Ukrproduct Regulatory News (UKR)

FOR IMMEDIATE RELEASE 13 September, 2012

UKRPRODUCT ANNOUNCES UNAUDITED INTERIM FINANCIAL RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2012

Kyiv, Ukraine - 13 September 2012 - Ukrproduct Group Limited ("Ukrproduct" or the "Group") (AIM: UKR), one of the leading Ukrainian producers and distributors of branded dairy products and now in addition beverages (kvass), today announces its unaudited interim consolidated IFRS financial results for the six months ended 30 June 2012.

FINANCIAL HIGHLIGHTS - MAJOR IMPROVEMENT IN PROFITABILITY

(Figures in brackets are for the six months ended or as at 30 June 2011)

·; Revenues similar to 2011 but improved sales product mix grew margins

·; Gross profit increased by 27% to GBP 4.3 m (GBP 3.4 m), with increase in gross profit margin to 16.9% (13.5%)

·; Dairy branded/own label products performed strongly, with gross profit growth by 32% year-on-year

·; Kvass grew significantly both in revenue and gross profit by 46.8% and 254% respectively year-on-year following the incorporation of the kvass producing company into the Group and growth of sales

·; Skimmed Milk Powder (SMP) saw an increase in revenue by 6% but a significant decline in gross profit as a result of low prices on the world market and a weak global economy

·; EBITDA increased by 27% to GBP 1.47 m (GBP 1.15 m) year-on-year

·; Tax management reduced the effective tax rate to 29% (41%)

·; Profit after tax up 106% year-on-year to GBP 0.636m (GBP 0.309 m)

·; Cash Flow from operating activities was GBP 1.775 m (GBP 0.5833 m)

·; Cash at the end of the 6 months was GBP 0.8 m (GBP 0.4 m)

·; Major cost saving capital expenditure at Starokostiantyniv Plant completed successfully

·; No interim dividend is proposed in view of this major capital expenditure program

·; Earnings per share increased to 1.6 pence (0.8 pence)

Sergey Evlanchik, CEO of Ukrproduct, commented: "In the first half of 2012 the Group focused on recovering the margins thus, whilst the sales remained in line with the previous year, the Group achieved a substantial improvement in profitability. Branded dairy products accounted for the lion's share of the Group's sales and gross profit. The newly acquired business of kvass also proved to be a success. The SMP sector remained challenging, with the market conditions severely undermining the profitability. A focus on efficient tax planning helped to mitigate the negative effect of the new stringent Tax Code."

CEO'S REPORT

In H1'2012 the economic environment in Ukraine remained challenging with consumer purchasing power further constrained by the effective inflation. The dairy sector was mainly affected by the ban on hard cheese exports to Russia which caused an oversupply on the domestic market of hard cheese and consequently of butter and Skimmed Milk Powder as several producers chose to switch to the output of these products. On the positive side, the restrictions on export to Russia together with the re-introduction of the milk subsidy regime prompted higher milk volumes availability in Ukraine which led to first stabilization and later a gradual decrease in raw milk prices.

The Group focused on improving the overall profitability thus, although the sales were in line with the last year, the gross profit showed an encouraging increase of 26.8%. The gross profit in branded dairy products improved by 31.5%, not least due to the repositioning of Group's product offering.

The butter market in Ukraine grew, mostly due to an increase in bulk butter output. The lack of hard cheese exports to Russia as mentioned above led to a domestic market cluttered with competitors. Ukrproduct therefore successfully focused on improving the sales margins rather than pursuing market share. Thus, despite some decrease in sales revenues compared to H1'2011, the Group achieved an increase in aggregate gross profit of 16.9%.

As the market of processed cheese expanded, the Group increased its sales both in revenue and tonnage terms and therefore confirmed its leadership in terms of market share. The gross profit showed a significant increase compared with H1'2011.

In the segment of hard cheese the Group has repositioned its product offering and its market position is growing though from a small base.

The Skimmed Milk Powder segment remained suppressed, with several factors further deteriorating profitability: namely increased energy costs, weak world market conditions and an overhang in the Ukrainian market. In order to minimize the losses, the Group decreased its output strictly to the volumes that need to be produced as the by-product of butter production.

The performance of the recently acquired business of kvass, a traditional fermented beverage, which the Group was exclusively distributing from September 2010 was a highlight. The sales of kvass increased by over 47% year-on-year in monetary terms as the Group expanded the geography of sales and strengthened the presence in the existing regions, largely supported by the integrated marketing communication. The Group thereby improved its market share with this authentic natural drink. The gross profitability also showed a very encouraging growth unhindered by the economic environment.

A very important step forward was made on the operational side with the completion of the first stage of modernization project with finance from the European Bank for Reconstruction and Development (EBRD). This modernization will substantially improve energy efficiency and productivity of Starokostiantyniv Dairy Plant, driving down the unit cost. The Group is now seeing the benefits and will continue to build up the savings.

OUTLOOK

The outlook for the second half of 2012 is to a similar economic environment perhaps accentuated by inflationary currency devaluation and government spending pre the autumn elections. The trading and volume trends will again be pursued in dairy and kvass. Margins will remain pressured with seasonal milk prices increase and persisting inflation pressures, especially in fuel. This may be partially compensated by an anticipated improvement in SMP prices. Nevertheless, the cost optimization program including the EBRD financed project is critical to Ukrproduct success.

Within these dynamics Ukrproduct looks to continue an improved performance.

FINANCIAL REVIEW

Ukrproduct's consolidated revenues in H1 2012 were in line with H1 2011 at GBP 25.3 million. The Branded products segment continued to account for the majority of the Group's revenues, representing 63% of total revenues (64% in H1'2011). Branded products segment revenues remained at the same level of GBP 16 million. Sales of processed cheese and processed cheese product increased by 23% year-on-year. The revenues of packaged butter and spreads decreased by 12% year-on-year due to focusing on increasing the profitability and abstaining from the low-profitability projects and activities. The revenue of the Skimmed milk products ("SMP") segment increased by 6% year-on-year. The revenues from kvass increased by 47% year-on-year.

The Group's gross profit increased by 27% from GBP 3.4 million in H1 2011 to GBP 4.3 million in H1 2012 with a gross profit margin of 16.7% in the first half of 2012 compared to 13.5% in the corresponding period of 2011. The rise in gross profit was mainly due to the focus on profitability in Branded product sales and kvass profit, which increased by 47%.

Ukrproduct continued to suffer from an unfavourable pricing environment in SMP in the first half of 2012, and as a result the gross losses from Skimmed milk products increased by GBP 0.2 m. The segment delivered a negative gross profit margin of -6% compared to -0.2% in the previous period.

Group EBITDA in H1 2012 increased by 27% from GBP 1.2 million in H1 2011 to GBP 1.5 million in H1 2012.

Profit after tax increased by 106% year-on-year to GBP 0.64 million in H1 2012 (GBP 0.31 million). These figures incorporate the exchange gain of difference growth by GBP 0.2 million year-on-year. 

The Group's basic earnings per share (EPS) doubled year-on-year from 0.8 pence to 1.6 pence in the first half of 2012.

Net cash generated by operating activities totalled GBP 1.5 million in the first half of 2012 (GBP 0.3 million), reflecting increased gross margins of Branded products and decreased inventories.

The Group's cash balances stood at GBP 0.8 million as at 30 June 2012, compared to GBP 0.4 million as at 30 June 2011. Bank borrowings include GBP 5.2 million of long term credit from EBRD for the financing of a project to increase energy efficiency and productivity of the Group's production facilities. As at 30 June 2012, the Group had a credit facility in UAH with OTP Bank equivalent to GBP 3.0 million (GBP 2.7 million). The Group's cash level is sufficient to meet current debt obligations in the short and medium term.

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 2012 (six months ended 30 June 2011: Nil).

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.

UK dial-in (toll-free): 0808 109 0700

Ukraine (toll-free): 0 800 50 20590

International dial-in: +44 (0) 20 3003 2666

The participant password is: Ukrproduct

A replay will then be available for 30 days after the conference call on Ukrproduct Group web-site.

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

Ukrproduct Group Ltd is one of the leading Ukrainian producers and distributors of branded dairy products and now in addition kvass, a traditional fermented beverage. The Group's product portfolio includes processed and hard cheese, skimmed milk powder (SMP), ) and butter and kvass. 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 33.5 million as at June 30, 2012 and consolidated revenues of approximately GBP 25.3 million for the six months ended June 30, 2012. Ukrproduct's securities are traded under the symbol "UKR" on AIM, a market operated by the London Stock Exchange.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.