Ukrproduct : Annual Report 2022

Annual Report

Ukrproduct Group

Annual Report 2022

Annual Report

Table of Contents

Chairman and Chief Executive Statement	3
The Board of Directors	6
Remuneration Committee Report	8
Corporate Governance Report	10
Corporate Social Responsibility Report	13
Directors' Report	15
Statements of Directors' Responsibilities	18
INDEPENDENT AUDITOR'S REPORT	19
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME	25
CONSOLIDATED STATEMENT OF FINANCIAL POSITION	26
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY	27
CONSOLIDATED STATEMENT OF CASH FLOWS	28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	29

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).

While reporting on the results of the financial year 2022, it is necessary to highlight that the unprovoked and illegal aggression of Russia has completely obscured the peace and life of all Ukrainians and placed a heavy toll on the business in Ukraine. The impact of these factors and the resulting uncertainties on the Company's results, balance sheet and cash flows have been considered and are reflected in the figures reported. The Group has had to adjust to the new emergency conditions, the key objectives of which were to ensure the safety of the employees and to maintain operations and assets. One of the key challenges for the Group's operations has been the inability to export goods via Ukrainian Black Sea ports, which significantly reduced the Group's export operations in the first half of 2022. The Group focused its efforts on establishing alternative export routes via the border between Ukraine and the EU.

Ukrproduct's consolidated revenue in FY2022 fell by 19.9% in local currencies. The general decline in sales in the domestic market is due to a decrease in the solvency of consumers, the outflow of Ukrainian population and the loss of part of the Ukrainian sales market due to active hostilities and the temporary occupation of territories in Ukraine. After currency translation, revenue decreased by 24.8% to £39.1 million year-on-year, due to the 6% impact of foreign exchange rates, in particular reflecting the depreciation of the Ukrainian Hryvnia against the British pound.

In the processed cheese and processed cheese product category, sales amounted to £22.6 million, reflecting a revenue increase of 5.4% compared with the previous year on a nominal basis, although sales represented a decline of 18.3% in volume. Sales have fallen due to market trends, the termination of cooperation with some retail networks and losses of some export sales.

In FY2022, butter sales reduced considerably, on a nominal basis, by 61.6% compared with the previous year, to £3.4 million. This was due to the planned butter reduction, especially low-margin contracts. The Company took a flexible approach by focusing on priority sales channels (export, key distributors), and benefiting from margin improvements. A significant price increase of butter in Ukraine and marginality growth assisted to offset much of the volume decline within the segment.

Sales of spreads increased to £5.6 million in FY2022 compared with £4.4 million in the prior year. This constituted an increase in sales of 35.9%, on a nominal basis, but reduction of 1.1% in volume. This is mainly attributable to the losses of some export sales.

Sales generated from skimmed milk powder decreased by 22.1% on a nominal basis to £2.5 million, compared with £3.4 million in the previous year. In terms of volume, skimmed milk powder sales decreased by 44.6% impacted by difficulties with the Black Sea ports in Ukraine. The Group's skimmed milk powder sales and exports from Ukraine in the first half of the year reduced by 69% year on year due to the low demand for the supply of skimmed milk powder to outside countries.

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Annual Report

Sales of kvass and beverages amounted to £1.1 million in FY2022, corresponding to a decline of 33.7% on a nominal basis and 38.3% in terms of volume, in each instance compared with the previous period. The decrease was principally due to the late start of the season due to active hostilities in key kvass sales regions, impacting the period of active sales which was less than half that achieved in FY2021.

In FY2022, the Group's administrative and selling expenses amounted to £4.1 million; a 2.5% decrease compared to FY2021. The Group optimized costs for payroll, rents, communication and banks services. The Group's Central Warehouse was closed, and its functions were transferred to production warehouses in Zhytomyr. Marketing campaigns were also significantly reduced. As a result of a 87.6% increase in fuel prices, transport and logistics costs increased by 26.0% in FY2022 compared to the previous period, to £1.1 million.

Due to the impact of the war, other operating expenses during the reporting period totaled £1.6 million (2021: £0.2 million), including losses from impairment of trade receivables, write-off of materials and finish goods, fines, and VAT losses.

The Group's operations recorded an EBITDA of £1.7 million, representing an increase of 57.2% year on year. The Group's EBITDA margin improved from 2.2% to 4.6%. This notable performance was largely attributed to a significant reduction in marketing and trade marketing activities, several product price increases, a reduction in the cost of production and an increase in production efficiency, and a focus on the most profitable product groups.

Net loss after tax for FY2022 amounted to a loss of £0.8 million, a decrease of £1.2 million compared to FY2021, stemming from the negative currency translation due to the 26% devaluation of the Ukrainian hryvnia against the Euro.

Financial Position

As at 31 December 2022, Ukrproduct reported net assets of £4.6 million including cash balances of £0.4 million compared to net assets of £5.9 million as at 31 December 2021 and a cash balances of £0.3 million.

For the year ended 31 December 2022, the Group was in breach of several provisions of its loan agreement with the European Bank for Reconstruction and Development ("EBRD") and missed repayments for which the bank has not issued a waiver. The Company have been holding negotiations with the EBRD to potentially restructure the loan repayment schedule since June 2021. These negotiations with EBRD are ongoing. At present, the EBRD has taken no action to accelerate repayment of the loan.

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Annual Report

Outlook

The Company continues to make every effort to navigate its strategy in a changing business environment and to respond to new challenges. The Group expects that in 2023 the focus will be placed on maintenance of the existing production facilities, maintaining sales volumes and increasing operating efficiency.

Jack Rowell	Alexander Slipchuk
Non-Executive Chairman	Chief Executive Officer

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