.3128 5.0500 (p) Pension costs The Group contributes to the Ukrainian mandatory state pension scheme, socialinsurance and employment funds in respect of its employees. The Group's pensionscheme contributions are expensed as incurred and are included in staff costs.The Group doesn't operate any other pension schemes. (q) Financial assets The group classifies its financial assets into one of the following categories,depending on the purpose for which the asset was acquired: Fair value through profit or loss: This category comprises only in-the-moneyderivatives. They are carried in the balance sheet at fair value with changes infair value recognised in the income statement. The Group does not have anyassets held for trading nor does it voluntarily classify any financial assets asbeing at fair value through profit or loss. Loans and receivables: These assets are non-derivative financial assets withfixed or determinable payments that are not quoted in an active market. Theyarise principally through the provision of goods and services to customers(trade debtors), but also incorporate other types of contractual monetary asset.They are carried at amortised cost using the effective interest method less anyprovision for impairment. Impairment provisions are recognised when there is objective evidence (such assignificant financial difficulties on part of the counterparty or default orsignificant delay in payment) that the Group will be unable to collect all ofthe amounts due under the terms receivable, the amount of such a provision beingthe difference between the net carrying amount and the present value of thefuture expected cash flows associated with the impaired receivable. For tradereceivables, which are reported net, such provisions are recorded in a separateallowance account with the loss being recognised within administrative expensesin the income statement. On confirmation that the trade receivable will not becollectable, the gross carrying value of the asset is written off against theassociated provision. From time to time, the Group may renegotiate the terms of trade receivables duefrom customers with which it has previously had a good trading history. Suchrenegotiations will lead to changes in the timing of payments rather thanchanges to the amounts owed and, in consequence, the new expected cash flows arediscounted at the original effective interest rate. (r) Financial liabilities The Group classifies its financial liabilities into one of two categories,depending on the purpose for which the asset was acquired. The Group'saccounting policy for each category is as follows: Fair value through profit or loss: This category comprises onlyout-of-the-money derivatives. They are carried in the balance sheet at fairvalue with changes in fair value recognised in the income statement. Other financial liabilities: Other financial liabilities include the followingitems: Trade payables and other short-term monetary liabilities, which are recognisedat amortised cost. Bank borrowings and bonds issued by the Group are initially recognised at theamount advanced net of any transaction costs directly attributable to the issueof the instrument. Such interest bearing liabilities are subsequently measuredat amortised cost using the effective interest rate method, which ensures thatany interest expense over the period to repayment is at a constant rate on thebalance of the liability carried in the balance sheet. "Interest expense" inthis context includes initial transaction costs and interest payable onredemption, as well as any interest or coupon payable while the liability isoutstanding. (s) Dividends Equity dividends are recognised when they become legally payable. In the case ofinterim dividends to equity shareholders, this is when declared by thedirectors. In the case of final dividends, this is when approved by theshareholders at the AGM. (t) Share issue costs All qualifying transaction costs in respect of the issue of shares are accountedfor as a deduction from share premium, net of any related tax deduction.Qualifying transaction costs include costs of preparing the prospectus,accounting, tax and legal expenses, underwriting fees and valuation fees inrespect of the shares and of other assets. (u) Borrowing costs Borrowing costs are recognised as an expense in the period in which they areincurred. 2. Segment information At 31 December 2007, the Group was organised on a worldwide basis into threemain business segments: (1) Cheese; (2) Butter; and (3) Milk powders The segment results for the year ended 31 December 2007 are as follows: £ '000 Cheese Butter Milk Total Transport Resale of Un-allocated Total powders dairy services third-party goods Sales, Total 32,180 40,794 35,805 108,779 3,172 11,888 - 123,839Sales to internal 20,023 27,796 15,395 63,214 2,513 10,002 - 75,729customersSales to external 12,157 12,998 20,410 45,565 659 1,886 - 48,110customers Gross profit 2,793 3,470 3,804 10,067 192 199 - 10,458Administrative expenses (1,003) (810) (335) (2,148) (49) - (573) (2,770)Selling and distribution (1,119) (932) (75) (2,126) (51) - (742) (2,919)expensesOther operating income / - - - - - - (604) (604)expensesIncome / loss from - - - - - - (15) (15)exchange differences Profit before interest and 671 1,728 3,394 5,793 92 199 (1,934) 4,150taxationFinance expense - - - - - - (493) (493)Finance income - - - - - - 20 20 Profit before taxation 671 1,728 3,394 5,793 92 199 (2,407) 3,677Taxation - - - - - - (415) (415) Profit for the year 671 1,728 3,394 5,793 92 199 (2,822) 3,262 Segment assets 11,522 5,324 3,780 20,626 206 312 - 21,144Unallocated corporate - - - - - - 2,470 2,470assetsUnallocated deferred tax - - - - - - 51 51 Consolidated total assets 11,522 5,324 3,780 20,626 206 312 2,521 23,665 Segment Liabilities 497 636 1,288 2,421 74 197 - 2,692Unallocated corporate - - - - - - 4,835 4,835liabilitiesUnallocated deferred tax - - - - - - 752 752 Consolidated total 497 636 1,288 2,421 74 197 5,587 8,279liabilities Other segment information:Depreciation and 671 327 274 1,272 31 - 68 1,371amortisationCapital expenditure 1,635 408 444 2,487 119 - 70 2,676 The unallocated corporate liabilities represent bank loans overdrafts, bonds andaccruals. The basis of pricing of the inter-segment transfers is the current market priceat which the goods could be bought on the spot market externally but not lowerthan the full production costs plus the accompanying transport expenses. The segment results for the year ended 31 December 2006 were as follows: £ '000 Cheese Butter Milk Total Transport Resale of Unallocated Total powders dairy services third-party goods Sales, Total 33,399 40,206 16,572 90,177 3,625 6,196 - 99,998Sales to internal customers 20,655 28,550 9,536 58,741 2,734 3,470 - 64,945Sales to external customers 12,744 11,656 7,036 31,436 891 2,726 - 35,053 Gross profit 3,075 2,878 866 6,819 171 258 - 7,248Administrative expenses (1,088) (796) (189) (2,073) (40) - (607) (2,720)Selling and distribution (1,347) (909) (32) (2,288) (45) - (283) (2,616)expensesOther operating income / - - - - - - (457) (457)expensesIncome / loss from exchange - - - - - - (20) (20)differences Profit before interest and 640 1,173 645 2,458 86 258 (1,367) 1,435taxationFinance expense - - - - - - (237) (237)Finance income - - - - - - - - Profit before taxation 640 1,173 645 2,458 86 258 (1,604) 1,198Taxation - - - - - - (119) (119) Profit for the year 640 1,173 645 2,458 86 258 (1,723) 1,079 Segment assets 9,237 4,627 2,549 16,413 198 807 - 17,418Unallocated corporate - - - - - - 1,563 1,563assetsUnallocated deferred tax - - - - - - 42 42 Consolidated total assets 9,237 4,627 2,549 16,413 198 807 1,605 19,023 Segment Liabilities 584 565 208 1,357 57 349 - 1,763Unallocated corporate - - - - - - 3,851 3,851liabilitiesUnallocated deferred tax - - - - - - 767 767 Consolidated total 584 565 208 1,357 57 349 4,618 6,381liabilities Other segment information:Depreciation and 775 351 131 1,257 34 - 68 1,359amortisationCapital expenditure 2,259 480 1,293 4,032 36 - 28 4,096 The unallocated corporate liabilities represent bank loans overdrafts, bonds andaccruals. Secondary reporting format - geographical segments: Sales by country Year ended 31 December Year ended 31 2007 December 2006 £ '000 £ '000 Ukraine 32,127 28,459Denmark 3,658 1,623Holland 3,432 332Japan 2,322 122Germany 1,085 683North Korea 872 -Azerbaijan 641 339Turkey 546 -Saudi Arabia 538 -Algeria 422 -Other countries 2,467 3,495 Total 48,110 35,053 The majority of the Group's recognised assets and liabilities are in Ukraine.Sales to the countries in Europe represent sales to international traders ofmilk powders located in Europe. These traders consequently resell the milkpowders to other countries worldwide. 3. Earnings per share Basic earnings per share has been calculated by dividing net profit attributableto the ordinary shareholders (profit for the year) by the weighted averagenumber of shares in issue. The diluted earnings per share take into account thepotential exercise of all options and warrants in existence and in the money atthe date of this report. The options were granted to the Directors of theCompany on 31 January, 2005 and are exercisable until 11 February 2009 at theprice of £0.57. The warrants were granted to the Company's Brokers on 31 January2005 and are exercisable until 11 February 2008 at the price of £ 0.535. 31 December 2007 31 December 2006 Net profit attributable to ordinary shareholders, £'000 3,256 1,095Weighted number of ordinary shares in issue 41,644,953 41,214,953Basic earnings per share, pence 7.8 2.6Weighted number of WH Ireland warrants in the money 1,172,896 -Weighted number of Directors' option shares in the money 612,028 -Diluted average number of shares 43,429,877 41,214,953Diluted earnings per share, pence 7.5 2.6 As at 31 December 2007, there were no non-dilutive options or warrants in issue(2006: 2,214,924). 4. Dividends As at 22 April 2008, the Board of Directors proposed the final dividend paymentof 0.82 pence per ordinary share for the year ended 31 December 2007 which wouldlead to 1.40 pence per ordinary share for the full year. If approved at the AGM,the final dividend will be paid on 30 June 2008 to the shareholders on theregister as at 6 June 2008. No tax consequences for the Group will arise out ofthis transaction as the Group's parent company is an entity registered under theJersey laws. Year ended 31 Year ended 31 December 2007 December 2006 £ '000 £ '000 Final dividend for 2006 of 0.51 pence (2005 - 0.50 pence) per 210 206ordinary share proposed and paid during the year relating to theprevious year's resultsInterim dividend of 0.60 pence (2006 - 0.10 pence) per ordinary 251 41share paid during the year Total 461 247 The directors are proposing a final dividend of 0.82 pence (2006 - 0.51 pence)per share totalling £350,000 (2006: £210,000). This dividend has not beenaccrued at the balance sheet date. 5. Availability or report The Annual Report will be dispatched to shareholders around 24 May and will beavailable on the Company's website, www.ukrproduct.com. -------------------------- This information is provided by RNS The company news service from the London Stock Exchange