Ukrproduct Group

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2019

Ukrproduct Group

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2019

These consolidated financial statements were approved and authorised for issue by the Board of Directors on 26 June 2020 and were signed on its behalf by Alexander Slipchuk.

Nature of Financial Information

The financial information contained in this announcement does not constitute statutory accounts as defined under section 113 of the Companies (Jersey) Law 1991 but has been extracted from the Group's 2019 statutory financial statements. It contained no statement under section 113B of the Companies (Jersey) Law 2011. The financial statements for 2019 will be delivered to the Registrar of Companies after adoption at the Company's Annual General Meeting.

EXTRACTS FROM NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Basis of preparation

The consolidated financial statements have been prepared on a historical cost basis, except for significant items of property, plant and equipment which have been measured using revaluation model. The consolidated financial statements are presented in British Pounds Sterling (GBP) and all values are rounded to the nearest thousand (£000) except where otherwise indicated.

2.   Going concern

These consolidated financial statements have been prepared on the assumption that the Group is able to continue its operations on a going concern basis for the foreseeable future.

For the year ended 31 December 2019, net profit amounted to approximately £2.0 million (year ended 31 December 2018 net profit of approximately £0.1 million). As at 31 December 2019, the Group continued to breach certain loan covenant terms of its loan with European Bank for Reconstruction and Development ("EBRD"). The bank has not issued a waiver for the breach. As a consequence, the loan is  reclassified as a Current Liability (for the impact of such reclassification on the financial statements, please see page 84). There has been no demand for repayment of the loan. The Company continues to communicate with EBRD and loan repayments are being met as they fall due. Should the Group be required to raise additional working capital, the Directors expect this would be raised from local banks.

Ukrproduct is also looking to expand domestic sales driven in part by the introduction of new products and rebranding. The Group continues to boost its dairy processing volumes via close cooperation with local farmers and cooperatives, thereby increasing its capacity utilisation. The Group's current strategy is to further expand its export sales worldwide with a focus on Asia and Africa. CIS markets also remain strategically important for the Group not least Kazakhstan where the Company increased its export volumes by signing new agreements.

3.   Bank Loans and Overdrafts

As at 31 December 2019 the Group has two loans: the loan from Creditwest Bank in the amount of 2 073 thousand GBP (UAH 65,0 million) and the loan from EBRD in the amount of 5 140 thousand GBP (EUR 6,036 thousand).

During the year to 31 December 2019, the Group continued to breach certain loan covenants in relation to the EBRD debt. The bank has not issued a waiver for the breach. As a consequence the loan is reclassified as a Current Lability. However, the Company continued to settle certain amounts to EBRD according to an agreed schedule. The Group completed installments of payments and in accordance with an agreement between all parties, the payment of the tranche in December was postponed to subsequent periods.

Impact of reclassification on Cash flow

Fixed assets with a net book value of GBP 3,177 thousand at 31 December 2019 (2018: GBP 4,872 thousand) were pledged as collateral. Assets pledged as security for the EBRD loan include property and land in Starokonstantinov, equipment for dairy production and production of hard cheese, as well as trademarks.

The average interest rate as at 31 December 2019 was 11% (2018: 6,15%).

SUBSEQUENT EVENTS

(a)  EBRD - breach of loan covenants

As at 31 December 2019, the Group was in breach of the Debt Service Coverage ratio covenant in the loan facility in place with European Bank for Reconstruction and Development ("EBRD").  The Group remained in breach of this covenant as at 31 March 2020 and EBRD has not issued a waiver in respect of this breach. There has been no demand for repayment of the loan. The Company continues to communicate with EBRD and the agreed loan repayments are being met as they fall due.

(b) Installment 

In Q1 2020, the Company, under the terms of its agreement with EBRD, agreed to defer payment of 200 000 EUR, resulting in a payment of 14 752.75 EUR plus an interest payment of 37 906 EUR. In Q2 2020, the Company, under the terms of its agreement with EBRD, agreed to defer payment of 200 000 EUR, resulting in a payment of 32 934,57 EUR plus an interest payment of 38 671,92   EUR.

(c)  Foreign exchange rates

Post year end, the Ukrainian Hryvnia continued to depreciate against the EUR, GBP. However, the Ukrainian Hryvnia strengthened against the US dollar. In particular, according to the National Bank of Ukraine the following are key exchange rates:

(d) Impact of COVID-19 pandemic

The outbreak of COVID-19 has had an unprecedented global impact on economic activities in most countries, including Ukraine. Nevertheless, Ukrproduct has taken all of the steps it can in order to safeguard the wellbeing of its employees and ensure continued stable operations.

Prior to the lockdown period commencing in Ukraine in March 2020, Ukrproduct began implementing a number of measures aimed at preventing the spread of COVID-19 amongst the Group's employees and their families.

The Company is pleased to report that, as at the date of this report, these measures have resulted in relatively few employees, in the context of the Group's workforce of over 800 personnel, showing symptoms of the virus. As such, so far, the impact on the Group's operations has been limited. Looking ahead, whilst COVID-19 creates significant economic uncertainty, the Group expects to utilise the experience gained during the pandemic, most notably from remote working, to streamline and optimise certain administrative and operational processes.

As would be expected in the context of a global pandemic, the onset of COVID-19 has had a number of connotations for the Group's business:

Exports

Since the implementation of the lockdown in Ukraine, whilst the sales price achieved by the Group for SMP has been higher than the Company had expected given the lockdown, largely driven by the sale of SMP to CIS countries, such as Kazakhstan and Moldova, unfortunately, such prices are lower than budgeted at the beginning of the year.

However, with regard to the export of other products (butter and spreads), pleasingly the lockdown experienced in the Group's target markets has not had a significant impact on sales prices. In addition, Ukproduct has managed to sign contracts for butter with new customers with significant sales volumes, which the Company expects should positively impact profitability in H2 2020.

Imports

The imposition of the lockdown in the Ukraine has had a negative impact on the imports of butter and other products, with such imports reducing significantly as a result of, firstly, an initial depreciation in the Hryvnia against the dollar, and, secondly, lockdown-related logistical issues in relation to customs activities.

The Board is of the view that the situation is improving as a result of lockdown restrictions easing from 11 May 2020 combined with the recent appreciation of the Hryvnia against the dollar.

Domestic market

The impact of the lockdown period in Ukraine has not, overall, had a significant impact on sales, as a result of the strong brand recognition and market share of the Group's products. In addition, the Group sells its products in supermarkets and other stores that have remained open during the lockdown, thereby providing a stable retail channel.

Moreover, the sale of the Group's products via outlets that have remained open has offered a competitive advantage, such that the Group has been able reduce milk prices in order to maintain volumes (with many competitors experiencing vastly reduced volumes) and increase the profitability of milk processing via access to cheaper raw materials and the ability source raw materials directly.

However, sales of kvass and other beverages (both bottled and in kegs) have suffered significantly as a result of the lockdown period. For bottled kvass and other beverages, the season started later than expected notwithstanding lockdown, however, the lockdown has predictably negatively impacted kvass sales, particularly keg sales, given it is primarily sold from retail street vendors. As a result, the Board is considering opportunities to increase bottled kvass sales in light of the challenging environment for keg sales. Nevertheless, the Board is hopeful that the Group can meet the annual budget expectations for bottled kvass and other beverages and expects keg sales to start picking up again in H2 2020.

As stated above, as of 11 May 2020, lockdown restrictions in Ukraine have started to ease and the Board will continue to monitor the changing conditions on an ongoing basis.

We continue to maximize sales efforts across the Group and implement measures to drive profitability in order to generate value for shareholders.