Final Results
Ukrproduct Group Ltd
23 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 Financial
Statements.
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 the
executive team and favourable business environment have delivered the best
performance on record to the shareholders. I am pleased to observe the
continuing flexibility of the business and the strength of the Group's product
portfolio. In a dynamically evolving environment of dairy sector of Ukraine such
a combination is a powerful portent for the soundness and vitality of the
underlying 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 on
world markets for skimmed milk powder, the Group reported sales of £48.1
million, an increase of 37% on the previous year. EBITDA, calculated as profit
from operations adding back depreciation and amortisation, grew from £2.8
million in 2006 to £5.5 million, an increase of over 96%. An increase in gross
margins from 20.7% to 21.7% contributed to a three-fold increase in profit
before tax from £1.2 million to £3.7 million.
For the domestic business in Ukraine, 2007 was a period of full recovery in
consumer confidence which had been hit hard by the Russian embargo on the import
of Ukrainian dairy products in early 2006. It is now obvious that the Group's
strategy of refusing to buckle under the huge price pressure in 2006 paid well
in the current year as sales recovered and margins improved. The development of
the product portfolio, while relatively minor, has helped to secure the broad
presence and recognition of products on the shelves of the fast-developing
retailers. For the international business, the past year was exceptional. Nearly
all dairy products, skimmed milk powder in particular, experienced a surge in
demand with prices adjusted upwards, accordingly. The Group managed to
capitalise on the opportunities presented with the timely installation of the
new skimmed milk dryer in December 2006; from January 2007 onwards the new
equipment operated at a near full capacity and produced skimmed milk of
excellent grade. As a result, both volumes and prices of skimmed milk powder
have been remarkably robust.
Dividends
It has been the Group's dividend policy to reward shareholders in line with the
trading performance of the business and financial results whilst maintaining the
cash position of the business and supporting the balance between reinvesting
profits and dividend distributions. In view of the recovery in the Group's core
business in Ukraine and strong financials delivered by the business, the Board
is recommending a final dividend payment of 0.82 pence per ordinary share for
the year ended 31 December 2007 which would lead 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 record as at 6 June 2008.
Strategy
2007 validated one of the central business principles of Ukrproduct Group, that
of the profitable retention of the Group's position in its core business
segments. As before, these are soft (processed) cheese, butter, skimmed milk
powder and the most recent addition of hard cheese. While maintaining the market
position in branded soft cheese, the Group also demonstrated an ability to
continue to improve margins in the butter segment.
In production, our strategy remains focused on manufacturing excellence with
only the newest and most advanced equipment installed in our plants and only the
most up-to-date technical expertise contracted for the industrial work. A
significant amount of capex, some £11 million in total, has been dedicated over
the last three years to upgrading our plants and supporting the Group's
competitive position in Ukraine. This capex has resulted in our production
facilities being one of our best assets, serving as the Group's manufacturing
platform and creating a significant barrier to entry to potential competitors.
Brands, as we always believed, are our most treasured business resource. They
withstood 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" (Our
Dairyman), are some of the most recognisable and profitable in Ukraine's dairy
sector. We are careful in preserving their integrity by conducting targeted
in-store merchandising campaigns and adhering to a policy aimed at price and
quality differentiation.
Our distribution network, always the backbone of the business, has been
strengthened and streamlined. The development of the modern retail formats in
Ukraine has seen the role of the Group's distribution network defined with
greater clarity. We envisage that the central warehouse facilities of the
supermarkets will play a bigger role in delivering the goods to customers in the
future however the time of the full-cycle service delivery has not yet come. In
this transitional period of three to five years, we are keen to support the
customers, both at retail and distribution level, by providing all necessary
logistical support for the timely delivery of our products and associated
services.
Our export operation has seen substantial progress in the last year. Buoyed by
nearly a two-fold increase in skimmed milk powder capacity and by significant
quality improvement, Starkon Plant has enjoyed a close-to-capacity utilisation
in 2007. While the situation on the world markets in 2007 has clearly been
exceptional, we believe that with the new equipment the opportunities to
capitalise on the favourable prices will be a material benefit for the Group in
the future.
In early 2008, Ukraine's long-awaited accession to the WTO finally happened. As
this report goes to print, the details of Ukraine's commitments are not yet
known in detail, neither is the potential impact of the accession to
Ukrproduct's business. We expect, however, that the new opportunities for our
business will be significant, in particular, with respect to the opening of the
hitherto closed export markets for skimmed milk powder. We intend to sustain the
growth in the future by growing organically via construction of the new modern
facilities as high production and quality standards become vital for the
Ukrainian dairy producers to be able to comply with the WTO requirements. In one
potential area of growth in Ukraine, acquisitions, we will continue to screen
the appropriate quality targets as bolt-on additions to the Group's core
businesses.
Outlook
Looking forward, the Board sees a number of opportunities to expand and improve
the business. Firstly, we are encouraged to see the continuing shift of consumer
demand in Ukraine towards quality products at a reasonable price. This is a
trend which the Group has used to its advantage in the past and shall continue
to employ in the future. The Group's brand portfolio is diversified yet focused
enough to withstand the competitive pressures. Improving recognition and sales
of particular growth products, such as smoked sausage cheese, is the best way
forward for leveraging our industrial and commercial advantages. Secondly, we
are convinced that consolidation in the dairy industry of Ukraine is inevitable
and is slowly happening. While it is difficult to assess a direct financial
impact of this process on the Group, we nevertheless believe that the
competitors are weakening and will gradually lose the ability to produce and
distribute dairy products. This bodes well, although indirectly, for the Group's
trading performance. In addition, barriers to entry into a dairy business in
Ukraine of a commercially meaningful scale are very high and we believe that
this barrier delivers a sizeable benefit to the Group. Finally, our
manufacturing base is now working towards providing a major competitive
advantage for the Group. At both of the Group's locations at Zhytomir and
Starkon, we now have centres of flexible production capable of delivering
quality products at short notice. This manufacturing ability is increasingly
important in Ukraine as seasonal factors and shifts in consumer preferences
demand greater flexibility from the leading dairy producers.
It was a year of excellent achievements. I congratulate everyone at the Group
with the success and look forward to a new exciting year.
Jack Rowell
Chairman
22 April 2008
CHIEF EXECUTIVE'S STATEMENT
Background
The year under review was the first year following the crisis in the dairy
industry of Ukraine inflicted by the Russian import ban in 2006. Without a
doubt, 2007 was a period of full-scale recovery for Ukrproduct Group. Helped by
the encouraging trends in skimmed milk powder worldwide, the Group jump-started
a gradual recovery of the domestic volumes in processed cheese as well. Butter
volumes held up very well throughout the year, just as the management team
expected at the outset. The margins on this product have improved, reflecting
the continuous effort by management to leverage the brands in the portfolio.
Hard cheese, our new flagship product, started well and is now in production. We
now have the requisite experience and inventories to carry on an introduction of
the product to the shelves of supermarkets in Ukraine.
Operating review
The year started well with the rapid and significant increase in the export
prices for skimmed milk powder (SMP) on the world markets. The Group's increased
SMP capacity allowed for an immediate intake of new orders which resulted in the
capacity utilisation rate being close to 100% in April-June 2007. Throughout
this period, the Group increased the supply of raw milk correspondingly to allow
for 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 high
level. In the second half of the year, there was a gradual reduction in demand
with the accompanying drop in price. Overall for the year, an average selling
price for a tonne of skimmed milk sold by the Group was some 83% higher than in
the previous year.
Domestically, the sales of our main products, soft (processed) cheese and
packaged butter, continued a steady recovery albeit at slightly different
speeds. In soft cheese, the price-depressing effects in the aftermath of the
Russian import embargo continued to hamper the revival of volumes although the
price recovery went well. Competitive landscape in Ukraine remained chaotic and
unpredictable to a large extent; a number of smaller and mid-tier players
displayed the signs of financial distress which they attempted to overcome by
diminishing quality and reducing prices. The Group's response to such attempts
was to keep a steady flow of good-quality products at reasonable prices and to
ensure the continuing presence of products on the shelves of supermarkets. This
strategy worked well, in our view, and by the end of the year the Group's
volumes in soft cheese experienced the dynamics not seen since 2004-2005. The
smoked sausage cheese, in particular, has been a bright spot. A relatively new
product for the Group, it now accounts for close to 30% of the total soft cheese
sales and continues to grow. As a result, the Group's overall domestic sales
have grown and are expected to grow further due to the continuing expansion of
the supermarkets.
The new product category, hard cheese, was moving into production by the end of
the year. The initial trials of the product were very encouraging as the quality
differentiated the Group's hard cheese from competitors' offerings. For the
reasons of profit maximisation due to the extremely favourable world market
conditions for skimmed milk powder in 2007, it was decided to divert the supply
of raw milk to production of skimmed milk powder - the strategy that worked very
well for the company and investors. Starting from the beginning of 2008, we
expect milk volumes to rise substantially to provide increasing input for the
volumes of hard cheese. The quality of our hard cheese is now sufficient to
safeguard the Group's brand standards and to provide customers with a
first-class product.
Our capex programme for the year was fully reflective of the recovery mode. The
emphasis was on the maintenance of capex, as well as on drawdown of the
pre-committed expenditures for the year. The hard cheese plant at Starkon was
completed in July, a new smoke room was deployed to Molochnik in August, and a
new 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 the
last two years. This approach safeguarded the Group's cash position and had the
benefit of helping the Group remain financially secure at a time of the credit
markets turmoil.
Our distribution system, while remaining the backbone of the Group's business
model, has had to adapt to the new requirements. The development of the modern
retail formats in Ukraine is both an opportunity and a challenge. It is an
opportunity because there is an on-going inevitable shift of consumers towards
supermarkets away from the open-air markets. The Group is keen to capitalise on
this opportunity by delivering good quality products and providing consistent
service to the emerging retail players. It is also a challenge because the
centralised distribution warehouses do not exist for a majority of supermarkets
in Ukraine. Therefore, the Group is expected to provide retail customers with
efficient yet economical distribution support. With this principle in mind, we
have determined that the distribution subsidiary in Ternopil, Western Ukraine
had to be closed. The closure did not affect the existing sales in the larger
Western Ukraine as the client lists have been transferred to the Lviv
subsidiary. In the future, we believe that a selective optimisation of the
distribution system will become a feature of the on-going corporate
rationalisation programme.
Our system for the supply of raw milk and raw milk ingredients proved itself
capable of handling significantly larger quantities of input than a year before.
We have been developing the milk collection system for over seven years now and
we believe that we have one of the best milk supply chains in the country. Being
a traditionally favourable region for milk production, Western Ukraine where our
major plants are located, offers significant opportunities for further expansion
of 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 are
still offering attractive opportunities for business development. Ukraine
remains a dynamically developing, vibrant economic environment with rising
consumer affluence and burgeoning interest in quality food products. It has been
the 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 segment
of 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 directed
at maximising the production capacities in these segments. In skimmed milk
powder, we are certain that the times of increased volatility will be succeeded
by times of excellent opportunities such as the year under review. Our
particular emphasis in the coming years is the development and firm
establishment of our new product, hard cheese, in the Ukrainian marketspace. The
initial steps are encouraging and we are looking forward to the continuation of
work in this direction. In particular, our new upmarket brand "Molendam" will be
introduced to the consumers soon and leveraged in hard cheeses (for which it was
primarily designed), as well as in processed cheese and butter. We anticipate
that this brand will improve margins considerably.
I would like to express my gratitude to everyone at the Group who made the last
year such a prominent success. Together, we are looking forward to the new
exciting future of opportunities and growth.
Iryna Yevets
Chief Executive Officer
22 April 2008
FINANCIAL REVIEW
Results
In 2007, the Group generated sales of £48.1 million (2006: £35.0 million), the
main driving factor of the increase being skimmed milk powder. This product
accounted for an unusually high proportion of sales and gross profits: £20.4
million (42%) and £3.8 million (36%) respectively (2006: £7.0 million and £0.9
million). Other product segments have also done well. Packaged butter, our
long-time solid performer, generated £13.0 million in sales and £3.5 million in
gross profit (2006: £11.6 million and £2.9 million). Soft (processed) cheese,
helped by an encouraging trend in smoked sausage cheese, posted sales of £12.2
million 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 of
third-party products and provision of transport services.
EBITDA(1) for the year under review is reported at £5.5 million vs. £2.8 million
the year earlier. Such a significant increase resulted mainly from the upside in
sales and margins delivered by skimmed milk powder, as well as from the
stringent cost controls imposed in 2006 and continued throughout 2007. Profit
before taxes (PBT) amounted to £3.7 million (2006: £1.2 million). One of the
substantial items of expenditure last year was interest expense at £0.5 million
(2006: £0.2 million). This was clearly a temporary situation, due to the
necessity to fund forward storage and complete the new hard cheese plant, and
the Group's borrowing requirement and leverage have always remained
conservative.
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 2006
Gross margin, % 26.8 24.7 18.6 12.3 22.9 24.1
PBT margin, % 13.3 10.1 16.6 9.2 5.5 5.0
Gross margins increased in butter and milk powders, but decreased in soft
cheese. In the first of these two categories, butter, there has been a
pronounced consumer shift towards quality. The Group, with its quality offering
of butters for every segment of the market, has been one of the principal
beneficiaries among the dairy processors in Ukraine. In milk powders, a runaway
demand for the product worldwide ensured that the margins increase accordingly,
notwithstanding a seasonal increase in raw milk prices in Ukraine. In soft
cheese, the gross margin decreased slightly as a consequence of the increase in
raw milk prices but the pre-tax margin increased reflecting the rising
efficiencies 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 direct
result of the improved profitability and management's efforts to control the
cash flow by maintaining the stringent debt collection discipline. Although the
balance of inventories and trade receivables increased somewhat during the year,
this was a normal consequence of the recovering sales and shift towards
supermarkets in distribution. Capital expenditure in the year came to £2.7
million (2006: £4.5 million) - a return to a more normal pattern of maintenance
capex. The main investments were made in the hard cheese plant and the
development of the milk collection areas surrounding the Group's plants.
1 EBITDA is calculated by adding depreciation and amortisation to the profit
from operations.
Bank facilities
The Group has a working capital facility of up to £4.0 million (2006: £4.5
million) provided by Ukraine OTP bank at interest rates fixed in both Hryvna and
US 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 clauses
protecting the Group from the occurrence of unexpected events. Overdraft
facilities of up to £1.5 million are also available to the Group from various
banks in Ukraine. As at 31 December 2007, none of these facilities was used
(2006: nil). Further funding for working capital needs and project finance, if
necessary, is available from either the principal bankers or other banking
institutions in Ukraine.
Earnings per share
The basic earnings per share (EPS) in the year was 7.8 pence as compared to 2.6
pence in 2006. The basic EPS has been calculated by dividing net profit
attributable to ordinary shareholders by the time-weighted average number of
shares in issue throughout the year. The diluted earnings per share was 7.5
pence 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 for
the year ended 31 December 2007 which would lead to 1.40 pence per ordinary
share for the full year (2006: 0.61 pence). If approved at the AGM, the final
dividend will be paid on 30 June 2008 to shareholders on the register as at 6
June 2008.
Dmitry Dragun
Chief 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 1,095
Minority interest 6 (16)
3,262 1,079
Earnings per share:
Basic 7.8 2.6
Diluted 7.5 2.6
CONSOLIDATED BALANCE SHEET
As at As at
31 December 2007 31 December 2006
£ '000 £ '000
Assets
Non-Current Assets
Property, Plant and equipment 11,903 10,865
Intangible assets 1,093 1,237
Loans and receivables 108 244
Deferred tax assets 51 42
Total non-current assets 13,155 12,388
Current assets
Inventories 4,008 2,650
Trade and other receivables 5,139 3,710
Other financial assets 276 116
Cash and cash equivalents 1,087 159
Total Current assets 10,510 6,635
Total assets 23,665 19,023
Equity and liabilities
Equity attributable to equity holders
Share capital 4,164 4,121
Other reserves 4,060 4,181
Retained earnings 7,031 4,141
Total equity attributable to equity holders of the 15,255 12,443
parent
Minority interest 131 199
Total equity 15,386 12,642
Liabilities
Non-Current Liabilities
Long-term loans - 102
Deferred tax liabilities 752 767
Total Non-Current Liabilities 752 869
Current Liabilities
Bank loans and overdrafts 3,407 3,146
Trade and other payables 3,239 1,953
Bonds 811 353
Other short-term liabilities - 36
Current 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 Board
of Directors on April 22, 2008.
CONSOLIDATED CASH FLOW STATEMENT
Year ended Year ended
31 December 2007 31 December
2006
£ '000 £ '000
Cash flows from operating activities
Profit for the year 3,262 1,079
Adjustments for:
Exchange difference 15 20
Depreciation and amortisation 1,371 1,359
Loss on disposal of non-current assets 64 16
Interest expense 493 237
Interest income (20) -
Income tax expense 415 119
Share based payments - 19
(Increase) / decrease in inventories (1,444) 1,396
(Increase) / decrease in trade and other receivables (1,884) 159
Increase / (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 activities
Payments 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 35
Proceeds from sale of loans and receivables 176 -
Net cash used in investing activities (2,533) (4,685)
Cash flows from financing activities
Gross repayments from long term borrowing (100) (34)
Proceeds from issue of bonds net of issue costs 463 357
Proceeds 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 159 453
Cash 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 13,382
Depreciation on revaluation of - (135) 137 2 - 2
non-current assets
Reduction 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 presentation
currency
Net income (expense) recognised - (1,037) (530) (1567) (31) (1,598)
directly in equity
Profit for the year - - 1,095 1,095 (16) 1,079
Total recognised income and - (1,037) 565 (472) (47) (519)
expense for the year
Dividends paid - - (247) (247) - (247)
Issue of shares - - - - - -
Share based payments - 19 - 19 - 19
Exclusion from Group - (1) 8 7 - 7
Balance at 31 December 2006 4,121 4,181 4,141 12,443 199 12,642
Depreciation on revaluation of - (122) 122 - - -
non-current assets
Reduction 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 presentation
currency
Net income (expense) recognised - (248) 22 (226) (74) (300)
directly in equity
Profit for the year - - 3,256 3,256 6 3,262
Total recognised income and - (248) 3,278 3,030 (68) 2,962
expense for the year
Dividends paid - - (459) (459) - (459)
Issue of shares 43 198 - 241 - 241
Reduction 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 financial
information are set out below. The policies have been consistently applied to
all the years presented, unless otherwise stated.
(a) Basis of preparation
These consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards, International Accounting Standards
and Interpretations (collectively IFRS) issued by the International Accounting
Standards Board (IASB) as adopted by the European Union ("adopted IFRSs").
The majority of companies making up the Group maintain their accounting records
in accordance with Ukrainian regulations. The financial information has been
prepared from those accounting records and adjusted as considered necessary in
order to comply with IFRS. Accounting records of the Operating Group are
maintained in Ukrainian Hryvna ("UAH"). The Hryvna has also been adopted as the
functional currency for the purpose of the consolidated financial statements
(see note 1(d)). Since the Ukrainian Hryvna is not a major convertible or
recognisable currency outside of Ukraine, and also because the Group's public
shareholder base has been located mostly in the UK, the financial information
has been translated into British pounds sterling (hereinafter "GBP" or £) at the
rates given in note 1(o), as the Group's presentational currency. The
preparation of financial statements in conformity with IFRS requires the use of
certain critical accounting estimates. It also requires management to exercise
its 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 rendering
of services are recognised in the period to which they relate and measured at
the fair value of the consideration received or receivable. Revenue comprises
the invoiced value of sales of goods and services net of value added tax,
rebates and discounts after eliminating sales within the Group. Revenue from the
sale of goods is recognised when the significant risks and rewards of ownership
of the goods are transferred to the buyer. Revenues and expenses are recognised
on an accruals basis.
(c) Principles of consolidation
Where the company has the power, either directly or indirectly, to govern the
financial and operating policies of another entity or business so as to obtain
benefits from its activities, it is classified as a subsidiary. The consolidated
financial statements present the results of the company and its subsidiaries
("the Group") as if they formed a single entity. Intercompany transactions and
balances 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 and
presentational currencies for these financial statements. As a result of this
review 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 presentational
currency for its consolidated IFRS financial statements.
Consequently, management has used the following basis for the translation of
Ukrainian Hryvna figures to British pounds for presentation purposes:
(i) for current year figures all assets and liabilities are translated at
the rate effective at the balance sheet date. Income and expense items are
translated at rates approximating to those ruling when the transactions took
place. (As there were no significant fluctuations of the exchange rate during
the year, the average rate was used).
(ii) for comparative figures all assets and liabilities are translated at
the closing rate existing at the relevant balance sheet date. Income and expense
items are translated at rates approximating to those ruling when the
transactions took place. (As there were no significant fluctuations of the
exchange rate during the year, the average rate was used).
(iii) all exchange differences resulting from the application of the
translation methods described above are recognised directly in equity as a
separate 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 providing
products or services that are subject to risks and returns that are different
from those of other business segments. A geographical segment is engaged in
providing products or services within a particular economic environment that are
subject to risks and returns different from those of segments operating in other
economic environments.
The Group has recognised business segments as primary format of segment
reporting. The secondary format was chosen to be the geographical segment.
(f) Property, plant and equipment
Figures calculated using Ukrainian statutory accounting rules, have been adopted
as deemed depreciated historical cost for property, plant and equipment as at 1
January 2004. Subsequent additions have been recorded at cost.
With effect from 1 January 2004, the Group adopted the revaluation model (as
defined in IAS 16: Property, Plant and Equipment) for all classes of assets. The
Group's assets were revalued in January 2004. This change of accounting policy
was made on the grounds that management believe that this policy provides more
reliable and relevant financial information because it better reflects the value
in use of such assets to the Group. In accordance with the provisions of that
standard, the revaluation model has not been applied retrospectively.
All categories of property, plant and equipment are subsequently carried at fair
value at the date of revaluation, less any subsequent accumulated depreciation
and subsequent accumulated impairment losses. Changes in fair value are
recognised in equity (the "revaluation reserve"). An appropriate transfer is
made from the revaluation reserve to the retained earnings when freehold land
and buildings are expensed through the income statement (e.g. through
depreciation, impairment or sale).
Depreciation is applied to all items of property, plant and equipment with the
exception of land. Depreciation is calculated using the straight-line method to
allocate their cost or revalued amounts to their residual values over their
estimated 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 the
carrying amount and are included in operating profit.
(g) Assets under construction
Assets under construction are reported at their cost of construction including
costs charged by third parties and the capitalisation of the Group's material
costs incurred. No depreciation is charged on assets during construction. Upon
the completion, the group assess whether there is any indication that an asset
may be impaired. If any such indication exists, the group performs impairment
testing as described in note 1(j). In case no indication exists that the asset
may be impaired, all accumulated costs of the asset are transferred to the
relevant fixed asset category and depreciated at applicable rates from the time
the asset is completed and ready for use.
(h) Intangible assets
Acquired computer software licences are capitalised on the basis of the costs
incurred to acquire and bring to use the specialised software. These costs are
amortised over their estimated useful lives using the straight-line method. The
amortisation expense is included within administrative expenses in the Income
Statement.
Trademarks are shown at historical cost. Trademarks have finite useful lives and
are carried at cost less accumulated amortisation. Amortisation is calculated
using the straight-line method to allocate the cost of trademarks over their
estimated useful lives (20 years). The amortisation expense is included within
Selling & Distribution expenses in the Income Statement.
Customer list is shown at fair value at the date of revaluation obtained by
using the estimates of the independent valuers, less any subsequent accumulated
depreciation and subsequent accumulated impairment losses. Amortisation is
calculated using the straight-line method to allocate the cost of the customer
list over its estimated useful lives (20 years). The amortisation expense is
included 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 to
the Income Statement within administrative expenses. Goodwill is assessed
annually with respect to the impairment of value and reported at cost net of
total loss from impairment of value. Gains or losses on disposal of a subsidiary
include 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 assessed
with respect to the impairment of their value. Assets subject to amortisation
are assessed with respect to the impairment of their value whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recovered. Whenever the carrying amount of an asset exceeds its recoverable
value, an impairment loss is recognised in income. The recoverable amount is the
higher of an asset's net selling price and value in use. The net selling price
is the amount obtainable from the sale of an asset in an arm's length
transaction while value in use is the present discounted value of estimated
future cash flows expected to arise from the continuing use of an asset and from
its disposal after the end of its useful life. Recoverable amounts are estimated
for individual assets or, if it is not possible, for a cash generating unit.
Impairment charges are included in the administrative expenses line item in the
Income Statement, except to the extent they reverse gains previously recognised
in the Statement of Changes in Equity.
(k) Inventories
Inventories are stated at the lower of cost and net realisable value. Cost is
determined using the first-in, first-out method. The cost of finished and
unfinished goods comprises raw materials, direct labour, other direct costs and
related production overheads (based on normal operating capacity) but excludes
borrowing costs.
(l) Cash and cash equivalents
Cash and cash equivalents comprise cash on hand, deposits held at call with
banks and other short-term highly liquid investments with original maturities of
three months or less. Bank overdrafts are included within borrowings in current
liabilities on the balance sheet.
(m) Share-based payments
Where share options are awarded to employees, the fair value of the options at
the 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, the
increase in the fair value of the options, measured immediately before and after
the modification, is also charged to the income statement over the remaining
vesting period. Where equity instruments are granted to persons other than
employees, the income statement is charged with the fair value of goods and
services received. Where fair value of goods and services received from persons
other than employees is difficult to identify, the group the fair value of the
instruments granted is charged to income statement over the vesting period.
(n) Income taxes
Taxation has been provided for in the financial statements in accordance with
relevant legislation currently in force. The charge for taxation in the Income
Statement 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, using
the 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, for
all temporary differences arising between the tax basis of assets and
liabilities and their carrying values for financial reporting purposes except
for those difference permanently disallowed. A deferred tax asset is recorded
only to the extent that it is probable that taxable profit will be available
against which the deductible temporary differences can be utilised. Deferred tax
assets and liabilities are measured at tax rates that are expected to apply to
the period when the asset is realised or the liability is settled, based on tax
rates that have been enacted or substantively enacted at the balance sheet date.
(o) Foreign currency translation
Transactions denominated in currencies other than the Hryvna ("foreign
currencies") are recorded in Hryvna at the exchange rate effective on the
transaction date. Exchange differences resulting from the settlement of
transactions denominated in foreign currency are included in the income
statement using the effective exchange rate on that date.
Monetary assets and liabilities denominated in foreign currency are translated
into Hryvna at the official exchange rate at the balance sheet date. Foreign
currency gains and losses arising from the translation of assets and liabilities
are reflected in the Income Statement as foreign exchange translation gains and
losses.
Income and expense figures have been converted to British pounds for
presentation purposes at rates approximating to those ruling when the
transactions took place. (As there were no significant fluctuations of the
exchange rate during the year, the average rate was used). Assets and
liabilities items have been converted to British Pounds (£) for presentation
purposes at the closing rate. The resulting exchange differences are recognised
as a separate component of equity.
For translation of the financial data, the exchange rates of Ukrainian Hryvna to
GBP and USD officially set by the National Bank of Ukraine were used. The
weighted average rate for the year was calculated based on the daily exchange
rates officially set by the Bank of Ukraine.
Hryvna for Hryvna for
1 GBP (£) 1 USD ($)
Official rate as at December 31, 2007 10.0973 5.0500
Official rate as at December 31, 2006 9.9045 5.0500
Weighted average rate for 2007 10.1124 5.0500
Weighted average rate for 2006 9.3128 5.0500
(p) Pension costs
The Group contributes to the Ukrainian mandatory state pension scheme, social
insurance and employment funds in respect of its employees. The Group's pension
scheme 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-money
derivatives. They are carried in the balance sheet at fair value with changes in
fair value recognised in the income statement. The Group does not have any
assets held for trading nor does it voluntarily classify any financial assets as
being at fair value through profit or loss.
Loans and receivables: These assets are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active market. They
arise 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 any
provision for impairment.
Impairment provisions are recognised when there is objective evidence (such as
significant financial difficulties on part of the counterparty or default or
significant delay in payment) that the Group will be unable to collect all of
the amounts due under the terms receivable, the amount of such a provision being
the difference between the net carrying amount and the present value of the
future expected cash flows associated with the impaired receivable. For trade
receivables, which are reported net, such provisions are recorded in a separate
allowance account with the loss being recognised within administrative expenses
in the income statement. On confirmation that the trade receivable will not be
collectable, the gross carrying value of the asset is written off against the
associated provision.
From time to time, the Group may renegotiate the terms of trade receivables due
from customers with which it has previously had a good trading history. Such
renegotiations will lead to changes in the timing of payments rather than
changes to the amounts owed and, in consequence, the new expected cash flows are
discounted 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's
accounting policy for each category is as follows:
Fair value through profit or loss: This category comprises only
out-of-the-money derivatives. They are carried in the balance sheet at fair
value with changes in fair value recognised in the income statement.
Other financial liabilities: Other financial liabilities include the following
items:
Trade payables and other short-term monetary liabilities, which are recognised
at amortised cost.
Bank borrowings and bonds issued by the Group are initially recognised at the
amount advanced net of any transaction costs directly attributable to the issue
of the instrument. Such interest bearing liabilities are subsequently measured
at amortised cost using the effective interest rate method, which ensures that
any interest expense over the period to repayment is at a constant rate on the
balance of the liability carried in the balance sheet. "Interest expense" in
this context includes initial transaction costs and interest payable on
redemption, as well as any interest or coupon payable while the liability is
outstanding.
(s) Dividends
Equity dividends are recognised when they become legally payable. In the case of
interim dividends to equity shareholders, this is when declared by the
directors. In the case of final dividends, this is when approved by the
shareholders at the AGM.
(t) Share issue costs
All qualifying transaction costs in respect of the issue of shares are accounted
for 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 in
respect of the shares and of other assets.
(u) Borrowing costs
Borrowing costs are recognised as an expense in the period in which they are
incurred.
2. Segment information
At 31 December 2007, the Group was organised on a worldwide basis into three
main 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 - 123,839
Sales to internal 20,023 27,796 15,395 63,214 2,513 10,002 - 75,729
customers
Sales to external 12,157 12,998 20,410 45,565 659 1,886 - 48,110
customers
Gross profit 2,793 3,470 3,804 10,067 192 199 - 10,458
Administrative expenses (1,003) (810) (335) (2,148) (49) - (573) (2,770)
Selling and distribution (1,119) (932) (75) (2,126) (51) - (742) (2,919)
expenses
Other operating income / - - - - - - (604) (604)
expenses
Income / loss from - - - - - - (15) (15)
exchange differences
Profit before interest and 671 1,728 3,394 5,793 92 199 (1,934) 4,150
taxation
Finance expense - - - - - - (493) (493)
Finance income - - - - - - 20 20
Profit before taxation 671 1,728 3,394 5,793 92 199 (2,407) 3,677
Taxation - - - - - - (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 - 21,144
Unallocated corporate - - - - - - 2,470 2,470
assets
Unallocated 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 - 2,692
Unallocated corporate - - - - - - 4,835 4,835
liabilities
Unallocated deferred tax - - - - - - 752 752
Consolidated total 497 636 1,288 2,421 74 197 5,587 8,279
liabilities
Other segment information:
Depreciation and 671 327 274 1,272 31 - 68 1,371
amortisation
Capital expenditure 1,635 408 444 2,487 119 - 70 2,676
The unallocated corporate liabilities represent bank loans overdrafts, bonds and
accruals.
The basis of pricing of the inter-segment transfers is the current market price
at which the goods could be bought on the spot market externally but not lower
than 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 - 99,998
Sales to internal customers 20,655 28,550 9,536 58,741 2,734 3,470 - 64,945
Sales 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 - 7,248
Administrative expenses (1,088) (796) (189) (2,073) (40) - (607) (2,720)
Selling and distribution (1,347) (909) (32) (2,288) (45) - (283) (2,616)
expenses
Other operating income / - - - - - - (457) (457)
expenses
Income / loss from exchange - - - - - - (20) (20)
differences
Profit before interest and 640 1,173 645 2,458 86 258 (1,367) 1,435
taxation
Finance expense - - - - - - (237) (237)
Finance income - - - - - - - -
Profit before taxation 640 1,173 645 2,458 86 258 (1,604) 1,198
Taxation - - - - - - (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 - 17,418
Unallocated corporate - - - - - - 1,563 1,563
assets
Unallocated 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 - 1,763
Unallocated corporate - - - - - - 3,851 3,851
liabilities
Unallocated deferred tax - - - - - - 767 767
Consolidated total 584 565 208 1,357 57 349 4,618 6,381
liabilities
Other segment information:
Depreciation and 775 351 131 1,257 34 - 68 1,359
amortisation
Capital expenditure 2,259 480 1,293 4,032 36 - 28 4,096
The unallocated corporate liabilities represent bank loans overdrafts, bonds and
accruals.
Secondary reporting format - geographical segments:
Sales by country Year ended 31 December Year ended 31
2007 December 2006
£ '000 £ '000
Ukraine 32,127 28,459
Denmark 3,658 1,623
Holland 3,432 332
Japan 2,322 122
Germany 1,085 683
North Korea 872 -
Azerbaijan 641 339
Turkey 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 of
milk powders located in Europe. These traders consequently resell the milk
powders to other countries worldwide.
3. Earnings per share
Basic earnings per share has been calculated by dividing net profit attributable
to the ordinary shareholders (profit for the year) by the weighted average
number of shares in issue. The diluted earnings per share take into account the
potential exercise of all options and warrants in existence and in the money at
the date of this report. The options were granted to the Directors of the
Company on 31 January, 2005 and are exercisable until 11 February 2009 at the
price of £0.57. The warrants were granted to the Company's Brokers on 31 January
2005 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 1,095
Weighted number of ordinary shares in issue 41,644,953 41,214,953
Basic earnings per share, pence 7.8 2.6
Weighted 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 41,214,953
Diluted 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 payment
of 0.82 pence per ordinary share for the year ended 31 December 2007 which would
lead 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 the
register as at 6 June 2008. No tax consequences for the Group will arise out of
this transaction as the Group's parent company is an entity registered under the
Jersey 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 210 206
ordinary share proposed and paid during the year relating to the
previous year's results
Interim dividend of 0.60 pence (2006 - 0.10 pence) per ordinary 251 41
share 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 been
accrued at the balance sheet date.
5. Availability or report
The Annual Report will be dispatched to shareholders around 24 May and will be
available on the Company's website, www.ukrproduct.com.
--------------------------
This information is provided by RNS
The company news service from the London Stock Exchange
Wednesday, 15th May 2024
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