ONE BIG FAMILY Annual Report 2015 CHERKIZOVO GROUP IS THE LARGEST VERTICALLY INTEGRATED MEAT AND FEED PRODUCER IN RUSSIA CHERKIZOVO GROUP IS RUSSIA’S TOP PRODUCER OF POULTRY, PORK, MEAT PRODUCTS, GRAIN, AS WELL AS THE COUNTRY’S LARGEST FEED MANUFACTURER. CHERKIZOVO’S ROBUST BUSINESS MODEL IS BASED ON THE SYNERGIES GAINED FROM ITS VERTICALLY INTEGRATED STRUCTURE AND DIVERSIFICATION. THE GROUP’S ASSETS INCLUDE AGRICULTURAL LAND, FEED MILLS, GRAIN ELEVATORS, POULTRY FARMS, PORK COMPLEXES, MEAT PROCESSING PLANTS, AS WELL AS LOGISTICS AND DISTRIBUTION INFRASTRUCTURE. POULTRY DIVISION 44.6 REVENUE, RUB BILLION 470 MEAT PROCESSING DIVISION 29.2 REVENUE, RUB BILLION 191 THIS ALLOWS CHERKIZOVO TO SUSTAIN HIGH ANNUAL GROWTH RATES AND RETAIN A STRONG POSI- TION IN ANY MARKET ENVIRONMENT. SALES THOUSAND TONNES SALES THOUSAND TONNES Company 1-5 Cherkizovo Group’s Competitive Advantages Strong Business Model Performance Overview 8-43 Chairman’s Statement Market Overview Chief Executive’s Review Performance by Division Poultry Pork Meat processing Grain Financial Review Employment Policies Environmental Responsibility Charitable Programmes №1 RUSSIAN №2 RUSSIAN №3 RUSSIAN 77.0 12.6 CONSOLIDATED REVENUE EBITDA 825 SALES FEED PRODUCER POULTRY PRODUCER PORK PRODUCER RUB BILLION RUB BILLION THOUSAND TONNES A LEADER IN EMPLOYING INNOVATIVE TECHNOLOGIES IN RUSSIA’S AGRO- INDUSTRIAL COMPLEX ONE OF THE BEST EQUITY CASES IN RUSSIA’S AGRICULTURAL SECTOR A MAJOR INVESTOR IN RUSSIAN AGRICULTURE 2 PORK DIVISION 16.6 REVENUE, RUB BILLION 164 SALES THOUSAND TONNES GRAIN DIVISION 2.6 REVENUE, RUB BILLION 140 LAND BANK THOUSAND HA Corporate Governance 46-57 Corporate Governance System Directors’ Report Members of the Board Members of the Executive Board Financial Statements 60-113 Financial Statements Shareholder Information 2 4 8 10 14 18 18 22 24 26 28 40 42 43 46 51 52 54 60 113 1 ANNUAL REPORT 2015ANNUAL REPORT 2015 CHERKIZOVO GROUP’S COMPETITIVE ADVANTAGES LEVERAGING ITS COMPETITIVE ADVANTAGES HAS BEEN THE CORNERSTONE OF CHERKIZOVO GROUP’S TEN YEAR SOLID GROWTH. 1 Development strategy, organic growth and M&A 2 Vertically integrated business model 3 Strong brands 4 Distribution and logistics 6 Favourable regulatory environment 8 Stable financial position The Company’s strategy encompasses organic growth through investment in new production facilities, as well as appropriate M&A opportunities that fit with Cherkizovo Group’s business model and can help increase the Group’s market share. As part of this strategy, the Company acquired the poultry facilities of Chicken Kingdom (2007), Mosselprom (2011) and Lisko-Broiler (2014). All Cherkizovo Group assets are equipped with the latest production technologies and are fully up-to-date with biosecurity standards. This approach to the Company’s development has been one of the key drivers behind the Group achieving the leading market position it enjoys today. Its vertically integrated business model enables Cherkizovo Group to be confident in any market environment. The profitability of the meat processing segment is inversely related to that of poultry and pork. When meat prices fall, the profitability of meat processing rises. Cherkizovo Group’s income from animal farming is well diversified, with half of the Company’s revenues and profits derived from poultry. The Company is consistently growing the volume of value-added products it produces, which, in turn, delivers higher margins. Cherkizovo Group has built a portfolio of strong brands across the poultry and meat processing segments. We are particularly proud of our Petelinka poultry brand, which enjoys the highest levels of brand recognition and consumer loyalty, primarily in the strategically important market of Moscow and the Moscow Region, home to approximately 10% of the country’s population. Another poultry brand we actively market across Russia is Chicken Kingdom (Kurinoe Tsarstvo). In 2014, the Company updated it's flagship meat processing brand, developing a more modern and dynamic brand identity. In 2015, the Company launched a new line of ready-to-cook pork products under the Cherkizovo brand distinctively marked with ‘24H’ to signify how we deliver goods from slaughter to store within 24 hours. Steady cash flow and access to low borrowing rates have enabled Cherkizovo Group to invest over RUB 57 billion in production development. The Company also maintains a comfortable debt/EBITDA ratio due to the majority of debt being denominated in rubles. Moody’s Investors Service has confirmed the stability of Cherkizovo Group’s financial position after upgrading the Company’s credit rating to B1 with a stable outlook in August 2015. While the Company has historically reinvested all of its profits, the Group has been paying dividends of at least 20% of its net profit since 2014. Cherkizovo Group’s ‘production belt’ is located in the most densely-populated area of the Russian Federation, c. 350–500 km from the Moscow Metropolitan Area (MMA), the country’s largest market with the highest purchasing power. Our own logistics complexes and refrigerator fleet of over 1,000 vehicles ensure our chilled products can be delivered promptly to 80% of Russia’s population. 5 Our team Cherkizovo Group has a strong management team, both at senior and middle management levels, employing experts professionally trained both in Russia and abroad with excellent track records in leading Russian and foreign companies. In particular, we have engaged a number of senior foreign managers with extensive experience at all levels of operations in some of the leading animal breeding companies of the US and Brazil. The agro-industrial sector and national food safety are key focuses of Russia’s domestic policy, with producers benefiting from favourable local regulations and tax environment. In particular, agricultural manufacturers are not subject to income tax under Russia’s Tax Code, and an interest rate subsidy system is in place to help reduce debt servicing costs. Following Russia’s accession to the World Trade Organisation (WTO) in 2012, import quotas were preserved, while imports exceeding quotas are subject to high customs duties. 7 Leader in innovation Cherkizovo Group is an established leader in innovation among Russian agro-industrial companies. Our technology investments help enhance efficiency and ensure all our products are of the highest quality and meet biosecurity standards. 2 3 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS STRONG BUSINESS MODEL BENEFITING OUR STAKEHOLDERS Cherkizovo Group is a major agro-industrial holding and the largest producer of meat, meat products and feed, operating efficiently and effectively for the benefit of our stakeholders. GRAIN DIVISION FEED PRODUCTION PORK DIVISION POULTRY DIVISION MEAT PROCESSING DIVISION DISTRIBUTION CONSUMERS FINANCIAL HIGHLIGHTS Land bank Self-sufficiency in feed Pork Broiler meat 140 thousand ha 100% 164 thousand tonnes 470 thousand tonnes Production output 191 thousand tonnes Refrigerated trucks 1,000 Cover up to Revenue 80% of the Russian population 77.0 RUB billion Contributing to national food security Bringing food products to 80% of the population Building on export potential Introducing the latest technologies across the entire production chain Promoting healthy eating A major employer committed to best practices For over 10 years, we have proudly carried out our mission to provide Russia with high-quality meat and meat products. Our production facilities are located c. 350–500 km from the Moscow Metropolitan Area (MMA) – the largest market in the country with the highest purchasing power. High-quality products certified to international standards and an ability to leverage insight in local consumption patterns across meat and meat products mean Cherkizovo Group enjoys access to export markets. Cherkizovo Group is an established leader in innovation among Russian agro-industrial companies. We continuously enhance our product mix. In 2015, we launched a unique line of ready-to-cook chilled chicken products for food steamers or multicookers. Steamed food is an excellent option for health conscious consumers. Cherkizovo Group’s leading position in the meat market reflects the good work of our people. We strive to excel in recruitment, professional development and career enhancement, and take a comprehensive approach to employee development and training. 4 4 ANNUAL REPORT 2015 ANNUAL REPORT 2015 5 5 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS PERFORMANCE OVERVIEW CHAIRMAN’S STATEMENT MARKET OVERVIEW CHIEF EXECUTIVE’S REVIEW PERFORMANCE BY DIVISION Poultry Pork Meat processing Grain FINANCIAL REVIEW EMPLOYMENT POLICIES ENVIRONMENTAL RESPONSIBILITY CHARITABLE PROGRAMMES 8 10 14 18 18 22 24 26 28 40 42 43 SALES GROWTH IN THE MEAT PROCESSING SEGMENT SALES VOLUME OF MEAT PRODUCTS +33% IN 2015 825 THOUSAND TONNES 6 6 ANNUAL REPORT 2015 ANNUAL REPORT 2015 7 7 ANNUAL REPORT 2015ANNUAL REPORT 2015 CHAIRMAN’S STATEMENT Developments in 2014 and 2015 have prompted the Russian government to recognise the importance of using Russia’s land resources more efficiently to limit the economy’s dependency on hydrocarbon exports. Efforts to develop the Russian agricultural industry over the past ten years have guaranteed Russia’s food security at a time of economic and geopolitical instability. The weakening ruble has made our pork, poultry and grain products more competitive in the global markets and these segments are well-positioned to become the key drivers of Russian food exports in the near future. We have been focused on these key segments for over ten years and we have made great progress, growing to become Russia’s leading meat producer. Today, our focus has expanded to include grain farming. We see this segment as one of the most promising future growth areas for the Company, offering massive export potential. Corporate Governance Dividends We remain fully committed to best practices in corporate governance. Four members of our Board of seven are independent, ensuring balanced decision-making which takes into account the interests of all shareholders. Our independent directors bring a wealth of expertise and lead all our Board Committees. During 2015, we amended a number of our corporate governance procedures to reflect legislative changes and improve the effectiveness of the Company’s management system. In 2015, we continued to strengthen our management team, reinforcing its In 2015, our Board of Directors approved the Company’s new dividend policy. During 2015, we paid RUB 2.4 billion in dividends for 2014. In addition, in November 2015, the Company distributed another RUB 1 billion to shareholders as dividends for the first six months of 2015. The Board also recommended the payment of a final dividend for 2015. We expect to maintain a steady dividend flow to shareholders at the level of at least 20% of our net profit. WE HAVE BEEN FOCUSED ON OUR KEY SEGMENTS FOR OVER 10 YEARS AND HAVE MADE GREAT PROGRESS, GROWING TO BECOME RUSSIA’S LEADING MEAT PRODUCER. TODAY, OUR FOCUS HAS EXPANDED TO INCLUDE GRAIN FARMING. WE SEE THIS SEGMENT AS ONE OF THE MOST PROMISING FUTURE GROWTH AREAS FOR THE COMPANY AND AN OPPORTUNITY TO BOOST OUR PROFILE IN INTERNATIONAL MARKETS. Our performance Against an adverse macroeconomic backdrop, in 2015, the Company achieved yet another milestone when it launched a joint project with Spain’s Grupo Fuertes to build a turkey production facility with a capacity of 50,000 tonnes per annum. We have successfully completed the construction phase of the project, which has invigorated both us and our partners, who regard our project as one of the best of its kind globally and are willing to invest in expanding production capacity. reputation as the best in the market. I would like to thank all employees of Cherkizovo Group for their hard work, excellent performance and the impressive results achieved in 2015. Today, meat processing is one of our priority areas and we are committed to taking this segment to a new level. Our plans include the construction of new, fully automated production facilities to provide Russian consumers with better, healthier products. The first project – a fully automated meat processing plant featuring state-of-the-art production equipment – will come online in Kashira. The launch of this plant, unique in Russia, is scheduled for early 2017. Outlook Cherkizovo Group’s potential is enormous. I believe we are well- positioned to capture the opportunities presented by the market and Russia’s vast land resources. I am proud of the commitment, expertise and achievements of our team. They are our key success driver and I am confident that, together, we will deliver on our ambitious growth programme. Igor Babaev Chairman Cherkizovo Group 9 8 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS 2. PERFORMANCE OVERVIEW SNAPSHOT OF RUSSIA’S AGRO-INDUSTRIAL MARKET Russian ruble exchange rate US Dollar to Russian Ruble exchange rate, 2013-2016* 75.5 61.0 31.8 38.4 80 60 40 20 0 The depreciation of the Russian ruble has had a direct effect on the entire agricultural market. Since this trend stimulates exports and restricts imports, the available resources and the ruble’s value are interdependent, with the weakening ruble supporting exports in the grain segment and restricting imports in the key meat segments. Available meat resources (supply) Consumption in the key meat categories, million tonnes 74 10.6 2.4 3.8 4.4 72 10.3 2.4 3.3 4.6 70 10.0 2.0 3.3 4.7 Beef Pork Poultry 2013 2014 2015 Per capita meat consuption, kg Source: Federal State Statistics Service, Belstat, Federal Custom Service, EEU, the company’s data Despite the unexpectedly high growth rates of meat production in 2015, “missing” imports led to cut backs in per capita consumption of meat in the Russian market. The only exception was the poultry segment, which demonstrated a slight increase in consumption levels. A likely scenario for 2016 is that consumption in the key meat categories will remain flat throughout the year. 2013 2014 2015 2016 Declines in the share of imports, % Per capita meat consumption, 2015, kg/year Prohibition imposed in August 2014 on certain imports supported prices for key meat products. The ruble’s depreciation combined with administrative measures prompted a sharp decline in imports from overseas and further reduction of their share in available resources. An equally important market driver is the national government, regulating the flows of food exports (grain) and imports (meat, fish, dairy products, fruits and vegetables, and so on). Customs duties were imposed on grain to regulate exports, helping to contain the growth of costs for meat producers. The US Department of Agriculture estimates that during the 2015/2016 season, Russia’s wheat export-production ratio will be 0.39, the same level as it was in the 2014/2015 season. Lower yields and the higher ratio will most likely lead to tougher regulation of the grain market. Source: OANDA * Bloomberg forecast Government regulation Wheat production and export in 2013/2014–2015/2016* 39% 39% 59,080 61,000 36% 52,091 18,568 22,800 23,500 2013/2014 2014/2015 2015/2016 Production, tonnes Export, tonnes Share of exports Source: USDA, * Forecast 10 34 32 22 26 Beef Pork Poultry 13 9 13 10 6 70 75 81 75 111 98 2013 2014 2015 Russia EU Canada Australia USA Biological standard The company’s data Source: USDA, IMF, Eurostat, Federal State Statistics Service, the company’s data Change in output of meat products and key substitutes in 2014–2015 (agricultural industry), % Beef Pork Poultry meat and by-products Sausages -2 11 13 10 Chilled ready-to-cook products Frozen ready-to-cook products Ready-to-serve meat products Tinned meat -18 Soya containing tinned meat Fish and fish products Processed liquid milk Cottage cheese Cheese and cheese products 7 4 6 3 4 0 10 17 The sausage market, the key segment of the meat processing market, has seen a decline in consumption as consumers have shifted towards chilled meat and/or less obvious substitutes (soya-based products and palm oil-based cheese products). Interestingly, the segment of cooked (ready-to-serve) meat products has made solid gains. The consumption of sausages is likely to continue to decline during 2016 since it correlates closely with GDP. Nevertheless, the Group plans to increase sales through enhanced engagement with federal retail chains, improved category management (product mix optimisation) and by maintaining the current level of marketing spending (both in ATL and BTL). -20 -15 -10 -5 0 5 10 15 20 11 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS Cherkizovo Group’s prospects on the international market Average annual changes in retail prices for key food categories in 2014–2015, % Russian exports in 2014–2016*, thousand tonnes 100 62 25 2014 2015 2016F Source: Federal State Statistics Service, EEU, the company’s data * Chicken without feet The Group has an extensive track- record as an exporter of meat, by-products and sausages. However, this distribution channel still accounts for a comparatively small share of overall sales. Growing this share to 10%–20% requires significant efforts to adjust the product mix and adapt the structure of the sales force. The Group is preparing to increase shipments to China and Central Asia and launch sales in the Middle East. With producers from Latin American countries remaining competitive due to accelerated depreciation of their local currencies in 2016, this competition will be a significant growth-limiting factor for sales in overseas markets. Overall, meat exports by Russian companies in 2016 are unlikely to have material impact on the available resources in the Russian market. Factors influencing consumer choice With real household incomes steadily in decline since November 2014, and retail price movements becoming a key driver of consumer choice, food products that demonstrate smaller price increases are the winners among products of comparable nutritional value. The below comparison of changes in retail prices explains why meat producers are facing less pressure than sausage producers. 825 thousand tonnes of meat products sold in 2015 21 12 13 13 17 17 18 19 14 26 1 23 22 31 33 39 75 ** from rye flour and mixed rye-wheat flour *** from premium wheat flour 0 20 40 60 80 Source: Federal State Statistics Service The Group’s market position and prospects for changes in market share Monthly changes in real incomes, %, Y-o-Y, 2009–2015 Russian poultry market, % Russian pork market, % Russian meat processing market, % 58% Prioskolie Cherkizovo Resurs 12 6 6 5 Belgrankorm Severnaya Others 13 12.2 67.8 6.0 5.4 5.2 3.4 78 6 5 4 4 3 Miratorg Rusagro Cherkizovo Agro-Belogorie Siberian Agrarian Group Others Cherkizovo Ostankino ABI PRODUCT Prodo Mikoyan Others 2009 2010 2011 2012 2013 2014 2015 In 2015, the Group increased its market shares in sausages and poultry. Its share of the pork market remained flat year-on-year. The Group’s strategy is to expand its market share across segments to benefit from its economy of scale and offset the growing influence of federal retail chains on the food market. Source: Russian Poultry Union, National Union of Pork Producers, the company’s data 13 20 15 10 5 0 -5 -10 12 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTSjanfebmaraprmayjunjulaugsepoctnovdecjanfebmaraprmayjunjulaugsepoctnovdecjanfebmaraprmayjunjulaugsepoctnovdecjanfebmaraprmayjunjulaugsepoctnovdecjanfebmaraprmayjunjulaugsepoctnovdecjanfebmaraprmayjunjulaugsepoctnovdecянвfebmaraprmayjunjulaugsepoctnovdecBeef (excl. boneless meat)Pork (excl. boneless meat)Chicken (chilled and frozen)Chicken quartersWiener sausageBologna sausageCheese (rennet, hard and soft)Fish (fresh and chilled)Chicken eggs (10)Bread**BuckwheatPasta*** PotatoesCucumbersTomatoesApplesBananas CHIEF EXECUTIVE’S REVIEW Group performance We had a very successful year in 2015, with sales of meat products reaching 825 thousand tonnes and revenues rising by 12% year-on-year to RUB 77 billion. During 2015, we rapidly expanded the production capacity of our poultry division by commissioning the largest and most advanced hatchery in Europe, with capacity of 240 million eggs per annum, and we are now making significant efforts to improve the health of parent flock. Going forward, we expect to cease imports of hatching eggs and day-old chicks. In 2016, as part of the Eletsprom project, we will be launching our first broiler sites, which will greatly strengthen our market position in this segment. Improving efficiency across our poultry processing plants also remains a key focus for the Group. Tambov Turkey, our joint project with Spain’s Grupo Fuertes, has entered the homestretch and our new turkey products are expected to hit the shelves at major retail chains as early as autumn 2016. We anticipate that demand for turkey in the Russian market will continue to grow and we believe this segment has vast growth potential. the higher value-added product mix. These efforts have helped to boost our sales in the segment by 33% year-on- year. This impressive growth has enabled us to consolidate our market position against the backdrop of a waning market. We will continue to invest significant effort in developing the meat processing division and growing its share of the Group’s total sales. We see our existing capacity for high-quality, high value-added products as our key competitive edge, differentiating us from our peers in the agricultural industry. As at the end of 2015, Cherkizovo Group’s operational land bank totalled 90,000 hectares and our gross yields countries enabled domestic producers to step in and fill the gap in the market. The Russian government’s programme to support the meat industry gave it a strong impetus and today the country is self-sufficient in poultry and is on track to achieving self-sufficiency in pork. Cherkizovo Group has acted incisively to take full advantage of the government support measures, making infrastructure investments in a number of regions where we operate. However, these support measures for the market’s major players need to be in place for several more years if a lasting positive effect is to be achieved. THE COMPANY’S HISTORY IS MADE UP OF THE MANY STEPS IT HAS TAKEN TO BUILD UP HIGH-TECH AND SAFE AGRO-INDUSTRIAL INFRASTRUCTURE IN RUSSIA, AND, TODAY, CHERKIZOVO GROUP IS ONE OF THE BIGGEST SUCCESS STORIES IN RUSSIAN AGRICULTURE. We have also established a strong platform for future growth in our pork division, as we have started building a major interregional pig-breeding cluster, with the first finisher sites coming online in the Voronezh Region. In late 2015, a production site in Orel resumed operations, after we populated it with purebred parent stock of high breeding-value from Norway. It was an important step in the further development of the Company’s pork division and, above all, in the genetic improvement of our breeding herds during the next production cycle. In 2016, we expect to fully restore our pork production levels. For our meat processing division, the focus has been on the expansion of production capacity and the renewal of grew by 37%. We have commissioned a grain elevator in Elets and feed mills in the Bryansk and Voronezh Regions. Our total storage capacity is now approaching 900,000 tonnes. Around 1.5 million tonnes of high-quality feed were produced over the past year, bringing our self-sufficiency in feed to almost 100% and placing us at the top of Russia’s leading feed producers. Government regulation and macroeconomic developments Our impressive achievements were, to a large extent, thanks to the measures taken by the Russian government to stimulate agricultural development. The current duties on imported pork meat coupled with restrictions on certain food imports from a number of In 2015, Russian President Vladimir Putin set the government the task of achieving full self-sufficiency in food by 2020. We believe that Cherkizovo Group has a role to play in achieving this goal. Export operations In 2015, we decided to make exports a priority area for Cherkizovo Group. The weakening Russian ruble has given us a pricing advantage on export markets and we intend to take full advantage of this opportunity. As such, we are currently targeting markets in the Middle East, Southeast Asia, and North Africa. 14 15 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS Cherkizovo Group has traditionally focused most of its exports on the CIS region. However, given the favourable market situation we are seeing at the moment, we intend to make ground on this front and expand the geographies we export to. Today, we are actively engaging with relevant agencies in Russia and regulators in our target markets with a view to opening up these markets for Russian producers. A number of our production facilities have already been certified and have obtained export licences for poultry supplies to the United Arab Emirates and Egypt. Similar efforts are being made to engage with other prospective partners in the region, including Iraq. Our strategic partnership dates back to 2012, when we launched our joint project, Tambov Turkey. In 2015, our Spanish partners purchased 5.06% of Cherkizovo Group shares on the open market as a sign of confidence in our team, our business model and production assets. We welcome our new shareholder and will make every effort to promote their interests. Outlook In 2016, we will continue to focus on financial stability and operating efficiency. While we will ensure continued financing for our ongoing capex projects, we will take a more conservative approach as far as new market position. Amid low pork prices, we will continue selling the bulk of our pork output to the Group’s meat processing division to grow the sales of value-added products and enhance our offering of diverse, high-quality products to meet market demand. Over the next three to five years, we expect to double Cherkizovo Group’s market share in the meat processing market. The Company will maintain its focus on grain farming, a relatively new segment for the Group’s business. If conditions are favourable, in 2016, we expect to increase our grain harvest by 50% year-on-year, taking it to 524 thousand tonnes, mostly through yield Our outlook for 2016 is generally positive. We see the current challenges in Russia’s agro-industrial sector and economy more broadly as an opportunity to further consolidate our market position. We intend to achieve that through both organic growth and M&A activity, where appropriate. We believe that within the next two years, our export supplies could represent up to 20% of the Company’s total sales. Our new shareholders Today, the agro-industrial sector is one of the fastest-growing segments of the Russian economy. The considerable potential for further growth and a favourable regulatory environment make it highly attractive to investors. In 2015, Grupo Fuertes, a major European agricultural company based in Spain, purchased a stake in our Company. project launches are concerned. Nevertheless, the implementation of our current initiatives will provide us with a solid production base and support further market expansion. We intend to grow pork sales in the year ahead as the sites previously affected by the African swine fever (ASF) outbreak return to their full capacity and new production facilities come online. We expect to double the pork division’s production capacity by 2018 and further strengthen our improvements. We plan to grow our land bank and improve soil fertility and health. Over the next three to five years, we will continue to focus on improving our self-sufficiency in grain, bringing it to at least 50%, reducing our dependence on third-party suppliers who quote their prices in hard currencies. THE WEAKENING RUSSIAN RUBLE HAS GIVEN US A PRICING ADVANTAGE ON EXPORT MARKETS AND WE INTEND TO TAKE FULL ADVANTAGE OF THIS OPPORTUNITY. AS SUCH, WE ARE CURRENTLY TARGETING MARKETS IN THE MIDDLE EAST, SOUTHEAST ASIA, AND NORTH AFRICA. Sergey Mikhailov Chief Executive Officer, Cherkizovo Group 16 17 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS POULTRY Performance Sales of finished products, thousand tonnes 319 343 260 470 417 2011 2012 2013 2014 2015 Performance indicators, 2013-2015 Meat yield, % of live weight Feed conversion rate per kg of live weight Average growing period, days Average daily gain, g Liveability, % 2013 73.9 1.8 36.6 54.2 94.1 2014 74.3 1.8 37.1 54.5 92.9 2015 2015 vs. 2014, % 75.2 1.7 37.2 56.9 93.4 0.88 –0.07 0.07 2.45 0.54 CHERKIZOVO GROUP OPERATES EIGHT POULTRY FARMS LOCATED IN THE CENTRAL AND VOLGA FEDERAL DISTRICTS. During 2015, the poultry division demonstrated its strongest operating performance, with poultry sales of finished products up 13% to 470,000 tonnes. The increase is largely attributable to growing consumer demand for poultry meat as the most affordable meat product, as well as the commissioning of new production facilities. Investments and development Eletsprom, Russia’s largest poultry breeding facility, located in the Lipetsk Region, was a key project developed by the Company during the reporting period. In 2015, Cherkizovo Group commissioned a hatchery, the largest in Europe and the most advanced in Russia, with capacity of 240 million eggs per annum, at the Eletsprom site. The hatchery uses the latest technology and equipment in line with international best practice and is designed to the strictest standards of biological safety and hygiene. As part of the Eletsprom project, the Company began the construction of a large poultry breeding facility in 2015. The facility, comprising reproduction and parent flock sites, will have a capacity of 128 million eggs per annum. These projects will reduce the Group’s dependency on imported hatching eggs and almost entirely satisfy its demand for day-old chicks. All the facilities of our poultry division were fully certified during the reporting period according to FSSC 22000, a food safety and quality certification scheme, another milestone towards better business relations with large international retail chains and fine-tuning the corporate management system. FSSC 22000 supports the production of high-quality food with highest safety standards. Cherkizovo Group has continued to strengthen its brand portfolio in the poultry division. In 2015, the Group organised a large-scale campaign for the updated Chicken Kingdom brand, targeting the Russian regions outside MMA. Awareness of the Petelinka brand, which is well-known in the Moscow Metropolitan Area, reached a record high of 94%. Ongoing efforts of the Company to increase output, improve product quality and set new industry standards in efficiency and safety have won international recognition. In 2015, Cherkizovo Group was included in the international list of top-rated poultry producers by WATT Poultry USA. The weakening ruble opens new prospects for poultry exports. Potential export markets for Russian products include the Middle East, South-East and Central Asia, Africa and the CIS. In 2015, Cherkizovo Group’s poultry farms were inspected by international veterinary experts. In December, Vasilievskaya Poultry Farm was visited by veterinary officials from the United Arab Emirates (UAE) to audit its sanitary conditions and quality standards and examine the veterinary control procedures adopted in Russia. 470 thousand tonnes of poultry products sold Petelinka is Russia’s leading brand of chilled poultry products. There are more than 100 products in the Petelinka's portfolio. Chicken Kingdom is one of the nation’s favourite chilled and frozen poultry brands. The chickens used for Chicken Kingdom products are raised in the ecologically clean Bryansk and Lipetsk regions. 18 19 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS TAMBOV TURKEY Tambov Turkey, a joint project of Cherkizovo Group and Grupo Fuertes, a major European agricultural company based in Spain, grew nearer to completion in 2015. The project is for the construction of a turkey breeding and processing facility in the Tambov Region with a live weight capacity of 50,000 tonnes per annum. The first phase of the project, including a state- of-the-art hatchery with an annual capacity of 5.9 million eggs, was put into operation in September. Approximately RUB 8 billion has been invested in the project. The first products from this facility are expected in autumn 2016 when Grade Maker breed turkey meat, currently unavailable on the Russian market, will be supplied to retail chains. Cherkizovo’s turkey will differ from that currently available in Russia in its compact size and relatively small weight (7–9 kg), perfect for home cooking. Cherkizovo’s turkey meat also contains half the fat of breeds commonly available on the Russian market, making it the leanest poultry meat on the market. For over 10 years we have been proudly carrying out our mission of providing the Russian population with high-quality meat products. OVERALL INVESTMENT INTO THE PROJECT 8 RUB BILLION IN SEPTEMBER 2015, A NEW STATE-OF-THE-ART HATCHERY WITH A CAPACITY OF 5.9 MILLION EGGS PER ANNUM WAS PUT INTO OPERATION 20 20 ANNUAL REPORT 2015 ANNUAL REPORT 2015 21 21 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS PORK CHERKIZOVO GROUP IS A TOP 3 RUSSIAN PORK PRODUCER. Assets Performance The Group operates 15 major pig breeding facilities in the Central and Volga Federal Districts, all located in close proximity to the Group’s grain elevators and feed mills and constructed in line with the highest international standards. The excellent location of the pig breeding facilities contributes to veterinary and biological safety, as well as the high quality of the pork. Each facility consists of a multiplication site for 5,700 sows, a nursery site for 18,000 animals and two finisher sites for 18,000 pigs each. Having started its pig business from scratch, the Company has grown to producing almost 1.5 million animals per annum. Sales, thousand tonnes, 2013-2015 91 104 158 170 164 2011 2012 2013 2014 2015 In 2015, the pork division demonstrated strong performance, with the best feed conversion rates at key finisher sites in Lipetsk, Penza and Tambov, while the weekly insemination rate reached 300 sows per commercial sow farm. These figures lay a solid foundation for organic production growth in 2016. Performance indicators, 2013-2015 1.5 million pigs raised by the Company in 2015 Pigs weaned per crate per year 107.9 109.4 115.9 Average hog weight, kg Feed conversion rate Finisher loss, % Products sold/sow, kg 110.5 117.3 121.4 2.95 10.9 2.68 2.61 7.1 8.0 2,035 2,131 2,138 5.9 3.5 –2.6 0.9 0.3 2013 2014 2015 2015 vs. 2014, % Investments and development In 2015, Cherkizovo Group offered its customers a new range of Cherkizovo branded ready-to-cook pork products marked with ‘24H’ to denote that they are delivered from slaughter to store within 24 hours. The Group continued its investments in the pork division throughout 2015. During the reporting period, Cherkizovo began its new pig-breeding cluster project that is set to bring together the pork production facilities in the Lipetsk and Voronezh Regions. The project will employ the latest technology, which has never been used in Russia before, to cut construction costs by almost 30%. As part of this RUB 9 billion project, two facilities, each with 14 finisher sites and annual production capacity of 294,000 animals (35,000 tonnes of live weight), are being constructed. Construction is scheduled to be completed in late 2017 or early 2018. A specific feature of the new cluster will be the absence of dedicated nursery. At present, 28-day old piglets are sent to the nursery and finisher site and kept there for 6 months before slaughtering. The absence of dedicated nurseries will reduce risks inherent in animal transportation between the sites and improve the overall performance of the division. As part of the project, Russia’s largest feed mill was commissioned in the Voronezh Region in 2015. Once the mill reaches its full capacity of 500,000 tonnes of feed per annum, Cherkizovo Group will fully satisfy its internal demand for feed. The key ingredient of feed will be grain produced in the Voronezh Region. This serves as an excellent example of how the Group’s vertically integrated business model guarantees the high quality of the pork offered to end consumers. Completion of the project will increase Cherkizovo Group’s output capacity by 70,000 tonnes of pork per annum and secure its leading position on the Russian market. In an effort to optimise the production process and improve operations management practices, Cherkizovo Group reorganised the pork division by reducing the number of legal entities and merging them into a single company, Cherkizovo Pig Breeding. 1.9 RUB billion Investments in the pork division in 2015 22 23 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS MEAT PROCESSING Performance Product sales, thousand tonnes 145 127 135 144 191 2011 2012 2013 2014 2015 Performance indicators, 2013-2015 Bone-in-meat, % of live weight Product sales per employee, tonnes Output per workshop employee, tonnes 70.6 28.2 30.0 73.0 31.3 40.6 73.0 40.7 51.7 0 30.0 27.3 2013 2014 2015 2015 vs. 2014, % +33% Sales growth in the segment THE MEAT PROCESSING DIVISION IS VIEWED BY CHERKIZOVO GROUP AS A STRATEGIC BUSINESS AREA. The Company plans to increase the share of high value-added products in its sales and expand its footprint in the sausage and ready-to-cook products market. Тhe meat processing division demonstrated impressive growth of 33% in 2015 despite the challenging market conditions. The new slaughtering capacity commissioned during the reporting period, a strong focus on product marketing and an improvement of the Group’s market offering in terms of product range and volumes were the key drivers behind this growth during 2015. Cherkizovo Group demonstrated, yet again, that it is quick to capture market demand and react with the best meat products amid strengthening competition. With its own upstream link in the production chain, the Company has a strong advantage over its competitors in the meat processing market. The meat processing division increased its share of intra-group procurement during 2015, thus securing high product quality and uninterrupted supplies. In 2015, supplies from other Group companies accounted for 74% of raw materials sourced by the meat processing facilities, compared to 55% in the previous year. Investments and development In 2015, Cherkizovo Group continued to invest in new production facilities, with the Dankovsky Meat Processing Plant in the Lipetsk Region put into operation in the reporting period to become a key supplier of bone-in-meat for the Company’s meat processing facilities. Following upgrades, the slaughtering line capacity at the plant was increased to 220 animals per hour, or 124,000 tonnes of live weight per year. The upgraded facility features state-of-the-art equipment meeting the highest global standards of efficiency and safety. Total investments in the project exceeded RUB 1.5 billion. In addition, in 2015, the Company launched the large-scale Monoplant project at the Penza, Ulyanovsk, Dankov and Otechestvennyi Product sites in order to focus production on a narrower range of products. This approach will increase labour efficiency, speed up staff training, cut down on switch-over losses and improve operations management. Following a retrofit, Cherkizovsky Meat Processing Plant expanded its sausage production capacity. In 2015, Cherkizovo Group continued to develop and strengthen its Cherkizovo brand with a strong focus on the promotion of chilled meat products. This effort was supported by a major advertising campaign across national media outlets. Cherkizovo has been one of Russia’s most popular brands for 40 years. Its portfolio includes nearly 250 types of sausage products, as well as chilled and frozen meat, ready-to-cook products, ham and deli meats. In the chilled meat and ready-to- cook products segment, Cherkizovo has a unique advantage – its 24H brand. Cherkizovo products marked ‘24H’ are delivered from slaughter to store within 24 hours. 191 thousand tonnes Product sales 24 25 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS GRAIN Assets, 2013-2015 Assets Land bank, thousand ha Crop areas, thousand ha Feed mills, pcs 2013 140 40 7 2014 140 58 8 2015 2015 vs. 2014, % 140 85 9 - 48 13 45 Grain elevator capacity, thousand tonnes 398 588 854 Performance Grain yield in 2013–2015 2013 2014 2015 Yield, thousand tonnes Cultivated area, thousand ha Yield, thousand tonnes Cultivated area, thousand ha Yield, thousand tonnes Cultivated area, thousand ha 78 43 23 13 14 3 16 125 5 7 6 4 2 42 25 23 19 8 21 10 5 7 8 8 150 116 6 17 23 20 175 40 242 58 333 43 16 2 6 7 11 85 Crop Wheat Corn Barley Peas Sunflower Others Total Gross yield, 2013-2015, thousand tonnes 333 242 174 Feed output, 2013-2015, thousand tonnes 1,4 1,5 1,1 2013 2014 2015 2013 2014 2015 26 THANKS TO THE EXPANSION OF CROP AREAS AND INVESTMENTS IN SOIL IMPROVEMENT AND INFRASTRUCTURE, THE GRAIN DIVISION DEMONSTRATED YIELD GROWTH OF 37% IN 2015. Following this success, in 2015, Cherkizovo Group strengthened its leading position on the feed market, producing more than 1.5 million tonnes of high-quality feed. In 2015, new technology, improving soil fertility, investing in advanced machinery and modernising grain elevators were the key development areas of the grain division. The division demonstrated excellent performance in the reporting year, with yield growth of 37%, reaching a record high of 333,000 tonnes. One of the growth drivers was the integration of a new company in Tambov (with crop area of 15,000 hectares) into the grain division, which led to the gross yield of grain crops increasing by almost 50,000 tonnes. In 2015, Cherkizovo Group launched a soil improvement (lime treatment) project in the Voronezh, Lipetsk and Orel Regions, reducing soil acidity and increasing soil nutrients in order to secure higher yields in the future. 37% Cherkizovo group increased grain yield Investments and development In 2015, the Company launched a corn production project (AHI) in the Lipetsk Region, to enable high corn yields to be maintained on the same fields for 4–5 consecutive years. Another key area of focus for the grain division during the reporting period was the development of infrastructure. For instance, the Group put the first grain storage facility of the Eletsprom project in the Lipetsk Region into operation in 2015. With this new 200,000 tonne elevator, the Company’s aggregate storage capacity is now more than 850,000 tonnes of grain. Investments in the grain elevator exceeded RUB 1.4 billion. The neighbouring Voronezh Region received one of Russia’s largest feed mills, with a capacity of 500,000 tonnes per annum. The feed mill features the latest equipment by Ottevanger Milling Engineers and PTN. Once the mill reaches full capacity, it will be able to fully meet the Voronezh cluster’s demand for high-quality feed. In-house feed production facilities and innovative feed improve the biological safety of pigs and poultry and reduce production costs. Cherkizovo Group will continue its efforts to use advanced technologies to enhance crop yields, both in gross terms and per hectare. Feed production is expected to rise once the feed mills in Voronezh and Bryansk reach their full capacity. 27 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS FINANCIAL REVIEW IN 2015, CHERKIZOVO’S RUBLE REVENUE INCREASED BY 12% YEAR-ON-YEAR TO RUB 77.0 BILLION, WITH ITS EBITDA MARGIN AT 16%. 2015 was a challenging year for Cherkizovo Group. Facing tough market conditions, a depreciating ruble and a decline in consumers’ real income, agricultural enterprises found themselves in a challenging environment. Business review The Group is a top 3 producer in the poultry, pork and processed meat markets and is the largest feed manufacturer in Russia. Despite a slight rise year-on year, average poultry and pork prices slipped in Q4. In the face of these adverse circumstances, Cherkizovo Group continued to pursue its large-scale investment programme. The Company’s revenues climbed 12% year-on-year to RUB 77 billion, with output of meat products exceeding 825 thousand tonnes. At the same time, gross profit slid 27% year-on-year due to higher foreign currency denominated costs. The poultry and meat processing segments posted the highest production growth. During 2015, the Company also focused on ramping up its sausage and ready-to- cook production volumes, an area seen as an additional revenue driver. Reduced consumer purchasing power will inevitably lead to consolidation in the consumer sector, enabling Cherkizovo Group to seize the opportunity and expand market share. Revenue of RUB 77.0 billion Our principal operations include: the production and sale of processed meat products, primarily in the European part of Russia; breeding of broilers; the processing and sale of chilled and frozen poultry products produced at facilities in the Bryansk, Voronezh, Kursk, Lipetsk, Moscow, Penza, and Tula Regions; breeding of pigs at our facilities in the Vologda, Voronezh, Lipetsk, Moscow, Orel, Penza, and Tambov Regions; the sale of live pigs; production of grain on the Company’s land bank. We also carry out trading and distribution activities and produce feed, which is used by our poultry and pork facilities. The Company’s operations are structured into four business divisions: poultry, pork, meat processing and grain. The poultry division consists of eight poultry breeding facilities and their associated trading company. The pork division operates 15 state-of- the-art breeding facilities. The meat processing division is made up of six processing plants producing sausages, hams, ready-to-cook meats and other meat products. This division also carries out associated sales and trading operations. In 2015, the grain division cultivated 85,000 hectares of land. Cherkizovo Group operates nine feed mills to meet the needs of its divisions. All our operating divisions are also involved in other non-core activities. The expenses of our management company are recorded under Corporate Expenditure. LUDMILA MIKHAILOVA Chief Financial Officer In 2015, we sold over 825 thousand tonnes of meat products, outperforming all our industry peers. According to the Russian Poultry Union and our own estimates, we have the largest sales of poultry in Moscow and the Moscow Region, and we are the second largest producer in Russia. According to the National Pig Farmers Union, we are also the third largest producer in Russia’s highly-fragmented pork market. According to our management team’s estimates, which are based on a number of market surveys, Cherkizovo ranks first in the meat processing market. In 2015, total sales reached 470 thousand tonnes of sellable weight in the poultry division, 164 thousand tonnes of live weight in the pork division and 191 thousand tonnes in the meat processing division. Grain sales totalled 267 thousand tonnes. The Group also produced approximately 1.5 million tonnes of feed for internal consumption. Market and regulatory review Seasonality INCOME TAX BENEFIT In line with the Tax Code of the Russian Federation, agricultural producers benefit from a zero income tax rate. For Cherkizovo Group, this rate applies to the poultry, pork and grain operations. However, the zero tax rate does not apply to our trading, distribution, feed production and meat processing segments. As a result of this tax benefit, our effective tax rate was 2.5% in 2015 (2014: 0.1%), whereas the general income tax rate in Russia is 20%. REIMBURSEMENT OF INTEREST EXPENSE Agricultural enterprises are also eligible for reimbursement of interest expense on investment loans equal to the official Central Bank of Russia (CBR) refinancing rate (the “refinancing rate”), and on working capital loans as per the state support (subsidising) rate, that equals the refinancing rate multiplied by 1.1 plus the CBR key rate (key rate) minus the 2014 inflation rate (11.4 %). They are also entitled to receive reimbursement of up to one-third of the refinancing rate from regional authorities. In 2015, the refinancing rate was 8.25%; between 1 January and 1 August 2015, the key rate was fixed at 17%; from 1 August to 31 December 2015, the key rate was fixed as of the date of a loan agreement or an addendum thereto changing the interest rate amount. We account for such subsidies on a net basis, together with accrued interest. As at 31 December 2015, the portion of subsidised loans in the portfolio was 81% (2014: 90%), which offset our interest expense by RUB 2.6 billion (2014: RUB 2.0 billion). As at 31 December 2015, our effective interest rate on loans and borrowings adjusted for accrued subsidies ranged from 4.71% to 6.70%, while the interest rate on loans outstanding as at the end of the year was between 12.54% and 13.49%. As at 31 December 2015, the effective cost of debt in ruble terms was 3.3% (2014: 3.5%). The interest expense subsidies do not apply to non-production agriculture-related operations, such as trading and distribution, M&A transactions, and meat processing operations. Sales volumes and average selling prices in each of our divisions are generally the highest in Q2, at the start of the summer season, and in Q4, at the beginning of the New Year holiday season. The typical post-holiday drop in consumer spending, along with lower meat consumption due to the Orthodox Great Lent, make Q1 sales and margins the lowest of the year. Seasonality also affects average selling prices, as retail consumers generally buy more high-end and high-quality products in Q4. In addition, lower feed costs during the harvest season drive higher profit margins for pork and poultry production in 2H. Interest rates and foreign exchange differences Our products are typically priced in rubles, and our direct costs, including raw materials (other than some feed components and veterinary supplies), payroll, and transportation expenses are also largely ruble- denominated. Other costs, such as interest expense, are incurred in rubles and a very minor portion is in euros. In 2015, the ruble continued to depreciate against global currencies. According to the Central Bank of Russia, the official exchange rates as at 1 January 2015 were 56.26 rubles per US dollar and 68.34 rubles per euro; as at 31 December 2015, these exchange rates were 72.88 and 79.70, respectively. Thus, in 2015, the ruble depreciated against the US dollar by 30%, and against the euro by 17%. In 2015, interest expense was up 33% year-on-year to RUB 3.9 billion. The main drivers behind this growth were a 48% year-on-year increase in total debt to RUB 41.2 billion (2014: RUB 27.8 billion), as well as a rise in interest rates on bank loans and credit facilities. Net interest expense for 2015 was RUB 1.4 billion, up 42% from RUB 1.0 billion in 2014. To help offset the higher interest expense, the Group accrued RUB 2.6 billion of subsidies in 2015, a year-on-year increase of 29%. As at 31 December 2015, 99% of our long-term and 100% of our short-term outstanding debt (excluding finance leases) consisted of ruble-denominated loans. 28 29 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS FINANCIAL REVIEW Key highlights PJSC Cherkizovo Group results The Group’s consolidated financial statements for the year ended 31 December 2015 have been prepared in accordance with International Financial Reporting Standards (“IFRS”) for the first time, the transition date to IFRS being 1 January 2014. Consequently, comparative data for 2014 is also shown under IFRS. The main difference between IFRS and the reporting standards previously used (US GAAP) is the revaluation of biological assets, which are shown as a separate line ‘Net change in fair value Consolidated income statement data (in thousands of rubles) Sales incl. Sales volume discount incl. Sales returns of biological assets and agricultural produce’ in the consolidated statement of profit or loss and other comprehensive income. The Company’s consolidated revenue increased by 12% year-on-year and reached RUB 77.0 billion in 2015 (2014: RUB 68.7 billion). Gross profit fell by 27% year-on-year to RUB 19.1 billion (2014: RUB 26.1 billion). Operating expenses as a percentage of sales increased to 15% in 2015 from 14% in 2014. In 2015, net income was RUB 6.0 billion (2014: RUB 16.5 billion). The majority of this decrease is due to the large amount of expenses pegged to foreign currencies, higher interest expense and the revaluation of biological assets, which drove our net income down by RUB 1.2 billion in 2015 (compared to gain of RUB 3.2 billion in 2014). Adjusted EBITDA decreased by 26% year-on-year in 2015 to RUB 12.6 billion (2014: RUB 17.0 billion). The adjusted EBITDA margin for 2015 fell to 16% (2014: 25%). Earnings per share dropped by 64% to RUB 136.98. Net change in fair value of biological assets and agricultural produce Cost of sales Gross profit Gross margin Operating expenses Operating Income Operating margin Income before income tax and minority interest Net income attributable to Cherkizovo Group Net profit margin Weighted average number of shares outstanding Earnings per share Net income attributable to Cherkizovo Group per share – basic and diluted Consolidated Adjusted EBITDA reconciliation* Income before income tax and minority interest Add: Gain from bargain purchase Interest expense, net of subsidies Interest income Foreign exchange loss Depreciation and amortisation Net change in fair value of biological assets and agricultural produce Loss on disposal of subsidiaries Consolidated Adjusted EBITDA* Adjusted EBITDA Margin Year ended 31 December 2015 77,032,622 (5,343,155) (1,034,171) (1,163,727) (56,720,216) 19,148,679 24.9% (11,614,653) 7,534,026 9.8% 5,871,749 6,007,482 7.8% 43,855,590 Year ended 31 December 2014 68,668,409 (3,571,085) (679,903) 3,177,764 (45,719,342) 26,126,831 38.0% (9,469,666) 16,657,165 24.3% 16,613,516 16,490,173 24.0% 43,851,090 136.98 376.05 5,871,749 16,613,516 – 1,364,766 (285,762) 646,802 3,826,525 1,163,727 42,569 12,630,376 16.4% (1,378,394) 964,119 (279,962) 739,117 3,481,944 (3,177,764) – 16,962,576 24.7% 12 months ended December 31, 2015 Consolidated Selected Financial Data (in thousands of rubles) Total Sales including other sales Meat- Processing Poultry Pork Grain Feed Corporate assets/ expendi- tures Inter- division Combined 29,150,254 44,590,211 16,579,185 2,580,713 27,855,810 27,205 (43,750,756) 77,032,622 416,945 1,511,443 172,835 57,512 including sales volume discount (3,954,954) (1,388,201) – – Interdivision Sales (32,016) (2,640,958) (11,502,192) (2,117,129) (27,458,461) Sales to external customers (Sales) 29,118,238 41,949,253 5,076,993 463,584 397,349 % of Total sales 37.8% 54.5% 6.6% 0.6% 0.5% – – 27,205 (647,109) 1,538,831 – – – (5,343,155) 43,750,756 – 27,205 0.0% – 77,032,622 0.0% 100.0% Net change in fair value of biological assets and agricultural produce Cost of Sales Gross profit Gross margin – (283,880) (1,387,143) 326,376 – – 180,920 (1,163,727) (24,835,957) (35,901,044) (10,529,115) (1,827,087) (27,033,691) (13,484) 43,420,162 (56,720,216) 4,314,297 8,405,287 4,662,927 1,080,002 822,119 13,721 (149,674) 19,148,679 14.8% 18.9% 28.1% 41.8% 3.0% n/a 0.3% 24.9% Operating expenses (3,060,987) (5,061,999) (662,041) (242,294) (590,873) (2,089,879) 93,420 (11,614,653) Operating income / (expense) 1,253,310 3,343,288 4,000,886 837,708 231,246 (2,076,158) (56,254) 7,534,026 Operating margin 4.3% 7.5% 24.1% 32.5% 0.8% n/a 0.1% 9.8% Other income and expenses, net (163,317) 794,746 (73,852) 15,555 (96,885) (314,189) (459,569) (297,511) Financial expenses, net (202,541) (628,523) (356,155) (14,277) (192,010) (430,748) 459,488 (1,364,766) Division profit / (loss) Division profit margin Supplemental information: Income Tax expense Depreciation expense Adjusted EBITDA reconciliation 887,452 3,509,511 3,570,879 838,986 (57,649) (2,821,095) (56,335) 5,871,749 3.0% 7.9% 21.5% 32.5% – 0.2% n/a 0.1% 7.6% (110,423) (8,040) 6,698 5,962 4,421 (47,678) 467,157 1,862,574 869,643 167,236 399,855 60,060 – – (149,060) 3,826,525 Division profit / (loss) 887,452 3,509,511 3,570,879 838,986 (57,649) (2,821,095) (56,335) 5,871,749 Add: Interest expense, net Interest income Foreign exchange loss/(gain) 202,541 628,523 356,155 14,277 192,010 430,748 (459,488) 1,364,766 (10,405) (175,026) 205,719 (614,651) (11,102) 71,822 (330) (25,059) (523,438) 459,598 (285,762) 17,144 129,179 837,589 – – 646,802 3,826,525 Depreciation and amortisation 467,157 1,862,574 869,643 167,236 399,855 60,060 Net change in fair value of biological assets and agricultural produce Loss on disposal of subsidiaries Adjusted EBITDA* Adjusted EBITDA Margin – – 283,880 1,387,143 (326,376) – 42,569 – – – – – (180,920) 1,163,727 – 42,569 1,752,464 5,494,811 6,287,109 710,937 638,336 (2,016,136) (237,145) 12,630,376 6.0% 12.3% 37.9% 27.5% 2.3% n/a 0.5% 16.4% Reconciliation between net division profit and income attributable to Cherkizovo Group Total net division profit Net income attributable to non-controlling interests Income taxes Net income attributable to Cherkizovo Group 5,871,749 (13,327) 149,060 6,007,482 30 31 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS FINANCIAL REVIEW Poultry Division Pork Division Sales volumes grew by 12.9% year-on- year to 470.4 thousand tonnes of sellable weight in 2015 (2014: 416.6 thousand tonnes). During the course of 2015, the average price of poultry products continuously fell on a quarter-on-quarter basis as a result of increasing market supply, which was partly driven by a drop in consumers’ real income. For 2015 as a whole, the average price increased by 4.2% year-on-year to 94.52 RUB/kg from 90.70 RUB/kg in the previous year. Total sales for the division increased by 19% year-on-year to RUB 44.6 billion (2014: RUB 37.5 billion). Gross profit fell by 32% year-on-year to RUB 8.4 billion from RUB 12.4 billion in 2014 due to the increased costs of feed components, hatching eggs and veterinary supplies, which are pegged to foreign currencies. The gross margin for 2015 decreased to 18.9% from 33.2% in the previous year. Operating expenses as a percentage of sales remained flat year-on-year at 11%. Operating income fell by 59% year-on-year to RUB 3.3 billion from RUB 8.2 billion in 2014, while the operating margin fell to 7.5% from 21.8% in 2014. Net income for the division fell 61% year-on-year to RUB 3.5 billion as a result of the increased costs of feed components and other raw materials pegged to foreign currencies. In 2015, adjusted EBITDA dropped 38% year-on-year to RUB 5.5 billion (2014: RUB 8.8 billion), while the adjusted EBITDA margin fell to 12.3% from 23.5% in 2014. In 2015, sales volumes in the pork division fell by 3.8% year-on-year to 163.7 thousand tonnes, compared to 170.2 thousand tonnes in 2014, as Cherkizovo Group made a strategic move to depopulate the Orel sow farm in order to improve genetics for future production. The average price of pork produced by the Company increased by 3.5% year-on-year to 99.57 RUB/kg, compared to 96.25 RUB/kg in 2014. However, there was a sharp drop in Q4 to 85.39 RUB/kg from 107.44 RUB/kg in Q3, a decrease driven largely by seasonality, as well as a reduction in consumers’ real income. Total sales in the pork division were flat year-on-year as a result of higher inter-company sales to the meat processing segment. In 2015, gross profit stood at RUB 4.7 billion, a year-on-year drop of 50%, as feed components and medication costs are denominated in foreign currencies. The segment’s gross margin fell to 28.1% from 56.1% in 2014. Operating expenses as a percentage of sales increased to 4% in 2015 from 2% in 2014, driven by the loss on sow cull sales, as well as other G&A expenses. Operating income fell by 55% year-on-year to RUB 4.0 billion from RUB 8.9 billion in 2014. Net income decreased by 59% year-on-year to RUB 3.6 billion (2014: RUB 8.6 billion). In 2015, adjusted EBITDA fell to RUB 6.3 billion, a year-on-year decrease of 22%. The adjusted EBITDA margin fell to 37.9% from 48.5% in 2014. Poultry division income statement data Pork division income statement data (in thousands of rubles) Total Sales Interdivision sales Sales to external customers Net change in fair value of biological assets and agricultural produce Cost of sales Gross profit Gross margin Operating expenses Operating Income Operating margin Other income and expenses, net Interest expense, net Division profit Division profit margin Poultry division Adjusted EBITDA reconciliation* Division profit Add: Interest expense, net of subsidies Interest income Foreign exchange Depreciation and amortisation Net change in fair value of biological assets and agricultural produce Poultry division Adjusted EBITDA* Adjusted EBITDA Margin Year ended 31 December 2015 Year ended 31 December 2014 44,590,211 (2,640,958) 41,949,253 (283,880) (35,901,044) 8,405,287 18.9% (5,061,999) 3,343,288 7.5% 794,746 (628,523) 3,509,511 7.9% 37,529,591 (1,344,655) 36,184,936 1,236,570 (26,317,750) 12,448,411 33.2% (4,257,893) 8,190,518 21.8% 1,150,788 (389,830) 8,951,476 23.9% 3,509,511 8,951,476 628,523 (175,026) (614,651) 1,862,574 283,880 5,494,811 12.3% 389,830 (326,404) (824,384) 1,847,365 (1,236,570) 8,801,313 23.5% 32 (in thousands of rubles) Total Sales Interdivision sales Sales to external customers Net change in fair value of biological assets and agricultural produce Cost of sales Gross profit Gross margin Operating expenses Operating Income Operating margin Other income and expenses, net Interest expense, net Division Profit Division profit margin Pork division Adjusted EBITDA reconciliation* Division Profit Add: Interest expense, net of subsidies Interest income Foreign exchange loss/(gain) Depreciation and amortisation Net change in fair value of biological assets and agricultural produce Loss on disposal of subsidiaries Pork division Adjusted EBITDA* Adjusted EBITDA Margin Year ended 31 December 2015 Year ended 31 December 2014 16,579,185 (11,502,192) 5,076,993 (1,387,143) (10,529,115) 4,662,927 28.1% (662,041) 4,000,886 24.1% (73,852) (356,155) 3,570,879 21.5% 16,660,455 (7,000,971) 9,659,484 1,832,835 (9,155,043) 9,338,247 56.1% (400,607) 8,937,640 53.6% 114,530 (396,851) 8,655,319 52.0% 3,570,879 8,655,319 356,155 (11,102) 71,822 869,643 1,387,143 42,569 6,287,109 37.9% 396,851 (11,533) (102,997) 976,236 (1,832,835) – 8,081,041 48.5% 33 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS FINANCIAL REVIEW Meat Processing Division In 2015, sales volumes in the meat processing division increased to 191.2 thousand tonnes from 144.2 thousand tonnes in 2014, representing a year-on-year increase of 32.6%. This growth was driven by the new Dankov pig slaughtering facility coming into operation and higher inter-company sales from the pork division. In 2015, the average price of processed meat products increased by 3.0% year-on-year to 172.31 RUB/kg from 167.29 RUB/kg in 2014. In Q4 2015, the average price fell 1.6% year-on-year to 170.50 RUB/kg, due to overall market conditions and lower real income levels driving consumers to switch to more affordable ready-to-cook products. Total sales were 33% higher in 2015 and reached RUB 29.2 billion (2014: RUB 21.9 billion). Gross profit for the same period increased 38% year-on-year to RUB 4.3 billion, compared to RUB 3.1 billion in 2014. The gross margin for 2015 climbed to 14.8% from 14.3% in the previous year. In 2015, operating expenses as a percentage of sales dropped to 11% from 13% in 2014. This was due to the Group executing more efficient control of G&A expenses during the year. Operating income increased four times compared to 2014 to reach RUB 1.3 billion. The operating margin rose to 4.3% from 1.5% in 2014. In 2015, the meat processing segment generated net income of RUB 1.0 billion, a significant increase compared to a loss of RUB 0.1 billion in 2014. Adjusted EBITDA increased almost threefold in 2015 and reached RUB 1.8 billion (2014: RUB 0.7 billion). The adjusted EBITDA margin grew to 6.0% in 2015 from 3.3% in 2014. Meat processing division income statement data (in thousands of rubles) Total Sales Interdivision sales Sales to external customers Cost of sales Gross profit Gross margin Operating expenses Operating Income Operating margin Other income and expenses, net Interest expense, net Division profit / (loss) Division profit margin Meat processing division Adjusted EBITDA reconciliation* Division profit / (loss) Add: Interest expense, net of subsidies Interest income Foreign exchange loss Depreciation and amortisation Meat processing division Adjusted EBITDA* Adjusted EBITDA Margin Year ended 31 December 2015 Year ended 31 December 2014 29,150,254 (32,016) 29,118,238 (24,835,957) 4,314,297 14.8% (3,060,987) 1,253,310 4.3% (163,317) (202,541) 887,452 3.0% 21,884,134 (19,306) 21,864,828 (18,755,203) 3,128,931 14.3% (2,810,496) 318,435 1.5% (160,019) (266,445) (108,029) -0.5% 887,452 (108,029) 202,541 (10,405) 205,719 467,157 1,752,464 6.0% 266,445 (4,477) 165,727 392,941 712,607 3.3% Grain Division Sales volumes in the grain division grew to 267.4 thousand tonnes in 2015, a year-on-year rise of 12.8% thanks to a strong harvest year (2014: 237.1 thousand tonnes). Cherkizovo Group harvested 332.9 thousand tonnes in 2015, up 37.3% from 2014. The average yield of land cultivated by Cherkizovo Group increased by 7% year-on-year to 41.9 tonnes/hectare, while the crop area increased by 32% year-on-year to 85.2 thousand hectares. In 2015, the average selling price of grain grew by 30.4% year-on-year to 9.40 RUB/kg (2014: 7.21 RUB/kg). Grain division income statement data (in thousands of rubles) Total Sales Interdivision sales Sales to external customers Net change in fair value of biological assets and agricultural produce Cost of sales Gross profit Gross margin Operating expenses Operating Income Operating margin Other income and expenses, net Interest expense Division profit Division profit margin Grain division Adjusted EBITDA reconciliation* Division profit Add: Interest expense, net of subsidies Interest income Foreign exchange loss Depreciation and amortisation Net change in fair value of biological assets and agricultural produce Grain division Adjusted EBITDA* Adjusted EBITDA Margin Year ended 31 December 2015 Year ended 31 December 2014 2,580,713 (2,117,129) 463,584 326,376 (1,827,087) 1 080,002 41.8% (242,294) 837,708 32.5% 15,555 (14,277) 838,986 32.5% 1,738,937 (1,243,970) 494,967 - (966,698) 772,239 44.4% (344,456) 427,783 24.6% 627 (126,470) 301,940 17.4% 838,986 301,940 14,277 (330) 17,144 167,236 (326,376) 710,937 27.5% 126,470 (627) - 142,129 - 569,912 32.8% 34 35 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS FINANCIAL REVIEW Liquidity and Capital Resources Capital expenditure Subsidies Capital requirements In addition to our working capital requirements, we need capital to finance the following: • capital expenditure, primarily to further enhance our production segments; • potential acquisitions; • repayment of debt. Debt We anticipate capital expenditure, potential acquisitions and repayment of our long-term debt to be the most significant expense items over the next few years. We generally rely on operating cash flows and bank loans to finance capital expenditure. In 2015, our major funding sources were cash from operating activities, as well as short-term and long-term bank loans. We financed our capital expenditure primarily with long-term loans and own funds. As at 31 December 2015, Cherkizovo Group’s net debt** amounted to RUB 35.0 billion, compared to RUB 26.2 billion at the end of 2014. Our total debt stood at RUB 41.2 billion in 2015 (2014: RUB 27.8 billion). In 2015, long-term debt represented 39% of our debt portfolio, or RUB 16.1 billion (RUB 15.8 billion excluding finance leases). Short-term debt stood at 61%, or RUB 25.1 billion. The cost of debt was 3.3% in 2015 (2014: 3.5%). The portion of subsidised loans and credit facilities in the portfolio was 81% (2014: 90%). As of 31 December 2015, cash and cash equivalents totalled RUB 5.6 billion. Maturities of long-term loans and borrowings (excluding finance leases) are detailed in the table below. Maturities of long-term loans and borrowings (excluding finance leases) Maturities of long-term loans and borrowings 1H 2016, RUB bn 2H 2016, RUB bn 2017, RUB bn 2018, RUB bn 2019, RUB bn 2020, RUB bn 2021, RUB bn >2021, RUB bn Total, RUB bn Total loans and borrowings 4.8 1.9 3.1 2.2 1.5 6.3 1.1 1.6 22.5 Total debt 2014, % 2014 10 51 Total debt 27.8 RUB BN 49 90 Short-term Long-term Subsidised loans Unsubsidised loans 36 Total debt 2015, % 2015 19 39 Total debt 41.2 RUB BN 61 81 Short-term Long-term Subsidised loans Unsubsidised loans The Group’s capital expenditure amounted to RUB 11.0 billion in 2015, a year-on-year increase of 63%. Of this amount, RUB 4.4 billion was invested into the poultry division, primarily into the construction of the hatchery and grain storage facility in the Lipetsk Region (the Eletsprom project), as well as the renovation of slaughtering facilities. In the pork division, RUB 1.9 billion was invested into purchasing equipment for the new finisher sites in the Voronezh Region, as well as constructing new finisher sites in the Lipetsk Region. The meat processing division received RUB 1.3 billion of investments for the renovation of the Dankov Meat Processing Plant, as well as the upgrade of the distribution centre in the Moscow Region. In the grain division, RUB 0.8 billion was invested in new agricultural equipment. The feed processing segment received RUB 2.0 billion of investments for the construction of the Voronezh feed mill. The Group also invested RUB 0.8 billion into the construction of its new Central Laboratory. In 2015, the Group accrued subsidies for interest rate reimbursement of RUB 2.6 billion, which offset the interest expense (2014: RUB 2.0 billion). The Group received RUB 2.0 billion of subsidies in 2015 (2014: RUB 2.4 billion). Cash flows The table below shows cash flows from continuing operations for the two years ending 31 December 2015 and 31 December 2014, respectively. Cash flows, RUB billion Net cash generated from operating activities Net cash used in investing activities Net cash (used in) / generated from financing activities Net (decrease)/increase in cash and cash equivalents Capital Expenditures, RUB billion 2014 11.4 (9.3) (3.2) (1.1) 2015 5.0 (10.1) 9.6 4.6 11.0 7.1 — 2.7 4.1 0.3 5.2 0.1 2.6 2.4 0.1 5.8 0.04 5.1 6.7 3.3 2.0 0.5 0.6 2.4 1.2 0.9 0.9 2.6 2.5 0.7 2010 2011 2012 2013 2014 2015 Meat processing Pork Poultry Other 3.4 4.4 1.9 1.3 37 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS FINANCIAL REVIEW Operating activities Investing activities Outlook Net cash from operating activities was RUB 5.0 billion in 2015. Net cash used in investing activities was RUB 10.1 billion in 2015, compared to RUB 9.3 billion in 2014. In 2015, the Company increased its working capital by RUB 5.7 billion year-on-year (2014: RUB 4.7 billion). Key factors driving the change in working capital include: • a RUB 6.2 billion increase in inventories (2014: an increase of RUB 2.1 billion); • a RUB 1.5 billion rise in other receivables (2014: growth of RUB 0.4 billion); • a RUB 3.6 billion increase in trade payables (2014: a decrease of RUB 0.5 billion). A significant year-on-year change in inventory was due to increased stock of grain, soybean meal and premixes. The increase in other receivables was driven by higher subsidies from the government. Higher trade payables resulted from the increased procurement of inputs and materials, higher procurement prices and more favourable payment terms. Notwithstanding a small difference in the change in working capital, the Company recorded a significant reduction in cash from operating activities in 2015, as a result of decrease in net income which totalled RUB 6.0 billion, compared to RUB 16.5 billion in 2014. Financing activities In 2015, net cash generated from financing activities was reported at RUB 9.6 billion, whereas the net cash used in financing activities in 2014 amounted to RUB 3.2 billion. Liquidity As at 31 December 2015, cash and cash equivalents totalled RUB 5.6 billion (2014: RUB 1.0 billion), and working capital stood at RUB 2.2 billion (2014: RUB 5.6 billion). Following 31 December 2015, we continue to meet our payment obligations to trade creditors using cash generated from operating activities and debt financing. As at 31 December 2015, our trade working capital, calculated as current assets less current liabilities, excluding short-term loans and the current portion of long-term debt, was RUB 27.3 billion (2014: RUB 19.1 billion). In 2015, our trade receivables climbed to RUB 4.4 billion (2014: RUB 4.0 billion). As at 31 December 2015, our trade receivables from related parties totalled RUB 0.2 billion (2014: RUB 0.2 billion). As at 31 December 2015, trade receivables turnover averaged 20 days (2014: 18 days) and allowance for doubtful accounts was RUB 0.05 billion (2014: RUB 0.1 billion). A decision to create a provision is made for each counterparty on a case-by-case basis. As at 31 December 2015, our trade payables increased to RUB 8.5 billion (2014: RUB 4.3 billion). Our payables to related parties was RUB 0.02 billion (2014: RUB 0.02 billion). As at the reporting date, our trade payables turnover averaged 30 days (2014: 22 days). As at 31 December 2015, advances paid, excluding the allowance for doubtful accounts, amounted to RUB 2.7 billion (2014: RUB 2.2 billion). Of our total advances paid, RUB 0.1 billion was given to related parties (2014: RUB 0.2 billion). As at 31 December 2015, the allowance for doubtful accounts on advances paid was RUB 0.1 billion (2014: RUB 0.08 billion). Our inventory consists primarily of raw materials and goods for resale, work in progress, livestock and finished goods. As at 31 December 2015, inventory amounted to RUB 22.1 billion (2014: RUB 16.8 billion). As at 31 December 2015, the value of our livestock amounted to RUB 9.8 billion (2014: RUB 9.3 billion). Other trade receivables primarily include subsidies from the government, which increased to RUB 1.4 billion in 2015 (2014: RUB 0.9 billion). 2016 is set to be another challenging year for the Russian economy. Real incomes will continue to come under pressure from external factors, likely resulting in lower consumption levels. The tough consumer market environment will accelerate the process of consolidation, providing Cherkizovo Group with an opportunity to increase its market share. During the year ahead, the Group will ramp up production in the pork segment, as projects that are currently in the investment stage start to come into operation. Our target is to become the second largest pork producer in Russia in 2016 when our new pork breeding facility is launched later in the year. Another segment where we fully expect to see growth is meat processing, and the Company will continue to focus on driving organic growth in this segment in 2016. The weak local currency will continue to weigh on the Group’s profitability, since a large portion of its expenses is pegged to the US dollar and euro. Nonetheless, Cherkizovo Group will take advantage of the ruble weakness to grow the share of exports in overall sales. As we have recently received halal certification and licences to export our poultry products to the UAE and Egypt, we will prioritise the halal segment. We are also actively pursuing export opportunities in Iraq, Europe and Southeast Asia, where we are now engaging with regulators and potential partners. Despite the challenging macroeconomic environment, we are fairly optimistic about the year ahead. We view these trying times as new opportunities to further grow our Group’s business lines and strengthen our market position both domestically and in export markets. Ludmila Mikhailova Chief Financial Officer * Non-IFRS financial measures. This review includes financial information prepared in accordance with international financial reporting standards, or IFRS, as well as other financial measures referred to as non-IFRS. The non-IFRS financial measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with IFRS. Adjusted Earnings before Interest, Income Tax, Depreciation and Amortisation (“Adjusted EBITDA”). Adjusted EBITDA represents income before income tax, non-controlling interests and extraordinary income (costs) adjusted for interest, depreciation and amortisation, foreign exchange differences, other finance income and gains on acquisitions, and net change in fair value of biological assets and agricultural produce, as shown in the table containing consolidated financials for twelve months. Adjusted EBITDA margin is defined as adjusted EBITDA as a percentage of net revenues. Our adjusted EBITDA may not be similar to adjusted EBITDA measures of other companies. It is not a measure under IFRS and should be considered in addition to, but not as a substitute for, net income, operating performance or cash from operating activities commonly used as liquidity measures. We include such measures in our financial statements as we believe they provide useful information on our ability to incur and service debt, fund capital expenditure, help assess compliance with working capital requirements and serve to measure returns. While depreciation and amortisation are considered operating costs in financial statements prepared under IFRS, these expenses primarily represent the non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods. Our adjusted EBITDA calculation is commonly used as one of the bases for investors and analysts to assess operating performance of companies. Adjusted EBITDA is reconciled to our consolidated financial measures as shown in the table containing consolidated financials for twelve months. ** Net debt is calculated as total debt minus cash and cash equivalents, short-term and long-term bank deposits. 38 39 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS EMPLOYMENT POLICIES RECRUITMENT AND EMPLOYEE DEVELOPMENT The recruitment and retention of qualified personnel are key to ensuring the Company’s continued success and strong market position. The Company relies on its active and talented workforce that strives for personal development in order to sustain its dynamic growth. Cherkizovo Group has developed a set of dedicated training programmes for new hires, operating personnel and sales teams, and has introduced on-the-job mentoring. Employees are offered a variety of self-development programmes including seminars, training sessions and other advanced teaching formats, as well as the chance to participate in industry conferences Your Opinion Counts Survey In September 2015, Cherkizovo Group organised the first ‘Your Opinion Counts’ survey, which covered 77% of the Group’s employees from all business and admi nistra tive units. The survey was designed to measure and improve employees’ engagement with the business as a whole, and social initiatives within the Company. The findings were benchmarked against the results of similar surveys run by top-performing peers to allow the management team to better assess employees’ satisfaction levels. Expat Induction Programme’, which was first introduced in the grain farming division. As part of the project, expatriates are trained in the local specifics of negotiation, HR management and business communications in Russia, and are provided with materials on cross- cultural communications. A Russian language course for expats is also in development. Most employees who work with expatriates are involved in the programme’. The programme’s effectiveness is regularly monitored and there are plans to extend it to other business divisions. OUR EMPLOYEES ARE OUR MOST VALUABLE ASSET AND THE COMPANY STRIVES TO EXCEL IN MOTIVATING, TRAINING AND DEVELOPING ITS PERSONNEL IN ORDER TO ATTRACT AND RETAIN THE BEST TALENT. and secondments to leading foreign companies. The Company also dedicates significant attention to management training. A corporate management competency model has been developed for this purpose, which will underpin a uniform approach to the selection of talented managers and strategic continuity in key positions. This project is due to be rolled out in 2016. In recent years, the Company has focused on developing its corporate culture and improving overall efficiency. A number of group-wide and local projects and initiatives were launched in 2015 to set the stage for a new round of future growth. These projects are presented below. The survey also helped to identify the Company’s key strengths, as well as areas for improvement, which could not be done effectively without the direct input of employees. Following the results of the survey, improving the situation is our major task for 2016-17. Cross-Cultural Communications Cherkizovo Group strives to follow international best practice in production and management by engaging national and international experts. To facilitate efficient communications between Russian employees and expatriates, the Company has developed the ‘Cross-Cultural Communication and Engaging young talent In 2015, the meat processing division launched the Foreman’s School project aimed at the professional development of production supervisors. This project also trains production employees to become line managers. The goal is to nurture management potential in line managers, encourage them to develop their teams, enhance on-site manageability and efficiency in individual business units and, consequently, across the entire Group. The programme, piloted at Cherkizovsky Meat Processing Plant, has already involved 75 supervisors. Based on the results of the Foreman’s In addition, there are 16 courses available for office employees to improve their skills and competencies. As part of the induction process, new employees embark on an onboarding programme, which covers topics such as Me and My Company, Occupational Health and Safety and Lean Manufacturing Tools. In 2016, corporate training opportunities will be expanded to respond to the challenges faced by the Company, and there are plans for the distance learning courses to be gradually rolled out more broadly across the Group. ENGAGING YOUNG TALENT Cherkizovo Group continues to engage with Russia’s leading agricultural universities. Stiff competition on the market and a shortage of skilled employees make recruitment of young talent a strategic priority for Cherkizovo Group. In 2015, the Company arranged a series of meetings with academic staff and 450 students at the industry-related departments of Voronezh State Agricultural University. The conference became a starting point for identifying areas for improvement in communications and cross-divisional collaboration, and enabled the participants to join key projects and contribute to the Company’s development as members of company-wide project teams. In 2016, work will continue on projects such as the Bank of Ideas, Communication Platforms, Corporate Culture, Recognition and Cutting Red Tape. The focus of this initiative is to enhance Cherkizovo Group’s efforts to recruit the required number of young employees whose competencies meet the high standards of Cherkizovo Group. Would-be employees are offered internship opportunities at industry- leading companies and the chance to plan their future career. School project, the Company plans to develop other corporate programmes for on-the-job technical training for production employees. Distance Learning In 2015, Cherkizovo Group piloted a distance learning programme in the meat processing division. Cherkizovo Group’s distance learning courses are delivered via multimedia courseware. The Company currently offers its employees over 250 self- instructional courses for different positions and work areas. A dedicated software application regularly monitors learning progress. 1st “Cherkizovo time” Strategic Management Conference In April 2015, the Company held its first conference on strategic planning for its key managers. Managers from across various business units and divisions gathered in Sochi to discuss long-term development trends and current opportunities to strengthen the Group’s market leadership. The conference participants were briefed on the Company’s strategic goals and objectives and discussed development plans and project progress, witnessing, and playing a part in, the formation of a new corporate culture. 40 41 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS ENVIRONMENTAL RESPONSIBILITY CHARITABLE PROGRAMMES IN ITS BUSINESS ACTIVITIES, CHERKIZOVO GROUP HAS TO ADHERE TO CONSERVATION LAWS WHEN CONSTRUCTING NEW SITES AND OPERATING EXISTING FACILITIES. As part of the zero-waste production programme, manure from pig breeding facilities has been certified to be used as an organic fertiliser to increase yields and restore soil fertility. IN 2015, CHERKIZOVO GROUP RAN PETELINKA: HELP FOR CHILDREN, A LARGE- SCALE CHARITABLE PROGRAMME. WE RAISED OVER RUB 6 MILLION AND HELPED 525 CHILDREN FROM ORPHANAGES. As part of the programme, we made a commitment to donate one ruble for every Petelinka product sold over a 35 day period. We were supported by consumers all over Russia and the campaign was unparalleled in terms of scale and format. The money raised was used to help specific recipients, with Cherkizovo representatives visiting orphanages and discussing the needs of the orphanages’ inhabitants. Five orphanages covered by the programme used the funds to build playgrounds and purchase exercise machines for the children. Two orphan schools were provided with sensory rooms, weather stations and Montessori materials. Other orphanages constructed dedicated flats to help children adapt to independent living in a social environment. These were not just gift-giving ceremonies – we staged special events for the children, giving them sweet treats, inviting professional entertainers, organising educational shows, cooking classes and picnics and educating them about agriculture and the different professions working within Cherkizovo Group. These events provided an environment for the children to socialise, and we hope they also helped them to explore possible future career paths. To show their gratitude, the children made a heart-warming gift for us, a Friendship Tree made of colourful hand prints on a large canvas and with warm wishes to us and all the children in the world. The Friendship Tree has become a symbol of this charitable programme and will remind us of the importance of doing good. Children in these orphanages can now live, play and study in comfort. Through this programme, we have proved that one can always find time in the daily routine to contribute to better conditions in orphanages. Cherkizovo Group recognises the scale of its business, its impact on the environment, as well as its environmental responsibility. The Group is committed to: • adhering to all applicable Russian laws and regulations in natural resource management, environment protection and environmental safety; • reducing environmental impact; • preventing environmental pollution. Each of the Group’s companies: • Sets limits for air pollution, waste generation and energy consumption; • Complies with buffer zones around production facilities and water wells; • Monitors environmental conditions at production facilities; • Analyses monitoring results to assess environmental impact. Environmental management systems implemented by the Group’s companies ensure compliance with applicable laws and regulations. As required by environmental legislation, each Group company maintains a set of regulatory documents defining acceptable levels of impact on the environment. Through regular monitoring, the Group assesses its environmental impact and, when required, plans preventive measures. The Group’s environmental management efforts are transparent and are disclosed in regular reports. A forward-looking approach to planning business activities is aimed at preventing and minimising potential risks of negative environmental effects. 42 43 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS CORPORATE GOVERNANCE CORPORATE GOVERNANCE SYSTEM DIRECTORS’ REPORT MEMBERS OF THE BOARD MEMBERS OF THE EXECUTIVE BOARD 46 51 52 54 44 44 ANNUAL REPORT 2015 ANNUAL REPORT 2015 45 45 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS 3. CORPORATE GOVERNANCE CORPORATE GOVERNANCE SYSTEM Cherkizovo Group’s shares are listed on the Moscow Exchange (Quotation List A) and the London Stock Exchange. We comply with all applicable corporate governance standards in the Russian Federation and the United Kingdom, as detailed below. • A Board of Directors with at least control procedures and suggest areas where these procedures could be improved. Membership of the Committee is reviewed annually, with members selected from the independent directors. In 2015, we updated the Regulation on the Audit Committee to bring it in line with the latest amendments to Russian legislation. three independent members The Group’s Board of Directors includes four independent directors as required by the Corporate Governance Code recommended by the Central Bank of the Russian Federation (the “Bank of Russia”). Mr Musheg Mamikonian, Mr Samuel Lipman, Mr Marcus Rhodes and Mr Vitaliy Podolskiy meet the independent director requirement of the Bank of Russia and the UK Corporate Governance Code. • Executive Board The Group’s Executive Board was established in June 2010 and included 10 members as at the end of 2015. • Audit Committee The Audit Committee was established by the Board of Directors in April 2006. Its exclusive functions are to assess candidates to act as the Group’s auditors, review auditors’ reports and evaluate the effectiveness of internal • Personnel and Remuneration Committee The Personnel and Remuneration Committee was established in July 2010 as part of the Board of Directors. Membership is reviewed annually. In 2012, the Group updated its Regulation on the Personnel and Remuneration Committee to incorporate the latest regulatory requirements. • Investment and Strategic Planning Committee The Investment and Strategic Planning Committee was established in June 2012 as part of the Board of Directors in accordance with the relevant corporate regulation. Membership is reviewed annually. • The corporate policies of Cherkizovo Group oblige its Directors, members of the Executive Board and the Chief Executive Officer to disclose any information on the possession and transactions of securities. • Disclosure procedures within Cherkizovo Group follow the guidelines set in the relevant corporate regulation approved on 25 April 2011. • Cherkizovo Group protects inside information in accordance with the Regulation on Insider Information adopted on 28 December 2011. This regulation contains a list of inside information relating to the Company and was updated in 2015. • Corporate Audit and Risk Management The Corporate Audit and Risk Management Department of Cherkizovo Group is responsible for the development, maintenance and validation of internal controls. Its other areas of responsibility include risk management, internal audit procedures and managing the anonymous reporting system. The department operates in accordance with Russian legislation and adheres to corporate procedures and regulations, the orders of Cherkizovo’s CEO and the Regulation on the Corporate Audit and Risk Management Department, which was updated in 2015. The role of the Board The Board of Directors is responsible for the general management of the Company and is exclusively authorised to: • Set the business priorities for the Company; • Convene Annual and Extraordinary General Shareholders’ Meetings, except as provided by Paragraph 8, Article 55 of the Federal Law on Joint Stock Companies; • Approve the agenda of the General Shareholders’ Meetings; 46 • Set the date for preparing a list of persons entitled to participate in the General Shareholders’ Meetings and decide on other matters referred to the Board of Directors in accordance with Chapter 7 of the Federal Law on Joint Stock Companies and related to convening and holding the General Shareholders’ Meeting; • Increase the share capital of the Group by selling shares in a secondary offering as permitted by the number and categories/types of authorised shares; • Issue bonds and other securities as stipulated by the Federal Law on Joint Stock Companies; • Set property prices (in monetary terms), as well as offer and redemption prices for securities as stipulated by the Federal Law on Joint Stock Companies; • Repurchase shares, bonds and other securities issued by the Group as stipulated by the Federal Law on Joint Stock Companies; • Establish and dissolve executive bodies and appoint members of the Executive Board; • Approve remuneration and compensation plans for the chairman and members of the Executive Board; • Recommend remuneration and compensation plans for members of the Revision Committee and approve auditors’ fees; • Approve transactions specified in Chapter 11 of the Federal Law on Joint Stock Companies; • Approve the Group’s registrar and terms of contract therewith, as well as terminating such contracts; • Decide on the participation in other organisations, except as provided by Subparagraph 18, Paragraph 1, Article 48 of the Federal Law on Joint Stock Companies; • Approve the Group’s strategic plans going beyond three years; • Recommend dividend distribution • Approve business plans, annual and a procedure thereof; • Dispose of reserves and other Company funds; • Approve the Group's internal documents, except for documents referred either to the General Shareholders’ Meeting by the Federal Law on Joint Stock Companies or to executive bodies by the charter; • Establish branches and representative offices of the Group; • Approve major transactions as provided for in Chapter 10 of the Federal Law on Joint Stock Companies; budgets and investment programmes; • Approve the Group’s capital investments in excess of USD 10,000,000 or an equivalent amount in rubles if such investments are not provided for in the annual budget; • Approve the terms of share option programmes for the Company’s employees; • Approve mergers and acquisitions in excess of USD 10,000,000 or an equivalent amount in rubles if such transactions are not provided for in the annual budget; • Consider other matters stipulated in the Federal Law on Joint Stock Companies. According to the Federal Law, the Board of Directors may not decide on matters that fall within the exclusive competence of the General Shareholders’ Meeting. According to the Charter, resolutions of the Board are deemed to be adopted upon their approval by a majority vote of the Directors present at a board meeting. Exceptions to this rule are matters, such as major transactions, that require approval by unanimous vote in accordance with Russian law. Meetings of the Board are considered to be duly convened and quorate if the majority of the Directors are present. Meetings of the Board are held as per the annual schedule and when necessary, but no fewer than five times a year. The Board held ten meetings during 2015. Disclosure to auditors As far as each of the Directors is aware, there is no material information undisclosed to the Company’s auditors. Each of the Directors has taken all steps required of them to obtain all material information and provide it to the Company’s auditors Corporate Secretary In line with the best international corporate governance practices, the Board of Directors appointed a Corporate Secretary in 2012 to support the Board’s functions and document flow. Mr. Valery Kuprienko was appointed Corporate Secretary for the current term of the Board (April 2015 – April 2016). 47 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS Chief Executive Officer The Chief Executive Officer (CEO) of Cherkizovo Group is responsible for all the day-to-day operations of the Company, except for issues referred to the General Shareholders’ Meeting, Board of Directors and Executive Board. The CEO also acts as Chairman of the Executive Board. The CEO arranges for the resolutions made by the General Shareholders’ Meeting, Board of Directors and Executive Board to be implemented. The CEO acts on behalf of Cherkizovo Group without power of attorney and, without limitation, represents the interests of the Company, concludes transactions on its behalf, approves personnel appointments, issues orders and gives instructions to all employees of the Company. The CEO is elected by the Board of Directors for a period of up to five years. The labour contract with the CEO is signed by the Chairman of the Board of Directors or a person authorised by the Board. The terms of the contract are approved by the Board of Directors. The CEO may combine his/her position with management functions in other organisations only if he/she receives the consent of the Board of Directors. If the CEO is not able to perform his/ her duties, the Board of Directors may terminate their powers early and elect a new CEO. Executive Board The Chairman of the Executive Board proposes, and the Board of Directors approves, nominees for, and the composition of, the Executive Board to ensure it is optimised for conducive discussions, as well as timely and effective decision-making. The powers of Cherkizovo Group’s Executive Board are set out in the Charter. The Executive Board is authorised to: • Approve the strategic plans and business priorities of the Company, its subsidiaries and affiliates; • Review the business performance of the Company’s subsidiaries and affiliates; • Approve incentive programmes for employees of Cherkizovo Group, its subsidiaries and affiliates; • Decide on the signing of collective bargaining agreements by the Company, its subsidiaries and affiliates; • Consider other issues proposed by members of the Executive Board. The Executive Board has the right to request information from employees of the Company and receive technical, financial, business and other data on the activities of the Company, its subsidiaries and affiliates, as well as performing other duties within the remit of the Executive Board. Internal Control and Risk Management The Board of Directors has overall responsibility for maintaining an adequate internal control and risk management system at the Company, as well as reviewing its effectiveness. Internal control is also exercised by the Revision Committee in compliance with the Charter and the Regulation on the Revision Committee. The Revision Committee coordinates financial and business audits in the Company, the key task being to ensure that the business operations of Cherkizovo Group comply with Russian law, meet the interests of shareholders, and that financial statements and audit reports do not contain material misstatements. Members of the Revision Committee are elected by the General Shareholders’ Meeting for one year. The CEO or other members of the Board of Directors are not permitted to be members of the Revision Committee. remuneration and terms of employment; • Supervising external audits and analysing audit quality and auditors’ opinions; • Ensuring smooth interaction between the Internal Audit Department and external auditors; • Developing the Group’s external audit policy and controlling the implementation thereof; IN THE AREA OF INTERNAL AND EXTERNAL FRAUD PREVENTION: • Maintaining an efficient system of reporting on internal and external frauds and other violations; • Supervising investigations of frauds and unauthorised use of insider or confidential information; • Controlling the implementation of measures approved by the Company’s management in response to reports on potential frauds or other violations by employees. Audit Committee In 2015, the members of the Audit Committee were Mr Musheg Mamikonian, Mr Samuel Lipman and Mr Marcus Rhodes, who acted as Chairman. As a chartered accountant and a former E&Y audit partner, Marcus Rhodes holds relevant financial expertise. The Audit Committee adheres to a formal list of items to be considered at each Committee meeting within the financial year. IN TERMS OF FUNCTIONS, THE AUDIT COMMITTEE SERVES TO: • Control the completeness, accuracy and consistency of financial statements; • Control the reliability and efficiency of risk management and internal control systems; • Ensure the independence and integrity of internal and external audits; • Maintain an efficient system of reporting on internal and external frauds (including unauthorised use of insider or confidential information) and other violations, and control the implementation of any related measures approved by the Company’s management. In addition, the Audit Committee is tasked with: ACCOUNTING AND FINANCIAL REPORTING: • Controlling the completeness, accuracy and consistency of financial statements; • Analysing material aspects of the accounting policy; • Participating in the discussion of material issues and judgements in relation to financial statements; • RISK MANAGEMENT, INTERNAL CONTROL AND CORPORATE GOVERNANCE: • Controlling the reliability and efficiency of risk management, internal control and corporate governance systems, assessing the efficiency of risk management and internal control procedures and corporate management practices, and proposing improvements where necessary; • Analysing and assessing corporate documents related to risk management and internal control, and approving the Regulation on Risks; • Monitoring processes that ensure compliance with applicable laws, as well as the standards, rules, procedures and requirements of the stock market; INTERNAL AND EXTERNAL AUDITS: • Ensuring the independence and integrity of internal audits; • Approving the Regulation on Internal Audit; • Approving action plans of the Internal Audit Department; • Appointing/dismissing the head of the Internal Audit Department and approving their remuneration; • Identifying the limitations on powers or budget of the Internal Audit Department that can affect the efficiency of internal audits; • Assessing the efficiency of internal audits; • Analysing the independence, fairness and absence of any conflicts of interest on the part of external auditors, approving nominees for auditors, making proposals for appointment, changing and dismissing Cherkizovo Group’s external auditors, agreeing auditors’ 48 49 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS • Training policies for employees and key managers; other issues subject to the decision of the Board of Directors or instructions of the Board’s Chairman. Personnel and Remuneration Committee In 2015, the members of the Personnel and Remuneration Committee were Mr Musheg Mamikonian, Mr Marcus Rhodes and Mr Vitaliy Podolskiy, who acted as Chairman. The Committee adheres to a formal list of items to be considered at each Committee meeting within the financial year. IN TERMS OF FUNCTIONS, THE COMMITTEE SERVES TO RECOMMEND THE BOARD OF DIRECTORS ON: • Formulating key aspects of the corporate HR policy; • Approval of performance targets for the remuneration of Directors, members of the Executive Board and the Chief Executive Officer (“the Management Bodies”). OTHER TASKS OF THE COMMITTEE ARE TO GIVE RECOMMENDATIONS TO THE BOARD OF DIRECTORS ON: • The Group’s policy on the recruitment of highly-qualified employees for the Management Bodies; • Remuneration of the Management Bodies; • Development and monitoring of the HR policy for affiliates and subsidiaries; • Establishment of the Executive Board; • Appointment of the Chief Executive Officer, Chairman and members of the Executive Board; • Recruitment and appointment of non-executive directors; • Remuneration of the Company’s key management staff; • Corporate management structure; Investment and Strategic Planning Committee AS REQUIRED BY THE FUNCTIONS LISTED ABOVE, THE COMMITTEE ALSO PROVIDES: • Recommendations to the Board of Directors on the strategic planning and investment policy; • Assessment of the efficiency of the interaction between the Board of Directors and the Company’s units responsible for strategic planning and investment management in accordance with internal documents of the Company, as well as assessment-based recommendations to the Board; • Assessment of Cherkizovo Group’s long-term performance and recommendations to the Board of Directors on the Company’s development strategy and specific business areas with a view to improving overall efficiency based on the latest product and capital market trends, Group performance, competitive environment and other factors. Acting within the scope of its competence, the Committee cooperates with the CEO, Executive Board and relevant business divisions of the Group. In 2015, the members of the Investment and Strategic Planning Committee were Mr Sergey Mikhailov, Mr Samuel Lipman, Mr Evgeny Mikhailov and Mr Musheg Mamikonian, who served as Chairman. The Committee adheres to a formal list of items to be considered at each Committee meeting within the financial year. IN TERMS OF FUNCTIONS, THE COMMITTEE SERVES TO RECOMMEND THE BOARD OF DIRECTORS ON: • The business priorities of Cherkizovo Group; • The development strategy and long-term strategic goals and objectives of the Group, as well as annual and long-term investment programs. DIRECTORS’ REPORT The Board of Directors presents their annual report and audited financial statements for the year ending 31 December 2015. Core operations and business overview Cherkizovo Group is a leading integrated and diversified meat producer in Russia. The Company’s operations are structured into four business divisions: poultry, pork, meat processing and grain farming. Each of them, with the exception of grain farming, incorporates a distribution unit, a sales unit, a retail network, warehouses and a marketing department, along with other non-core operations, such as related services. Future developments The Group aims to become an unrivalled leader among vertically- integrated diversified producers in every business segment. To this end, the Group will continue to upgrade its existing meat processing plants, invest in its poultry breeding facilities and consider mergers where appropriate. We will develop our retail network and build new warehouses, expanding the geographic coverage of the Group and maintaining investment across all divisions. The management believes that the Company has every opportunity to expand its footprint considerably on this somewhat fragmented market both through acquisitions and organic growth. The poultry division consists of eight poultry breeding facilities. Going concern The pork division includes 15 pig farms. The meat processing division is made up of six processing plants producing ready-to-cook and fresh meat products, as well as a wide selection of sausages, wieners, hams and delicatessen meats. The grain division cultivates nearly 90,000 operational hectares of land. Detailed information on Cherkizovo Group’s business operations is presented in the Chairman’s Statement (page 8), Chief Executive Officer’s Review (page 14) and in the overview of the business divisions (page 18-27). The Board of Directors is satisfied with the fact that the Group’s financial statements have been prepared by applying the going concern principle, and that the same principle is embedded in the 2016 budget and long-term plans of the Group. Dividends In 2015, Cherkizovo Group distributed a total of RUB 3.4 billion in dividends (RUB 77.4 per ordinary share), including RUB 2.4 billion paid as dividends for 2014. Board of Directors in the reporting year The persons listed below served on the Board of Directors in the year ended 31 December 2015 (in alphabetical order): • Igor Babaev, Chairman of the Board; • Samuel Lipman, independent non-executive director; • Musheg Mamikonian, independent non-executive director and Chairman of the Investment and Strategic Planning Committee; • Evgeny Mikhailov, executive director and Head of Business Development; • Sergey Mikhailov, executive director and Chief Executive Officer; • Vitaliy Podolskiy, independent non-executive director and Chairman of the Personnel and Remuneration Committee; • Marcus Rhodes, independent non-executive director and Chairman of the Audit Committee. Election and re-election of directors According to the Company’s Charter, the entire Board of Directors is re-elected at every Annual General Shareholders’ Meeting. Directors are elected by cumulative voting where each shareholder may cast all of their votes equal to the number of voting shares held, multiplied by the number of directors to be elected to the Board. Each shareholder may either cast all of their votes for one nominee or distribute votes across two or more nominees. Directors may be removed from office by a majority vote at the shareholders’ meeting at any time and without explanation. 50 51 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS MEMBERS OF THE BOARD IGOR BABAEV Chairman of the Board SERGEY MIKHAILOV executive director, Chief Executive Officer EVGENY MIKHAILOV executive director, Head of Business Development SAMUEL LIPMAN independent non-executive director Sergei Mikhailov has been CEO of Cherkizovo Group since 2006. Previously, he was Deputy President and Chief Operating Officer of Cherkizovsky MPP from 2000 before joining AIC Cherkizovsky as Deputy President of Marketing and Sales in 2004. In the same year, he was appointed General Director of the Cherkizovsky Trade House. He founded the aTelo, Inc Telecommunications Company in 1998 in the United States, serving as a director until 2001. He was an intern at Goldman Sachs in 1997, moving to become a financial analyst at Morgan Stanley in 1999. He graduated with a BSc in Finance from Georgetown University (Washington DC) in 2000. Evgeny Mikhailov has been the Head of buisness development since 2006 and has served on the Board of AIC Mikhaylovskiy since joining as the first Deputy General Director in 2004. He was a financial analyst at Morgan Stanley in 2002, following a period in 2001 as assistant to the vice-president at Washington DC’s aTelo, Inc. He received a BSc in Economics from the University of California, Los Angeles in 2004. Samuel Lipman joined the Board of Directors in April 2006. He also currently serves as founder and President of The Lipman Company, which has been providing management consulting services to the broiler industry since 1997. He has served as Chief Executive Officer of Broiler of the Future LLC since 2007 and as President of Stromyn Breeders LLC, an investment holding company, since 2003. Mr. Lipman founded and was President and Chief Executive Officer of Golden Rooster in Lipetsk, Russia from 1996 to 2000. He graduated from Colby College, USA in 1972. In 1988, Igor Babaev was appointed Chief Engineer of the Cherkizovsky Meat Processing Plant (CMPP) in Moscow and, in 1993, he became President and Member of the Board of Directors of the company. From there, in 2005 he founded Cherkizovo Group, the biggest meat and feed producer in Russia and, in 2006, he took the company public on the LSE. In the 1980s, he worked in different cities in the southern part of Russia, holding various senior positions in meat processing factories. He began his career as a production engineer at a cannery in Essentuki. Igor Babaev was one of the pioneers who transformed the Russian agricultural sector. He was a key player in shaping the current government support system of agricultural producers in Russia. Mr. Babaev has been awarded the Russian Federation’s ‘Medal of Honour’. He also holds the honorary title, ‘Honored Worker of the Food Industry of the Russian Federation.’ He is a graduate of Krasnodar State Polytechnic Institute and holds a Ph. D from the Moscow Technological Institute of the Food Industry. MUSHEG MAMIKONIAN independent non-executive director, Chairman of the Investment and Strategic Planning Committee VITALIY PODOLSKIY independent non-executive director, Chairman of the Personnel and Remuneration Committee Musheg Mamikonian joined the Board of Directors in 2006. Since 1997, Mr. Mamikonian has held senior positions in such meat processing companies as OJSC Lianozovsky Sausage Plant, OJSC Dmitrovsky Meat Plant, and OJSC CMPP. Since 2013, he has been the President of the Meat Council of the Common Economic Space (CES ). Mr. Mamikonian graduated from Yerevan Polytechnic Institute in 1981 and received a PhD from Moscow Technological Institute of Meat and Dairy Processing Industry in 1986. He holds over 100 patents for technical and technological inventions, and in 1999 received a Russian Federation State award for achievements in Science and Technology. Vitaliy Podolskiy joined the Board of Directors of Cherkizovo Group in June 2012. He has 17 years of experience in the financial and retail/FMCG sectors in the USA, UK, Germany and Russia. He has held the position of Chief Financial Officer (CFO) at Perekrestok and X5 Retail Group NV. Between 2008 and 2013, Mr. Podolskiy held senior management positions in companies working in the food retail markets in Russia and Central Asia and served on the board of directors at Caesar Satellite, Rosinter Restaurants Holding, Kukhni Marii, Uyuterra, and Kazakhstan Kagazy. He graduated from the Moscow State University named after M. V. Lomonosov in 1991. In 1995, he received an MBA in International Business and Finance from the University of Chicago. MARCUS RHODES independent non-executive director, Chairman of the Audit Committee≈ Marcus Rhodes joined the Board of Directors of Cherkizovo Group in February 2009. He has 30 years’ experience in auditing and accounting and has spent the last 20 years in Russia. From 1996 to 2008, he was an audit partner in the practices of Arthur Andersen and Ernst & Young, and also a director of Spartacus Private Equity Group Ltd. He has served as an independent director on the boards of directors of Phosagro Group, Rosinter Restaurants Holding and Tethys Petroleum. Mr. Rhodes earned a BA degree (Hons) in Economics from Loughborough University in England in 1982 and has been a member of the Institute of Chartered Accountants in England and Wales since 1986. He is also a member of the non- executive group of the Institute in London. 52 53 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS MEMBERS OF THE EXECUTIVE BOARD SERGEY MIKHAILOV Chief Executive Officer, Chairman of the Executive Board Sergei Mikhailov has been CEO of Cherkizovo Group since 2006. Previously, he was Deputy President and Chief Operating Officer of Cherkizovsky MPP from 2000 before joining AIC Cherkizovsky as Deputy President of Marketing and Sales in 2004. In the same year, he was appointed General Director of the Cherkizovsky Trade House. He founded the aTelo, Inc Telecommunications Company in 1998 in the United States, serving as a director until 2001. He was an intern at Goldman Sachs in 1997, moving to become a financial analyst at Morgan Stanley in 1999. He graduated with a BSc in Finance from Georgetown University (Washington DC) in 2000. LUDMILA MIKHAILOVA Chief Financial Officer Ludmila Mikhailova has been CFO since 2006, having previously held the posts of Deputy General Director of the Company and first Deputy President of AIC Cherkizovsky. In 2005, she was Deputy General Director of Cherkizovo Group. Mrs. Mikhailova worked as a financial analyst at General Mills Corporation Canada (Toronto) in 2004, joining from ING Barings (London) and also served at McFarlane Gordon Inc. (Toronto). Before this, she served as financial analyst at Cherkizovsky MPP for two years until 1998. Mrs. Mikhailova graduated from the Financial Academy of the Government of the Russian Federation in 1998 and also completed a Canadian Securities Course at the Canadian Securities Institute. She holds an MBA from York University (Canada), 1999. YURY DYACHUK Head of the Legal Department Yury Dyachuk has been Head of Cherkizovo Group’s Legal Department since 2006. He has 20 years’ legal practice experience and, in 2005, he led the legal support team during the restructuring of Cherkizovo Group. He has also served as Head of the Legal Department of AIC Cherkizovsky and was head of the Legal Department at CMPP. Mr. Dyachuk has a degree in Civil Law from the Moscow State Law Academy (1995). MARINA KAGAN Head of Communications Marina Kagan has been Head of Communications at Cherkizovo Group since 2015. Her core responsibilities include engagement with government bodies, public relations, investor relations and stakeholder communications. Prior to joining Cherkizovo Group, she was Director of External Relations and member of the Management Board at Wimm-Bill-Dann Foods since 2004. As the company was acquired by PepsiCo in 2010, she was appointed Vice President of Corporate Communications, Eastern Europe at PepsiCo. More recently, she has held a position of Head of Communications at O'Key Group. Before moving in corporate and financial communications Marina had a successful career in journalism, spending many years at the BBC radio and television in London. Marina Kagan has in-depth knowledge of the Russian consumer market and a unique professional experience in media and communications. She graduated from Westminster University, London. ANDREI KHIZHNYAK Head of Sales and Marketing Strategy Andrei Khizhnyak took the post of Head of Commercial and Marketing Strategy in 2013. He has 17 years of management experience in marketing and sales in various markets. Prior to joining Cherkizovo Group, he worked for such companies as OJSC United Confectioners, Razgulyay- Market LLC, and the OST Group of Enterprises. From 2001 to 2004, he led the marketing activities of Cherkizovsky MPP and AIC Cherkizovsky. In 2010, he was recognised as one of the five best commercial directors in Russia, having previously also been acknowledged as one of the best directors for food marketing in 2007 by the Managers’ Association of the Russian Federation. He graduated from the Moscow State Law Academy with a specialisation in Law. ALEXEI SKOROBOGATOV Head of Procurement and Logistics Alexey Skorobogatov has been Cherkizovo Group’s Head of Procurement since October 2011, having spent the previous three years as Procurement Director at the Danone Nutricia Baby Food Company, responsible for Eastern Europe. Before joining Danone in 2009, he was Head of Procurement at OJSC Wimm-Bill-Dann Foods. Prior to this, he founded and headed the procurement and logistics department at OJSC MTS. He is a graduate of the Pyatigorsk State Linguistic University. SERGEI POLYAKOV Head of the Poultry Division ANDREI CHOLOKYAN Head of the Meat Processing Division Sergey Polyakov has been the Head of the Poultry Division Management Company since 2014. From 2000 to 2009 he held management positions at Sodrugestvo Group. From 2009 to 2011 he was CEO in PRODO. Before joining Cherkizovo Group, Sergei Polyakov worked at the United Grain Company OJSC, where he served as CEO and was in charge of the company’s business activities. Sergei Polyakov graduated with honours from the economics department of the European Humanities University. VLADISLAV BELYAEV Head of IT Vladislav Belyaev has been Head of IT since February 2012. Prior to joining Cherkizovo, from 2008 to 2012 he was Head of the Enterprise Management Systems department at OJSC VimpelCom. He previously held senior positions at JSC CafeMax and OJSC Moscow Industrial Bank. He graduated from the Moscow Institute of Radio Engineering, Electronics and Automation, and also the Moscow State University named after M. V. Lomonosov. Andrey Cholokyan has been Cherkizovo Group’s Head of Meat Processing since 2010, and was formerly Deputy Director for Development and Marketing at the Lianozovo Sausage Plant. Before this, he held senior positions at the Ostankinsky, Biryulyovsky and Cherkizovsky meat processing plants. He is a graduate of the Moscow Technological Institute of the Meat and Dairy Processing Industry and holds a PhD in Economics. SERGEI CHUMAK Head of Strategic and Organisational Development Sergey Chumak has been the Head of Strategic and Organisational Development since 2014. He has 15 years of international experience in strategic consulting. Sergey participated in projects associated with changes in restructuring, strategy development, and the establishment of management systems for Russian and international companies in various industries (engineering, car distributing, FMCG, retail, hospitality and restaurant business, pharmacological sector, media). He has gained consulting experience in IPO launch, mergers and acquisitions. Sergey graduated from Harvard Business School (Executive programs), as well as Loyola College and the Sellinger School of Business and Management (MBA). 54 55 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS DISCLOSURE TO AUDITORS As far as each of the Directors is aware, there is no material information undisclosed to the Company’s auditors. Each of the Directors has taken all steps required of them to obtain all material information and provide it to the Company’s auditors. Investor and shareholder information Share capital and shares Ownership of the Company: Igor Babaev’s family controls a 65 % stake in the Company, with a 35% free float on the London and Moscow stock exchanges. • Ordinary or preferred shares: all issued shares are ordinary. • Free float calculation: the free float ratio of 35% was calculated based on information disclosed by the issuer and other publicly available data about the (beneficiary) owners of ordinary shares and/or depositary receipts. The total number of shares is the number of outstanding shares and/or shares represented by depositary receipts within the same category (type) as of the calculation date. The free float is calculated as the total number of outstanding shares minus the number of shares that are not in free float. The free float ratio is the ratio between the number of shares in free float and the total number of outstanding shares, expressed as a percentage. GDRs Global depositary receipts: Cherkizovo Group GDRs have been traded on the London Stock Exchange (LSE) since 2006. In 2015, they rose in value by 17%. Bonds • Bonds: on 13 October 2015, the Company issued BO-001P-01 series semi-annual coupon bonds for a total amount of RUB 5,000,000,000 (registration number 4B02-01-10797-A-001P), all of which are currently outstanding. • Historical reference: on 16 March 2013, the Company issued BO-04 series semi-annual coupon bonds for a total amount of RUB 3,000,000,000 (registration number 4B02-04-10797-A), all of which are currently outstanding. • Debt ratio (Debt/EBITDA, payments by year): coupon payments are made semi-annually, with bonds redeemed at final maturity. BO-04 bonds will be redeemed in March 2016 and BO-001P-01 bonds will be redeemed in October 2020. The debt/EBITDA ratio will be available immediately after the financial statement disclosure. Shareholder and investor relations IR HIGHLIGHTS • On 30 October 2015, Grupo Fuertes, a major European agricultural company based in Spain, purchased 5.06% of Cherkizovo Group shares on the open market. • In 2015, Cherkizovo Group shares traded on the London Stock Exchange appreciated by 17% from USD 8.22 to USD 9.62 per share. • In 2015, Cherkizovo Group shares traded on the Moscow Stock Exchange increased in value by 48% from RUB 702 to RUB 1,040 per share. Dividend policy In 2015, Cherkizovo Group distributed a total of RUB 3.4 billion in dividends (RUB 77.4 per ordinary share), including RUB 2.4 billion paid as dividends for 2014. Shareholder and investor relations Two shareholders’ meetings (annual and extraordinary) were held in 2015. Stock exchanges and share price performance MOEX On 15 August 2006, shares of Cherkizovo Group were listed on the Moscow Exchange (MOEX). As of 31 December 2014 12-month low 12-month high As of 31 December 2015 702 639 1,077 1,040 LSE Cherkizovo Group GDRs have been traded on the London Stock Exchange (LSE) since 16 May 2006. As of 31 December 2014 12-month low 12-month high As of 31 December 2015 8.22 6.15 10.95 9.62 Share price vs. LSE industry index 40 30 20 10 0 -10 -20 -30 -40 PJCS CHERK S Food Producers Feb’2015 Apr’2015 Jun’2015 Aug’2015 Oct’2015 Dec’2015 GDR price on LSE 9,25 8,47 6,15 10,95 10,00 10,15 458 863 337 927 2 643 578 9,19 8,36 1 718 915 9,95 10,35 9,46 PJCS CHERK S Volume 217 606 Jan’2015 Feb’2015 Mar’2015 Apr’2015 May’2015 Jun’2015 Jul’2015 Aug’2015 Sen’2015 Oct’2015 Nov’2015 Dec’2015 GDR price on MOEX 556 673 1 077 812 830 736 723 690 779 78 184 21 405 685 639 923 910 925 851 833 PJCS CHERK S Volume 752 148 068 26 722 Jan’2015 Feb’2015 Mar’2015 Apr’2015 May’2015 Jun’2015 Jul’2015 Aug’2015 Sen’2015 Oct’2015 Nov’2015 Dec’2015 56 57 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS CONTACTS FOR SHAREHOLDERS 60 113 58 58 ANNUAL REPORT 2015 ANNUAL REPORT 2015 59 59 ANNUAL REPORT 2015ANNUAL REPORT 2015 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 AND AUDITOR’S REPORT STATEMENT OF MANAGEMENT RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 Management is responsible for the preparation of the consolidated financial statements that present fairly the financial position of PJSC Cherkizovo Group (the “Company”) and its subsidiaries (the “Group”) as at 31 December 2015, Management is also responsible for: • Designing, implementing and maintaining an effective system of internal controls throughout the Group; • Maintaining adequate accounting records that are and the consolidated results of its operations, cash flows and sufficient to show and explain the Group’s transactions and changes in equity for the year then ended, in compliance with disclose with reasonable accuracy at any time the International Financial Reporting Standards (“IFRS”). consolidated financial position of the Group, and which INDEPENDENT AUDITORS’ REPORT of the Board of Directors and Shareholders of PJSC Cherkizovo Group: depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making We have audited the accompanying consolidated financial those risk assessments, the auditor considers internal control statements of PJSC Cherkizovo Group and subsidiaries relevant to the entity’s preparation and fair presentation of (together “the Group”), which comprise the consolidated the consolidated financial statements in order to design audit statement of financial position as at 31 December 2015, and procedures that are appropriate in the circumstances, but not the consolidated statements of profit or loss and other for the purpose of expressing an opinion on the effectiveness comprehensive income, changes in equity and cash flows for of the entity’s internal control. An audit also includes the year then ended, and a summary of significant evaluating the appropriateness of accounting policies used accounting policies and other explanatory information. and the reasonableness of accounting estimates made by Management’s Responsibility for the Consolidated Financial Statements management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is enable them to ensure that the consolidated financial Management is responsible for the preparation and fair sufficient and appropriate to provide a basis for our audit In preparing the consolidated financial statements, statements of the Group comply with IFRS; management is responsible for: • Properly selecting and applying accounting policies; • Presenting information, including accounting policies, in • Maintaining statutory accounting records in compliance with local legislation and accounting standards; • Taking such steps as are reasonably available to them to presentation of these consolidated financial statements in opinion. accordance with International Financial Reporting Standards and for such internal control as management determines is Opinion necessary to enable the preparation of consolidated financial a manner that provides relevant, reliable, comparable and safeguard the assets of the Group; and statements that are free from material misstatement, In our opinion, the consolidated financial statements present understandable information; • Preventing and detecting fraud and other irregularities. whether due to fraud or error. • Providing additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable The consolidated financial statements of the Group for the Auditor’s Responsibility users to understand the impact of particular transactions, year ended 31 December 2015 were approved by fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2015, and its consolidated financial performance and its cash flows for the year then ended in accordance with International Financial other events and conditions on the Group’s consolidated Management on 16 March 2016. Our responsibility is to express an opinion on these Reporting Standards. financial position and financial performance; • Making an assessment of the Group’s ability to continue as a going concern. On behalf of the Management: consolidated financial statements based on our audit. We conducted our audit in accordance with Russian Federal 16 March 2016 Auditing Standards and International Standards on Auditing. Moscow, Russian Federation Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated Sedov Andrew, Partner (license no. 01-000487) financial statements are free from material misstatement. ZAO Deloitte & Touche CIS An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected The Entity: PJSC Cherkizovo Group Independent Auditor: ZAO “Deloitte & Touche CIS” Sergei Mikhailov Chief Executive Officer Ludmila Mikhailova Chief Financial Officer Certificate of registration in the Unified State Register № 1057748318473 of 22.09.2005, issued by Moscow Interdistrict Inspectorate of the Russian Ministry of Taxation № 46. Address: 5B, Lesnaya street, Moscow, Russian Federation, 125047 Certificate of state registration № 018.482, issued by the Moscow Registration Chamber on 30.10.1992. Primary State Registration Number: 1027700425444 Certificate of registration in the Unified State Register № 77,004840299 of 13.11.2002, issued by Moscow Interdistrict Inspectorate of the Russian Ministry of Taxation № 39. Certificate of membership in «NP «Audit Chamber of Russia» (auditors’ SRO) of 20.05.2009 № 3026, ORNZ 10201017407. 60 60 61 61 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the year ended 31 December 2015 (in thousands of Russian rubles, unless otherwise indicated) CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December 2015 (in thousands of Russian rubles, unless otherwise indicated) Notes 6 16 7 8 9 10 1 11 Revenue Net change in fair value of biological assets and agricultural produce Cost of sales Gross profit Selling, general and administrative expenses Other operating income, net Operating profit Interest income Interest expense, net Other expenses, net Gain from bargain purchase Profit before income tax Income tax benefit Profit for the year Profit attributable to: Cherkizovo Group Non-controlling interests Earnings per share Weighted average number of shares outstanding – basic: Net income attributable to Cherkizovo Group per share – basic (in Russian rubles): Weighted average number of shares outstanding – diluted: Net income attributable to Cherkizovo Group per share – diluted (in Russian rubles): 2015 77,032,622 (1,163,727) (56,720,216) 19,148,679 (11,947,142) 332,489 7,534,026 285,762 (1,364,766) (583,273) - 5,871,749 149,060 6,020,809 6,007,482 13,327 2014 68,668,409 3,177,764 (45,719,342) 26,126,831 (9,903,786) 434,120 16,657,165 279,962 (964,119) (737,886) 1,378,394 16,613,516 10,211 16,623,727 16,490,173 133,554 43,855,590 43,851,090 136.98 43,855,590 376.05 43,851,090 136.98 376.05 ASSETS Non-current assets Property, plant and equipment Investment property Goodwill Intangible assets Non-current biological assets Notes receivable, net Investments in joint venture Long-term deposits in banks Deferred tax assets Other non-current assets Total non-current assets Current assets Biological assets Inventories Taxes recoverable and prepaid Trade receivables, net Advances paid, net Other receivables, net Cash and cash equivalents Other current assets Total current assets TOTAL ASSETS Notes 31 December 2015 31 December 2014 1 January 12 13 14 15 16 17 18 11 16 19 20 21 22 23 24 2014 60,436,029 432,771 557,191 1,603,903 1,617,833 300,000 1,301,663 641,365 331,300 430,811 67,652,866 9,829,675 12,258,555 2,835,987 4,444,991 2,733,842 1,782,019 5,560,824 612,566 40,058,459 107,711,325 53,758,354 624,928 557,191 1,512,738 1,765,088 - 851,663 671,365 218,467 90,904 60,050,698 9,337,667 7,469,137 1,535,298 3,953,085 2,246,624 1,186,673 1,007,554 648,879 27,384,917 87,435,615 45,475,577 629,713 557,191 1,380,721 1,360,897 56,312 425,663 671,365 205,397 89,634 50,852,470 6,135,960 4,833,451 1,114,439 2,705,276 1,304,538 1,416,830 2,107,282 286,068 19,903,844 70,756,314 The accompanying notes form an integral part of these consolidated financial statements. The accompanying notes form an integral part of these consolidated financial statements. 62 62 63 63 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December 2015 (continued) (in thousands of Russian rubles, unless otherwise indicated) CONSOLIDATED STATEMENT OF CHANGES IN EQUITY As at 31 December 2015 (in thousands of Russian rubles, unless otherwise indicated) EQUITY AND LIABILITIES Equity Share capital Treasury shares Additional paid-in capital Retained earnings Total shareholder’s equity Non-controlling interest Total equity Non-current liabilities Long-term borrowings Provisions Deferred tax liability Other liabilities Total non-current liabilities Current liabilities Short-term borrowings Trade payables Advances received Payables for non-current assets Tax related liabilities Payroll related liabilities Other payables and accruals Total current liabilities Total liabilities TOTAL EQUITY AND LIABILITIES Notes 31 December 2015 31 December 2014 1 January 25 25 25 26 27 11 27 28 440 (78,033) 5,588,320 46,582,955 52,093,682 1,055,392 53,149,074 16,118,747 67,131 405,097 96,185 16,687,160 25,093,017 8,461,657 443,018 1,445,128 790,344 1,372,176 269,751 37,875,091 54,562,251 107,711,325 440 (78,033) 5,591,204 43,968,239 49,481,850 1,057,073 50,538,923 14,284,784 67,487 535,206 177,787 15,065,264 13,557,909 4,315,188 1,099,337 574,073 844,935 1,217,693 222,293 21,831,428 36,896,692 87,435,615 440 (83,920) 5,599,703 28,991,797 34,508,020 923,519 35,431,539 17,143,944 73,339 588,329 74,316 17,879,928 10,496,284 3,963,918 813,620 318,822 628,133 925,385 298,685 17,444,847 35,324,775 70,756,314 Share capital Treasury shares Amount Number of shares Amount Number of shares Additional paid-in capital Retained earnings Total share- holder’s equity Non- controlling interests Total equity 440 43,963,773 (83,920) (117,183) 5,599,703 28,991,797 34,508,020 923,519 35,431,539 – – – – – – – – – 16,490,173 16,490,173 133,554 16,623,727 5,887 – 9,000 – (8,499) (2,612) – – (1,513,731) (1,513,731) (2,612) – – (1,513,731) 440 43,963,773 (78,033) (108,183) 5,591,204 43,968,239 49,481,850 1,057,073 50,538,923 – – – – – – – – – – – – – 6,007,482 6,007,482 13,327 6,020,809 (2,884) (2,884) – – (3,392,766) (3,392,766) (15,008) (17,892) – (3,392,766) 440 43,963,773 (78,033) (108,183) 5,588,320 46,582,955 52,093,682 1,055,392 53,149,074 Balances at 1 January 2014 Profit for the year and total comprehensive income Share based compensation Dividends Balances at 31 December 2014 Profit for the year and total comprehensive income Acquisition of non-controlling interests Dividends Balances at 31 December 2015 The accompanying notes form an integral part of these consolidated financial statements. The accompanying notes form an integral part of these consolidated financial statements. 64 64 65 65 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2015 (in thousands of Russian rubles, unless otherwise indicated) CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2015 (continued) (in thousands of Russian rubles, unless otherwise indicated) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term loans Repayment of long-term loans Proceeds from short-term loans Repayment of short-term loans Dividends paid Acquisition of non-controlling interests Net cash generated from (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 2015 2014 9,218,443 (5,110,160) 21,686,431 (12,736,663) (3,392,766) (17,892) 9,647,393 4,553,270 1,007,554 5,560,824 1,957,281 (4,986,462) 11,222,194 (9,884,073) (1,513,731) – (3,204,791) (1,099,728) 2,107,282 1,007,554 CASH FLOWS FROM OPERATING ACTIVITIES Profit before income tax Adjustments for: Depreciation and amortization Bad debt expense Foreign exchange loss, net Interest income Interest expense, net Net change in fair value of biological assets and agricultural produce (Gain) loss on disposal of property, plant and equipment, net Gain on disposal of non-current biological assets, net Gain from bargain purchase Other adjustments, net Operating cash flows before working capital and other changes Increase in inventories Increase in biological assets Increase in trade receivables Increase in advances paid Increase in other receivables and other current assets (Increase) decrease in other non-current assets Increase (decrease) in trade payables Increase in tax related liabilities (other than income tax) (Decrease) increase in other current payables Operating cash flows before interest and income tax Interest received Interest paid Government grants for compensation of interest expense received Income tax paid Net cash from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment Purchase of non-current biological assets Purchase of intangible assets Proceeds from sale of property, plant and equipment Proceeds from disposal of non-current biological assets Investments in joint venture Placing of deposits and issuance of short-term loans Placing of notes receivable Repayment of short-term loans issued and redemption of deposits Acquisition of subsidiaries, net of cash acquired Net cash used in investing activities 2015 2014 5,871,749 16,613,516 3,826,525 32,062 646,802 (285,762) 1,364,766 1,163,727 (49,793) (282,827) – (108,612) 12,178,637 (4,648,048) (1,586,899) (466,088) (522,982) (1,450,027) (28,022) 3,607,415 17,693 (651,507) 6,450,172 219,758 (3,530,632) 2,019,481 (166,521) 4,992,258 (9,415,480) (432,481) (273,343) 220,832 537,051 (450,000) (156,855) (300,000) 183,895 – (10,086,381) 3,481,944 121,804 739,117 (279,962) 964,119 (3,177,764) 51,083 (485,267) (1,378,394) 1,970 16,652,166 (1,961,626) (148,289) (1,328,884) (1,113,979) (435,192) 2,294 (493,525) 175,953 556,199 11,905,117 243,860 (3,052,669) 2,401,906 (121,776) 11,376,438 (6,146,638) (429,047) (154,159) 246,394 820,375 (426,000) (239,210) – 105,198 (3,048,288) (9,271,375) The accompanying notes form an integral part of these consolidated financial statements The accompanying notes form an integral part of these consolidated financial statements. 66 66 67 67 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS PJSC Cherkizovo Group (the “Company”) is a public joint stock Babaev / Mikhailov family who jointly control MB Capital and 20,349, respectively. Company’s shares at 31 December 2015 and 2014. At 31 December 2015, 2014 and 1 January 2014 the number cash consideration of 3,306,158 of which 3,227,025 has been The ultimate controlling party of PJSC Cherkizovo Group is of staff employed by the Group approximated 21,690, 21,303 paid as of 31 December 2014 (presented in the cash flow Operating environment land plots. statement net of cash acquired of 178,737) and 79,133 is payable upon completion of ownership registration of certain The Company’s parent is MB Capital Europe Ltd., which is included the following principal companies: Emerging markets such as Russia are subject to different risks Allocation of the purchase price of LISKO Broiler in the NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended 31 December 2015 (in thousands of Russian rubles, unless otherwise indicated) 1. Nature of the business General information company incorporated in Russia. The registered office of the Europe Ltd. Company is 5, Lesnaya st., building B, Moscow, 125047, Russia. At 31 December 2015, 2014 and 1 January 2014 the Group registered in Cyprus and owned approximately 61% of the Name of company Legal form Nature of business 31.12.2015, % 31.12.2014, % 01.01.2014, % Meat processing plant Limited Liability Company Limited Liability Company Open Joint Stock Company Meat processing plant OJSC Cherkizovsky Meat Processing Plant (JSC CMPP) LLC PKO Otechestvennyi Product LLC Cherkizovo-Kashira (Cherkizovo-Kashira Ltd.) TPC Cherkizovo Ltd. Limited Liability Company (Cherkizovo-2) Closed Joint Stock Company Raising poultry CJSC Petelinskaya Raising poultry Open Joint Stock Company OJSC Vasiljevskaya OJSC Kurinoe Tsarstvo Raising poultry Open Joint Stock Company CJSC Kurinoe Tsarstvo Bryansk Closed Joint Stock Company Raising poultry Closed Joint Stock Company Raising poultry CJSC Mosselprom Raising poultry Limited Liability Company LLC Lisko Broiler Trading company: distribution of poultry Meat processing plant Procurement company Limited Liability Company Closed Joint Stock Company Pig breeding Pig breeding Limited Liability Company Pig breeding Limited Liability Company 95% 95% 95% 95% 88% 100% 100% 100% 100% 100% 88% 76% 100% 100% 95% 95% 95% 95% 88% 100% 100% 100% 100% 100% 88% 76% 100% 100% 95% 95% 95% 95% 88% 100% 100% 100% 100% - 88% 76% 100% 100% Limited Liability Company Limited Liability Company Mixed fodder production Genetic pig breading and grain crops cultivation 100% 100% 100% 100% 100% 100% Limited Liability Company Grain crops cultivation 100% 100% 100% LLC Petelino Trade House CJSC Botovo LLC Cherkizovo-Pork* LLC Kuznetsovsky Kombinat LLC Cherkizovo-Feed Production LLC Voronezhmyasoprom LLC Cherkizovo-Grain Production The Group owns locally recognised brands, which include Acquisitions and divestitures Cherkizovo (“Черкизово”), Pyat Zvezd (“Пять Звезд”), Petelinka (“Петелинка”), Kurinoe Tsarstvo (“Куриное Acquisition of “Lisko Broiler” Царство”) and Imperia Vkusa (“Империя вкуса”) and has a diverse customer base. On 24 March 2014, the Group completed an acquisition of 100% of the share capital of ZAO LISKO Broiler (“LISKO”) for than more developed markets, including economic, political consolidated financial statements for the year ended and social, and legal and legislative risks. Laws and 31 December 2014: regulations affecting businesses in Russia continue to change rapidly; tax and regulatory frameworks are subject to varying interpretations. The future economic direction of Russia is heavily influenced by the fiscal and monetary policies adopted by the government, together with developments in the legal, regulatory, and political environment. Because Russia produces and exports large volumes of oil and gas, its economy is particularly sensitive to the price of oil and gas on the world market. During 2014-2015, the oil price decreased significantly, which led to substantial decrease of the Russian Ruble exchange rate. Starting from 2014, sanctions have been imposed in several Purchase price Inventory Biological assets Cash and cash equivalents Other current assets Property, plant and equipment Trademarks Short-term loans and finance leases Other current liabilities Long-term loans and finance leases Total assets acquired and liabilities assumed Gain from bargain purchase recognized on acquisition 3,306,158 530,671 398,685 178,737 216,252 5,390,363 34,837 (445,000) (288,717) (1,331,276) 4,684,552 (1,378,394) packages by the U.S. and the E.U. on certain Russian officials, A bargain purchase gain arose because the seller was acting businessmen and companies. In the first quarter of 2015 two under pressure of changing business environment in Russia international credit agencies downgraded Russia’s long-term (see operating environment section above) and was selling foreign currency sovereign rating to the speculative level with non-core business to a strategic investor. the negative outlook. The above mentioned events have led to reduced access of consolidated income statements as if the acquisition the Russian businesses to international capital markets, occurred as of the beginning of the prior annual reporting increased inflation, slackening of the economic growth rates period (1 January 2014). In determining proforma amounts, and other negative economic consequences. The impact of all non-recurring costs were determined to be immaterial. The following pro forma financial information presents * In December 2015, 7 companies of pork segment: LLC Lipetskmyaso, LLC RAO Penzenskaya Grain Company (PZK), LLC Orelselprom, LLC further economic developments on future operations and financial position of the Group is difficult to determine at this Resurs, LLC Agroresurs-Voronezh, LLC TD Myasnoe Tsarstvo and LLC Tambovmyasoprom were merged into Cherkizovo-Pork LLC. stage. The business of the Group a swine nucleus unit. The Group also operates three trading houses with subsidiaries in several major Russian cities. The Group’s operations are spread over the full production cycle from grain and feed production and breeding to meat The Group’s geographical reach covers Moscow, the Moscow processing and distribution. The operational facilities of the region, the regions of Saint Petersburg, Kaliningrad, Penza, Group include six meat processing plants, fifteen pig Lipetsk, Vologda, Ulyanovsk, Chelyabinsk, Tambov, production complexes, Krasnodar, Ekaterinburg, Rostov-na-Donu, Briansk, Voronezh, Belgorod, Kursk, Orel and Kazan. The Group is represented in eight poultry production complexes, six combined fodder the European part of Russia through its own distribution production plants and four grain farming complexes and network. Pro forma Information Sales Operating income Profit for the year For the year ended 31 December 2014 RUR’000 69,734,300 13,596,827 13,547,457 68 68 69 69 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS 2. Significant accounting policies Statement of compliance registered. Accounting policies and financial reporting procedures in these jurisdictions may differ substantially The functional currency of the Company, and each of its subsidiaries, is the Russian ruble. These consolidated financial Functional and presentation currency statements are also presented in Russian rubles which is the presentation currency used by the Group. These consolidated financial statements of the Group for the from those generally accepted under IFRS. Accordingly, the year ended 31 December 2015 have been prepared in consolidated financial statements, which have been prepared accordance with International Financial Reporting Standards from the Group’s statutory basis accounting records, reflect (“IFRSs”) for the first time. The Group’s transition date to adjustments necessary for such financial statements to be IFRS is 1 January 2014. presented in accordance with IFRS. 2. Significant accounting policies continued Foreign currency transactions changes to one or more of the three elements of control For all periods up to and including the year ended The consolidated financial statements have been prepared listed above. 31 December 2014 the Group prepared its consolidated under the historical cost convention, except for biological In preparing the financial statements of each individual group financial statements in accordance with generally accepted assets measured at fair value less estimated point-of-sale entity, transactions in currencies other than the entity’s When the Company has less than a majority of the voting accounting principles in the United States of America (“US costs; and assets and liabilities of subsidiaries acquired and functional currency (foreign currencies) are recognised at the rights of an investee, it has power over the investee when the GAAP”). Certain disclosures required by IFRS 1 “First-Time recorded in accordance with IFRS 3 “Business combinations” rates of exchange prevailing at the dates of the transactions. voting rights are sufficient to give it the practical ability to Adoption of International Financial Reporting Standards” (“IFRS 3”). (“IFRS 1”) in relation to the Group’s transition from US GAAP to IFRS are provided in Note 5. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. At the end of each reporting period, monetary items direct the relevant activities of the investee unilaterally. denominated in foreign currencies are retranslated at the The Company considers all relevant facts and circumstances rates prevailing at that date. Non-monetary items that are in assessing whether or not the Company’s voting rights in an measured in terms of historical cost in a foreign currency are investee are sufficient to give it power, including: IFRS 1 sets out the procedures that the Group must follow not retranslated. when it adopts IFRS for the first time as the basis for Fair value is the price that would be received to sell an asset preparing its consolidated financial statements. The Group is or paid to transfer a liability in an orderly transaction Exchange differences on monetary items are recognised in • The size of the Company’s holding of voting rights relative to the size and dispersion of holdings of the other vote required to develop an accounting policy to comply with IFRS between market participants at the measurement date, profit or loss in the period in which they arise. holders; effective at the reporting date of its first annual IFRS regardless of whether that price is directly observable or consolidated financial statements (i.e. at 31 December 2015) estimated using another valuation technique. In estimating and in general, apply it retrospectively to determine the IFRS the fair value of an asset or a liability, the Group takes into opening statement of financial position at its date of account the characteristics of the asset or liability if market transition (i.e. at 1 January 2014). In preparing the participants would take those characteristics into account Going concern These consolidated financial statements have been prepared on the assumption that the Group will continue as a going • Potential voting rights held by the Company, other vote holders or other parties; • Rights arising from other contractual arrangements; and • Any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to consolidated financial statements in accordance with IFRS 1 when pricing the asset or liability at the measurement date. concern in the foreseeable future, which implies the direct the relevant activities at the time that decisions need the Group has applied the mandatory exemptions and has Fair value for measurement and/or disclosure purposes in realization of assets and settlement of liabilities in the normal to be made, including voting patterns at previous applied the following optional exemptions by electing to: these consolidated financial statements is determined on course of business. shareholders’ meetings. • Measure certain land plots classified as property, plant and equipment at the date of transition to IFRS at its fair value the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as net such a basis, except for leasing transactions that are within The Group continues to monitor its existing liquidity needs on Consolidation of a subsidiary begins when the Company an on-going basis. Management believes that the Group will obtains control over the subsidiary and ceases when the and used that measurement as its deemed cost at that realizable value in IAS 2 or value in use in IAS 36. have sufficient operating cash flows and borrowing capacity Company loses control of the subsidiary. Specifically, income date. • Measure all land plots classified as investment property at the date of transition to IFRS at its fair value and used that In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on measurement as its deemed cost at that date. • Not to apply IFRS 3 “Business Combinations” the degree to which the inputs to the fair value • Not to apply IFRS 2 “Share-based Payment” retrospectively to equity instruments that were granted • Level 1 inputs are quoted prices (unadjusted) in active and vested before the date of transition to IFRSs. markets for identical assets or liabilities that the entity can retrospectively to past business combinations that inputs to the fair value measurement in its entirety, which are financial statements of the Company and entities controlled occurred before the date of transition to IFRSs. described as follows: by the Company (its subsidiaries). measurements are observable and the significance of the The consolidated financial statements incorporate the ceases to control the subsidiary. to continue as a going concern in the foreseeable future. Basis of consolidation and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Company gains control until the date when the Company Control is achieved when the Company: the non-controlling interests. Total comprehensive income of Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. Basis of preparation access at the measurement date; • Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, • Has power over the investee; • Is exposed, or has rights, to variable returns from its involvement with the investee; and The entities of the Group maintain their accounting records in either directly or indirectly; and accordance with laws, accounting and reporting regulations • Level 3 inputs are unobservable inputs for the asset or • Has the ability to use its power to affect its returns. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies of the jurisdictions in which they are incorporated and liability. The Company reassesses whether or not it controls an into line with the Group’s accounting policies. investee if facts and circumstances indicate that there are 70 70 71 71 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS All intragroup assets and liabilities, equity, income, expenses initially measured either at fair value or at the non-controlling its carrying amount, the impairment loss is allocated first to When a group entity transacts with a joint venture of the and cash flows relating to transactions between members of interests’ proportionate share of the recognised amounts of reduce the carrying amount of any goodwill allocated to the Group, profits and losses resulting from the transactions with the Group are eliminated in full on consolidation. the acquiree’s identifiable net assets. The choice of unit and then to the other assets of the unit pro rata based on the joint venture are recognised in the Group’s consolidated Business combinations (from third parties) measurement basis is made on a transaction-by-transaction basis. Other types of non-controlling interests are measured at fair value or, when applicable, on the basis specified in Acquisitions of businesses from third parties are accounted another IFRS. for using the acquisition method. The consideration the carrying amount of each asset in the unit. Any financial statements only to the extent of interests in the impairment loss for goodwill is recognised directly in profit or joint venture that are not related to the Group. loss. An impairment loss recognised for goodwill is not reversed in subsequent periods. On disposal of the relevant Property, plant and equipment cash-generating unit, the attributable amount of goodwill is transferred in a business combination is measured at fair If the initial accounting for a business combination is included in the determination of the profit or loss on disposal. Owned assets value, which is calculated as the sum of the acquisition-date incomplete by the end of the reporting period in which the fair values of the assets transferred by the Group, liabilities combination occurs, the Group reports provisional amounts incurred by the Group to the former owners of the acquiree for the items for which the accounting is incomplete. Those Investments in joint venture Property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Land is not and the equity interests issued by the Group in exchange for provisional amounts are adjusted during the measurement A joint venture is a joint arrangement whereby the parties depreciated. control of the acquiree. Acquisition-related costs are period, or additional assets or liabilities are recognized, to that have joint control of the arrangement have rights to the recognized in profit or loss as incurred. reflect new information obtained about facts and net assets of the joint arrangement. Joint control is the Cost includes expenditure that is directly attributable to the circumstances that existed as of the acquisition date that, if contractually agreed sharing of control of an arrangement, acquisition of the asset. The cost of self-constructed assets At the acquisition date, the identifiable assets acquired and known, would have affected the amounts recognized as of which exists only when decisions about the relevant activities includes the cost of materials, direct labour, and any other the liabilities assumed are recognized at their fair value at the that date. The measurement period is the period from the require unanimous consent of the parties sharing control. costs directly attributable to bringing the asset to a working acquisition date, except for: date of acquisition to the date the Group obtains complete condition for its intended use, and the costs of dismantling • Deferred tax assets or liabilities and liabilities or assets the acquisition date – and is subject to a maximum of one related to employee benefit arrangements are recognized year. and measured in accordance with IAS 12 Income Taxes and equity method of accounting, whereby an investment in an are located. Purchased software that is integral to the associate or a joint venture is initially recognised in the functionality of the related equipment is capitalized as part consolidated statement of financial position at cost and of that equipment. information about facts and circumstances that existed as of The Group reports its interests in joint venture using the and removing the items and restoring the site in which they IAS 19 Employee Benefits respectively; • Liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based Acquisitions of entities under common control adjusted thereafter to recognise the Group’s share of the Acquisitions of entities under common control are accounted associate or joint venture. When the Group’s share of losses different useful lives, they are accounted for as separate profit or loss and other comprehensive income of the When parts of an item of property and equipment have payment arrangements of the Group entered into to for on the basis of predecessor carrying values, which results of an associate or a joint venture exceeds the Group’s interest items (major components) of property and equipment. replace share-based payment arrangements of the in the historical book value of assets and liabilities of the in that associate or joint venture (which includes any acquiree are measured in accordance with IFRS 2 Share- acquired entity being combined with that of the Group. For long-term interests that, in substance, form part of the Gains and losses on disposal of an item of property, plant and based Payment at the acquisition date; and common control transactions the consolidated historical Group’s net investment in the associate or joint venture), the equipment are recognized net in other income in profit or • Assets (or disposal groups) that are classified as held for financial statements of the Group are retrospectively Group discontinues recognising its share of further losses. loss. sale in accordance with IFRS 5 Non-current Assets Held for restated to reflect the effect of the acquisition as if it Additional losses are recognised only to the extent that the Sale and Discontinued Operations are measured in occurred at the beginning of the earliest period presented. Group has incurred legal or constructive obligations or made Repairs and maintenance accordance with that Standard. Consideration paid is reflected as a decrease in additional payments on behalf of the associate or joint venture. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling Goodwill interests in the acquiree, and the fair value of the acquirer’s paid in capital. An investment in an associate or a joint venture is accounted equipment is recognized in the carrying amount of the item if for using the equity method from the date on which the it is probable that future economic benefits embodied within investee becomes an associate or a joint venture. the part will flow to the Group and its cost can be measured The cost of replacing part of an item of property, plant and previously held interest in the acquiree (if any) over the net of Goodwill arising on an acquisition of a business is carried at reliably. The carrying amount of the replaced part is the acquisition-date amounts of the identifiable assets cost as established at the date of acquisition of the business The requirements of IAS 39 are applied to determine whether derecognized. The costs of day-to-day servicing of property, acquired and the liabilities assumed. If, after reassessment, (see accounting policy on Business combinations (from third it is necessary to recognise any impairment loss with respect plant and equipment are recognized in profit or loss as the net of the acquisition-date amounts of the identifiable parties) above) less accumulated impairment losses, if any. to the Group’s investment in an associate or a joint venture. incurred. assets acquired and liabilities assumed exceeds the sum of When necessary, the entire carrying amount of the the consideration transferred, the amount of any non- For the purposes of impairment testing, goodwill is allocated investment (including goodwill) is tested for impairment in Depreciation controlling interests in the acquiree and the fair value of the to each of the Group’s cash-generating units (or groups of accordance with IAS 36 Impairment of Assets as a single acquirer’s previously held interest in the acquiree (if any), the cash-generating units) that is expected to benefit from the asset by comparing its recoverable amount (higher of value in Depreciation is recognized to write off the cost of assets excess is recognized immediately in profit and loss as synergies of the combination. use and fair value less costs to sell) with its carrying amount, (other than freehold land and properties under construction) a bargain purchase gain. Any impairment loss recognised forms part of the carrying less their residual values over their useful lives, using the A cash-generating unit to which goodwill has been allocated amount of the investment. Any reversal of that impairment straight-line method. Leased assets are depreciated over the Non-controlling interests that are present ownership is tested for impairment annually, or more frequently when loss is recognised in accordance with IAS 36 to the extent that shorter of the lease term and their useful lives unless it is interests and entitle their holders to a proportionate share of there is an indication that the unit may be impaired. If the the recoverable amount of the investment subsequently reasonably certain that the Group will obtain ownership by the entity’s net assets in the event of liquidation may be recoverable amount of the cash-generating unit is less than increases. the end of the lease term. 72 72 73 73 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS The estimated useful lives for the current and comparative periods are as follows: Impairment of tangible and intangible assets other than goodwill Inventories Based on the above policy, the principal groups of biological assets and agricultural produce are stated as follows: Land Buildings, infrastructure and lease hold improvements Machinery and equipment Vehicles Other indefinite life 20-40 years 3-22 years 3-10 years 3-10 years The carrying amounts of the Group’s non-current assets are reviewed at each reporting date to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, then the asset’s principle and includes expenditure incurred in acquiring the The cost of inventories is based on the weighted average (i) Broilers Broilers comprise poultry held for chicken meat production. recoverable amount is estimated. Intangible assets with inventories, production or conversion costs and other costs The fair value of broilers is determined by reference to the indefinite useful lives and intangible assets not yet available included in bringing them to their existing location and cash flows that will be obtained from sales of finished Inventories are measured at the lower of cost and net realizable value. Biological assets Depreciation methods, useful lives and residual values are for use are tested for impairment at least annually, and condition. In the case of manufactured inventories and work chickens, with an allowance for costs to be incurred and risks reassessed at each reporting date, with the effect of any whenever there is an indication that the asset may be in progress cost includes an appropriate share of production to be faced during the remaining transformation process. changes in accounting estimate recognized on a prospective impaired. overheads based on normal operating capacity. basis. Investment property The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to Net realizable value is the estimated selling price in the (ii) Breeders (laying hens and replacement flock) Breeders comprise poultry held for regeneration of broilers. ordinary course of business, less the estimated costs of The fair value of breeders is determined by reference to the sell. In assessing value in use, the estimated future cash flows completion and selling expenses. cash flows that will be obtained from sales of hatchery eggs, Investment properties represent buildings and land held to are discounted to their present value using a pre-tax discount earn rentals and/or for capital appreciation (including rate that reflects current market assessments of the time property under construction for such purposes). Investment value of money and the risks specific to the asset for which properties are measured at cost, including transaction costs, the estimates of future cash flows have not been adjusted. less accumulated depreciation and impairment losses. Land is For the purpose of impairment testing, assets are grouped Biological assets and agricultural produce faced during the remaining productive period. with an allowance for costs to be incurred and risks to be Biological assets of the Group consist of livestock (pigs and poultry) and unharvested crops (grain crops and other (iii) Market hogs Market hogs comprise of pigs held for pork meat production. not depreciated. together into the smallest group of assets that generates plantations). cash inflows from continuing use that are largely The fair value of broilers is determined by reference to the cash flows that will be obtained from sales of finished pigs, Depreciation is recognized in profit or loss on a straight-line independent of the cash inflows of other assets or groups of The Group recognizes a biological asset or agricultural with an allowance for costs to be incurred and risks to be basis over the estimated useful lives (10-40 years) of each assets (the “cash-generating unit”). The goodwill acquired in produce when the Group controls the asset as a result of past faced during the remaining transformation process. building. a business combination acquisition, for the purposes of events, it is probable that future economic benefits impairment testing, is allocated to cash-generating units that associated with the asset will flow to the Group, and the fair An investment property is derecognised upon disposal or are expected to benefit from the synergies of the value or cost of the asset can be measured reliably. when the investment property is permanently withdrawn combination. from use and no future economic benefits are expected from the disposal. Any gain or loss arising on derecognition of the An impairment loss is recognized if the carrying amount of an to sell at both initial recognition and as of the reporting date, piglets, with an allowance for costs to be incurred and risks to property (calculated as the difference between the net asset or its cash-generating unit exceeds its recoverable with any results recognized in profit or loss. Costs to sell be faced during the remaining productive period. Biological assets are stated at fair value less estimated costs to the cash flows that will be obtained from sales of weaned disposal proceeds and the carrying amount of the asset) is amount. Impairment losses are recognised immediately in included in profit or loss in the period in which the property is profit or loss. Impairment losses recognized in respect of include all costs that would be necessary to sell the assets, including costs necessary to get the assets to market. (iv) Sows Sows comprise pigs held for regeneration of market hogs population. The fair value of sows is determined by reference derecognised. Intangible assets Intangible assets represent acquired trademarks and cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. The difference between fair value less costs to sell and total production costs is allocated to biological assets held in stock (v) Unharvested crops (wheat, corn, sunflower, barley, pea and others). At the year-end unharvested crops are carried at the accumulated costs incurred, which approximate the fair value as of each reporting date as a fair value adjustment. since little biological transformation has taken place due to The change in this adjustment from one period to another is the seasonal nature of the crops. Subsequent to the year-end computer software. All trademarks have been determined to When an impairment loss subsequently reverses, the carrying recognized as “Net change in fair value of biological assets unharvested crops in fields are measured at fair value, which have an indefinite life. amount of the asset (or a cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that and agricultural produce” in profit or loss. is determined by reference to the cash flows that will be obtained from sales of harvested crops, with an allowance for Intangible assets with finite useful lives are carried at cost the increased carrying amount does not exceed the carrying Agricultural produce harvested from biological assets is costs to be incurred at the point of sale and risks to be faced less accumulated amortisation and accumulated impairment amount that would have been determined had no recognised in inventory and measured at its fair value less during the remaining transformation process. losses. Amortisation is recognised on a straight-line basis over impairment loss been recognised for the asset (or cash- costs to sell at the point of harvest. A gain or loss arising on their estimated useful lives. The estimated useful life and generating unit) in prior years. A reversal of an impairment initial recognition of agricultural produce at fair value less Agricultural produce amortisation method are reviewed at the end of each loss is recognised immediately in profit or loss. reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with indefinite useful lives are carried at cost less accumulated impairment losses. costs to sell is recognized as “Net change in fair value of biological assets and agricultural produce” in profit or loss and for items sold is presented on net basis as a reduction of the line “Cost of sales”. (i) Dressed poultry and pork The fair value of dressed poultry and pork is determined by reference to market prices at the point of harvest. 74 74 75 75 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS (ii) Crops The fair value of crops is determined by reference to market prices at the point of harvest. of those assets, until such time as the assets are substantially Taxation Leases ready for their intended use or sale. Income tax expense represents the sum of the tax currently Leases are classified as finance leases whenever the terms of All other borrowing costs are recognized in profit or loss in payable and deferred tax. The Group’s biological assets are classified into bearer and the period in which they are incurred. consumable biological assets depending upon the function of a particular group of biological assets in the Group’s Government grants production process. Consumable biological assets are those Current tax operating leases. The tax currently payable is based on taxable profit for the Assets held under finance leases are recognised as assets of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as that are to be harvested as agricultural produce, and include In accordance with Russian legislation, enterprises engaged in year. Taxable profit differs from ‘profit before tax’ as reported the Group at their fair value or, if lower, at the present value boilers, market hogs and unharvested crops. Bearer agricultural activities receive certain government grants. in the consolidated statement of profit or loss and other of the minimum lease payments, each determined at biological assets include poultry breeders and sows. Government grants are not recognised until there is comprehensive income because of items of income or inception of the lease. The corresponding liability is included Revenue recognition reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received. The Group derives its revenue from four main sources: sale of processed meat, poultry, pork and grain crops. Revenue is The largest of such government grants relate to recognised when the products are shipped or when goods are reimbursement of interest expense on qualifying loans received by its customer, title and risk of ownership has (“interest subsidies”). The Group records interest subsidies as passed, the price to the buyer is fixed or determinable and an offset to interest expense during the period to which they recoverability is reasonably assured. relate. expense that are taxable or deductible in other years and in the balance sheet as lease liability. Lease payments are items that are never taxable or deductible. The Group’s apportioned between interest expense and reduction of the current tax is calculated using tax rates that have been lease obligation so as to achieve a constant rate of interest on enacted or substantively enacted by the end of the reporting the remaining balance of the liability. Interest expense is period. Deferred tax charged directly against income, unless it is directly attributable to qualifying assets, in which case it is capitalised in accordance with the Group’s general policy on interest costs (see Borrowing cost above). Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the Cash and cash equivalents In accordance with the Group’s standard sales terms, title is The Group also receives government grants based on square consolidated financial statements and the corresponding tax transferred and the customer assumes the risks and rewards of cultivated land and volumes of meat or eggs produced and bases used in the computation of taxable profit. Deferred tax Cash and cash equivalents represent cash on hand and in of ownership upon shipment. However, on contracts with fodder purchased. These grants are less systematic and liabilities are generally recognised for all taxable temporary bank accounts and short-term highly liquid investments certain large retail chains, title transfers upon acceptance of therefore in general the Group recognizes them only when differences. Deferred tax assets are generally recognised for having original maturities of less than three months. goods by the customer at delivery. Sales made under these receives the grant or it is highly probable that the grant will all deductible temporary differences to the extent that it is contracts are recognized upon acceptance by customer. be received. These grants are recorded as reductions to cost probable that taxable profits will be available against which Provisions of sales during the period to which they relate. those deductible temporary differences can be utilised. Such Sales are recognised at the fair value of the consideration deferred tax assets and liabilities are not recognised if the A provision is recognized if, as a result of a past event, the received or receivable, net of VAT, discounts and returns. In addition to that, from time to time the Group receives temporary difference arises from the initial recognition (other Group has a present legal or constructive obligation that can The Group grants discounts to customers primarily based on government grants for compensation of certain capital than in a business combination) of assets and liabilities in be estimated reliably, and it is probable that an outflow of the volume of goods purchased. Discounts are based on expenditures. These grants are non-systematic and therefore a transaction that affects neither the taxable profit nor the economic benefits will be required to settle the obligation. monthly, quarterly, or annual target sales. Discounts range the Group recognizes them only when receives the grant. accounting profit. up to 31% for the meat processing segment and 12.5% for the These grants are recorded as reductions to costs capitalized The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at poultry segment. No discounts are offered in the pork and during the period to which they relate. Deferred tax liabilities are recognised for taxable temporary the end of the reporting period, taking into account the risks grain segments. The discounts are graduated to increase when actual sales exceed target sales. Employee benefits differences associated with investments in subsidiaries and interests in joint ventures, except where the Group is able to and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to control the reversal of the temporary difference and it is settle the present obligation, its carrying amount is the The Group offers product guarantees to its customers, Remuneration to employees in respect of services rendered probable that the temporary difference will not reverse in the present value of those cash flows (when the effect of the providing them with an option to return damaged and non during the reporting period is recognized as an expense in foreseeable future. Deferred tax assets arising from time value of money is material). conforming goods and goods of initial improper quality. that reporting period. The Group does not have any material deductible temporary differences associated with such The period that goods may be returned is set to a maximum long-term employee benefits. of one month from the date of shipment. Returns are investments and interests are only recognised to the extent Share capital that it is probable that there will be sufficient taxable profits accounted for as deductions to sales in the period to which The Group contributes to the State Pension Fund of the against which to utilise the benefits of the temporary Ordinary shares are classified as equity and are recorded at sales relate. Borrowing costs Russian Federation. The only obligation of the Group with respect to these defined contribution plans is to make the specified contributions in the period in which they arise. differences and they are expected to reverse in the the par value of proceeds received. Where shares are issued foreseeable future. above par value, the proceeds in excess of par value are recorded in additional paid-in capital, net of direct issue costs. Borrowing costs directly attributable to the acquisition, Federation are recognized in the consolidated statement of end of each reporting period and reduced to the extent that it Treasury shares construction or production of qualifying assets, which are profit or loss and other comprehensive income when is no longer probable that sufficient taxable profits will be These contributions to the State Pension Fund of the Russian The carrying amount of deferred tax assets is reviewed at the assets that necessarily take a substantial period of time to employees have rendered services entitling them to the available to allow all or part of the asset to be recovered. Where the Company or its subsidiaries purchase the get ready for their intended use or sale, are added to the cost contribution. The Group does not maintain any supplemental post-retirement benefit plans for its employees. 76 76 Company’s equity instruments, the consideration paid, including any directly attributable incremental costs, net of 77 77 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS income taxes, is deducted from equity attributable to the (including all fees and points paid or received that form an exceed what the amortised cost would have been had the Financial liabilities Company’s owners until the equity instruments are integral part of the effective interest rate, transaction costs impairment not been recognised. cancelled, reissued or disposed of. Where such shares are and other premiums or discounts) through the expected life Financial liabilities are classified as either financial liabilities subsequently sold or reissued, any consideration received, net of the debt instrument, or, where appropriate, a shorter Individually significant financial assets are tested for ‘at FVTPL’ or ‘other financial liabilities’. At the reporting dates, of any directly attributable incremental transaction costs and period, to the net carrying amount on initial recognition. impairment on an individual basis. The remaining financial the Group had only financial liabilities classified as ‘other the related income tax effects, is included in equity assets are assessed collectively in groups that share similar financial liabilities’. attributable to the Company’s owners. Loans and receivables credit risk characteristics. Dividends Loans and receivables are non-derivative financial assets with Derecognition of financial assets fixed or determinable payments that are not quoted in an Other financial liabilities (including borrowings and trade and Dividends are recognized as a liability and deducted from active market. Loans and receivables (including trade and The Group derecognises a financial asset when the other payables) are initially recognised at fair value less equity at the reporting date only if they are declared before other receivables, bank balances and cash) are measured at contractual rights to the cash flows from the asset expire, or transaction costs. Subsequently they are measured at or on the reporting date by the shareholders at a general amortised cost using the effective interest method, less any when it transfers the financial asset and substantially all the amortised cost using the effective interest method. meeting. Dividends are disclosed when they are proposed impairment. before the reporting date or proposed or declared after the risks and rewards of ownership of the asset to another party. On derecognition of a financial asset in its entirety, the Derecognition of financial liabilities reporting date but before the consolidated financial Interest income is recognised by applying the effective difference between the asset’s carrying amount and the sum statements are authorized for issue. interest rate, except for short-term receivables when the of the consideration received and receivable and the The Group derecognises financial liabilities when, and only effect of discounting is immaterial. cumulative gain or loss that had been recognised in other when, the Group’s obligations are discharged, cancelled or Other financial liabilities Financial instruments Impairment of financial assets Financial assets and financial liabilities are recognised when a group entity becomes a party to the contractual provisions Financial assets, other than those at FVTPL, are assessed for of the instruments. indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is Financial assets and financial liabilities are initially measured objective evidence that, as a result of one or more events that at fair value. Transaction costs that are directly attributable occurred after the initial recognition of the financial asset, to the acquisition or issue of financial assets and financial the estimated future cash flows of the investment have been liabilities (other than financial assets and financial liabilities at affected. fair value through profit or loss) are added to or deducted comprehensive income and accumulated in equity is they expire. The difference between the carrying amount of recognised in profit or loss. the financial liability derecognised and the consideration paid and payable is recognised in profit or loss. 3. New and revised international financial reporting standards IFRS and IFRIC interpretations adopted in the current year IFRS and IFRIC interpretations in issue but not yet effective from the fair value of the financial assets or financial For financial assets carried at amortised cost, the amount of In accordance with IFRS 1, the Group has adopted all IFRS and At the date of authorization of these consolidated financial liabilities, as appropriate, on initial recognition. Transaction the impairment loss recognised is the difference between the Interpretations that are relevant to its operations and statements, the following standards and interpretations have costs directly attributable to the acquisition of financial asset’s carrying amount and the present value of estimated effective for annual reporting periods beginning on 1 January been published that are mandatory for the Group’s assets or financial liabilities at fair value through profit or loss future cash flows, discounted at the financial asset’s original 2015. are recognised immediately in profit or loss. effective interest rate. accounting periods beginning on or after 1 January 2016 or later periods and which the entity has not early adopted: Financial assets The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the Financial assets are classified into the following specified exception of trade receivables, where the carrying amount is categories: financial assets ‘at fair value through profit or reduced through the use of an allowance account. When Standards and Interpretations IFRS 9 “Financial Instruments” IFRS 14 “Regulatory Deferral Accounts” loss’ (FVTPL), ‘held-to-maturity’ investments, ‘available-for- a trade receivable is considered uncollectible, it is written off IFRS 15 “Revenue from Contracts with Customers” sale’ (AFS) financial assets and ‘loans and receivables’. against the allowance account. Subsequent recoveries of IFRS 16 “Leases” Effective for annual periods beginning on or after 1 January 2018 1 January 2016 1 January 2018 1 January 2019 The classification depends on the nature and purpose of the amounts previously written off are credited against the financial assets and is determined at the time of initial allowance account. Changes in the carrying amount of the recognition. At the reporting dates, the Group had only allowance account are recognised in profit or loss. financial assets classified as ‘loans and receivables’. Effective interest method For financial assets measured at amortised cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an The effective interest method is a method of calculating the event occurring after the impairment was recognised, the amortised cost of a debt instrument and of allocating interest previously recognised impairment loss is reversed through income over the relevant period. The effective interest rate is profit or loss to the extent that the carrying amount of the the rate that exactly discounts estimated future cash receipts investment at the date the impairment is reversed does not Amendments to IFRS 11 – Accounting for Acquisition of Interests in Joint Operations Amendments to IAS 1 – Disclosure Initiative Amendments to IAS 7 – Disclosure Initiative Amendments to IAS 16 and IAS 38 – Clarification of Acceptable Methods of Depreciation and Amortisation Amendments to IAS 16 and IAS 41 – Agriculture: Bearer Plants Amendments to IFRS 10 and IAS 28 – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture Amendments to IFRS 10, IFRS 12 and IAS 28 – Investment Entities: Applying the Consolidation Exception 1 January 2016 1 January 2016 Amendments to IAS 27 – Equity Method in Separate Financial Statements 1 January 2017 Amendments to IAS 12 – Recognition of Deferred Tax Assets for Unrealised Losses 1 January 2016 Annual Improvements to IFRSs 2012-2014 Cycle 1 January 2016 1 January 2016 1 January 2017 1 January 2016 1 January 2016 Date to be determined by the IASB 78 78 79 79 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS IFRS 9 “Financial Instruments” comprehensive income would create or enlarge an The five steps in the model are as follows: Under IFRS 16 a lessee recognises a right-of-use asset and the IFRS 9 issued in November 2009 introduced new attributable to a financial liability’s credit risk are not requirements for the classification and measurement of subsequently reclassified to profit or loss. Under IAS 39, accounting mismatch in profit or loss. Changes in fair value financial assets. the entire amount of the change in the fair value of the financial liability designated as fair value through profit or IFRS 9 was subsequently amended in October 2010 to include loss is presented in profit or loss. • Identify the contract with the customer • Identify the performance obligations in the contract • Determine the transaction price • Allocate the transaction price to the performance obligations in the contracts lease liability. The right-of-use asset is treated similarly to other non-financial assets and depreciated accordingly and the liability accrues interest. The lease liability is initially measured at the present value of the lease payments payable over the lease term, discounted at the rate implicit in the lease, or if that cannot be readily determined, the lessee shall requirements for the classification and measurement of • Impairment. In relation to the impairment of financial • Recognise revenue when (or as) the entity satisfies use their incremental borrowing rate. financial liabilities and for derecognition, and in November assets, IFRS 9 requires an expected credit loss model, as a performance obligation. 2013 to include the new requirements for general hedge opposed to an incurred credit loss model under IAS 39. As with IAS 17, lessors classify leases as operating of finance accounting. Another revised version of IFRS 9 was issued in The expected credit loss model requires an entity to Under IFRS 15, an entity recognises revenue when or as in nature. A lease is classified as a finance lease if it transfers July 2014 mainly to include a) impairment requirements for account for expected credit losses and changes in those a performance obligation is satisfied, i.e. when ‘control’ of the substantially all the risks and rewards incidental to ownership financial assets and expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. In other goods or services underlying the particular performance of an underlying asset. Otherwise, a lease is classified as an obligation is transferred to the customer. Far more operating lease. For finance leases a lessor recognises finance b) limited amendments to the classification and words, it is no longer necessary for a credit event to have prescriptive guidance has been added in IFRS 15 to deal with income over the lease term, based on a pattern reflecting measurement requirements by introducing a ‘fair value occurred before credit losses are recognised. specific scenarios. Furthermore, extensive disclosures are a constant periodic rate of return on the net investment. through other comprehensive income’ (FVTOCI) • Hedge accounting. The new general hedge accounting required by IFRS 15. measurement category for certain simple debt instruments. requirements retain the three types of hedge accounting A lessor recognises operating lease payments as income on a straight-line basis or, if more representative of the pattern The key requirements of IFRS 9 are: • Classification and measurement of financial assets. All recognised financial assets that are within the scope of mechanisms currently available in IAS 39. Under IFRS 9, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the types of risk components of IAS 39 Financial Instruments: Recognition and non-financial items that are eligible for hedge accounting. IFRS 16 Leases Measurement are required to be subsequently measured In addition, the effectiveness test has been overhauled and The impact of adoption of these standards and in which benefit from use of the underlying asset is interpretations in the preparation of the consolidated diminished, another systematic basis. financial statements in future periods is currently being assessed by management. The management of the Group anticipates that the application of IFRS 16 in the future may have a significant impact on the amount of assets and liabilities due to recognition of all leases for contracts where the Group is at amortised cost or fair value. Specifically, debt replaced with the principle of an ‘economic relationship’. IFRS 16 Leases brings most leases on-balance sheet for a lessee. However, it is not practicable to provide a reasonable investments that are held within a business model whose Retrospective assessment of hedge effectiveness is also no lessees under a single model, eliminating the distinction estimate of the effect of IFRS 16 until a detailed review has objective is to collect the contractual cash flows, and that longer required. Enhanced disclosure requirements about between operating and finance leases. Lessor accounting been completed. have contractual cash flows that are solely payments of an entity’s risk management activities have also been principal and interest on the principal outstanding are introduced. generally measured at amortised cost at the end of subsequent accounting periods. Debt instruments that are The standard is effective from 1 January 2018 with early held within a business model whose objective is achieved application permitted. The impact of adoption of these both by collecting contractual cash flows and selling standards and interpretations in the preparation of the financial assets, and that have contractual terms that give consolidated financial statements in future periods is rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount currently being assessed by management. however remains largely unchanged and the distinction between operating and finance leases is retained. 4. Key sources of estimation uncertainty Management has made a number of judgments, estimates and assumptions relating to the reporting of assets and The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of outstanding, are generally measured at FVTOCI. All other IFRS 15 Revenue from Contracts with Customers liabilities and the disclosure of contingent assets and the reporting period, that may have a significant risk of debt investments and equity investments are measured at their fair value at the end of subsequent accounting periods. In addition, under IFRS 9, entities may make an • In May 2014, IFRS 15 was issued which establishes a single comprehensive model for entities to use in accounting for irrevocable election to present subsequent changes in the revenue arising from contracts with customers. IFRS 15 will liabilities to prepare these consolidated financial statements causing a material adjustment to the carrying amounts of in conformity with IFRSs. The estimates and associated assets and liabilities within the next financial year. assumptions are based on historical experience and other factors that are considered relevant. Actual results may differ Biological assets fair value of an equity investment (that is not held for supersede the current revenue recognition guidance from those estimates. Additional information relating to trading) in other comprehensive income, with only dividend including IAS 18 Revenue, IAS 11 Construction Contracts contingencies and commitments is disclosed in Note 31. Biological assets are recorded at fair values less costs to sell. income generally recognised in profit or loss. and the related interpretations when it becomes effective. Fair value of the Group’s biological assets was determined by • Classification and measurement of financial liabilities. With regard to the measurement of financial liabilities The core principle of IFRS 15 is that an entity should an ongoing basis. Revisions to accounting estimates are market prices near the reporting date for biological assets of The estimates and underlying assumptions are reviewed on using valuation techniques, as there were no observable designated as at fair value through profit or loss, IFRS 9 recognise revenue to depict the transfer of promised goods recognized in the period in which the estimate is revised if the the same physical conditions. Fair value is determined using requires that the amount of change in the fair value of the or services to customers in an amount that reflects the revision affects only that period, or in the period of the financial liability that is attributable to changes in the consideration to which the entity expects to be entitled in revision and future periods if the revision affects both current credit risk of that liability is presented in other exchange for those goods and services. Specifically, the and future periods. comprehensive income, unless the recognition of the standard provides a single, principles based five-step model effects of changes in the liability’s credit risk in other to be applied to all contracts with customers. 80 80 81 81 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS Level 3 of fair value hierarchy and the following key unobservable inputs: Description Broilers Fair value as at 31 December 2015 1,728,769 Valuation technique Discounted cash flows Breeders held for hatchery eggs production 2,602,867 Discounted cash flows Sows 1,597,495 Discounted cash flows Unobservable inputs Average weight of one broiler – kg Poultry meat price – rubles Projected production costs – rubles per kg Number of hatchery eggs produced by one breeder Hatchery egg price – rubles Projected production costs of hatchery egg – rubles Average number of piglets produced by one sow Market price of weaned piglet – rubles Discount rate Market hogs 4,232,255 Discounted cash flows Average weight of one market hog – kg Pork meat price – rubles per kg Unharvested crops (except for year-end) 948,080 Discounted cash flows Projected production costs – rubles per kg Crops yield – tonne/Ha Selling price Projected production costs Value of unobservable inputs Relationship of unobservable inputs to fair value 2.2 90.2 80.1 153 19.7 7.3 27.7 2,063 13% 118.7 83.3 67.4 Not applicable for year-end Not applicable for year-end Not applicable for year-end The higher the weight, the higher the fair value The higher the price, the higher the fair value The higher the costs, the lower the fair value The higher the number, the higher the fair value The higher the price, the higher the fair value The higher the costs, the lower the fair value The higher the number, the higher the fair value The higher the price, the higher the fair value The higher the discount rate, the lower the fair value The higher the weight, the higher the fair value The higher the price, the higher the fair value The higher the costs, the lower the fair value The higher the yield, the higher the fair value The higher the price, the higher the fair value The higher the costs, the lower the fair value expense for the period. There have been no significant possible reduction in value, including a number of factors changes in estimates of useful lives of property, plant and such as changes in current competitive conditions, equipment during the periods included in these consolidated expectations of growth in the industry, increased cost of financial statements. Impairment of trademarks capital, changes in the future availability of financing, technological obsolescence, discontinuance of service, current replacement costs and other changes in circumstances that indicate impairment exists. Whenever All trademarks owned by the Group have been determined to such indications exist, management makes an estimate of the have an indefinite life because the patent securing the asset’s recoverable amount to ensure that it is not less than Group’s title can be renewed an unlimited number of times its carrying value. If the asset’s fair value is not readily and therefore are tested for impairment annually, or more determinable or is less than asset’s carrying value plus costs frequently when there is an indication that they may be to sell, management necessarily applies its judgment in impaired. Determining whether a trademark is impaired determining the appropriate cash-generating unit to be requires an estimation of the recoverable value of the asset, evaluated, estimating the appropriate discount rate and the being higher of fair value of value in use. Fair value, which is timing and value of the relevant cash flows for the value determined using a relief from royalty method based on in-use calculation. expected sales by trademark. This approach requires the management to estimate the future sales by trademark, royalty rate and a suitable discount rate in order to calculate present value. Where the actual future cash flows are less Allowance for impairment of receivables and advances to suppliers than expected, a material impairment loss may arise. Where Management maintains an allowance for impairment of the recoverable amount determined on a fair value basis receivables and advances to suppliers in the form of an indicates impairment, the Group must also compute a value allowance account equal to estimated losses resulting from in use in order to determine if the asset is impaired. the inability of customers and other debtors to make required The carrying amount of trademarks at 31 December 2015 payments. When evaluating the adequacy of this allowance was 1,215,509 (31 December 2014: 1,215,509, 1 January 2014: account, management bases its estimates on the ageing of 1,180,672). accounts receivable balances and historical write-off experience, customer creditworthiness and changes in No impairment loss was recognised during 2015 and 2014. customer payment patterns. If the financial condition of Details are set out in Note 15. customers were to deteriorate, actual write-offs might be higher than expected. As of 31 December 2015, 2014 and Impairment of property, plant and equipment 1 January 2014 the allowance for impairment of receivables was recognized in the amount of 77,840, 107,341 and 190,571, The Group reviews at each reporting date the carrying respectively (see Notes 21, 22) and the allowance of advances Among the unobservable inputs stated above, there are the reporting date would be higher or (lower) by the following amounts of property, plant and equipment to determine to suppliers was recognized in the amount of 113,686, 77,848 whether there is any indication that assets are impaired. This process involves judgment in evaluating the cause for any and 83,471, respectively. several key assumptions that the Group estimates to determine the fair values of biological assets: amounts: • Expected crops yield (except for year-end); • Expected selling prices; • Projected production costs and costs to sell; • Discount rate. Expected selling prices Projected production costs and costs to sell Discount rate 31 December 2015 10% increase 10% decrease 1,792,307 (1,805,074) (1,255,978) (36,988) 1,233,528 37,633 Although some of these assumptions are obtained from Useful lives of property, plant and equipment published market data, a majority of these assumptions are estimated based on the Group’s historical and projected The Group assesses the remaining useful lives of items of results. property, plant and equipment at least at each financial year-end. If expectations differ from previous estimates, the Should key assumptions used in determination of fair value of changes are accounted for as a change in an accounting biological assets have been 10% higher or lower with all other estimate in accordance with IAS 8 “Accounting policies, variables held constant, the fair value of biological assets at changes in accounting estimates and errors”. These estimates may have a material impact on the amount of the carrying values of property, plant and equipment and on depreciation 82 82 83 83 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS 5. Reconciliation of US GAAP with IFRS Reconciliation of the consolidated statement of profit and loss and other comprehensive income for the year ended 31 December 2014 is as follows: Revenue Net change in fair value of biological assets and agricultural produce Cost of sales Gross profit Selling, general and administrative expenses Other operating expenses, net Operating profit Interest income Interest expense, net Other expenses, net Gain from bargain purchase Profit / (loss) before income tax Income tax benefit Profit / (loss) for the year US GAAP 2014 68,668,409 – (45,719,342) 22,949,067 (9,903,786) 446,905 13,492,186 279,962 (964,119) (737,886) 1,378,394 13,448,537 7,654 13,456,191 Valuation of biological assets Valuation of agricultural produce Other IFRS 2014 – – – 68,668,409 3,061,499 – 3,061,499 – – 3,061,499 – – – – 3,061,499 116,265 – 116,265 – – 116,265 – – – – 116,265 3,061,499 116,265 – – – – (12,785) (12,785) – – – – (12,785) 2,557 (10,228) 3,177,764 (45,719,342) 26,126,831 (9,903,786) 434,120 16,657,165 279,962 (964,119) (737,886) 1,378,394 16,613,516 10,211 16,623,727 Reconciliation of consolidated statement of financial position as at 31 December 2014 are as follows: US GAAP balance Reclassification of biological assets Valuation of biological assets Revaluation of land Valuation of agricultural produce Reclassification of investment property Other IFRS balance ASSETS Non-current assets Property, plant and equipment Investment property Goodwill Intangible assets Non-current biological assets Notes receivable, net Investments in joint venture Long-term deposits in banks Deferred tax assets Other non-current assets Total non-current assets Current assets Biological assets Inventories Taxes recoverable and prepaid, net Trade receivables, net Advances paid, net Other receivables, net Deferred tax assets Cash and cash equivalents Other current assets Total current assets TOTAL ASSETS 84 84 53,156,568 – 557,191 1,493,939 – 555,700 295,963 671,365 68,232 90,904 56,889,862 (570,738) – – – – 1,797,452 – – – – – – – 1,194,350 570,738 – – – – – – – – – – – – – – – – 1,194,350 1,797,452 – – – – – – – – – – – – 12,387,623 5,557,233 3,780,434 – (5,557,233) – – – 174,349 – 3,953,085 2,246,624 1,186,673 150,235 1,007,554 2,667,374 23,599,168 80,489,030 – – – – – – – – – – – – – – – – – – – – – – 3,780,434 – – 4,974,784 1,797,452 – – – – – – – 174,349 174,349 (624,928) 624,928 – – – 53,758,354 624,928 – 557,191 – 18,799 1,512,738 – – – – – – – – – (555,700) 555,700 – 150,235 – – 1,765,088 – 851,663 671,365 218,467 90,904 169,034 60,050,698 464,398 9,337,667 7,469,137 – 1,535,298 1,535,298 – 3,953,085 – – 2,246,624 – – 1,186,673 – – – – 1,007,554 – – (2,018,495) 648,879 (169,034) 27,384,917 – – 87,435,615 – (150,235) US GAAP balance Reclassification of biological assets Valuation of biological assets Revaluation of land Valuation of agricultural produce Reclassification of investment property Other IFRS balance EQUITY AND LIABILITIES Equity Share capital Treasury shares Additional paid-in capital Retained earnings 440 (78,033) 5,591,204 37,422,831 – – – – – – – – – – – – – 4,974,784 1,437,962 174,349 Total shareholder’s equity 42,936,442 – 4,974,784 1,437,962 174,349 Non-controlling interests 1,015,386 – – – – Total equity 43,951,828 – 4,974,784 1,437,962 174,349 Non-current liabilities Long-term borrowings 14,284,784 Provisions Deferred tax liability Tax related liabilities Payable to shareholders Other liabilities – 111,373 67,487 10,886 166,901 Total non-current liabilities 14,641,431 Current liabilities Short-term borrowings Trade payables Advances received Payables for non-current assets Deferred tax liability Tax related liabilities Payroll related liabilities Interest payable Other payables and accruals Total current liabilities Total liabilities TOTAL EQUITY AND LIABILITIES 13,467,709 4,315,188 1,099,337 574,073 64,343 844,935 1,217,693 90,200 222,293 21,895,771 36,537,202 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 359,490 – – – 359,490 – – – – – – – – – – 359,490 – – – – – – – – – – – – – – – – – – 80,489,030 – 4,974,784 1,797,452 174,349 – – – – – – – – – – – – – – – – – – – – – – – – – – – – 440 (78,033) – 5,591,204 (41,687) 43,968,239 (41,687) 49,481,850 41,687 1,057,073 – 50,538,923 – 14,284,784 67,487 67,487 64,343 535,206 (67,487) (10,886) – – 10,886 177,787 64,343 15,065,264 90,200 13,557,909 – 4,315,188 – 1,099,337 – 574,073 (64,343) – – 844,935 – 1,217,693 (90,200) – – 222,293 (64,343) 21,831,428 – 36,896,692 – 87,435,615 85 85 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS Other liabilities US GAAP balance 63,430 Total non-current liabilities 17,296,622 Current liabilities Short-term borrowings 10,382,441 Trade payables Advances received Payables for non-current assets Deferred tax liability Tax related liabilities Payroll related liabilities Interest payable 3,963,918 813,620 318,822 221,258 628,133 925,385 113,843 Other payables and accruals 309,927 Total current liabilities 17,677,347 Total liabilities 34,973,969 Reclassification of biological assets Valuation of biological assets Revaluation of land Valuation of agricultural produce Reclassification of investment property Other IFRS balance – – – – – – – – – – – – – – – – – – – – – – – – – – – 362,048 – – – – – – – – – – 362,048 – – – – – – – – – – – – – – 10,886 74,316 – 221,258 17,879,928 – 113,843 10,496,284 – – – – 3,963,918 – 813,620 – 318,822 – (221,258) – – – – – 628,133 925,385 – (113,843) – – (11,242) 298,685 – (232,500) 17,444,847 – (11,242) 35,324,775 TOTAL EQUITY AND LIABILITIES 66,985,949 – 1,913,285 1,810,238 58,084 – (11,242) 70,756,314 Reconciliation of the consolidated statement of financial position as at 1 January 2014 is as follows: US GAAP balance Reclassification of biological assets Valuation of biological assets Revaluation of land Valuation of agricultural produce Reclassification of investment property Other IFRS balance – – – – – – – – – – – – (629,713) 629,713 – 45,475,577 – 629,713 (11,242) 557,191 18,043 1,380,721 – 1,360,897 – – – 56,312 425,663 671,365 91,438 205,397 – 89,634 98,239 50,852,470 – – – – – – – – – – Total non-current assets 48,378,135 565,858 1,810,238 – 4,788,533 1,347,427 9,215,267 (4,788,533) 45,090,091 (795,039) – 1,810,238 – 568,433 1,362,678 – – – – – – – 795,039 565,858 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – ASSETS Non-current assets Property, plant and equipment Investment property Goodwill Intangible assets Non-current biological assets Notes receivable, net Investments in joint venture Long-term deposits in banks Deferred tax assets Other non-current assets Current assets Biological assets Inventories Taxes recoverable and prepaid, net Trade receivables, net Advances paid, net Other receivables, net Deferred tax assets 56,312 425,663 671,365 113,959 89,634 – 2,705,276 1,304,538 1,416,830 91,438 Cash and cash equivalents 2,107,282 Other current assets Total current assets TOTAL ASSETS EQUITY AND LIABILITIES 1,767,183 18,607,814 66,985,949 Equity Share capital Treasury shares 440 (83,920) Additional paid-in capital 5,599,703 – 6,135,960 • Reclassification of biological assets – under US GAAP the equipment and investment property at the date of 58,084 – 348,633 4,833,451 balance was presented within Inventories, while IFRS transition to IFRS at its fair value and used that – – – – – – – – 1,114,439 1,114,439 – – – – – – 2,705,276 – 1,304,538 – 1,416,830 (91,438) – – 2,107,282 – (1,481,115) 286,068 58,084 – (109,481) 19,903,844 requires separate presentation, if material. measurement as its deemed cost at that date. • Valuation of biological assets and agricultural produce – under US GAAP both balances are measured at cost. Under • Reclassification of investment property – under US GAAP the balance was presented within Property, plant and IFRS, biological assets were stated at fair value less costs to equipment, while IFRS requires separate presentation, if sell at the reporting dates and agricultural produce was material. stated at fair value less costs to sell at the harvest date. • Other adjustments – under these heading the Group • Revaluation of land – as stated in Note 2, the Group accumulated various individually not significant applied an exemption allowed by IFRS 1 and measured adjustments and reclassifications, such as deferred taxes certain land plots classified as property, plant and and other assets reclassifications. – 1,347,427 – 1,913,285 1,810,238 58,084 – (11,242) 70,756,314 6. Operating segments – – – – – – – – – – – – Retained earnings 25,618,771 – 1,913,285 1,448,190 58,084 Total shareholder’s equity 31,134,994 – 1,913,285 1,448,190 58,084 Non-controlling interests 876,986 – – – – Total equity 32,011,980 – 1,913,285 1,448,190 58,084 Non-current liabilities Long-term borrowings 17,143,944 Provisions Deferred tax liability Tax related liabilities Payable to shareholders – 5,023 73,339 10,886 86 86 – – – – – – – – – – – – 362,048 – – – – – – – – – – – – – – – – – – 440 (83,920) – 5,599,703 (46,533) 28,991,797 (46,533) 34,508,020 46,533 923,519 – 35,431,539 – 17,143,944 73,339 73,339 – 221,258 588,329 – – (73,339) (10,886) – – The Group’s operations are divided into five segments by segment is involved in the farming of wheat and other crops. types of products produced: poultry, pork, meat processing, The feed segment is involved in the production of feed for grain and feed. Substantially all of the Group’s operations are internal use by pork and poultry segments. All five segments located within the Russian Federation. All segments have are involved in other business activities, including production different segment managers responsible for the segments’ of dairy, sale of non-hatchery eggs and other services, which operations. The chief operating decision maker (the Chief are non-core business activities. Executive Officer) is individual responsible for allocating resources to and assessing the performance of each segment The Group evaluates segment performance based on of the business. adjusted EBITDA. This is the measure reported to the chief operating decision maker for the purposes of resource The meat processing segment is involved in the production of allocation and assessment of segment performance. a wide range of meat products, including sausages, ham and The Group accounts for inter-segment sales and transfers as raw meat. The pork and poultry segments produce and offer if the sales or transfers were to third parties. The accounting distinctive products, such as semi-finished poultry products, policies of the reportable segments are the same as the raw meat and other poultry meat products in the poultry Group’s accounting policies described in Note 2. segment and raw pork meat in the pork segment. The grain 87 87 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS Segment information for the year ended at 31 December 2015 comprised: Segment information for the year ended at 31 December 2014 comprised: Total sales including other sales including sales volume discounts Intersegment sales Sales to external customers Net change in fair value of biological assets and agricultural produce Cost of sales Gross profit / (loss) Operating expense Operating income / (expense) Other income (expense), net Interest expense, net Profit before income tax (division profit) Adjustments for: Interest expense, net Interest income Foreign exchange loss/ gain Depreciation and amortisation expense Net change in fair value of biological assets and agricultural produce Loss on disposal of subsidiaries Adjusted EBITDA Supplemental information: Expenditure for segment property, plant and equipment Income tax expense (benefit) 4,314,297 (3,060,987) 1,253,310 (163,317) (202,541) 887,452 202,541 (10,405) 205,719 467,157 Meat- Feed processing 29,150,254 16,579,185 44,590,211 2,580,713 27,855,810 Poultry Grain Pork 416,945 (3,954,954) 172,835 1,511,443 57,512 – (1,388,201) – – – (32,016) (11,502,192) (2,640,958) (2,117,129) (27,458,461) Total operating segments Corporate Intersegment Total consolidated 27,205 (43,750,756) 77,032,622 120,756,173 2,158,734 27,205 (647,109) 1,538,831 (5,343,155) (43,750,756) – – – (5,343,155) 43,750,756 – 29,118,238 5,076,993 41,949,253 463,584 397,349 77,005,417 27,205 – 77,032,622 – (24,835,957) (10,529,115)(35,901,044) (1,827,087) (27,033,691) – (1,387,143) (283,880) 326,376 (1,344,647) (100,126,894) – (13,484) 180,920 (1,163,727) 43,420,162 (56,720,216) 4,662,927 8,405,287 1,080,002 822,119 19,284,632 13,721 (149,674) 19,148,679 (662,041) (5,061,999) (242,294) (590,873) (9,618,194) (2,089,879) 93,420 (11,614,653) 4,000,886 3,343,288 837,708 231,246 9,666,438 (2,076,158) (56,254) 7,534,026 (73,852) 794,746 15,555 (96,885) 476,247 (314,189) (459,569) (297,511) (356,155) (628,523) (14,277) (192,010) (1,393,506) (430,748) 459,488 (1,364,766) 3,570,879 3,509,511 838,986 (57,649) 8,749,179 (2,821,095) (56,335) 5,871,749 356,155 (11,102) 628,523 (175,026) 14,277 (330) 192,010 (25,059) 1,393,506 (221,922) 430,748 (523,438) (459,488) 459,598 1,364,766 (285,762) 71,822 (614,651) 17,144 129,179 (190,787) 837,589 – 646,802 869,643 1,862,574 167,236 399,855 3,766,465 60,060 – 3,826,525 – 1,387,143 283,880 (326,376) – 42,569 – – – – 1,344,647 42,569 – – (180,920) 1,163,727 – 42,569 1,752,464 1,339,934 (110,423) 6,287,109 5,494,811 710,937 638,336 14,883,657 (2,016,136) (237,145) 12,630,376 1,932,674 4,390,494 812,359 2,034,685 10,510,146 459,969 – 10,970,115 6,698 (8,040) 5,962 4,421 (101,382) (47,678) – (149,060) Meat- Feed processing 21,884,134 16,660,455 37,529,591 1,738,937 19,379,873 Poultry Grain Pork Total operating segments 97,192,990 Corporate 32,684 Total consolidated Intersegment (28,557,265) 68,668,409 43,119 149,478 1,005,931 31,261 – 1,229,790 32,684 (14,486) 1,247,989 (2,272,910) – (1,298,175) – – (3,571,085) (19,306) (7,000,971) (1,344,655)(1,243,970) (18,948,363) (28,557,265) – – – (3,571,085) 28,557,265 – 21,864,828 9,659,484 36,184,936 494,967 431,510 68,635,725 32,684 – 68,668,409 (18,755,203) – 1,832,835 – (9,155,043) (26,317,750) (966,698) (18,581,210) 1,236,570 – 3,069,405 (73,775,904) – (39,631) 108,359 3,177,764 28,096,193 (45,719,342) 3,128,931 9,338,247 12,448,411 772,239 798,663 26,486,491 (6,947) (352,713) 26,126,831 (2,810,496) (400,607) (4,257,893) (344,456) (488,767) (8,302,219) (1,336,555) 169,108 (9,469,666) 318,435 8,937,640 8,190,518 427,783 309,896 18,184,272 (1,343,502) (183,605) 16,657,165 (160,019) (266,445) 114,530 1,150,788 627 (295,895) 810,031 (637,045) (630,910) (457,924) (396,851) (389,830) (126,470) (45,382) (1,224,978) (370,051) 630,910 (964,119) – – – – – – 1,378,394 – 1,378,394 (108,029) 8,655,319 8,951,476 301,940 (31,381) 17,769,325 (972,204) (183,605) 16,613,516 266,445 (4,477) 396,851 (11,533) 389,830 126,470 (627) (326,404) 45,382 (38,721) 1,224,978 (381,762) 370,051 (529,110) (630,910) 630,910 964,119 (279,962) 165,727 (102,997) (824,384) – 334,616 (427,038) 1,166,155 – 739,117 392,941 976,236 1,847,365 142,129 86,177 3,444,848 37,096 – 3,481,944 – (1,832,835) (1,236,570) – – – – – – (3,069,405) – (108,359) (3,177,764) – – (1,378,394) – (1,378,394) 712,607 8,081,041 8,801,313 569,912 733,335 2,525,966 2,607,449 408,572 396,073 18,560,946 (1,306,406) (291,964) 16,962,576 296,190 6,571,512 149,688 – 6,721,200 (16,651) 23,350 17,173 1,219 (5,710) 19,381 (29,592) – (10,211) Total sales including other sales including sales volume discounts Intersegment sales Sales to external customers Net change in fair value of biological assets and agricultural produce Cost of sales Gross profit / (loss) Operating expense Operating income / (expense) Other income (expense), net Interest expense, net Gain from bargain purchase Profit before income tax (division profit) Adjustments for: Interest expense, net Interest income Foreign exchange loss/ gain Depreciation and amortisation expense Net change in fair value of biological assets and agricultural produce Gain from bargain purchase Adjusted EBITDA Supplemental information Expenditure for segment property, plant and equipment Income tax expense (benefit) 88 88 89 89 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS Operating expenses include selling, general and No single customer contributed 10% or more to the Group’s administrative expense and other operating expense, net. revenue for both 2015 and 2014. Items included within Corporate mainly include payroll and other expenses of the holding company. Segment assets and liabilities are not disclosed, as this information is not provided to the chief operating decision maker. 7. Cost of sales Cost of sales for the years ended 31 December 2015 and 2014 comprised: Raw materials and goods for resale Personnel (excluding pension costs) Depreciation Utilities Pension costs Other Total cost of sales 2015 39,911,889 6,962,848 3,454,254 3,174,341 1,286,236 1,930,648 56,720,216 2014 32,187,794 5,499,369 3,156,465 2,805,909 967,537 1,102,268 45,719,342 9. Interest expense, net Interest expense, net for the years ended 31 December 2015 and 2014 comprised: Interest on bank overdrafts and loans Interest on obligations under finance leases Less: amounts included in the cost of qualifying assets Total interest expense Government grants for compensation of interest expenses Less: amounts included in the cost of qualifying assets Total government grants for compensation of interest expenses Total interest expense, net 2015 3,976,055 49,231 (92,545) 3,932,741 (2,616,550) 48,575 (2,567,975) 1,364,766 2014 3,187,868 38,913 (279,087) 2,947,694 (2,151,444) 167,869 (1,983,575) 964,119 10. Other expenses, net Other expenses, net for the years ended 31 December 2015 and 2014 comprised: 2015 (646,802) 63,529 (583,273) 2014 (739,117) 1,231 (737,886) Raw materials and goods for resale include as an offset and 2014, respectively. These subsidies were received based subsidies received from local governments in the amount on the amount of meat produced. of 33,902 and 82,759 for the years ended 31 December 2015 Foreign exchange loss Other income, net Total other expense, net 8. Selling, general and administrative expenses 11. Income tax Selling, general and administrative expenses for the years ended 31 December 2015 and 2014 comprised: All of the Group’s taxes are levied and paid in the Russian Federation. Personnel (excluding pension costs) Transportation Materials and supplies Taxes (other than income tax) Pension costs Rent expenses Advertising and marketing Security services Depreciation and amortization Information technology and communication services Utilities Audit, consulting and legal fees Veterinary services Repairs and maintenance Insurance Bank charges Change in bad debt allowance and other write-off Other Total selling, general and administrative expenses 2015 4,216,641 1,442,255 902,606 687,737 675,212 673,789 657,163 427,248 372,271 231,153 222,247 191,010 126,251 106,012 103,208 100,828 32,063 779,448 11,947,142 2014 3,653,708 1,118,105 624,026 539,837 675,623 576,573 531,910 415,067 325,479 139,243 109,748 184,737 109,934 43,739 91,970 39,012 121,804 603,271 9,903,786 Under Russian legislation, the statutory income tax rate for entities designated as agricultural entities is 0%. The statutory tax rate for non-agricultural entities is 20%. The main components of income tax for the years ended 31 December 2015 and 2014 were as follows: Current tax expense Deferred tax benefit Total income tax benefit 2015 (93,882) 242,942 149,060 2014 (55,982) 66,193 10,211 90 90 91 91 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS The income tax benefit (expense) can be reconciled to the theoretical tax provision at the statutory rate for the years ended The Group’s tax loss carry forwards expire as follows: 31 December 2015 and 2014 as follows: Profit before income tax Profit before income tax of entities taxed at zero rates (agricultural entities and other tax regimes) (Loss) profit before income tax of generally taxed entities Statutory income tax rate (agricultural entities and other tax regimes) Statutory income tax rate (general) Theoretical income tax (benefit) expense at the statutory tax rates Expenses not deductible for Russian statutory taxation purposes Effect of unused tax losses and tax offsets not recognised as deferred tax assets Gain from bargain purchase Other permanent differences Income tax benefit 2015 2014 5,871,749 16,613,516 7,495,350 (1,623,601) 0% 20% (324,720) 103,359 47,953 – 24,348 (149,060) 16,135,484 478,032 0% 20% 95,606 165,875 – (275,678) 3,986 (10,211) The following amounts, determined after appropriate offsetting, are presented in the consolidated statement of financial position as of 31 December 2015, 2014 and 1 January 2014: Deferred tax asset Deferred tax liability Net deferred tax liability 31 December 2015 31 December 2014 1 January 2014 2014 (405,097) (73,797) 218,467 (535,206) (316,739) 205,397 (588,329) (382,932) The movement in the net deferred tax liability for the year ended 31 December 2015 comprised: Property, plant and equipment and investment property Trade receivables Other assets and liabilities Tax loss carry forward Net deferred tax liability 31 December 2014 Recognised in profit or loss 31 December 2015 (610,486) (120,498) 172,978 241,267 (316,739) 47,393 27,658 (28,393) 196,284 242,942 (563,093) (92,840) 144,585 437,551 (73,797) The movement in the net deferred tax liability for the year ended 31 December 2014 comprised: Property, plant and equipment and investment property Trade receivables Other assets and liabilities Tax loss carry forward Net deferred tax liability 1 January 2014 Recognised in profit or loss 31 December 2014 (562,787) 37,058 19,964 122,833 (382,932) (47,699) (157,556) 153,014 118,434 66,193 (610,486) (120,498) 172,978 241,267 (316,739) At 31 December 2015 and 2014, temporary differences associated with undistributed earnings of subsidiaries were not recognized in these consolidated financial statements, because the Group is in a position to control the timing of the reversal of such temporary differences and it is probable that such differences will not reverse in the foreseeable future. Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years Total 31 December 2015 31 December 2014 1 January 2014 – 26,050 2,161,705 2,187,755 – 26,498 1,226,939 1,253,437 – 18,819 638,710 657,529 12. Property, plant and equipment, net The following table represents movements in property, plant and equipment for the years ended 31 December 2015 and 2014: Buildings, infrastructure and leasehold improvements Land Machinery and equipment Vehicles Other Construction in progress Total 2,586,076 61,438 31,525,407 1,292,920 71,902 (155,811) 2,563,605 82,969 (29,344) (188) 2,617,042 4,189,099 (35,880) 36,971,546 4,769,768 (59,216) (96,188) 41,585,910 COST Balance as at 1 January 2014 Additions Acquired through business combinations Disposals As at 31 December 2014 Additions Disposals Disposal of subsidiary As at 31 December 2015 ACCUMULATED DEPRECIATION OR IMPAIRMENT LOSS Balance as at 1 January 2014 Depreciation charge Eliminated on disposals As at 31 December 2014 Depreciation charge Eliminated on disposals Eliminated on disposal of subsidiary As at 31 December 2015 CARRYING AMOUNTS At 1 January 2014 At 31 December 2014 At 31 December 2015 (5,331,048) (1,239,687) 18,155 (6,552,580) (1,321,935) 8,027 26,194,359 30,418,966 33,781,830 2,586,076 2,563,605 2,617,042 62,408 (7,804,080) – – – – – – – – 16,079,407 2,592,407 2,893,776 742,171 132,251 16,696 5,588,561 1,953,214 58,805,478 6,658,846 951,852 (267,204) 19,356,462 3,567,109 (268,031) (22,159) 22,633,381 104,716 (192,680) 3,547,983 837,617 (151,602) (11,473) 4,222,525 (6,719,715) (1,720,077) 180,870 (8,258,922) (1,872,860) 201,937 (1,197,849) (408,290) 85,765 (1,520,374) (429,257) 147,349 – (2,900) 146,047 61,177 (1,931) (81) 205,212 (81,289) (7,059) 2,900 (85,448) (25,554) 1,931 10,305 (9,919,540) 4,987 (1,797,295) 73 (108,998) 72,793 (24,533) 7,590,035 1,268,643 (17,596) (39,210) 8,801,872 5,390,362 (679,008) 70,175,678 10,587,283 (527,720) (169,299) 80,065,942 – – – – – – – – (13,329,901) (3,375,113) 287,690 (16,417,324) (3,649,606) 359,244 77,773 (19,629,913) 9,359,692 11,097,540 12,713,841 1,695,927 2,027,609 2,425,230 50,962 60,599 96,214 5,588,561 7,590,035 8,801,872 45,475,577 53,758,354 60,436,029 The Group has certain tax loss carry forwards, that are not expected to be utilised by management. As the Group does not have improvements include 122,484, 153,830 and 191,296 of plant and equipment are included in construction in progress a legal right to offset deferred tax assets and deferred tax liabilities between different legal entities, management expects that leased buildings and infrastructure as of 31 December 2015, in the amount of 2,611,365, 1,858,072 and 1,151,368 as at the Group will not be able to utilize all of the tax loss carry forwards as certain of the Group’s subsidiaries are expected to have 2014 and 1 January 2014, respectively. Net book values of 31 December 2015, 2014 and 1 January 2014, respectively. operating losses in the future. Total amount of unrecognised tax loss carry forwards equalled nil as of 31 December 2015 and vehicles and machinery and equipment include 349,636, Net book values of buildings, infrastructure and leasehold Advances paid for acquisition and construction of property, 47,155 as of 31 December 2014. 281,673 and 184,899 of leased equipment as of 31 December 2015, 2014 and 1 January 2014, respectively. 92 92 93 93 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS 13. Investment property 15. Intangible assets The Group’s investment property consists of commercial units located in Vostochnoe Biryulevo region of Moscow and land The following table represents movements of intangible assets for the years ended 31 December 2015 and 2014: plots. The changes in the carrying amount of investment property for the years ended 31 December 2015 and 2014 were as follows: Land Buildings Total COST Balance as at 1 January 2014 Reconstruction and modernisation As at 31 December 2014 Reconstruction and modernisation Transfer into other non-current assets Sale of land plots As at 31 December 2015 ACCUMULATED DEPRECIATION OR IMPAIRMENT LOSS Balance as at 1 January 2014 Depreciation charge As at 31 December 2014 Depreciation charge As at 31 December 2015 CARRYING AMOUNTS At 1 January 2014 At 31 December 2014 At 31 December 2015 489,679 – 489,679 – (100,801) (113,929) 274,949 – – – – – 489,679 489,679 274,949 183,159 655 183,814 28,232 – – 212,046 (43,125) (5,440) (48,565) (5,659) (54,224) 140,034 135,249 157,822 672,838 655 673,493 28,232 (100,801) (113,929) 486,995 (43,125) (5,440) (48,565) (5,659) (54,224) 629,713 624,928 432,771 Computer software Indefinite life trademarks Other intangible assets Total 241,469 142,833 – 384,302 230,845 615,147 COST Balance at 1 January 2014 Additions Acquisitions through business combinations Balance at 31 December 2014 Additions Balance at 31 December 2015 ACCUMULATED AMORTISATION AND IMPAIRMENT LOSS Balance at 1 January 2014 Amortisation expense Balance at 31 December 2014 Amortisation expense Balance at 31 December 2015 CARRYING AMOUNTS At 1 January 2014 At 31 December 2014 At 31 December 2015 (44,766) (56,663) (101,429) (147,371) (248,800) 196,703 282,873 366,347 1,180,672 – 34,837 1,215,509 – 1,215,509 – – – – – 1,180,672 1,215,509 1,215,509 9,630 21,217 – 30,847 42,498 73,345 (6,284) (10,207) (16,491) (34,807) (51,298) 3,346 14,356 22,047 1,431,771 164,050 34,837 1,630,658 273,343 1,904,001 (51,050) (66,870) (117,920) (182,178) (300,098) 1,380,721 1,512,738 1,603,903 The Group measured buildings within investment property and 1 January 2014 based on the income approach. Computer software As of 31 December 2015, 2014 and 1 January 2014, management tested the Kurinoe Tsarstvo trademark for at the date of transition to IFRS (1 January 2014) at its cost The fair value is equal to 988,685 and it did not Software is amortised over its useful life ranging from 2 impairment and determined that the trademark was not and land at its fair value. significantly change during 2014 and 2015. to 10 years. For disclosure purpose only, the Group determined the The Group recognised the following amounts in respect of Indefinite life trademarks fair value of the buildings as at 31 December 2015, 2014 the investment property in profit or loss: impaired. The fair value was determined using a relief from royalty method based on expected sales by trademark derived from the segment business plan approved by the management covering a five-year period. The cash flows Rental income from investment property Direct operating expenses arising from investment property that generated rental income during the year Operating profit from investment property 2015 188,009 (90,018) 97,991 2014 167,138 (61,263) 105,875 14. Goodwill Kurinoe Tsarstvo (“Куриное Царство”) trademark beyond that period have been extrapolated using a steady 5% per annum growth rate, which is the projected long-term The carrying value of the Kurinoe Tsarstvo trademark was average general inflation in Russia. 744,935 as of 31 December 2015, 2014 and 1 January 2014. The key assumptions used for impairment testing purposes are set out below. In percent 31 December 2015 31 December 2014 1 January 2014 Discount rate Terminal value growth rate Royalty rate Trademark revenue growth rate (average of next five years) 18% 5% 3.3% 8% 16.9% 5% 3.3% 25% 16.3% 5% 3.3% 21% There have been no changes in the carrying amount of The recoverable amount of both cash-generating units is goodwill for the years ended 31 December 2015 and 2014. determined based on a value in use calculation, which uses The Group expected and achieved a major increase in sales The management believes that any reasonably possible cash flow projections based on financial budgets approved by under that trademark in 2015 driven by massive advertising change in the key assumptions on which recoverable amount Goodwill has been allocated for impairment testing purposes the management. to the following cash-generating units, being also operating segments of the Group, and represents the lowest level at The management believes that any reasonably possible campaign in Central part of Russia and increase in production is based would not cause the aggregate carrying amount to capacity after Lisko acquisition. exceed the aggregate recoverable amount of the trademark. which goodwill is monitored for impairment by management: change in the key assumptions on which recoverable amount The values assigned to the key assumptions represented Cherkizovo (“Черкизово”) trademark • Meat-processing – 250,247 thousand rubles; • Poultry – 306,944 thousand rubles. exceed the aggregate recoverable amount of the cash- industries and were based on historical data from both The carrying value of the Cherkizovo trademark was 435,737 generating unit. external and internal sources. as of 31 December 2015, 2014 and 1 January 2014. is based would not cause the aggregate carrying amount to management’s assessment of future trends in the relevant 94 94 95 95 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS As of 31 December 2015, 2014 and 1 January 2014, and therefore the Group did not make a detailed calculation management tested the Cherkizovo trademark for for the whole life of the trademark. Current biological asset impairment and determined that the trademark was not All current biological assets are consumable except for breeders, which are bearer biological assets. The balances of current impaired. The fair value was determined using a relief from The management believes that any reasonably possible biological assets were as follows: royalty method based on current year actual sales by change in the key assumptions on which recoverable amount trademark and royalty rate of 3.3%. Potential royalty from is based would not cause the aggregate carrying amount to one-year sales covers the carrying value of the trademark exceed the aggregate recoverable amount of the trademark. 16. Biological assets Non-current biological asset The balances of non-current biological assets were as follows: 31 December 2015 31 December 2014 1 January 2014 Units 76,640 423 Carrying amount 1,597,495 20,338 Units 77,461 367 Carrying amount 1,749,344 15,744 Units 83,505 343 Carrying amount 1,348,909 11,988 Sows, heads Cattle, heads Total bearer non-current biological assets PORK Market hogs, heads POULTRY Broilers, heads Breeders, heads (bearer biological assets) HATCHERY EGGS, QUANTITY Other Unharvested crops, hectares Total current biological assets 31 December 2015 31 December 2014 1 January 2014 Units Carrying amount Units Carrying amount Units Carrying amount 799,184 799,184 4,232,255 4,232,255 793,138 793,138 4,870,838 4,870,838 792,247 792,247 3,711,406 3,711,406 29,890,640 2,174,496 32,065,136 21,195,577 435 26,482 27,445,928 1,728,769 2,602,867 2,318,997 4,331,636 29,764,925 287,676 22,552,268 412 30,028 948,080 28,892 9,829,675 1,860,688 21,981,250 1,892,419 1,765,654 3,753,107 23,746,904 241,819 16,338,212 518 16,848 27,369 444,534 9,337,667 1,119,364 755,916 1,875,280 136,747 28,609 383,918 6,135,960 77,063 1,617,833 77,828 1,765,088 83,848 1,360,897 16. Biological assets continued The following table represents movements in sows: The following table represents movements in the most material classes of the current biological assets: Balance at 1 January 2014 Increase due to purchases and breeding costs of growing livestock Decrease due to sale Deprecation of sows recognized during the year Gain arising from changes in fair value less estimated point-of-sales costs Balance at 31 December 2014 Increase due to purchases and breeding costs of growing livestock Decrease due to sale Deprecation of sows recognized during the year Gain arising from changes in fair value less estimated point-of-sales costs Balance at 31 December 2015 Amount 1,348,909 425,736 (820,889) (219,914) 1,015,502 1,749,344 432,481 (537,051) (186,394) 139,115 1,597,495 96 96 Balance at 1 January 2014 Acquisitions through business combinations Increase due to purchases and gain arising from cost inputs Transfer to consumable biological assets Decrease due to sale or harvest of assets Disposal of pigs due to African Swine Fever Gain arising from changes in fair value less estimated point-of-sales costs Balance at 31 December 2014 Increase due to purchases and gain arising from cost inputs Transfer to consumable biological assets Decrease due to sale or harvest of assets Disposal of pigs due to African Swine Fever Gain arising from changes in fair value less estimated point-of-sales costs Balance at 31 December 2015 Pork Broilers Breeders Unharvested crops Total 3,711,406 – 1,119,364 119,763 755,916 228,255 383,918 – 5,970,604 348,018 9,108,907 – (16,510,977) (149,942) 25,248,957 571,968 (34,115,719) – 606,164 (571,968) – – 1,009,935 – (1,707,676) – 35,973,963 – (52,334,372) (149,942) 8,711,444 4,870,838 8,916,355 1,860,688 874,052 1,892,419 758,357 444,534 19,260,208 9,068,479 11,154,812 – (16,406,350) (271,610) 33,041,422 810,452 (38,968,269) – 1,083,897 (810,452) – – 2,293,804 – (2,523,201) – 47,573,935 – (57,897,820) (271,610) 4,884,565 4,232,255 4,984,476 1,728,769 437,003 2,602,867 732,943 948,080 11,038,987 9,511,971 Reconciliation of net change in fair value of biological assets and agricultural produce as of year ended 31 December 2014 and 2015 are as follows: Fair value adjustment at the beginning of the year (biological assets transferred to inventory and subsequently sold) Fair value adjustment at the beginning of the year (agricultural produce subsequently sold) Fair value adjustment at the end of the year (biological assets) Fair value adjustment at the end of the year (agricultural produce) Net change in fair value of biological assets and agricultural produce 2015 2014 (4,974,784) (174,349) 3,303,761 681,645 (1,163,727) (1,913,285) (58,084) 4,974,784 174,349 3,177,764 97 97 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS The main crops of the Group’s agricultural production and The production output of pork and poultry segments of the output were as follows (in thousands of tonnes): Group were as follows (in thousands of tonnes): Winter wheat Corn Barley Pea Spring wheat Sunflower Soya bean 2015 106 111 6 17 42 22 17 2014 105 42 25 23 20 19 7 Pork meat Poultry meat 2015 164 470 2014 170 417 Key inputs in fair value measurement of biological assets together with sensitivity to reasonably possible changes in those inputs are disclosed in Note 4. 17. Investments in joint venture During the year ended 31 December 2012 the Group, Summarised financial information in respect of the Group’s together with Grupo Corporativo Fuertes, S.L., established joint venture and its reconciliation to the carrying amount of a joint venture, LLC Tambovskaya Indeika. The joint venture’s the interest in the joint venture are set out below. primary business is breeding of turkey. The joint venture The summary contains only financial position data, because started construction of an integrated full cycle turkey financial results are immaterial due to construction process. production complex in 2013 and expects to start operations The summarised financial information below represents in 2016. amounts shown in the joint venture’s financial statements prepared in accordance with IFRSs adjusted by the Group for equity accounting purposes. 31 December 2015 31 December 2014 1 January 2014 Cash and cash equivalents Other current assets Non-current assets Current liabilities Non-current liabilities Net assets of the joint venture Proportion of the Group’s ownership interest in the joint venture The Group’s equity interest in the joint venture Notes receivable classified as net investment in the joint venture Carrying amount of the Group’s interest in the joint venture 195,016 1,707,620 6,178,274 (146,611) (7,342,373) 591,926 50% 295,963 1,005,700 1,301,663 107,823 586,040 3,419,251 (159,431) (3,361,757) 591,926 50% 295,963 555,700 851,663 62,347 346,602 918,234 (356,894) (118,963) 851,326 50% 425,663 - 425,663 18. Long-term deposits in banks Deposits in Gazprombank Deposits in Odinbank Long-term deposits in banks CCY Effective rate, % Maturity RUR RUR 8% 10.5% 2019 2017 31 December 2015 31 December 2014 641,365 – 641,365 641,365 30,000 671,365 1 January 2014 641,365 30,000 671,365 19. Inventories Raw materials Spare parts Work in-process Finished goods Total inventory 31 December 2015 31 December 2014 1 January 2014 9,655,054 742,454 311,393 1,549,654 12,258,555 6,069,555 464,398 310,307 624,877 7,469,137 3,609,188 348,633 229,744 645,886 4,833,451 20. Taxes recoverable and prepaid Value added tax Other taxes Total tax recoverable and prepaid, net 31 December 2015 31 December 2014 1 January 2014 2,570,134 265,853 2,835,987 1,374,489 160,809 1,535,298 992,773 121,666 1,114,439 21. Trade receivables, net Trade receivables Less: allowance for doubtful trade receivables Total trade receivables, net 31 December 2015 31 December 2014 1 January 2014 4,492,507 (47,516) 4,444,991 4,052,156 (99,071) 3,953,085 2,880,611 (175,335) 2,705,276 The following table summarizes the changes in the allowance for doubtful trade receivables for the years ended 31 December 2015 and 2014: Balance at beginning of the year Additional allowance, recognized during the year Trade receivables written off during the year Balance at end of the year 22. Other receivables, net Subsidies receivable for interest expense reimbursement Subsidies receivable for purchase of fodder Other receivables Less: allowance for doubtful other receivables Total other receivables, net 2015 99,071 20,239 (71,794) 47,516 2014 175,335 21,986 (98,250) 99,071 31 December 2015 31 December 2014 1 January 2014 1,417,074 4,916 390,353 (30,324) 1,782,019 907,361 30,462 257,120 (8,270) 1,186,673 1,201,642 5,671 224,753 (15,236) 1,416,830 98 98 99 99 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS The following table summarizes the changes in the allowance for doubtful other receivables for the years ended 31 December calculated in accordance with statutory rules in local currency. On 10 November 2014 dividends of approximately 34.44 rubles 2015 and 2014: Balance at beginning of the year Additional allowance, recognized during the year Other receivables written off during the year Balance at end of the year 23. Cash and cash equivalents RUR-denominated cash at banks EURO-denominated cash at banks USD-denominated cash at banks Bank deposits Cash in hand Total Bank deposits are denominated in rubles and have original maturity of less than 3 months. 2015 8,270 23,163 (1,109) 30,324 2014 15,236 1,655 (8,621) 8,270 31 December 2015 31 December 2014 1 January 2014 468,173 74 84,997 5,002,812 4,768 5,560,824 845,757 – 27,069 129,286 5,442 1,007,554 337,523 – 101,314 1,661,739 6,706 2,107,282 24. Other current assets Prepaid expenses Receivables from insurance company Loans receivable Other assets Total other current assets 31 December 2015 31 December 2014 1 January 2014 182,551 319,987 105,919 4,109 612,566 215,729 221,054 197,483 14,613 648,879 79,184 – 33,675 173,209 286,068 In the last week of December 2014 and in January 2015, the Orel and Voronezh regions and slaughtered and disposed African Swine Fever (further – ASF) was discovered at Group’s of approximately 50,000 heads of pigs. All of the destroyed units in Orel region, which has a big population of wide boars animals were insured and the Group expects to receive full and high ASF risks. Pigs from that unit were sent to Voronezh compensation equal to their cost within the 12 months. unit for fattening, which caused a transmission of the disease. The amount of expected compensation was accrued and As a result of the ASF outbreak, the Group closed two units in included in receivables from insurance company. 25. Shareholder’s equity Share capital authorized to issue preferred shares not exceeding 25% of its ordinary share capital. No such shares are currently issued. As of 31 December 2015, 2014 and 1 January 2014, issued shares of the Company had a par value of 0.01 rubles. Dividends The total number of authorized shares was 54,702,600 and the number of issued shares was 43,963,773. All issued and In accordance with Russian legislation, earnings available for outstanding shares have equal voting rights. The Company is dividends are limited to retained earnings of the Company, 100 100 per share (1,513,731 in total) were approved at the extraordinary shareholders’ meeting and have been fully paid during the year ended 31 December 2014. On 6 April 2015 and 29 September 2015 dividends of approximately 54.60 and 22.75 rubles per share, respectively (3,392,766 in total) were approved at the extraordinary shareholders’ meeting and have been fully paid during the year ended 31 December 2015. 26. Non-controlling interests The following table summarises the information relating to each of the Group’s subsidiaries that has material NCI, before any intra-group eliminations: As at 31 December 2015 and for 2015 CJSC Petelinskaya NCI percentage Non-current assets Current assets Non-current liabilities Current liabilities Net assets Carrying amount of NCI Revenue Profit Total comprehensive income Profit allocated to NCI Cash flows from operating activities Cash flows from investment activities Cash flows from financing activities (dividends to NCI: nil) Net increase in cash and cash equivalents 11.8% 1,914,873 5,269,449 (144,241) (2,098,165) 4,941,916 583,146 5,323,190 321,251 321,251 37,908 (681,980) (358,562) 1,041,352 810 CJSC CMPP 4.9% 5,614,060 5,128,212 (196,629) (8,610,891) 1,934,752 95,554 29,643,821 (777,751) (777,751) (38,412) 75,628 (424,768) 469,749 120,609 Total 7,528,933 10,397,661 (340,870) (10,709,056) 6,876,668 678,700 34,967,011 (456,500) (456,500) (504) (606,352) (783,330) 1,511,101 121,419 As at 31 December 2014 and for 2014 CJSC Petelinskaya CJSC CMPP Total NCI percentage Non-current assets Current assets Non-current liabilities Current liabilities Net assets Carrying amount of NCI Revenue Profit Total comprehensive income Profit allocated to NCI Cash flows from operating activities Cash flows from investment activities Cash flows from financing activities (dividends to NCI: nil) Net decrease in cash and cash equivalents 11.8% 1,750,243 3,768,957 (10,420) (930,977) 4,577,803 540,181 5,339,578 629,860 629,860 74,323 6,595 (227,848) 220,000 (1,253) 4.9% 6,095,819 4,601,141 (88,327) (7,640,639) 2,967,994 146,583 24,864,859 (733,737) (733,737) (36,238) (369,555) 73,332 244,000 (52,223) 7,846,062 8,370,098 (98,747) (8,571,616) 7,545,797 686,764 30,204,437 (103,877) (103,877) 38,085 (362,960) (154,516) 464,000 (53,476) 101 101 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS As at 1 January 2014 NCI percentage Non-current assets Current assets Non-current liabilities Current liabilities Net assets Carrying amount of NCI 27. Borrowings CJSC Petelinskaya 11.8% 1,764,104 2,715,949 (40,272) (576,107) 3,863,674 455,914 CJSC CMPP 4.9% 4,978,374 4,130,941 (1,133,608) (4,233,660) 3,742,057 184,787 Total 6,742,488 6,846,980 (1,173,880) (4,809,767) 7,605,731 640,701 Bonds due in October 2020 an interest ranging from 12.00% to 13.60% per annum. Principal of the long-term loan is due on maturity in 2017. In October 2015, the Group placed 5,000,000 bonds in rubles The amount outstanding of loans was 987,302, 588,575 and at par value (1,000 rubles at the issuance date) with 694,906 RUR as of 31 December 2015, 31 December 2014 a maturity date in October 2020. The coupon rate on the and 1 January 2014, respectively. bonds, payable semi-annually, is set at 12.5% per annum. The Group accounts for these instruments at amortized cost. Rosselhozbank Bank loans Gazprombank Borrowings from Rosselhozbank consist of eight long-term ruble denominated loans with interest ranging from 12.0% to 16.5% per annum. Principal of the long-term loan is due on maturity from 2018 to 2023. The amount outstanding of This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings, which are euro denominated loans with interest ranging from 3.39% to December 2015, 31 December 2014 and 1 January 2014, measured at amortised cost. For more information about the Group’s exposure to interest rate, foreign currency and liquidity 4.92% per annum and one short-term ruble denominated respectively. Borrowings from Gazprombank consist of two long-term loans was 1,532,155, 2,292,642 and 255,582 RUR as of 31 risk, see Note 29. Terms and conditions of outstanding loans were as follows: Nominal interest rate Adjusted EIR2 Year of maturity EIR1 Current Non-current 9.75%– 12.50% 11.58% 11.58% 2016– 2020 2,500,000 5,000,000 3.39% – 16.50% 12.54% 6.70% 2016– 2023 1,805,224 1,685,587 2,541,709 9.50% – 22.00% 13.49% 4.71% 2016– 2023 20,343,233 Current Non-current – 2,500,000 68,699 9,145,226 10,857,646 8,402,530 7,348,038 14,251,642 Current Non-current – 2,500,000 3,047,518 3,008,108 31 December 2015 31 December 2014 1 January 2014 loans with interest ranging in 13.00% per annum. Principal of the long-term loan is due on maturity from 2018 to 2019. Alfa bank The amount outstanding of loans was 829,493, 2,707,886 and 2,126,383 RUR as of 31 December 2015, 31 December 2014 Borrowings from Alfa Bank consist of two long-term euro and 01 January 2014, respectively. denominated loan with an interest rate of 4.1% per annum. The amount outstanding was 141,648 RUR as of Savings Bank of Russia 31 December 2015. – – – 2023 – 10,947 – 75,611 – 92,035 363,084 – 90,200 – 113,832 – Borrowings from Savings Bank of Russia consist of one long-term and two short-term ruble denominated loan with 8.5% – 16.62% 14.5% 14.5% 2016 – 2024 81,476 276,987 68,354 259,125 26,306 231,568 25,093,017 16,118,747 13,557,909 14,284,784 10,496,284 17,143,944 27. Borrowings continued Bonds Bank loans Credit lines Other borrowings Interest payable Finance lease liabilities Total borrowings 1 EIR represents the weighted average interest rate on outstanding loans. 2 Adjusted EIR represents the effective rate on borrowings at year end, adjusted by government subsidies for certain qualifying debt. Since approvals for subsidies are submitted annually by the Group as required by law, the existence of such subsidies in any given year is not necessarily indicative of their existence in future periods. See Note 10 for further disclosure of government subsidies related to interest on borrowings. As of 31 December 2015, the Group’s borrowings were Bonds denominated in the following currencies: 40,874,513 in Russian rubles, 337,251 in Euro. As of 31 December 2014, the Bonds due in April 2016 Group’s borrowings were denominated in the following Lines of credit Sberbank of Russia Bank Zenith Borrowings from Bank Zenith consist of four long-term ruble denominated lines of credit with interest ranging 13.00% per Borrowings from the Sberbank of Russia consist of twelve annum. Principal is due upon maturity in 2016. The amount long-term and eighteen short-term ruble denominated lines outstanding was 45,174, 587,281 and 1,129,354 RUR as of of credit with interest ranging from 9.74% to 18.00%per 31 December 2015, 31 December 2014 and 1 January 2014, annum. Principal payments are due from 2016 to 2023. respectively. The amount outstanding was 14,963,631, 11,396,095 and currencies: 27,825,534 in Russian rubles, 17,159 in Euro. As In April 2013, the Group placed 3,000,000 bonds in rubles at 12,285,953 RUR as of 31 December 2015, 31 December 2014 Rosselkhozbank 1 January 2014, the Group’s borrowings were denominated in par value (1,000 rubles at the issuance date) with a maturity and 1 January 2014, respectively. the following currencies: 27,426,964 in Russian rubles, 85,947 date in April 2016. The Group accounts for these instruments in Euro and 127,317 in US dollars. at amortized cost. 500,000 of these bonds were purchased by a Group company upon issuance, for the purpose of selling on Gazprombank Borrowings from Rosselkhozbank consist of nineteen ruble and one Euro denominated long-term lines of credit with fixed interest rates ranging from 10.5% to 15% per annum. Interest on the majority of borrowings is paid on a monthly or the market when funds are required; such bonds have not, to Borrowings from Gazprombank consist of six long-term and Principal payments are due from 2016 to 2020. The amount quarterly basis, with the exception of bonds, for which the date, been sold on the market. The remaining eight short-term ruble denominated lines of credit with outstanding was 1,674,497, 1,766,064 and 4,508,382 RUR for interest is paid on a semi-annual basis. 2,500,000 bonds held by third parties are presented as interest ranging from 9.5% to 15.94% per annum. Principal ruble denominated and 11,982, 17,159 and 81,005 for Euro current debt as of 31 December 2015. The coupon rate on the payments are due from 2016 to 2022. Amount outstanding denominated lines of credit as of 31 December 2015, bonds, payable semi-annually, is set at 9.75% per annum. was 8,361,308, 3,552,324 and 3,595,008 RUR as of 31 December 2014 and 1 January 2014, respectively. 31 December 2015, 31 December 2014 and 1 January 2014, respectively. 102 102 103 103 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS Bank VTB Collateral under borrowings Financial lease liabilities are payables as follows: At 1 January 2014 Future minimum lease payments Portion related to interest Present value of minimum lease payments At 31 December 2014 Future minimum lease payments Portion related to interest Present value of minimum lease payments At 31 December 2015 Future minimum lease payments Portion related to interest Present value of minimum lease payments 28. Tax related liabilities Value added tax Payroll related taxes Property tax Personal income tax withheld Income tax Land tax Transportation tax Other taxes Not later than 1 year Between 1 and 5 years Later than 5 years 58,061 31,755 26,306 107,679 39,325 68,354 125,255 43,779 81,476 201,220 90,521 110,699 250,350 86,244 164,106 290,264 85,587 204,677 160,275 39,406 120,869 120,393 25,374 95,019 86,401 14,091 72,310 31 December 2015 31 December 2014 1 January 2014 313,552 213,792 165,934 69,858 5,448 12,392 5,673 3,695 790,344 513,045 129,915 105,921 63,113 14,179 6,675 5,866 6,221 844,935 374,234 85,481 92,311 57,749 3,410 6,209 4,106 4,633 628,133 Borrowings from Bank VTB consist of fifteen long-term and Shares of and participating interests in the following Group four short-term ruble denominated lines of credit with companies are pledged as collateral under certain interest ranging from 11.90% to 15.60% per annum. Principal borrowings: as of 31 December 2015: is due upon maturity from 2016 to 2017. Amount outstanding was 2,644,099 and 1,942,040 RUR as of 31 December 2015 and 31 December 2014, respectively. Alfa-Bank Borrowings from Alfa-Bank consist of three short-term ruble denominated lines of credit with interest ranging from 11.25% to 22.00% per annum. Amount outstanding was 1,486,000 RUR as of 31 December 2015. Unused lines of credit The total amount of unused credit on lines of credit as of 31 December 2015 is 18,712,368. The unused credit can be utilized from 2016 to 2018 with expiration of available JSC Vasiljevskaya LLC Cherkizovo Pork LLC Tambocmyasoprom CJSC Agroresurs-Voronej LLC Resurs CJSC Lipetzkmyaso LLC Kuznetsovsky kombinat LLC Kurinoe Tsarstvo – Bryansk JSC Kurinoe tsarstvo LLC Orelselprom LLC Lisko Broiler 31 December 2015 31 December 2014 1 January 2014 51% 25% – – – – 51% 100% 51% 100% 100% 100% 51% 85% 51% 100% 100% 100% 100% 100% 100% 99% 100% – 99% 99% 100% – 99% 99% 100% 100% – amounts varying as follows: 13,127,450 expires Non-current biological assets with a carrying value by 31 December 2016, 2,850,000 expires by 31 December of 485,251, 345,085 and 544,390 were pledged as security 2017, 2,734,918 expires by 30 April 2018. under certain borrowings as of 31 December 2015, 2014 and 1 January 2014, respectively. Current biological assets with a carrying value of 152,246, 825,930 and 1,291,789 were pledged as security under certain borrowings as of 31 December 2015, 2014 and 1 January 2014, respectively. 27. Borrowings continued Property, plant and equipment with a carrying value Finance leases liabilities of 16,563,987, 18,681,618 and 19,312,514 was pledged as security under loan agreements as of 31 December 2015, The Group uses certain fixed assets under leasing contracts 2014 and 1 January 2014, respectively. that qualified for treatment as finance leases. The lower of the incremental borrowing rate and the rate implicit in the Certain significant loan agreements with the Sberbank of lease agreement was used in capitalising the leases. Russia, Rosselkhozbank, Bank VTB, Gazprombank and Alfa-bank contain financial covenants requiring maintenance of specific debt to EBITDA, net short-term debt to EBITDA, EBIT to Interest expense and debt service coverage ratios. The Group is in compliance with these covenants as of 31 December 2015. 104 104 105 105 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS 29. Financial instruments Categories of financial instruments and fair value measurements The carrying values and fair values of the Group’s financial assets and liabilities as of 31 December 2015, 2014 and 1 January 2014 are as follows: 31 December 2015 31 December 2014 1 January 2014 Carrying value Fair value Carrying value Fair value Carrying value Fair value FINANCIAL ASSETS NOT MEASURED AT FAIR VALUE Loans and receivables Notes receivable, net Long-term deposits in banks Other non-current assets Trade receivables Other receivables Other current assets Cash and cash equivalents 300,000 641,365 96,379 4,444,991 1,782,019 425,906 5,560,824 13,251,484 296,044 601,369 96,379 4,444,991 1,782,019 425,906 5,560,824 13,207,532 – 671,365 90,904 3,953,085 1,186,673 418,537 1,007,554 7,328,118 – 473,305 90,904 3,953,085 1,186,673 406,467 1,007,554 7,117,988 56,312 671,365 89,634 2,705,276 1,416,830 33,675 2,107,282 7,080,374 41,951 462,428 89,634 2,705,276 1,416,830 16,597 2,107,282 6,839,998 FINANCIAL LIABILITIES NOT MEASURED AT FAIR VALUE Amortised cost Borrowings, other than finance lease* Financial lease liabilities Trade payables Payables for non-current assets Payroll related liabilities Other payables and accruals 40,853,301 358,463 8,461,657 1,445,128 1,372,176 269,751 52,760,476 39,545,901 336,368 8,461,657 1,445,128 1,372,176 269,751 51,430,981 27,515,214 327,479 4,315,188 574,073 1,217,693 222,293 34,171,940 26,038,342 324,434 4,315,188 574,073 1,217,693 222,293 32,692,023 27,382,354 257,874 3,963,918 318,822 925,385 298,685 33,147,038 26,189,172 245,597 3,963,918 318,822 925,385 298,685 31,941,579 The Group’s maximum exposure to credit risk arises from the following classes of financial assets: Long-term deposits in banks Notes receivable, net Other non-current assets Trade receivables Other receivables Other current assets Cash and cash equivalents (except for cash in hand) Total maximum credit risk Trade receivables 31 December 2015 31 December 2014 1 January 2014 641,365 300,000 96,379 4,444,991 1,782,019 425,906 5,556,056 13,246,716 671,365 – 90,904 3,953,085 1,186,673 418,522 1,002,112 7,322,661 671,365 56,312 89,631 2,705,276 1,416,830 33,675 2,100,577 7,073,666 The maximum exposure to credit risk for trade receivables by counterparty was as follows: Company 1 Company 2 Company 3 Company 4 Company 5 Other counterparties Total 31 December 2015 31 December 2014 1 January 2014 725,702 742,947 367,084 219,462 262,253 2,127,543 4,444,991 823,604 510,731 370,745 267,742 179,161 1,801,102 3,953,085 339,158 484,357 304,128 199,550 63,002 1,315,081 2,705,276 The average credit period on sales of goods is 30 days. No Trade receivables disclosed above include amounts (see interest is charged on trade and other receivables. Before below for aged analysis) that are past due at the end of the accepting any new customer, the Group uses an internal reporting period for which the Group has not recognised an credit scoring system to assess the potential customer’s allowance for doubtful debts because there has not been credit quality and defines credit limits by customer. Limits a significant change in credit quality and the amounts are still * at 31 December 2015 the Group used 12.9% as market rate of cost of debt for the fair value estimation (for borrowings nominated in RUB). and scoring attributed to customers are regularly reviewed. considered recoverable. The ageing of trade receivables that That rate of the cost of debt excludes the effect of subsidies (13.9% and 12.7% at 31 December 2014 and 1 January 2014, respectively). Financial risk management The management of the Group reviews the capital structure on a regular basis. As part of this review, management The main risks arising from the Group’s financial instruments considers the cost of capital and the risks associated with are capital risk management, interest rate risk, credit risk and each class of capital. liquidity risk. Management considers that foreign currency risk is not material to the Group, because the Group has no Credit risk material outstanding balances denominated in foreign Neither past due nor impaired Past due 1-90 days Past due 91-180 days Past due 180-365 days Past due more than 365 days Total currencies. Credit risk refers to the risk that counterparty may default on Other receivables its contractual obligations resulting in financial loss to the The Group’s management identifies measures and manages Group. Financial assets which potentially subject the Group Other receivables disclosed above mainly consists of were not impaired was as follows: 31 December 2015 31 December 2014 1 January 2014 4,082,044 321,957 18,677 7,086 15,227 4,444,991 3,481,259 394,075 24,509 11,361 41,881 3,953,085 2,366,096 278,873 20,452 9,184 30,671 2,705,276 Cash and cash equivalents and long-term deposits financial risks in accordance with the Group’s policies and to credit risk consist primarily of trade and other receivables, subsidies receivable from regional ministries of agriculture. The credit risk on cash and cash equivalents and long-term procedures. Capital risk management long-term deposits, notes receivable and cash in current and deposit accounts with banks and other financial institutions. The Group manages its capital to ensure that it will be able to continue as a going concern while maximizing the return to the equity holders. The capital structure of the Group consists of debt, cash and cash equivalents and equity, comprising issued capital, reserves and retained earnings. Timing of collection depends on availability of budget funds deposits is limited because these funds are placed only with and on average is approximately 6 months. In very limited banks with high credit ratings assigned by international situations, ageing can exceed one year and all these cases are credit-rating agencies. All balances on bank accounts are carefully reviewed and followed up by management. neither overdue nor impaired. At 31 December 2015, the amount of subsidies receivable outstanding more than one year was 199,034. 106 106 107 107 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS The table below shows the rating and cash and cash equivalents balances with major banks at the reporting dates: The following tables detail the Group’s expected maturity for its financial assets, except for cash and cash equivalents. 31 December 2015 31 December 2014 1 January 2014 The tables below have been drawn up based on the undiscounted contractual maturities of the financial assets, including Rating agency Moody's Standard & Poor’s Fitch Ratings Fitch Ratings Fitch Ratings Standard & Poor’s Standard & Poor’s Moody's – Rating BBB- BB+ BB+ BB+ BBB– BB+ A– BB– – Bank 1 Bank 2 Bank 3 Bank 4 Bank 5 Bank 6 Bank 7 Bank 8 Other Total cash and cash equivalents at banks 490,328 6 8,607 2,034,351 7,976 3,003,177 992 341 10,278 900,272 – 8,521 70,789 284 2,747 7,745 14 11,740 806,654 1,000,000 209,630 52,426 16,516 10 12,143 2,455 743 5,556,056 1,002,112 2,100,577 29. Financial instruments continued The table below shows the rating and long-term bank deposits balances at the reporting dates: Rating agency Rating 31 December 2015 31 December 2014 1 January 2014 Fitch Ratings – BB+ – 641,365 – 641,365 30,000 641,365 30,000 641,365 671,365 671,365 Gazprombank Odinbank Total long-term bank deposits Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. interest that will be earned on those: Effective interest rate, % Less than 6 month 6 months- 1 year At 1 January 2014 Trade and other receivables Long-term deposits in banks Notes receivable, net Other non-current assets Other current assets Total At 31 December 2014 Trade and other receivables Long-term deposits in banks Other non-current assets Other current assets Total At 31 December 2015 Trade and other receivables Long-term deposits in banks Notes receivable, net Other non-current assets Other current assets Total 8% – 10.5% 8.36% 8% – 10.5% 8% 9%-9.5% 4,122,106 25,666 – – 33,675 4,181,447 5,139,758 25,666 – 418,522 5,583,946 6,227,010 25,666 14,005 – 425,906 6,692,587 – 25,666 – – – 25,666 – 25,666 – – 25,666 – 25,666 14,005 – – 39,671 1-3 years – 102,665 56,312 – – 158,977 – 102,665 – – 102,665 – 761,433 328,010 – – 1,089,443 More than 3 years – 790,344 – 89,631 – 879,975 – 739,011 90,904 – 829,915 – – – 96,379 – 96,379 Total 4,122,106 944,341 56,312 89,631 33,675 5,246,065 5,139,758 893,008 90,904 418,522 6,542,192 6,227,010 812,765 356,020 96,379 425,906 7,918,080 The following are the contractual maturities of financial liabilities, including estimated interest payments: Effective interest rate, % Less than 6 month 6 months- 1 year 1-3 years More than 3 years Total At 1 January 2014 Borrowings, other than finance lease Finance lease obligations Trade and other payables Payables for non-current assets Payroll related liabilities Total At 31 December 2014 Borrowings, other than finance lease Finance lease obligations Trade and other payables Payables for non-current assets Payroll related liabilities Total At 31 December 2015 Borrowings, other than finance lease Finance lease obligations Trade and other payables Payables for non-current assets Payroll related liabilities Total 8% – 15% 10.91% – 15.30% 7,498,684 29,030 4,262,602 318,822 925,385 13,034,523 4,799,148 29,030 – – – 4,828,178 17,518,672 113,636 – – – 17,632,308 4,072,027 33,888,531 419,555 4,262,602 318,822 925,385 4,319,886 39,814,895 247,859 – – – 8% – 15.6% 10.91% – 15.30% 8,200,092 53,853 4,537,481 574,073 1,217,693 14,583,192 7,922,702 53,825 – – – 7,976,527 13,307,249 163,735 – – – 13,470,984 3,708,792 207,008 – – – 3,915,800 33,138,835 478,421 4,537,481 574,073 1,217,693 39,946,503 3.39% – 22% 10.91% – 15.30% 14,818,169 62,642 8,731,408 1,445,128 1,372,176 26,429,523 12,952,502 62,642 – – – 13,015,144 11,438,923 248,992 – – – 11,687,915 10,701,330 126,121 – – – 49,910,924 500,397 8,731,408 1,445,128 1,372,176 10,827,451 61,960,033 108 108 109 109 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS Interest rate risk Management does not have a formal policy of determining which proportion of the Group’s exposure should be to fixed The Group adopts a policy of limiting its exposure to changes or variable rates. However, at the time of raising new loans or in interest rates by borrowing on a fixed rate basis. borrowings management uses its judgment to decide Changes in interest rates impact primarily loans and more favourable to the Group over the expected period until whether it believes that a fixed or variable rate would be borrowings by changing either their fair value (fixed rate maturity. debt) or their future cash flows (variable rate debt). 30. Related parties Parties are generally considered to be related if one party has Trading transactions the ability to control the other party or can exercise significant influence over the other party in making financial Trading transactions with related parties comprise mostly of or operational decisions, as defined by IAS 24 Related Party purchases of grain crops from and rendering of storage Disclosures. In considering each possible related party services to TZK NAPKO, Agrarnaya Gruppa and CJSC Transactions with related parties (companies under common control) are summarized as follows: Transactions Sales Rent income Purchases of security services Purchases of property, plant and equipment Purchases of goods and other services Balances with related parties (joint ventures) are summarized as follows: 2015 2,591,240 114,779 21,810 267,459 1,173,810 2014 2,156,212 121,227 43,311 108,612 570,783 31 December 2015 31 December 2014 1 January 2014 Balances Trade receivables Advances paid Other receivables Other current assets Trade payables Advances received Other payables 21 135,641 28,293 3,400 4,557 63,722 – 3,853 144,770 72,696 – 3,674 610,439 – 2015 5,539 666,349 1,030 246,715 2,455 21,798 – – 6,088 480,006 1,538 2014 6,407 – 5,125 125,146 relationship, attention is directed to the substance of the Penzamyasoprom. The Group also sells sausages, raw meat Transactions with related parties (joint ventures) are summarized as follows: relationship not merely the legal form. Related parties may and poultry to a retail chain “Myasnov”. All noted related enter into transactions which unrelated parties might not, parties are entities under common control with the Group. and transactions between related parties may not be The Group also purchases day-old chick from its joint venture effected on the same terms, conditions and amounts as Brioler Budushchego LLC. transactions between unrelated parties. The Company and its subsidiaries enter into various associated with such transactions. The Group expects to transactions with related parties such as the sale and settle such balances in the normal course of business. purchase of inventory. In addition, the Group enters into financing transactions with related parties. The Group also received an advance from its joint venture Trade receivables, trade payables and advances issued are (Tambovskaya Indeika) for future supply of machinery and Transactions Sales Sales of property, plant and equipment Rent income Purchases of goods and other services 31. Commitments and contingencies Transactions with key management personnel equipment to be purchased by the Group and resold to the Legal Key management personnel of the Group are all members of Board of Directors. The remuneration of key management Financing transactions personnel during the year was as follows: joint venture. As of 31 December 2015 and 2014, several Group companies authorities. The tax authorities in the Russian Federation reported negative net assets in their statutory financial frequently take an assertive position in their interpretation of statements. In accordance with the Civil Code of the Russian the legislation and assessments and as a result, it is possible of such legislation as applied to the activity of the Group may be challenged by the relevant regional and federal Salaries and bonuses Share-based payments 2015 2014 184,078 – 122,651 2,612 During the years ended 31 December 2015 and 2014, certain Federation, a liquidation process may be initiated against that transactions and activities may be challenged. It is shareholders issued loans to the Group and have personally guaranteed certain of the bank loans and lines of credit for a total amount of 1,377,670 and 1,511,813, respectively. a company reporting negative net assets. Management therefore possible that significant additional taxes, penalties believes that it is remote that the liquidation process will be and interest may be assessed. Under certain circumstances initiated against those companies. reviews may cover longer periods. Where uncertainty exists, the Group has accrued tax liabilities as management’s best Balances with related parties (companies under common control) are summarized as follows: The Group has been and continues to be the subject of legal estimate of the probable outflow of resources which will be Balances 31 December 2015 31 December 2014 1 January 2014 Trade receivables Other non-current assets Advances paid Advances paid for property, plant and equipment Other current assets Other receivables Trade payables Advances received Other payables Long-term borrowings Long-term payables to shareholders 182,548 57,083 2,269 – 2,927 18,450 17,141 439 53 – 9,138 206,756 61,609 25,151 127,935 – 10,009 14,408 109 606 5,431 9,356 167,472 69,844 18,197 – – 6,317 33,047 – 2,821 22,485 10,899 proceedings and adjudications from time to time. required to settle such liabilities. Management believes that it Management believes that the resolution of all such has provided adequately for tax liabilities based on its outstanding matters will not have a material impact on the interpretations of tax legislation. However, the relevant Group’s financial position, results of operations or cash flows. authorities may have differing interpretations, and the effects could be significant. Taxation Laws and regulations affecting businesses in the Russian from 1 January 2012 to introduce additional reporting and Federation continue to change rapidly. These changes are documentation requirements. The new legislation allows the characterized by different interpretations and arbitrary tax authorities to impose additional tax liabilities in respect of application by the authorities. Management’s interpretation certain transactions, including but not limited to transactions Russian transfer pricing legislation was amended starting 110 110 111 111 ANNUAL REPORT 2015ANNUAL REPORT 2015COMPANYPERFORMANCE OVERVIEWCORPORATE GOVERNANCEFINANCIAL STATEMENTS with related parties, if they consider transaction to be priced Operating lease commitments not at arm’s length. As the practice of implementation of the new transfer pricing rules has not yet developed and wording Obligations under non-cancellable operating lease of some clauses of the rules is unclear, the impact of agreements for the five years ending 31 December 2018 and challenge of the Group’s transfer pricing positions by the tax thereafter are as follows: authorities cannot be reliably estimated. In 2014, amendments were introduced into the Russian tax legislation in respect of taxation of profit of controlled foreign companies. According to these changes, the 2015 undistributed profits of the Group foreign subsidiaries, recognized as controlled foreign companies, may result in an Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years Total operating lease commitments increase of the tax base of the controlling entities in 2016. Agricultural market risk The Group is formulating its tax planning strategy with 31 December 2015 281,442 521,876 1,128,662 1,931,980 regard to the foreign subsidiaries. As a rule, grain prices exhibit rather high seasonal fluctuation. Environmental remediation costs As a general trend, prices tend to be lower in autumn mainly due to the increasing in supply. Market prices of agricultural commodities are also influenced by a variety of unpredictable The Group’s management believes that the Group is in factors which are beyond the control of the Group, including compliance with applicable legislation and is not aware of any weather, planting intentions, government (Russian and potential environmental claims; therefore, no liabilities foreign) farm programs and policies, changes in global SHAREHOLDER INFORMATION Contacts Cherkizovo Group PJSC 5B Lesnaya St., Moscow 125047, Russia White Square Office Center Tel.: +7,495,660,2440 Website: www.cherkizovo.com Email: info@cherkizovo.com Registration number 1057748318473 of 22 May 2005 Registrar Joint Registration Company OJSC 70 Pyatnitskaya St., Moscow 113095, Russia associated with such costs are recorded as of 31 December demand resulting from population growth and higher Tel.: +7,495,745,7891, +7,495,504,2886 2015 and 2014. standards of living and global production of similar and competitive crops. Insurance The Group holds insurance policies in relation to certain assets. As of 31 December 2015 the Group secured part of its livestock with a total insurance policy of approximately 5,659,509 and part of property, plant and equipment and other assets with a total insurance policy of approximately 87,829,423 with a number of insurance companies. The Group holds no other insurance policies in relation to operations, or in respect of public liability or other insurable risks. Auditors Deloitte and Touche CIS 5B Lesnaya St., Moscow 125047, Russia White Square Office Center Depository The Bank of New York Mellon 1 Wall Street, New York, NY 10286 United States Legal advisors (English law) Cleary Gottlieb Steen & Hamilton LLP, 55 Basinghall Street, London EC2V 5EH, UK Capital commitments Capital commitments by each operating segments are as follows: Commitments for the acquisition of property, plant and equipment Meat-processing Pork Poultry Feed Commitments for the development or acquisition of biological assets Pork Total capital commitments 31 December 2015 40,662 1,438,865 2,139,069 8,561 3,627,157 96,819 96,819 3,723,976 At 31 December 2015, the Group had capital projects in progress at LLC Cherkizovo Pork, OJSC Kurinoe Tsarstvo and LLC Voronezhmyasoprom. In addition, the Group is in the process of implementing SAP. As part of this project, commitments have been made to contractors of approximately 210,036 toward completion of the project. 112112 ANNUAL REPORT 2015