Annual Report 2021

Annual Report

Ukrproduct Group

Annual Report 2021

Annual Report

Table of Contents

Annual Report

Chairman and Chief Executive Statement

Trading

Ukrproduct Group Ltd ("Ukrproduct", the "Company" or, together with its subsidiaries, "the Group") is one of the leading Ukrainian producers and distributors of branded dairy foods and beverages (kvass).

During 2021, Ukrproduct experienced several global challenges. There was an acute, ongoing shortage of dairy raw materials, and an increase in imports of dairy products from abroad which hampered the development of the Ukrainian dairy products market. Rising costs of raw materials and consumables, energy and transport created additional problems. Increases in selling prices could not keep pace with the growth in costs and this affected manufacturers in 2021. Manufacturers were forced to raise selling prices in stages and over time, as they faced resistance from retailers.

For FY 2021, consolidated sales stood at £52.0 million, down 6.3% from the previous year (2020: £55.5 million), though in local currency it grew 0.6%.

Due to an increase of 18% in the price of raw milk over the period, the Group limited the volume of raw milk procured and used previously purchased, semi-finished products for production. The Group also suspended operations at its minor production facility in Letychiv due to the rise in raw milk prices in its captive raw milk zone.

Despite the challenging situation and limited marketing activities, Ukrproduct exceeded its expectations in sales of branded dairy products in 2021 achieving 7% growth compared to 2020. This increase in sales was delivered following a revision of the Company's marketing strategy with renewed focus on processed cheese and processed cheese products, where sales have grown by 24% and 98% respectively. The overall Group market share in processed cheese and processed cheese products in Ukraine increased from 14% in 2020 to 21% in 2021.

Also in 2021, the Group resumed cooperation with the largest national retail chain in Ukraine, ATB- Market LLC, for the production of Private Label Cheese. However, due to a significant increase in costs as a result of the above noted factors, the sales margin of processed cheese and other processed cheese products decreased from 20.2% and 7.5% in 2020 to 16.0% and 6.4% in 2021, respectively.

In order to maintain profitability in the Company's key segment, butter, Ukrproduct reduced low-margin sales of packaged butter in retail chains in the second half of 2021 and utilised the butter in the production of processed cheeses. This led to a 46.3% decrease in sales of packaged butter in 2021, but allowed for a significant increase in the category's margin (from 7.4% in 2020 to 10.6% in 2021), which almost maintained the gross margin at 2020 levels.

The Group increased sales of spreads by 8.1% in 2021, despite the market contraction in Ukraine. However, a significant increase in the cost of vegetable fats (up 35% compared to 2020) led to a decrease in sales margin from 19.9% in 2020 to 14.7% in 2021.

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Annual Report

An additional factor contributing to the slight growth of turnover in 2021 (in local currency) was an increase in sales of kvass and beverages of 5.8% in volume and 5.9% in value. Ukrproduct continued to increase its range of products in 2021, launching several new drinks into the market during the year.

The Group expanded its exports in 2021 both in terms of geographic locations and penetration in existing markets, which resulted in an increase in sales of exported branded products by 55.5% in volume (from 3,600 tons in 2020 to 5,600 tons in 2021), and by 60.5% in value (from $7.1 million in 2020 to $11.4 million in 2021). The main growth was delivered in the processed cheese category, sales of which increased 2.4 times in volume (from 1,900 tons in 2020 to 4,600 tons in 2021) and 2.6 times in value (from $3.2 million in 2020 to $8.4 million in 2021).

In 2021, the Group minimized production and export of skimmed milk powder, instead using the raw milk in the production of other semi-processed products.

The export of spreads declined significantly compared to 2020 due to cost inflation, the impact of COVID-19 lockdowns on transportation, and a reluctance by major customers including retailers to pass on the respective price increases.

Additionally, Ukrproduct undertook a number of initiatives to improve its operational cost efficiency, including optimised energy consumption and production standards complemented with increased productivity. The Group was also successful in maintaining the same level of logistical costs as in 2020 due to further optimisation of transportation routes and processes. This was a material achievement offsetting fuel inflation in 2021.

In 2021, the Group operating expenses rose by 12.0% compared to 2020, mainly driven by increases in salaries, legal and audit costs, marketing and fuel expenses.

These trading headwinds were significant and meant the Group's EBITDA in 2021 level reduced by 21.6% to £1.1 million compared with the prior year, with the EBITDA margin decreasing from 2.6% in 2020 to 2.2% in 2021.

The consolidated net profit of Ukrproduct for 2021 amounted to £0.4 million compared with a net loss of £1.2 million loss in 2020.

Financial Position

As at 31 December 2021, Ukrproduct reports net assets of £5.9 million including cash balances of £0.3 million compared to net assets of £5.3 million as of 31 December 2020 with a cash balances of £0.2 million.

For the year ended 31 December 2021, the Group was in breach of several provisions of the loan agreement with the European Bank for Reconstruction and Development ("EBRD"), missed some repayments and the bank has not issued a waiver for the breaches. The Company have been holding negotiations with the EBRD to potentially restructure the loan repayment schedule since June 2021. At this current stage the active phase of negotiations with EBRD have been slowed owing to the ongoing war in Ukraine. At present the EBRD has taken no action to accelerate repayment of the loan.

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Annual Report

Outlook

Trading in 2022 has been severely affected by the Russian invasion of Ukraine and the ongoing war. Dairy processing enterprises will not have the opportunity to maximize production capacity in 2022. For the first 5 months of 2022 raw material supply for processing was down to 2.9 million tons (16% lower than last year). Ukrainian regions have experienced a loss of production capacity in the occupied territory and in the war zone. Moreover, damaged infrastructure, and increases in fuel prices complemented with fuel shortages, have impacted transportation and adversely affected logistics costs, both on the supply and distribution side. As the Ukrainian sea ports have been blockaded by the Russian Navy, there is increased pressure on the remaining routes for export. Ukrproduct expects to make provisions for some of its sales to distributors, which operate in the regions engaged in military activities and cannot pay on time.

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