30 September 2020

UKRPRODUCT GROUP LIMITED

("Ukrproduct", the "Company" or, together with its subsidiaries, the "Group")

UNAUDITED INTERIM FINANCIAL RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2020

Ukrproduct Group Limited (AIM:UKR), one of the leading Ukrainian producers and distributors of branded dairy foods and beverages (kvass), today announces its unaudited interim financial results for the six months ended 30 June 2020. 

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR").

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Chairman and Chief Executive Statement

Ukrproduct, one of the leading Ukrainian producers and distributors of branded dairy foods and beverages (kvass), is pleased to announce its interim results for the half year ended 30 June 2020 ("1H 2020") and outlook for 2020.

1H 2020 financial highlights

·    Revenue increased by 24% to £27.5 million (1H 2019: £22.2 million)

·    Gross profit increased by 15% to £2.2 million (1H 2019: £1.9 million)

·    Operating profit increased by 23% to £0.49 million (1H 2019: 0.4 million)

·    EBITDA margin decreased to 2.8 % (1H 2019: 3%)

·    Net foreign exchange loss of £0.67 million (1H2019: gain £0.59 million)

·    Loss after tax of £0.42 million (1H 2019: Profit £0.74 million)

1H 2020 Trading Update

Overall, the Ukrainian economy, in the first half of 2020, faced decline caused by COVID-19 related quarantine measures. The restrictions had an impact on services in general, resulted in a significant fall in investment, deepened the decline in consumer spending. This was primarily due to the difficult fiscal situation and weaker growth in private consumption and exports amid weakening external demand. According to National Bank of Ukraine, the economy will contract by 6% in 2020. Despite the coronavirus crisis, consumer spending has continued to rise, including on essential goods. However, consumer behavior has changed on the back of the prevailing economic uncertainty, which has caused an increase in the consumption of cheaper products rather than premium ones.

Nevertheless, in this challenging operating environment, for 1H 2020, the Group is pleased to report improved revenue of approximately £27.5 million, which is an increase of 24% compared with the 6 months to 30 June 2019 ("1H 2019"). Overall for 2020, the Group plans to report improved revenue when compared to 2019.

Operating profit increased by 23% to approximately £0.49 million. The Group`s ongoing pursuit to deliver cost efficiencies helped to improve 1H 2020 gross profit by 15% against 1H 2019, however these results are below the Company's pre-COVID quarantine expectations at the beginning of the year.

Financial position

Ukrproduct reported net assets of £2.6 million as at 30 June 2020, including cash balances of £0.39 million.

During 2020, the Group continued to breach certain loan covenants in relation to the EBRD debt. However, the Company continued to settle certain amounts to EBRD according to an agreed schedule. The Directors are confident that EBRD will not demand accelerated repayment of the loan due to breach of covenants.

Outlook for 2020

Overall, the business environment in Ukraine in general and in the food industry in particular has been recovering since quarantine restrictions were eased. The Group's management is seeking further improvements and efficiencies in order to improve the Group results in 2H 2020. The financial result is negatively affected by the decline of protein prices in the world market, however, the Group compensates these losses by increasing sales and market share for processed cheese, butter, spreads and implementing cost cutting projects. Though the Group expects to report improved operating results and profit from operations for 2020, the net profitability performance is still difficult to predict due to the volatile local currency (UAH) exchange rate.

Statement of Management's Responsibilities

for preparation and approval of condensed consolidated interim financial statements for the six months ended 30 June 2020

The directors are responsible for the preparation of the condensed consolidated interim financial statements in accordance with applicable Jersey law and other regulations and enactments in force at the time. The Companies (Jersey) Law 1991 as amended requires the directors to prepare financial statements for each year in accordance with Generally Accepted Accounting Principles.

The directors of the Group are responsible for preparing the condensed consolidated interim financial statements which reflect in all material aspects the financial position of the Group as at 30 June 2020, as well as the results of its activities, cash flows and changes in equity for the six months then ended in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

In preparing condensed consolidated interim financial statements the Group's Management is responsible for:

-     selecting appropriate accounting policies and their consistent application;

-     making reasonable measurement and calculation;

-     following principles of IFRS as adopted by the European Union or disclosing all considerable deviations from IFRS in the notes to condensed consolidated interim financial statements;

-     preparing condensed consolidated interim financial statements of the Group on the going concern basis, except for the cases when such assumption is not appropriate.

The board of directors confirms that the Group has complied with the abovementioned requirements in preparing its condensed consolidated interim financial statements.

The directors are also responsible for:

- implementing and maintaining an efficient and reliable system of internal controls in the Group;

- keeping accounting records in compliance with the legislation and accounting standards of the respective country of the Group's registration;

- taking reasonable steps within its cognizance to safeguard the assets of the Group;

- detecting and preventing from fraud and other irregularities.

These condensed consolidated interim financial statements as at 30 June 2020 prepared in compliance with IFRS as approved by the European Union are approved on behalf of the Group's Directors on 29 September 2020.

Management Statements

This statement is provided to confirm that, to the best of our knowledge, the condensed consolidated interim financial statements for the six months ended 30 June 2020, and the comparable information, have been prepared in compliance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board and as adopted by the European Union and give a true, fair and clear view of Group's assets, financial standing and net results.

Single Management Report

1.   Operational and Financial Results

The following table sets forth the Group's results of operations derived from the condensed consolidated interim financial statements:

Non-IFRS financial information

The Group's results are reported under International Financial Reporting Standards (IFRS). However, the Group uses Non-IFRS measures including earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation and amortisation (EBITDA) which are used to measure segment performance. Non-IFRS measures have not been subject to audit or review.

The Group uses EBIT and EBITDA as key measures of its performance.

EBIT is an indicator of a Group`s profitability, calculated as revenue less expenses, the latter excluding tax and interest. To external users, EBIT provides information on the Group's ability to generate earnings directly from its operations, disregarding its cost of capital and the tax burden and thus making the Group's results comparable to similar companies across the industry where those companies may have varying capital structures or tax environments. To the management, EBIT provides a performance measure additionally adjusted for expenses that may be deemed fixed (i.e. stemming from the given capital structure) or externally imposed by the environment (i.e. the tax burden).

EBITDA is calculated as revenue less expenses, the latter excluding tax, interest, depreciation and amortisation. Being a proxy to the operating cash flow before working capital changes, EBITDA is widely used as an indicator of a company's ability to generate cash flows, as well as its ability to service debt. Consequently, to the management, EBITDA serves as a measure to estimate financial stability of the Group. Besides, excluding the effect of depreciation and amortisation, along with cost of capital and taxation, provides to external users another measure to compare to similar companies, regardless of varying tax environments, capital structures or depreciation accounting policies.

Revenue

The Group's revenue from sales of finished products increased by 37% in 1H 2020 in comparison with previous period.

The most significant portion of the Group's revenue comes from selling packaged butter and supplementary products, which represented 51.9% in the first half of 2020 and 57.2% in first half of 2019 of total revenue for the relevant periods.

Cost of sales

The Group's cost of sales increased to GBP 25.3 million in the current period from GBP 20.3 million in previous period. The following table sets forth the principal components of the Group's cost of sales for the periods indicated:

Gross profit/(loss)

The Group's gross profit increased to GBP 2.2 million in 1H 2020 from GBP 1.9 million of gross profit in 1H 2019.

Selling and distribution expenses

Selling and distribution expenses increased year-on-year to GBP 1.2 million in the current period from GBP 0.9 million in 1H 2019, reflecting an increase in sales volume and delivery costs in 2020.

Net foreign exchange loss

In 1H 2020, the Group reports a net foreign exchange loss of GBP 0.7 million versus a net gain of GBP 0.6 million in the 1H 2019.

CONDENSED CONSOLIDATED INTERIM STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 30 JUNE 2020

CONDENSED CONSOLIDATED INTERIM STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 2020

CONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30 JUNE 2020

CONDENSED CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 30 JUNE 2020

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 30 JUNE 2020

BASIS OF PREPARATION AND SIGNIFICANT ACCOUNTING POLICIES

1.   REPORTING ENTITY

Ukrproduct Group Limited ("the Company") is a public limited liability company registered in Jersey with a registered office at 26 New Street, St Helier, Jersey, JE2 3RA, Channel Islands.

The Group's overall management and production facilities are based in Ukraine, with the HQ in Kyiv. The Group commands leading positions in the Ukrainian processed cheese and packaged butter markets and owns a range of widely recognisable trademarks in Ukraine, including "Nash Molochnik" (translated as Our Dairyman), "Narodniy Product" (People's Product) "Molendam" and "Vershkova Dolina" (Creamy Valley).

2.   BASIS OF PREPARATION

(a)  Statement of compliance

The unaudited condensed consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU). The condensed consolidated financial information in this half yearly report has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting' (IAS 34), as adopted by the EU, and the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority.

The interim financial statements are unaudited but have been reviewed by the auditors.

The condensed 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.

The accounting policies used and the methods of computation is the same as those disclosed in the Group's recent annual consolidated financial statements except for the adoption of new and revised accounting standards as disclosed in Note 3.

The preparation of the unaudited condensed consolidated financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. Actual results may differ from those estimates.

The Board has reviewed the Group's ongoing commitments for the next twelve months and beyond.

The Board's review included the Group's strategic plans and updated forecasts, capital position, liquidity and credit facilities. Based on this review no material uncertainties that would require disclosure have been identified in relation to the ability of the Group to remain a going concern for at least the next twelve months, from both the date of the Condensed Consolidated Statement of Financial Position and the approval of the Condensed Consolidated Financial Statements.

(a)  Going concern

These condensed consolidated interim financial statements have been prepared on a going concern basis, which envisages the disposal of assets and the settlement of liabilities in the normal course of business. The recoverability of Group's assets, as well as the future operations of the Group, may be significantly affected by the current and future economic environment.

EBRD covenants

The Board notified EBRD in advance on a breach of one of the covenants of the loan agreement with EBRD during the first half of 2020. At the same time, EBRD noted that there was  significant progress in compliance with the covenants in general when compared to the previous period. As such, EBRD has not demanded accelerated repayment of the loan.

Impact of COVID-19 pandemic

The impact of COVID-2019 on the Group in 1H 2020 was not material and the Group largely continued to operate as usual. The management implemented a range of measures for preventing sickness and spread of infection within the Group premises (including but not limited to remote working, additional medical screenings, corporate transportation to and from the workplaces, obligatory use of protective masks etc.). Additionally the Group reorganised work in its production facilities in smaller shifts to increase social distance and to minimise potential spread of infection. So far, the COVID-19 and respective quarantine impact on the Group's operations has been limited. Looking ahead, whilst COVID-19 creates significant economic uncertainty, the Group will continue to apply acquired experience - most notably remote working - to streamline and optimise certain administrative and operational processes.

Finally, though the Group faced net foreign exchange loss of GBP 0.67 million, the overall financial results were solid and the Group generated positive cash flow from operating activities totaling GBP 1.03 million. Accordingly, the management believes that the Group has reliable access to finance capable to support growing sales and respective increase in working capital requirements.

(b) Foreign currency translation

Functional and presentation currency

The Ukrainian Hryvnia is the currency of the primary economic environment in which the majority of

the Group companies operate.

Items included in the financial statements of each of the Group's companies are measured using the currency of the primary economic environment in which the company operates ("the functional currency"). For the companies operating in Cyprus and BVI the functional currency is United States Dollars ("USD"). For the Parent company, which is located in Jersey, the functional currency is Pound Sterling ("GBP"). For the companies operating in Ukraine the functional currency is Ukrainian Hryvnia ("UAH").

These condensed consolidated interim financial statements are presented in the thousands of Pound Sterling ("GBP"), unless otherwise indicated.

Foreign currency transactions and balances

Transactions in foreign currencies are initially recorded by the Group entities at their respective functional currency rates prevailing at the date of the transaction.

Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency spot rate of exchange ruling at the reporting date.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined.

The principal exchange rates used in the preparation of these condensed consolidated interim financial statements are as follows:

(c)  Reclassification

Where applicable, comparatives have been adjusted to present them on the same basis as current period figures.

(d)  Rounding of amounts

Amounts in this financial report have, unless otherwise indicated, been rounded to the nearest thousand pounds.

3.     ADOPTION OF NEW AND REVISED ACCOUNTING STANDARDS

IFRS 16 'Leases'

IFRS 16 replaced the existing standard IAS 17 'Leases' with effect from 1 January 2019. Its objective

is to ensure that lessees and lessors provide relevant information in a manner that faithfully represent

lease transactions.

The Group elected to use the following practical expedients on transition:

- Use of single discount rates to reflecting similar lease terms and economic environments;

- Recognition exemptions for lease contracts that at the transition date have a remaining lease term

of 12 months or less;

- Exclusion of initial direct costs from the measurement of the right of use asset;

- The use of hindsight in determining the lease term for contracts containing options to extend or terminate the lease;

Recognition and measurement

The lease liability is recognised at the inception of a lease as the present value of the fixed and certain

variable lease payments, plus any guaranteed residual values, any termination penalties if the lease term

assumes termination options will be exercised and the purchase option value if it is reasonably certain

that it will be exercised.

Interest is accrued on the lease liability based on the discount rate at commencement of the lease and is

accounted for in finance costs and subsequent payments are deducted from the lease liability.

The right of use asset is initially measured as the value of the lease liability, adjusted for any indirect

costs incurred to obtain the lease, restoration provisions and any lease payments made before the commencement of the lease.

The right of use asset will be depreciated over the life of the contract on a straight line basis.

Where the Group act as a lessor the lease will be classified as a finance lease if it transfers substantially

all the risk and rewards incidental to ownership of the underlying asset, or otherwise as an operating

lease.

An amendment to IFRS 16

The amendments with regard to COVID-19 are effective for annual reporting periods beginning on or after June 1, 2020.

Nature and effect of amendment to IFRS 16

There are no significant impact on the Group's consolidated financial statements.

4.     ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE

IFRS 17 'Insurance Contracts'

The International Accounting Standards Board (IASB) issued IFRS 17 'Insurance Contracts' in May 2017 to replace IFRS 4 'Insurance Contracts' for annual reporting periods beginning, at the latest, on or after 1 January 2021. The IASB tentatively decided to defer the effective date of IFRS 17 'Insurance Contracts' to annual periods beginning on or after January 1, 2022. In this connection, the IASB also published ''Extension of the Temporary Exemption from Applying IFRS 9 (Amendments to IFRS 4)' to defer the fixed expiry date of the amendment also to annual periods beginning on or after January 1, 2023.

Draft legislation has been laid before Parliament to ensure that IFRS as endorsed by the EU at the date of the UK leaving the EU will be adopted for use in the UK as well as providing the Secretary of State with the power to adopt and endorse IFRS for use in the UK. It is expected that this power will be delegated to a UK IFRS Endorsement Board. In the event that IFRS 17 has not been endorsed by the EU by the time the UK leaves the EU, including any transitional period or arrangements that may be agreed, then the UK IFRS Endorsement Board will have responsibility for its endorsement. This is being monitored closely.

Other pronouncements

There are a number of amendments to IFRS that have been issued by the IASB that become mandatory during 2020 or in a subsequent accounting period. The Group has evaluated these changes and none have had, or are expected to have, a significant impact on the consolidated financial statements.

5.  ESTIMATES AND JUDGEMENTS

The preparation of the interim financial report requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

6.       INVENTORY WRITE OFF TO NET REALISABLE VALUE

Inventories are measured at the lower of cost or net realisable value.

The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.

The cost of work in progress and finished goods includes costs of direct materials and labor and other direct productions costs and related production overheads (based on normal operating capacity).

The cost of inventories is assigned by using the FIFO method.

Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.

The Group periodically analyses inventories to determine whether they are damaged, obsolete or slow-moving or if their net realisable value has declined, and makes an allowance for such inventories.

The loss from impairment of inventories amounted to:

7.       RELATED PARTY TRANSACTIONS

A related party is a person or an entity that is related to the reporting entity:

1.       A person or a close member of that person's family is related to a reporting entity if that person has control, joint control, or significant influence over the entity or is a member of its key management personnel.

2.       An entity is related to a reporting entity if, among other circumstances, it is a parent subsidiary, fellow subsidiary, associate, or joint venture of the reporting entity, or it is controlled, jointly controlled, or significantly influenced or managed by a person who is a related party.

The Group enters into transactions with related parties in the ordinary course of business.

Related parties comprise the Group's shareholders and companies that are under control of the Group's shareholders.

All sales and purchases were with related parties under common control of the ultimate beneficiaries of the Company.

Balances due from/(to) related parties at each period end are shown below.

8.   SEGMENT INFORMATION

IFRS 8 requires segment information to be presented on the same basis as that used by the Board for assessing performance and allocating resources.

Segment information is presented in respect of the group's key operating segments. The operating segments are based on the group's management and internal reporting structure.

At 30 June 2020, the Group was organised internationally into five main business segments:

1)   Branded products - processed cheese, hard cheese, packaged butter and spreads

2)   Beverages - kvass, other beverages

3)   Non-branded products - skimmed milk powder, other skimmed milk products

4)   Distribution services and other - resale of third-party goods and processing services

5)      Supplementary products - export trading activities with non-dairy products. The Group has expanded export sales into non-dairy products such as corn, protein meal and oil. These operations make use of third party logistics services and are financed by deferring payment for purchased products.

The segment results for the six months ended 30 June 2020 are as follows:

The segment results for the six months ended 30 June 2019 are as follows:

9.       EARNINGS PER SHARE

The earnings per ordinary share are calculated by reference to the profit attributable to the ordinary shareholders and the weighted average number of shares in issue during the period.

Basic earnings per share are calculated by dividing the profit attributable to the ordinary shareholders of the Parent Company by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares purchased by various employee share trusts and held as own shares.

Diluted earnings per share are calculated by dividing the profit attributable to the ordinary shareholders of the Parent Company by the diluted weighted average number of ordinary shares in issue during the period, excluding ordinary shares purchased by various employee share trusts and held as own shares.

10.       SUBSEQUENT EVENTS

As at 30 June 2020, 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 of date of issue of the report 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.

11.     APPROVAL OF INTERIM STATEMENTS

The unaudited condensed consolidated financial statements were approved by the board of directors on 29 September 2020.