Chairman and Chief Executive Officer’s Report:
The economic environment during 2013 continued to be challenging due
to weak demand and an uncertain political situation in Ukraine. At the
same time the dairy sector was mainly marked by the significant increase
in raw milk prices across both domestic and global markets and shortage
of raw milk supply in Ukraine. Within this context, Ukrproduct has
continued to pursue its strategies of business development.
Branded Dairy Products
In
terms of sales, the major branded dairy product groups have performed
well resulting in an aggregated revenue increase of 13% year-on-year.
The profitability however was negatively affected by the escalation of
raw milk prices rising approximately 24% compared to the previous year
average price. The reason behind the price increase were the shortage of
raw milk and consequently stricter competition for supply caused, among
other factors, by the active exports to Russia from the hard cheese
producers. During this time the competitive market environment did not
allow to fully off-set the pressure of the rising costs on the margins
by lifting the consumer prices.
The Company sustained its leading
position in its core categories of packaged butter and processed cheese
with the market shares of 20.8% and 23.2% respectively (Source: expert
estimates based on the data from State Statistics Committee of Ukraine.
The
category of packaged butter was the most affected by the increase in
the price of raw milk which constitutes a very substantial proportion of
this product’s unit cost. Thus despite the 5% increase in revenues the
gross profit has decreased by 55% year-on-year.
Processed cheese
showed an encouraging increase in sales in both revenues and volumes due
to securing new clients and increasing selling prices in line with the
market trends. As result the revenues increased by 28% year-on-year.
However the quickly rising input costs did not allow a similar increase
in gross profit which made up only 3% compared to the previous year.
Hard
cheese category benefitted from the further penetration into the
profitable retail chains and has shown a 27% increase in revenues along
with reaching a 13% gross profitability compared to the zero
profitability in the previous year.
Skimmed Milk Powder
The
segment of skimmed milk powder showed a strong recovery in
profitability from the previous year benefitting from higher domestic
and export demand together with higher prices. However the shortage of
raw milk supply constrained the sales volumes. As result the sales have
declined by an average 10% year-on-year whilst the gross profit [margin]
achieved was an average of 9% compared to the negative profitability in
the previous year.
Beverages
Kvass was further
supported by the sales and marketing initiative and improvement in
geographical coverage. As result the brand of this unique fresh product
was significantly strengthened and the market share improved. However at
the same time the sales were affected by the short high season caused
by poor weather in the summer. Consequently both the revenue and gross
profit declined by 12% and 14% respectively. Ukrproduct is currently
holding the 5th position on the market of kvass with the market share of
4.9% (Source: expert estimates based on the data from State Statistics
Committee of Ukraine).
Distribution Services
The
Company continued to provide distribution services to third parties but
with the focus on growing a quality-driven business with sustainable
margins. Sales of products becoming commoditized and cash consuming have
been reduced. As the issues with VAT refund on export persisted, the
Company has concentrated on domestic operations.
Operational highlights
In
2013 the Group has received a further Euro 1.3 million loan from the
European Bank of Reconstruction and Development (“EBRD”) for the second
stage of modernization project at Starokostiantyniv Dairy Plant. This is
focused on upgrading the production platform for butter and spreads
improving both quality and costs. This part of the project is scheduled
to be launched into operations with an effective start in mid 2014.
Additionally the Company performed structural reorganizations of the
Group aimed at increasing the operational efficiencies and reducing
costs.
Financial overview
Financial results for the year
reflect the sensitivity of dairy business margins to the ongoing high
raw milk prices. The previously buoyant butter category was affected
substantially with margins reduced by half. Effectively this alone
pushed Ukrproduct Group into the overall loss.
Such margin pressure
was mitigated by improving branded dairy sales, the resumption of
profitability in the skimmed milk powder category and reduction in Group
overheads. EBITDA margin fell a percentage point resulting in EBITDA of
GBP 2.2 m (2012: GBP 3.2 m). The operational profit was negated by the
increase in interest charges arising from the EBRD loan. This was
compounded by an exchange difference charge of GBP 361,000 and a tax
charge, net loss notwithstanding, imposed by the Ukrainian tax regime.
Operating
cash flow was positive. The Group started to repay the EBRD loan on
schedule making the first instalment of Euro 437,000 in December 2013.
The Company believes that it will have further support from EBRD should
any rescheduling of repayments be necessary. Other banking facilities
remain in place for working capital requirements.
Ukrproduct Group is substantially a hryvna business and a sustained devaluation will affect translation in other currencies.
Outlook
The unstable political and economic
situation, as to be expected, has had an adverse effect on businesses
throughout Ukraine including Ukrproduct Group.
In the early year the
Company revenues in hryvna were below expectations as consumer
confidence fell, a range of open markets servicing mass and mid-market
closed and a number of agents in other sales channels withdrew from the
market not least for the reason of bad debt risk. Sales were also
adversely affected as higher unit costs due to a currency devaluation of
the hryvna and sustained high raw milk prices has necessitated the
consumer price increases.
Trading has now improved. Sales are
recovering across all product categories. At the same time hryvna
devaluation is having a positive influence on the export revenues thus
Ukrproduct will aim to grow its export oriented sales. More positively
margins are increasing with the declining milk prices. This follows on
an increase in milk availability given the constraints on exports to
Russia.
Plans internal to the Company are little affected as
Ukrproduct has been engaged in restructuring - simplify and modernize –
its operations to improve cost, quality and speed of its supply chain.
This embraces site consolidation, outsourcing of distribution, boosting
sales force efficiency and overheads elimination. This program is
fundamental to the Company turnaround plans. Progress has been made and
the benefits will be are expected to be evident throughout the year
ahead.
In summary Ukraine has been facing political and economical
challenges. Within the context of such headwinds, Ukrproduct has
adjusted its business model to allow viable progress through the current
turbulent environment so far as it can be assessed successfully.
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