Annual Report 2023

Annual Report

Ukrproduct Group

Annual Report 2023

Annual Report

Table of Contents

Annual Report

Chairman and Chief Executive Statement

Trading

Ukrproduct Group Limited ("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).

In the financial year ended 31 December 2023 ("FY2023"), Ukrproduct continued to face a volatile operating environment due to the challenges of the war in Ukraine. As in 2022, one of the Group's key objectives was to ensure the safety of employees and maintain its operations and assets.

Ukrproduct's consolidated revenue in FY2023 increased by 8.0% in local currency. The general growth in sales was due to a focus on the development of key products, namely processed cheese and processed cheese products, the development of new product categories, snacks and beverages, and the expansion of the Group's presence in retail chains. After currency translation, revenue decreased by 5.4% to £37.0 million year-on-year, due to the 14.1% impact of foreign exchange rates, in particular reflecting the depreciation of the Ukrainian hryvnia against the British pound sterling.

In the processed cheese and processed cheese product category, sales amounted to £24.9 million, reflecting a revenue increase of 25.7% in local currency compared with the previous year. Sales represented an increase in volume of 12.4%. This was mainly attributable to the increase in export volumes to the Middle East, the focus of marketing campaigns on these product categories and the development of new items.

In FY2023, butter sales amounted to £3.1 million, reflecting a revenue increase of 3.4% in local currency compared with the previous year, although sales represented a decline of 4.3% in volume. The Group took a flexible approach by prioritizing key sales channels, such as exports and major distributors. A significant increase in the purchase price of raw milk and bulk butter in Ukraine during the second half of 2023, rising logistics costs and strengthened market competition led to a decrease in the margins of butter sales.

Sales of spreads decreased to £4.6 million in FY2023 compared with £5.6 million in the prior year. This constituted a decrease in sales of 6.0% in local currency and reduction of 12.9% in volume. The decrease was principally due to the increased competition in the market.

Sales generated from skimmed milk powder decreased significantly by 52.1% in local currency to £1.1 million, compared with £2.5 million in the previous year. In terms of volume, skimmed milk powder sales decreased by 43.4%, which continues the dramatic decline seen in the previous period. Due to a significant reduction in prices for skimmed milk powder in 2023, the Group minimized its output of this product for sale in favour of utilizing semi-processed milk protein as an ingredient in the production of processed cheese.

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Annual Report

Sales of kvass and beverages amounted to £1.8 million in FY2023, corresponding to a growth of 90.2% in local currency and 42.8% in terms of volume, in each instance compared with the previous period. The growth was due to the revival of full sales period in FY2023 whereas in FY2022 the sales season in key kvass sales regions was delayed till June due to the Russian invasion of Ukraine.

In FY2023, the Group's administrative and selling expenses amounted to £4.1 million; a 0.4% increase compared to FY2022. In FY2023 the Group focused on carrying out trade marketing activities, in particular providing discounts to customers and consumers, rather than on advertising campaigns. As a result, marketing costs were reduced by 51.3% compared with the previous year. The changes in other types of expenses were mainly driven by sales dynamics and routine business activities throughout FY2023. In contrast, in FY2022, following the start of the Russian invasion of Ukraine, the Group was forced to temporarily suspend or minimise some of its activities and processes.

Other operating expenses in FY2023 totaled £1.1 million (FY2022: £1.6 million), including losses from impairment of stock of supplementary products that the Group was unable to sell for export due to the blockade of Ukrainian Black Sea ports, as well as minor fines and some VAT losses.

The Group's operations recorded an EBITDA of £2.4 million, representing a strong increase of 32.8% year on year. The Group's EBITDA margin improved from 4.6% to 6.5%.

Finance costs in FY2023 grew by 67.6% year on year, to £0.78 million, primarily driven by increased interest rates and recognized additional interest expenses for the European Bank for Reconstruction and Development ("EBRD") loan for the previous periods. In June 2023, notwithstanding the challenging operating environment due to the war in Ukraine, the EBRD decided to exercise its right under the loan agreement and increased the interest rate on the loan retrospectively from September 2021.

Net profit after tax for FY2023 amounted to £0.4 million, a swing of £1.2 million compared to FY2022 (loss: £0.8m), principally driven by the significantly lower currency translation losses, which are due to the devaluation of the Ukrainian hryvnia against the British pound and Euro.

Financial Position

As at 31 December 2023, Ukrproduct reported net assets of £4.5 million including cash balances of £0.4 million, compared to net assets of £4.6 million as at 31 December 2022 and cash balances of £0.4 million.

For the year ended 31 December 2023, the Group continued to be in breach of several provisions of the loan agreement with the EBRD. The Group failed to repay Tranche A (aggregate EUR 2.1 million principal, equivalent to £1.8 million) before the maturity date of 1 December 2022 and has missed interest payments since 1 March 2022. In June 2023 the EBRD notified the Group about a recalculation and an increased interest rate in respect of the aggregate EUR 5.7 million (equivalent to £4.9 million) principal and interest of Tranche A and Tranche B from 1 September 2021.

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Annual Report

The Group has been negotiating with the EBRD since June 2021 to potentially restructure the loan repayment and active negotiations are ongoing but have been slowed down owing to the ongoing war in Ukraine. At present, the EBRD has taken no action to accelerate repayment of the loan. The Group resumed repayment of interest to EBRD starting from December 2023.

In January 2024, after the period end, the Group fully repaid the previous working capital loan of UAH

63.8 million (GBP 1.3 million) and arranged a new facility of UAH 70.0 million (GBP 1.4 million), with the same Ukrainian bank, for general working capital purposes. The new facility has a significantly lower interest of 9% (against 20% on the repaid previous facility).

Outlook

The Group continues to make every effort to navigate its strategy in a very challenging business environment, not least ensuring a stable power supply and responding to new challenges. In 2024, the Group expects to focus on maintaining existing production facilities, sustaining sales volumes and ongoing improvement of operational efficiency.

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The Board of Directors

As of the date of the approval of the 2023 Annual Report, the Board members are as follows:

All directors were re-elected at Annual General Meeting (AGM) on 3 August 2023.

Jack Rowell

Non-Executive Chairman - Retired on June 19, 2024

Jack Rowell has acted as Chairman of a number of companies in the public and private sector, mainly within the food production industry. He was previously an executive director on the board of Dalgety plc responsible for the consumer foods division. Jack also served as Chairman of Celsis plc. He has also been Manager of Bath Rugby, then the Champions of England and the English national team. Prior to this, Jack Rowell was CEO of Golden Wonder Ltd. and Lucas Food Ingredients (also part of the Dalgety Food Group). He was educated at Oxford University and is a Chartered Accountant.

Jack Rowell has retired from the Board as of 19 June 2024 following a 19 year tenure as Chairman.

Oleksandr Slipchuk

Chief Executive Officer

Oleksandr Slipchuk is responsible for the Group's overall performance and strategy implementation and is a founder of Ukrproduct Group. He studied at Far-Eastern High Engineering Marine School in USSR and graduated as a maritime navigator in 1989. Together with Sergey Evlanchik, Oleksandr established the securities house Alfa-Broker in 1994, developed the equity trading business and acquired initial stakes in the companies that later became part of Ukrproduct Group. Later in 1998, Oleksandr took on the executive positions at the Molochnik and the Starokonstantynivsky Dairy plants, Ukrproduct's two main operating assets.

Sergey Evlanchik

Interim Chairman - Executive Director

Sergey Evlanchik received his Master's degree at Oxford University, where he studied Business Administration at Said Business School. Together with Oleksandr Slipchuk, he established the equity trading group, Alfa-Broker in 1994 and after the downturn of equity markets in 1998, Mr Evlanchik refocused his activities on business development in the industrial sector of Ukraine, particularly within the dairy industry, where he joined the companies that would subsequently form Ukrproduct Group in 2004. Sergey then led the Group to its successful listing on the AIM market of the London Stock Exchange in 2005.

In 2011 under the leadership of Sergey Evlanchik the Group secured debt finance with EBRD focused on energy and production efficiency upgrade of the existing production facilities. Sergey is also a partner in Rengy Development that is focused on development of renewable projects - mainly solar power generation in Ukraine.

After Jack Rowell retired from the Board Sergey Evlanchik agreed to become Interim Chairman on a temporary basis, in addition to his role as Executive Director of Ukrproduct.

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Yuriy Hordiychuk

Chief Operational Officer

Yuriy Hordiychuk has been with the Group since 2002. Firstly, he was Director of Procurement, and in 2005 was promoted to Director of Production. The next significant step in the career of Mr. Hordiychuk was taken in 2008, when the owners of Ukrproduct Group appointed him as Chief Operational Officer of the Company. Yuriy has a successful track record of business administration and a degree in "Production Organization Management".

Senior Management

Andrii Honcharuk

Chief Financial Officer

Andrii Honcharuk joined the Group in September 2021 and has overall control and responsibility for all financial aspects of Company strategy. He holds a Master`s degree in Finance and has 17 years' experience in corporate finance, including 11 years in managerial positions.

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Annual Report

Remuneration Committee Report

This report is prepared by the Remuneration Committee of the Board and sets out the Group's policy on the remuneration of the Directors, with a description of service agreements and remuneration packages for each Director in relation to the financial year ended 31 December 2023. Subsequent to the year end, on 19 June 2024 Jack Rowell retired as Chairman and Sergey Evlanchik agreed to become Interim Chairman on a temporary basis, in addition to his role as Executive Director of Ukrproduct, until a replacement independent Non-Executive Chairperson is appointed, at which time the composition of the Board Committees will be updated.

Remuneration Committee

The Remuneration Committee comprises one Non-Executive Director, Jack Rowell. This Committee is scheduled to meet at least twice per annum to advise the Board on the Group's remuneration strategy and to determine the terms of employment and total remuneration of the respective Executive Directors of the Group and of its subsidiary companies, including the granting of share options. Among others, the objective of this Committee is to attract, retain and motivate Executives capable of delivering the Group's objectives. The Remuneration Committee is also responsible for the evaluation of the performance of Executive Directors.

The board members were invited to discuss issues on the Remuneration Committee, which held two meetings during 2023.

Remuneration Policy

The Group's remuneration policy is to provide remuneration packages which:

• are designed to attract, motivate and retain high calibre Executives;
• are competitive and in line with comparable businesses;
• are rooted in practices exercised in countries where the Group operates;
• intend to align the interests of the Executives with those of the shareholders by means of fixed and performance related remuneration; and
• set challenging performance targets and motivate Executives to achieve those targets both in the short and long-term.

Base salary

The Committee on an annual basis reviews base salaries of the respective Executive Directors of the Company and its subsidiaries, taking into account job responsibilities, competitive market rates and the performance of the Executive concerned. Consideration is also given to the cost of living and the Director's professional experience. While determining the base salaries, the Committee also considers general aspects of the employment terms and conditions of employees elsewhere in the Group.

Incentive Bonus Plans and Equity Arrangements

The Committee continues to plan to introduce long-term equity incentive arrangements to make the overall Executive Remuneration structure more performance-related, more competitive and aligned with shareholders' interests subject to an improving environment in Ukraine.

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Annual Report

Service contracts

The appointments of the respective Executive Directors of the Company and its subsidiaries are valid for an indefinite period and may be terminated with three months' notice given by either party at any time.

The Group's policy, including for individual subsidiaries, for compensation for loss of office is to provide compensation that reflects the Group's or a subsidiary's contractual obligations.

Bonus Scheme

The Committee has established a cash bonus scheme for Executive Directors based on the overall performance of the Group and/or respective subsidiary company and attainment of the operating profit targets. Annual bonus for the Executive Directors on the basis of 2022 extraordinary circumstances and financial results was approved in the amount of £110,000 in FY2023.

Non-Executive Directors

The appointments of non-executive Directors are valid for an indefinite period and may be terminated with three months' notice given by either party, at any time. The decision to re-appoint, as well as the determination of the fees of the non-executive Directors, rests with the Board. The non-executive Directors may accept appointments with other companies, although any such appointment is subject to the Board's approval, terms, and conditions of Service Agreements.

Directors' remuneration

Details of the Directors' cash remuneration are outlined below. Information in the table has been audited.

*This relates to fees paid to Yuriy Hordiychuk for general management services under a separate contract to his service contract.

Share based payments

As at 31 December 2023 there are no outstanding options issued by Group.

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Annual Report

Corporate Governance Report

Corporate Governance Policy

As an AIM-quoted company, the Company is required to apply a recognised corporate governance code, demonstrating how the Group complies with such corporate governance code and where it departs from it.

The Directors of the Company have formally made the decision to apply the Quoted Companies Alliance Corporate Governance Code (the "QCA Code"). The Board recognises the principles of the QCA Code, which focuses on the creation of medium to long-term value for shareholders without stifling the entrepreneurial spirit in which small to medium sized companies, such as Ukrproduct Group Limited, have been created. The Company will provide annual updates on its compliance with the QCA Code in its Annual Report.

Subsequent to the financial year end, on 19 June 2024 Jack Rowell retired as Chairman and Sergey Evlanchik agreed to become Interim Chairman on a temporary basis, in addition to his role as Executive Director of Ukrproduct, until a replacement independent Non-Executive Chairperson is appointed, at which time the Corporate Governance Policy and composition of the Board Committees will be updated.

The Board

The Board now consists of three Executive Directors with one of those acting as Interim Chairmanreflecting a blend of different experience and backgrounds. The Board acknowledges that there is now no director who can be classified as an independent Non-Executive Director under the QCA guidelines. The Company is currently searching for a new independent Non-Executive Director.

The Board meets four times a year. At these quarterly meetings the Board, inter alia, discusses the implementation of strategy, reviews financial progress and evaluates the individual and collective accountability of the Board.

The Group's day-to-day operations are managed by the Executive Directors. All Directors have access to the Company Secretary and any Director needing independent professional advice in the furtherance of their duties may obtain this advice at the expense of the Group.

When a new independent Non-Executive Director will be appointed, the Board will be satisfied that it has a suitable balance between independence on the one hand, and knowledge of the Company on the other, to enable it to discharge its duties and responsibilities effectively, and that all Directors have adequate time to fill their roles.

Details of the current Directors, their roles and background are set out on the Company's website at http://ukrproduct.com/en/investor-relations-aim-rule-26/board-of-directors/

The role of the Chairman is to provide leadership of the Board and ensure its effectiveness on all aspects of its remit to maintain control of the Group. In addition, the Chairman is responsible for the implementation and practice of sound corporate governance. The Interim Chairman is not considered independent. A new appointee will be and he or she will have adequate separation from the day-to-day running of the Group.

The role of the Chief Executive Officer is for the strategic development of the Group and for communicating it clearly to the Board and, once approved by the Board, for implementing it. In addition, the Chief Executive Officer is responsible for overseeing the management of the Group and its executive management.

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