Ukrproduct Group Ltd 15 September 2005 15 September 2005 Ukrproduct Group Ltd Interim results for six months ended 30 June 2005 Ukrproduct Group is a leading Ukraine-based producer and distributor of branded dairy foods. Combined* results (H12004 in brackets): • Net Sales up 57% to £17.3m (£11m) • Gross profit up 70% to £2.9m (£1.7m) • EBITDA up 56% to £1.6m (£1m) • Net profit up 78% to £1.16m (£0.65m) • Basic earnings per share**: 2.8p (2.1p) • Proposed first interim dividend of 0.36p per share Operating highlights • Continued growth in core processed cheese and packaged butter segments. • Strengthening of market leadership in core segments. • Further preparation to enter the hard cheese segment. • Redemption of bank debt to secure cheaper credit facilities. • Upgraded production facilities and improved the logistical and trading capabilities. • Successful IPO on AIM on 11 Feb 2005: • First Ukrainian trading group to be listed on London Stock Exchange • Offer oversubscribed, raising £6 million gross • Shares have consistently outperformed the placing price Sergey Evlanchik, CEO of Ukrproduct Group, commented: "In the first half of the year, I am pleased to report that we have made progress on all fronts with good growth in revenues, improved margins and, consequently, profits are ahead strongly. "We are well positioned to take advantage of the continuing economic growth of Ukraine. Dairy-based foods are directly benefiting from rising consumer affluence and the shift of preferences towards packaged quality products. In addition, we are watching adjacent segments of the market closely, and in particular hard (cheddar) cheese, in order to be able to react quickly to opportunities as they arise." For further information: Ukrproduct Group +38 044 502 8014 Sergey Evlanchik, CEO, and Dmitry Dragun, CFO Financial Dynamics +44 20 7831 3113 Ben Foster/ Charles Watenphul \* The combined figures refer to the aggregated results of the Enlarged Group, as defined in the non-statutory financial statements for the period ended 31 December 2004, for the six months ended 30 June 2005 and are fully comparable with the financial results for the first half of 2004. The Directors believe that the combined method best illustrates like for like performance. The combined figures are also supplemented by the consolidated results which show the results since Ukrproduct Group Ltd ("the Company") acquired the "Operating Group" on 11 February 2005 using purchase accounting. This consolidated method will form the basis for the statutory financial statements for the year ended 31 December 2005 (Note 1). ** Earnings per share excluding non-recurring items: release of "negative goodwill", income from exchange differences and other non-operating expenses CHAIRMAN'S AND CHIEF EXECUTIVE'S STATEMENT It gives us great pleasure to announce our first set of interim results since becoming a public company. This is Ukrproduct's first six month trading period - which includes the initial public offering (IPO) of Ukrproduct Group on 11 February 2005. The flotation was a momentous step in the continuation of our strategy to become the leading branded dairy-based FMCG business in Ukraine. Trading Results Our results for the six month period show increases in both sales and operating profits (EBITDA) on a comparable, like for like basis, by 57% and 56% respectively. Net profits on the same basis grew more substantially by 78%, helped by lower interest charges. The growth in margins was also material. On the basis of the combined accounts for the six months to 30 June 2005 - which we believe provide the most appropriate comparison with the last year's corresponding six month period - basic earnings per share increased by 33% from 2.1p to 2.8p. The Board proposes to pay a 0.36 pence interim dividend to those shareholders on the register on 23 September 2005. This dividend will be paid on 28 October 2005. Operating Review The operating environment of the Group remained buoyant and dynamic. As in the last year, the processed cheese and packaged butter segments in Ukraine once again experienced significant volume growth. Consumer demand remained strong in the first half of the year and trading so far in the second half points to the continuation of this trend. Using the funds raised at flotation, the Group significantly strengthened its distribution network, conducted the forward storage in full volume (thereby securing an uninterrupted supply of raw materials for production in winter months), and completed the new processed cheese workshop at Molochnik, which resulted in capacity increasing to 2,000 tonnes of processed cheese per month. We are continuing to invest in the development of new products, with the first innovative products of this year, vacuum-packed processed cheeses are due to arrive on the shelves of the country's retail outlets shortly. We have broadened the product range to include several new taste varieties including paprika, crab and bacon. Initial Public Offering On February 11, 2005 the Group successfully listed in section AIM of London Stock Exchange. The number of the shares offered to the public was 11,214,953, which represented 27.2% of the enlarged issued share capital of the Company (41,214,953 shares). The Company's market capitalisation based on the placing price of 53.5p per share was approximately £22 million when the dealings commenced. The Company raised £6 million gross, with flotation expenses of roughly £0.8m. On the date of the IPO, Ukrproduct Group Limited completed the acquisition of 100% of the share capital of CJSC Ukrproduct Group (Ukraine), Dairy Trading Corporation (BVI) and LinkStar Limited (Cyprus). Strategic update The Group intends to remain the leader in the two core segments of processed cheese and packaged butter, by increasing its presence domestically and facilitating its corporate marketing and promotional activities in larger cities throughout the country. The Group is also active in developing its logistical arm (Ukrproduct Logistics - a subsidiary of the Group's main operating company in Ukraine), in order to serve its parent company and also to provide the services to third parties. In addition, the Group plans to enter the lucrative hard (cheddar) cheese segment in 2006-2007. Outlook The Board believes that the Group remains well positioned to take advantage of the continuing economic growth of Ukraine. Dairy-based foods are directly benefiting from rising consumer affluence and the shift of preferences towards packaged quality products. We are watching adjacent segments of the market closely and in particular hard (cheddar) cheese in order to be able to react quickly to opportunities as they arise. Jack Rowell Sergey Evlanchik Chairman CEO Combined financial results for the Group: • Net Sales up 57% to £17.3m (£11m) • Cost of sales up 55% to £14.4m (£9.3m) • Gross profit up 69% to £2.9m (£1.7m) • Gross margin increased to 16.7% (15.5%) • Administrative expenses increased by 140% to £0.85m (£0.35). This increase was mainly due to the new expense category related to the post-IPO public nature of the Company, as well as increase in the wages category, due to employee number and average pay increase. • Selling expenses up 70% to £0.7m (£0.4m). The main factor influencing this increase was staff salaries. • EBITDA up 56% to £1.6m (£1m) • EBIT up 58% to £1.36m (£0.86m) • Profit before tax up 73% to £1.3m (£0.75m) • Profit after tax up 78% to £1.16m (£0.65m) • Earnings per share up 33% to 2.8p (2.1p) Combined segmental analysis: Sales Share in Share in Gross Profit Gross Gross H1 2005 Sales Sales H1 2005 Margin Margin £ 000 H1 2005 H1 2004 £ 000 H1 2005 H1 2004 Cheese 7,309 42% 40% 1,617 22.1% 20.4% Butter 5,081 29% 37% 759 14.9% 10.9% Milk Powder 3,611 21% 16% 490 13.6% 19.5% Services 201 1% - 9 4.4% 4.6% Other 1,107 7% 7% 14 1.3% 2.7% Total 17,309 100% 100% 2,889 BALANCE SHEET £ '000 30/06/2005 30/06/2005 31/12/2004 Consolidated Combined Combined __________ __________ __________ Unaudited Unaudited Audited Non-Current Assets Property, Plant and equipment 6,945 6,945 5,023 Intangible assets 9 9 3 Investments 92 92 83 Deferred tax 41 41 36 Total non-current assets 7,087 7,087 5,145 Current assets Cash and cash at bank 1,264 1,264 300 Inventories 4,370 4,370 2,328 Loans issued 727 727 212 Receivables and prepayments 3,481 3,481 2,029 Total Current assets 9,843 9,843 4,869 Total assets 16,929 16,929 10,014 Current Liabilities Bank loans and overdrafts 859 859 1,077 Trade and other payable 2,787 2,787 1,671 Current income tax liabilities 135 135 253 Total Current Liabilities 3,781 3,781 3,002 Non-Current Liabilities Long-term credits 44 44 221 Bonds 119 119 933 Promissory note 5 5 5 Deferred tax 758 758 703 Total Non-Current Liabilities 926 926 1,862 Minority interest 164 164 132 Capital and reserves Share capital 4,121 4,121 3,000 Merger reserve -1,750 -1,866 Additional capital 4,109 6,287 2,020 Accumulated profit and other reserves 3,828 3,400 1,865 Total shareholders' equity 12,058 12,058 5,018 Total liabilities and shareholders' equity 16,929 16,929 10,014 INCOME STATEMENT £ '000 30/06/2005 30/06/2005 30/06/2004 31/12/2004 Consolidated Combined Combined Combined __________ __________ __________ __________ Unaudited Unaudited Audited Audited Sales 15,389 17,309 11,026 27,115 Cost of Sales -12,906 -14,421 -9,319 -22,698 Gross profit 2,483 2,889 1,706 4,418 16.1% 16.7% 15.5% 16.3% Administrative expenses -780 -850 -354 -1,045 Selling and distribution expenses -597 -706 -415 -1,070 1,106 1,333 937 2,303 Release of "negative goodwill" (Note 2) 2,368 Income from exchange differences 367 105 Other non-operating expenses -65 -79 -72 -233 Profit before interest and taxation 3,776 1,359 865 2,070 24.5% 7.8% 7.8% 7.6% Interest expense -78 -95 -112 -305 -0.5% -0.6% -1.0% -1.1% Interest income 41 41 2 -7 Profit before taxation 3,739 1,305 755 1,757 24.3% 7.5% 6.8% 6.5% Taxation -149 -147 -110 -301 Profit after taxation 3,591 1,158 645 1,456 23.3% 6.7% 5.8% 5.4% Minority interest -6 -13 -7 -19 Profit attributable to ordinary shareholders 3,585 1,144 638 1,437 22.3% 6.6% 5.8% 5.3% Earnings per share: - basic 2.2p 2.8p 2.1p 4.8p - diluted 2.1p 2.7p 2.1p 4.8p CASH FLOW STATEMENT £ '000 1/01/2005 1/01/2005 1/01/2004 to 30/06/05 to 30/06/05 to 31/12/04 Consolidated Combined Combined __________ __________ __________ Unaudited Unaudited Audited Cash flows from operating activities Net profit before taxation 3,739 1,305 1,757 Adjustments for: Release of negative goodwill -2,368 0 0 Exchange difference -367 -105 Depreciation 260 308 516 Interest expense 78 95 305 Interest income -41 -41 7 1,302 1,562 2,586 "-" Increase in trade and other receivables -1,071 -588 -71 "-" Increase in inventories -1,704 -1,666 -872 "+" Increase in trade and other payables 1,176 868 -349 Cash (used by)/generated from operations -297 177 1,293 Interest paid -78 -95 -305 Interest received 41 41 Income tax paid/(refunded) -159 -179 -67 Net cash (used in)/generated by operating activities -493 -57 922 Cash flows from investing activities Purchase of property, plant and equipment -2,123 -2,234 -1,566 Purchase of investments 207 0 1 Proceeds from sale of property, plant and equipment 0 0 3 Proceeds from sale of investments 0 0 -7 Loans repaid (issued) -297 -461 -207 Net cash used in investing activities -2,213 -2,696 -1,776 Cash flows from financing activities Proceeds from issue of bonds and other non current -833 -1,054 912 loans Proceeds from issue of shares 1,121 1,109 0 Proceeds from issue of additional capital 4,111 4,112 0 Distribution of profit 0 0 0 Net proceeds from issue of promissory notes 0 0 -20 Net proceeds from short term borrowing -307 -321 147 Net cash generated by/(used in) financing activities 4,093 3,846 1,039 Effect of exchange rate changes and restatements on -122 -129 -17 cash and cash equivalents Net increase/(decrease) in cash and cash equivalents 1,264 965 168 Cash and cash equivalents at the beginning of the 300 132 year 0 Cash and cash equivalents at the end of the year 1,264 1,264 300 STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Consolidated) £ '000 Share Additional Retained Share- Minority Total capital capital and earnings holders interest equity revaluation equity reserve Balance at 1 January 2005 Issue of shares 4,121 4,398 8,519 144 8,663 Fund-raising expenses -286 -286 -286 Exclusion from Group Issued on acquisition of Operating Group Net profit for the period 3,585 3,585 6 3,591 Exchange differences on -3 243 240 14 254 translation to the presentation currency ======= ======= ======= ===== ======= ===== Balance at 30 June 2005 4,121 4,109 3,828 12,058 164 12,222 ======= ======= ======= ===== ======= ===== NOTES 1. Accounting Policy Statement and Basis of Preparation The accounting policies used in preparation of the above statements are those expected to be adopted by the Company in preparing its annual financial results for the year ended 31 December 2005. The main difference in the basis of preparation of these results as compared to those produced previously is the method used to consolidate the results of the Group companies. The Group prepared its financial statements for the year ended 31 December 2004 using on the pooling of interests ("merger") method, to reflect the activities of the whole Operating group for the full year. In practice such method is used to illustrate the "combined" results of a group of companies operating under common control and management, but formally not being linked by a common parent company. However, since all the companies within the Operating Group became subsidiaries of Ukrproduct Group Ltd (the Company) on the date of its floatation on AIM, the Company will use the purchase method to consolidate its financial results starting from the date of the IPO. Since the Group was formally established on February 11 2005, the first half consolidated results for 2005 should be prepared from that day forth, thus resulting in exclusion of trading results for the period 01.01.05 - 11.02.05. Due to operational and presentational reasons, the consolidated results have been prepared for the 5 months ended June 30, 2005. However, in order to provide a more accurate and comparable information to the shareholders, in addition to the consolidated 5 month results, the management has decided to also prepare the combined accounts for 6 months ended June 30, 2005, which are comparable to the same period in the previous year. These combined results are referred to as "combined" results within this interim financial review. 2. Goodwill The consolidation of a group of companies using the purchase method gives rise to goodwill, which is measured as the excess of the consideration paid over the net fair value of assets acquired by the acquirer ("goodwill"). In the case of Ukrproduct Group Ltd, such excess was negative, meaning that the Company purchased the assets of its subsidiaries at a price lower than the net fair value of those assets, thus giving rise to "negative goodwill". The "negative goodwill" is a non-recurring item which has been released through the Income Statement. As can be noticed, the "negative goodwill" number which was treated as income in the Income Statement (2,368) is different from the number of the " negative goodwill" as calculated in Note 4 (2,792) for the purposes of the Balance Sheet. The difference is due to different treatment of the exchange rate of Ukrainian and British currencies, when calculating the Income Statement and the Balance Sheet. The Income Statement is calculated using the average exchange rate for the period, while the Balance Sheet is calculated using the exchange rate as at the end of the period. 3. Earnings per share Basic earnings per share have been calculated by dividing the net profit attributable to ordinary shareholders excluding non-recurring items (release of "negative goodwill", income from exchange differences and other non-operating expenses) by the weighted average number of shares in issue during the period. Consolidated Combined Combined Combined Five months Six months Six months Twelve ended 30 ended 30 ended 30 months ended June 2005 June 2005 June 2004 31 December 2004 Net Profit attributable to ordinary shareholders, £ 914,656 1,157,638 637,677 1,436,020 Weighted average number of ordinary shares 41,214,953 41,214,953 30,000,000 30,000,000 Basic earnings per share 2.2p 2.8p 2.1p 4.8p Number of ordinary shares granted under warrants and option agreements 2,214,924 2,214,924 0 0 Fully diluted average number of ordinary shares 43,429,877 43,429,877 30,000,000 30,000,000 Fully diluted earnings per share 2.1p 2.7p 2.1p 4.8p 4. Acquisition of CJSC Ukrproduct Group, Linkstar Limited and Dairy Trading Corporation Limited With effect from 11 February 2005 the Company acquired a Group of Companies (previously referred to as the Operating Group) with business operations primarily in Ukraine. The assets acquired are summarised in the following table: £' 000 Net assets 5,792 Fair value of assets acquired 5,792 Consideration 3,000 Goodwill 2,792 5. Dividend: On 29 June 2005, the Board recommended the first interim dividend of 0.36 pence per share to be paid to the shareholders on record as at 23 September 2005. The payment date is 28 October 2005. This information is provided by RNS The company news service from the London Stock Exchange