Chemed Annual Report 2016

Plain-text annual report

Annual Report 2016 STEPPING UP CONTENTS Cherkizovo Group is... Russia’s largest vertically integrated meat and feed producer. The Group is among the top three producers and suppliers of raw and processed poultry and pork products and the leading feed manufacturer in Russia. During 2016, Cherkizovo Group further strengthened its leading market position across all of its key segments. The Group’s operations are structured into four operating divisions: Poultry, Pork, Meat Processing, and Grain. The Group also carries out associated sales and trading operations. The Group’s Poultry division consists of eight full cycle poultry production complexes with a combined capacity of 600,000 tonnes live weight per annum. The Pork operations consist of 15 modern, integrated pork production complexes. The Group operates six meat processing plants with a combined annual capacity of 226,000 tonnes, where it produces fresh and ready-to- cook products. In addition, the Group owns: nine feed mills, with a combined annual capacity of over 2.5 million tonnes; grain storage facilities, with an overall storage capacity of more than 850,000 tonnes; and over 140,000 hectares of agricultural land. Сherkizovo Group employs 22,800 people. Cherkizovo’s strategy is aimed at ensuring stable organic growth and efficient expansion, underpinned by the continued development of its infrastructure through the implementation of a long-term investment programme. Cherkizovo Group’s shares and GDRs are traded on the London Stock Exchange (LSE) and on the Moscow Exchange under the symbols LSE:CHE; MOEX:GCHE. ABOUT COMPANY 04-19 Operational Review: Our Year in Review Key Figures Our Key Strengths Where We Operate Key Events Message from the Chairman Message from the CEO 06 08 09 10 12 14 16 STRATEGIC REPORT 20-43 Market Overview Our Strategy: Strategy Overview Business Model New Markets Investment Programme Quality Control Research & Development 22 26 26 27 28 28 30 32 Poultry Pork Meat Processing Grain FINANCIAL REPORT 44-55 CORPORATE GOVERNANCE 56-75 Corporate Governance System Directors Statement Board of Directors Board Committees Management Board Corporate Secretary Internal Control and Risk Management Disclosure to Auditors 58 58 60 62 63 68 68 68 34 34 38 40 42 Investor and Shareholder Information Shareholder Structure Dividend Policy Bonds Investor Relations Shareholder Access to Information Sustainable Development Employee Policies Health, Safety and the Environment Community Relations and Charity 69 69 69 69 70 70 71 71 74 75 FINANCIAL STATEMENTS 76-139 ABOUT COMPANY ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS STEPPING UP STEPPING UP the Corporate Ladder the Corporate Ladder STEPPING UP the Operating Ladder STEPPING UP the Transparency Ladder 82.4 82.4 RUB bln CONSOLIDATED REVENUE CONSOLIDATED REVENUE 10.3 RUB bln CONSOLIDATED EBITDA 903 th. tonnes MEAT PRODUCTS SALES POULTRY POULTRY PORK 500.3 500.3 TH. TONNES TH. TONNES 184.8 TH. TONNES MEAT PROCESSING 218.1 TH. TONNES GRAIN 338.8 TH. TONNES +57% from 2012 +57% from 2012 +78% from 2012 +71% from 2012 +201% from 2012 №1 RUSSIAN №1 RUSSIAN FEED PRODUCER FEED PRODUCER №2 RUSSIAN POULTRY PRODUCER №3 RUSSIAN PORK PRODUCER Sources: Poultry Union of Russia, Pork Union of Russia. Sources: Poultry Union of Russia, Pork Union of Russia. MOODY’S RATING B1 MOODY’S RATING B1 EXPERT RA RATING A++ EXPERT RA RATING A++ RUSSIA’S TOP MEAT PRODUCER ACCORDING TO THE RANKING BY AGROINVESTOR For more information, please, visit our corporate website: www.cherkizovo.com 02 CHERKIZOVO GROUP Annual Report 201 6 www.cherkizovo.com www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 03 CONTENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Stepping Up A comprehensive re-branding of the Group undertaken in 2016 reﬂects our enhanced positioning, vision and strategy. the Corporate Ladder New corporate colours: Brand colours Poultry Turkey Pork Meat Processing Grain ABOUT COMPANY 06-19 Our Year in Review Key Figures Our Key Strengths Where We Operate Key Events Message from the Chairman Message from the CEO 06 08 09 10 12 14 16 OUR YEAR IN REVIEW WHERE WE OPERATE KEY EVENTS In 2016, Cherkizovo Group strengthened its positions as Russia’s top meat producer with sales surpassing 903,000 tonnes of meat products. Production facilities serve 80% of the population of Russia. A year of milestones for Cherkizovo Group. MESSAGE FROM THE CHAIRMAN MESSAGE FROM THE CEO “Despite challenging macroeconomic conditions, we not only delivered strong ﬁnancial and operational results, but also signiﬁcantly improved our governance structure to ensure that the Group is well positioned for the next phase of its development”. “Our focus is shifting from development to maintenance, streamlining, production of higher- margin value added products, further development of the downstream part of the business and investment in operational efficiency across all segments”. P. 06-07 P. 10-11 P. 12-13 P. 14-15 P. 16-19 04 CHERKIZOVO GROUP Annual Report 201 6 www.cherkizovo.com www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 05 ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS ABOUT COMPANY Our Year in Review In 2016, Cherkizovo Group strengthened its position as Russia’s top meat producer with sales surpassing 903,000 tonnes of meat products. The Group’s sales volumes increased 9% year-on- year, with particularly strong volume growth in the Grain farming segment, which grew by 27% year- on-year to around 339,000 tonnes. Sales volumes of meat products in 2016 Poultry Pork Meat Processing Sales volume, th. tonnes Sales volume share 218.1 184.8 24% 21% 500.3 Revenue in 2016 Poultry Pork Meat Processing Grain Revenue, RUB bln Revenue share 3.1 31.7 15.9 47.7 3% 32% 16% POULTRY PORK MEAT PROCESSING GRAIN Cherkizovo Group is one of Russia’s largest poultry meat producers and a leading manufacturer of brand name poultry products. In 2016, total sales volumes for the Poultry division increased by 6% year-on-year to 500,321 tonnes of sellable weight. This growth was driven by higher production levels achieved through improvements in efficiency and the launch of new poultry houses. Cherkizovo Group also launched production at the new Tambov Turkey facility and expanded the export of poultry products to international markets. For more information see pages 34-35. 55% In 2016, Cherkizovo Group maintained its position as one of the top three pork producers in Russia. Production volumes for the Pork division increased by 9% year-on-year in 2016 to 184,766 tonnes of live weight. This was primarily due to a new genetics enhancement programme launched at the beginning of the year to improve the health status of livestock and efficiency by increasing liveability and weekly farrows. For more information see pages 38-39. Cherkizovo Group is one of the top three meat processing producers in Russia. Cherkizovo manufactures a wide range of high-quality meat products. In 2016, sales volumes in the Meat Processing division grew by 14% year-on-year to 218,085 tonnes. This increase was primarily due to the launch of a new pig slaughter facility at the Dankov meat processing plant in the second half of 2015, which boosted both the volume and the product range. For more information see pages 42-43. Cherkizovo Group cultivated 81,000 hectares in Russia’s central regions in 2016 and achieved crop yields that are above the national average. Cherkizovo harvested 41% more grain in the Central Black Earth region compared to the previous year. The record results were achieved through investments in new technology, including the deployment of highly intensive technologies in soil treatment and using the top grade market and hybrid seeds. Sales volumes of the segment reached 338,808 tonnes in 2016, increasing by 27% compared to 2015. For more information see pages 40-41. 47.7 RUB bln REVENUE 15.9 RUB bln REVENUE 31.7 RUB bln REVENUE 3.1 RUB bln REVENUE 49% 500.3 th. tonnes SALES 184.8 th. tonnes PRODUCTION 218.1 th. tonnes SALES 338.8 th. tonnes SALES 06 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 07 ABOUT COMPANY Key Figures Divisions Poultry Pork Meat Processing Grain Revenue Gross proﬁt Operating expenses Adjusted EBITDA Adjusted EBITDA margin Operating proﬁt / (loss) Income / (Loss) before tax Proﬁt / (loss) Net operating cash ﬂow Net debt KEY OPERATIONAL FIGURES, TONNES 2016 500,321 184,766 218,085 338,808 2015 470,432 169,563 191,200 267,371 KEY FINANCIAL FIGURES, RUB MLN 2016 82,417.2 17,854.8 (12,798.3) 10,282.5 12.5% 5,056.5 1,960.4 1,919.2 9,368.5 36,949.1 2015 77,032.6 19,148.7 (11,614.7) 12,630.4 16.4% 7,534.0 5,871.7 6,007.5 4,992.3 35,009.6 Year-on-year 6% 9% 14% 27% Year-on-year 7% (7%) 10% (19%) (33%) (67%) (68%) 88% 6% ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Our Key Strengths VERTICALLY INTEGRATED BUSINESS MODEL STABLE FINANCIAL POSITION STRONG BRANDS A diversiﬁed, integrated business model ensures Cherkizovo Group’s strong presence across all key segments of the meat production and processing chain. As a result, the Group is well positioned, in terms of its strategic sustainability and readiness, to withstand challenges in the marketplace. For more information see page 27. Steady cash ﬂow and access to borrowing at low interest rates have enabled Cherkizovo Group to continue its investments in the development of production. The Group maintains a comfortable debt/EBITDA ratio of 3.75 as at the end of 2016. For more information see pages 44-55. Cherkizovo Group has built a broad portfolio of strong brands in the poultry and meat processing market segments and these have earned high levels of brand recognition and consumer loyalty. In 2016, the Group introduced new brands targeted at the international marketplace. For more information see pages 10-11. OUR TEAM People represent our key advantage. Cherkizovo Group has built a strong professional team headed by experts trained both in Russia and internationally with distinguished track records in leading Russian and foreign companies. For more information see pages 63-67. DEVELOPMENT STRATEGY ENCOMPASSING ORGANIC GROWTH AND M&A The Group’s strategy encompasses organic growth through investment in new production facilities, as well as taking advantage of selective M&A opportunities that ﬁt with the Group’s business model and can increase its market share. For more information see pages 26-33. LEADER IN TECHNOLOGY AND INNOVATION All of Cherkizovo Group’s facilities are equipped with the latest production technologies and comply with the latest biosecurity standards. The Group is an established leader in innovation among Russian agro-industrial companies. For more information see pages 29-33. DISTRIBUTION AND LOGISTICS Cherkizovo Group’s ‘production belt’ is located in the most densely-populated area of the Russian Federation. The Group’s own logistics complexes and refrigerator ﬂeet of over 1,000 vehicles ensure our chilled products can be delivered promptly to our customers. For more information see pages 10-11. FAVOURABLE REGULATORY ENVIRONMENT The agro-industrial sector and national food security are key focuses of Russia’s domestic policy, with producers beneﬁting from favourable local regulations and tax environment. Cherkizovo Group, as a leading Russian meat producer, beneﬁts from this favourable regulatory environment. For more information see page 16. 08 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 09 ABOUT COMPANY Where We Operate We have production facilities in Moscow and Moscow region, as well as Bryansk, Voronezh, Kursk, Lipetsk, Kaliningrad, Penza, Tambov, Orel, Tula, Vologda and Ulyanovsk regions and deliver our products to 80% of the population of Russia. OUR BRANDS Our marketing strategy is aimed at aligning our product offering with the needs of our customers across the markets where we operate. The high level of recognition and loyalty enjoyed by our brands reﬂect the popularity of our products nationwide, and increasingly abroad. POULTRY Petelinka Domashnaya Kurochka (Home Chicken) Kurinoe Tsarstvo (Chicken Kingdom) Petelinka is Russia’s best known and most popular chilled poultry meat brand. The Petelinka brand range includes more than 40 products: whole chickens, cuts, by-products, minced meat, and marinated kebabs. The National Trade Association recognised Petelinka as Product of the Year. The Petelinskaya Poultry Factory produces eco-products made of chilled poultry meat under the Domashnaya Kurochka (Home Chicken) brand. The product line includes whole chickens and cuts. The brand is sold in all major retail chains in Moscow and the Central Federal District. Kurinoe Tsarstvo is one of Russia’s leading chilled and frozen poultry brands. The product line includes whole chickens, cuts, by-products and minced meat. Kurinoe Tsarstvo products have won numerous medals and awards at leading trade fairs. Vasilievsky Broiler Mosselprom Dajajti Latifa Distribution Centre Meat Processing Plant Pork Complex Turkey Complex Poltry Complex Feed Mill Plowing Land ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Kaliningrad St. Petersburg Bryansk region Greater Moscow Area Vologda Region Kursk region Tula region Orel region Lipetsk region Tambov region Voronezh region Kazan Penza region Ulyanovsk region Rostov-on-Don Samara Chelyabinsk CHERKIZOVO PREMIUM Cherkizovo Imperiya Vkusa (The Taste Empire) Myasnaya Gubernia Vasilievsky Broiler is the market leader in the chilled poultry segment of the Volga and Central Federal Districts. It is produced at Vasilievskaya Poultry Farm located in the Penza region. Mosselprom is one of the most popular poultry brands in Moscow and the Moscow region. Poultry farms in the Moscow and Tula regions produce chilled and frozen poultry, as well as ready-to-cook products. Cherkizovo Group launched a new halal export brand, Dajajti, in 2016 after it received licences to export poultry products to the Middle East. Dajajti, which means ‘my chicken’, is a brand aimed primarily at the international halal market. Cherkizovo’s ﬁrst halal brand, Latifa, is sold on the domestic market and in CIS countries. Cherkizovo is one of Russia’s leading meat product brands. The product line includes nearly 300 types of sausages, as well as chilled and frozen meats, ready-to-cook products, ham and deli meats. The company supplies raw meat for Cherkizovsky Meat Processing Plant from its own farms. Imperiya Vkusa (The Taste Empire) ham is produced at Сherkizovo’s plants in Kaliningrad and Ulyanovsk. The product line includes four kinds of deli meat: turkey, beef, pork shoulder and poultry meat, prepared with modern equipment imported from Spain. Myasnaya Gubernia is a range of sausage products offering an optimum price/quality ratio. The product line includes cooked and semi-smoked sausages. The products are manufactured from domestic raw materials at Cherkizovo’s plants in Moscow, Penza and Ulyanovsk. 10 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 11 ABOUT COMPANY Key Events ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC They are smaller and lighter than the turkeys Russian consumers are accustomed to, with the average turkey weighing just 7-9kg. The Group’s turkeys will contain half the fat of other brands, making it the healthiest meat available on the market. The turkey products that will be delivered to stores will be branded with at least four different types of packaging and designed to suit a broad range of preferences. For more information see the website: http://cherkizovo.com/en/ press/company-news/5972/ APRIL Cherkizovo Group implements SAP in one of the biggest such projects in the Russian food industry FEBRUARY Cherkizovo Group acquires right to export its products to the UAE Cherkizovo Group receives all of the necessary licences to export chicken meat to the United Arab Emirates. Cherkizovo Group’s largest chicken production plant, Vasilievskaya Poultry Farm, located in Penza Region, was granted the right to export to the UAE. The export authorisation was issued by the UAE’s Ministry of Environment and Water following an inspection of the poultry factory in December 2015. The Group’s halal products are made under the Latifa and Dajajti brands. For more information see the website: http://cherkizovo.com/en/ press/company-news/5970/ Cherkizovo Group begins breeding turkey unique for the Russian market Cherkizovo Group announces the operational launch of a hatchery as part of the Tambov Turkey project, which will allow the Group to begin breeding a variety of turkey that is unique for the Russian market. Cherkizovo Group’s ultra-fresh products, which are delivered from slaughter to store within 24 hours, were the main driver behind the implementation of SAP ERP. As a result of implementing SAP ERP, Cherkizovo Group is now able to track and meet the primary demand for its products. The beneﬁts of SAP ERP can already be seen. The Group has been able to halve headcount in the sales department and reallocate these staff to other departments, leading to increased efficiency in other areas of the business. Order processing time has also fallen by half. For more information see the website: http://cherkizovo.com/en/ press/company-news/7105/ AUGUST Cherkizovo Group starts exporting poultry meat to Egypt Cherkizovo Group dispatched its ﬁrst shipment of poultry meat to Egypt. Products are shipped from Cherkizovo’s Chicken Kingdom poultry farm in Lipetsk region. The production process at these facilities has been certiﬁed by the Halal Centre of Moscow. For more information see the website: http://cherkizovo.com/en/ press/company-news/6512/ Cherkizovo Group ranks as Russia’s top meat producer Cherkizovo Group has come ﬁrst in Agroinvestor’s (Russia’s leading agricultural publication) ranking of Russia’s top 20 meat producers of 2015. The Group tops this ranking by a margin of 75,000 tonnes, which underlines its leading position within the domestic market. In 2015, the Company produced 582,000 tonnes of poultry meat in live weight and 169,000 tonnes of live pork. For more information see the website: http://cherkizovo.com/en/ press/company-news/6511/ NOVEMBER Cherkizovo Group receives permission to export poultry products to the EU Cherkizovo Group’s Vasilyevskaya poultry farm receives the EU Export Compliance Certiﬁcate 58/4, allowing the Group to export poultry products to the European Union and beyond. This certiﬁcate is also recognised by many countries outside the EU, such as Serbia, Macedonia, Georgia and South Africa. As a result of receiving this certiﬁcation, the company is now a member of the European Commission’s Trade Control and Expert System (TRACES), which is an online management tool for all sanitary requirements for intra-EU trade. For more information see the website: http://cherkizovo.com/en/ press/company-news/7312/ John Ross appointed Chief Operating Officer (COO) at Cherkizovo Group John Ross joins Cherkizovo Group with over 25 years of operational and management experience in the agricultural sector. At Cherkizovo Group, John Ross will be responsible for the production functions across the Group’s ﬁve business segments. Prior to this, he was at Zacky Farms, USA, for over 20 years, working his way up from operations manager to president of the company. He began his career at Cargill. For more information see the website: http://cherkizovo.com/en/ press/company-news/7338/ Cherkizovo Group begins construction of a new meat processing plant in the Moscow region Cherkizovo Group begins construction of a new meat processing plant in the Kashira district of Moscow region. When completed, this new plant will be the largest of its kind in Europe. The 80-tonne daily production capacity of this new facility outstrips that of any other meat processing plant in Europe. It will be ﬁtted with state-of-the-art equipment to ensure the highest quality and biosafety of the end products. For more information see the website: http://cherkizovo.com/en/ press/company-news/7347/ DECEMBER Cherkizovo launched a new organic line ‘Clean Label’ The line represents new, affordable organic products under the Petelinka brand. ‘Clean Label’ includes cutlets, sausages, barbecue meat and various products for oven roasting. All of the products are made using only poultry meat and spices and are manufactured in Moscow region at one of Russia’s largest poultry production facilities. For more information see the website: http://cherkizovo.com/en/ press/company-news/7431/ Cherkizovo Group achieves a record harvest in 2016 Over 465 thousand tonnes of grain were gathered, an increase of 40% from the previous year. The main crops harvested in 2016 included corn (231,000 tonnes), winter and spring wheat (181,000 tonnes), soy (26,000 tonnes) and peas (26,000 tonnes). Production of corn, the highest contributor to the crops, has doubled compared to the previous year. To meet the demand, a total of 79 harvesters and 100 tractors were deployed by the Group during the harvesting campaign. For more information see the website: http://cherkizovo.com/en/ press/company-news/7584/ 12 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 13 ABOUT COMPANY ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Message from the Chairman “Last year, the Board of Directors of Cherkizovo Group entrusted me, as its new Chairman, with the privilege of looking after the interests of our shareholders. Therefore, it gives me great pleasure to present the Group’s 2016 Annual Report. First of all, on behalf of the Board and all our employees, I would like to express our sincere gratitude to Igor Babaev, the founder and former Chairman of Cherkizovo Group, for his determination and unrelenting effort in creating and guiding the company from its inception to becoming the hugely successful organisation it is today. Thanks to his unfailing enthusiasm, vast experience and dedication, the Group is now Russia’s largest meat company, which gives us a solid foundation for continued future growth and international expansion. Last year, despite challenging macroeconomic conditions, we not only delivered strong ﬁnancial and operational results, but also signiﬁcantly improved our governance structure to ensure that the Group is well positioned for the next phase of its development with a key, strategic focus on improving efficiency. We put in place a new Board structure to signiﬁcantly increase the role of independent directors and broaden the pool of expertise. The newly elected independent directors bring a wealth of international and world-class knowledge and experience, ranging from the agriculture and food production industries to strategic investment and management. In order to strengthen our existing corporate governance still further, independent directors are now heading all of our key Board committees. The strengthened Board’s main focus during the year has been on revamping the Group’s long-term growth strategy. The Board also made a number of important operational decisions in order to deal with the challenges posed by the market during the reporting period. I would like to thank the directors for their invaluable contribution and stewardship during this turbulent period. I ﬁrmly believe that their unparalleled experience and dedication will continue to be instrumental in our next stage of development. In 2015, the Board of Directors approved the Group’s new dividend policy. We expect to maintain a steady dividend ﬂow to shareholders at a level of at least 20% of our net proﬁt. In the drive to overhaul our governance and management structure, we also strengthened our Executive team. We created the new position of Group Chief operating officer (COO) to further coordinate and improve the efficiency of our operations across all divisions. We welcome John Ross, with over 25 years of international operational and management experience in the agricultural sector, to this important role. I am conﬁdent that John’s vast experience will make an invaluable contribution to achieving our strategic objectives. The Board was faced with a challenging macroeconomic situation on our domestic market, as overall conditions in the Russian economy continued to put pressure on the agriculture industry. The devaluation of the rouble, falling disposable incomes and rising inﬂation had a signiﬁcant impact on our operations, in particular during the ﬁrst quarter of 2016. The Group was able to overcome the signiﬁcant challenges posed in the early part of the year with a concerted sales effort, which resulted in increased sales volumes for the year of around 900,000 tonnes, making Cherkizovo the number one producer of meat products in Russia. In many respects, 2016 was a breakthrough year for us in terms of recognising our achievements over the last ten years and identifying the Group’s future strategic direction. We are gradually coming to the end of a signiﬁcant, capital-intensive stage in our development and investment, which has seen the creation of a new, integrated operational structure. With this now in place, we are turning our attention to investment in the processing and production of high-margin value-added products. We have laid solid foundations for the future proﬁtable growth of the Group and have put in place several strategic initiatives designed to generate good returns over the next three to ﬁve years. That said, the priority for the Board remains ensuring the continued growth of the Group over the longer-term, by capitalising on the new vertically integrated structure and focusing on the most proﬁtable market segments. The Group has a unique combination of international expertise and home-grown talent. We continuously aim to implement the most advanced technologies and strive to be at the forefront of scientiﬁc developments in the agricultural and food industry. Thus, in 2016, we established the most high-tech state-of-the art in-house R&D centre in the Russian food production industry and became the ﬁrst partner of the Skolkovo Innovation Centre in biotechnology. Cherkizovo Group will continue building on its competitive advantages and focusing on the quality and biosafety of our products. With the progress we are making in achieving operational and working capital efficiencies and our strong and growing market position in Russia, we are well-positioned to capture growth opportunities, both domestically and internationally. On behalf of all of the shareholders and the Board of Directors of Cherkizovo Group, I would like to express my sincere gratitude to the management and all employees for their commitment and contribution to the development and growth of the Group, making it the company it is today. I am conﬁdent, that with our solid vertically integrated operations, talented and dedicated workforce and highly experienced Board, we are on course to achieving our long-held objective of becoming a truly world-class company, radically changing international perceptions of the Russian agriculture sector along the way. Evgeny Mikhailov Chairman 14 CHERKIZOVO GROUP Annual Report 201 6 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 15 ABOUT COMPANY ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS “While 2016 marked an impressive year of expansion for Cherkizovo Group, we are now seeking to build on this strong foundation and consolidate our market- leading position. Our focus is shifting from development to maintenance, streamlining, production of higher-margin value added products, further development of the downstream part of the business and investment in operational efficiency across all segments. Message from the CEO I am pleased to report that 2016 proved to be a year of milestones for Cherkizovo Group. We completed a number of landmark projects and achieved signiﬁcant progress on our strategic initiatives. At the same time, we were able to deliver a strong set of results across all business divisions despite a backdrop of adverse market conditions. We also remained at the forefront of the national agricultural industry, setting new standards for the quality and biosafety of our products and the efficiency of our operations. OUR PERFORMANCE In 2016, we increased total meat product sales by 9% year-on-year, reaching 903,000 tonnes and reclaiming our status as Russia’s top meat producer. Within this ﬁgure, the Poultry division’s share of total sales increased by 6% to 500,321 tonnes, which was primarily attributable to the delivery of the new Mosselprom poultry houses, the growth of branded product sales and the expansion of our presence in the ready- to-eat, value-added segment. Production in the Pork division grew by 9% in 2016 to 184,766 tonnes, which was primarily due to our new genetic improvement strategy coming on stream and the establishment of two new wean- to-ﬁnish sites in Voronezh region. The Meat Processing division’s sales increased by 14%, to 218,085 tonnes in 2016, with the new pig slaughter facility at the Dankov meat processing plant working at full capacity during the year. We managed to increase our market share in meat processing despite the challenging market conditions. While all divisions delivered strong results, the Grain division demonstrated particularly robust sales, up 27% year- on-year to 338,808 tonnes. The average price, however, fell by 6% year-on-year as a result of record harvest in the country. The Group’s revenue for the year grew by 7% to RUB 82.4 billion with the Poultry and Meat Processing segments being the main growth drivers. The latter performed particularly strongly and saw revenue increase 9% to RUB 31.7 billion. The fourth quarter was our best performing quarter of the year. Our focus on enhanced operational efficiency across all segments has already helped to deliver an uptick in EBITDA, with an 83% year-on-year increase in fourth quarter EBITDA. Poultry prices remained strong and the segment delivered over half of the year’s EBITDA in the last three months of the year. CHALLENGING MARKET ENVIRONMENT During the year, Cherkizovo Group faced extremely challenging market conditions resulting from a combination of macroeconomic factors. In particular, the volatility of the rouble, which was especially acute during the ﬁrst half of 2016, combined with falling disposable incomes, had a signiﬁcant impact on our operations. At the same time, Russian pork and poultry prices fell signiﬁcantly and, when combined with the effects of the rouble devaluation, reached some of the lowest levels seen in the world in US dollar equivalent terms. The underlying fall in pork and poultry prices was primarily caused by a rise in supply as the Russian government’s agricultural development policy continued to boost domestic meat production capacity during the year. As a result of this policy, Russia is rapidly moving towards full self-sufficiency in domestic pork and poultry production, thus dramatically reducing the share of imported meat products on the market. Overall, we had to overcome the extreme volatility in pork and poultry prices during the ﬁrst half of the year, although they then gradually stabilised towards the end of the year. REGULATORY ENVIRONMENT In July 2016, a new amendment to the law “On the Fundamentals of State Regulation of the Trade Activities in the Russian Federation” came into effect, stipulating new pricing rules for retail chains and their relationships with suppliers. Prior to this, the amendment had been subject to discussions for almost two years. Among other things, it abolishes retroactive bonuses and shifts the balance slightly towards producers. EU and US sanctions against Russia, and the corresponding Russian sanctions against the EU and US, had little overall impact on the domestic meat production industry. The low-price environment, combined with increased domestic meat production capacity, made meat product imports into Russia commercially unviable for many international producers, notwithstanding the sanctions. I would like to highlight the great signiﬁcance of the support provided by the Russian government for the domestic agricultural industry. The national subsidy programmes, along with the levels of support offered by local authorities in the regions, are essential for the continued successful development of the sector. The measures aimed at encouraging domestic agricultural companies to expand their presence in overseas markets are also contributing signiﬁcantly to the growth of the industry. In 2016, Cherkizovo Group and the Russian Ministry of the Economic Development signed a cooperation agreement to promote foreign trade, which is designed to support our export strategy. 16 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 17 ABOUT COMPANY ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Message from the CEO (continued) “ An important element of our strategy is the expansion of production capacity and the enhancement of our product range with higher value-added, higher-margin products for domestic and international consumers, leveraging our vertically integrated model. NEW LANDMARK PROJECTS In recent years, we have invested in the development of landmark projects that we believe will both ensure the Group’s continued future growth and further strengthen our competitive advantage as Russia’s leading meat producer. In 2016, we continued to open new production facilities and we expect these to make a signiﬁcant positive contribution to our overall performance in the future. We completed the construction of the Elets egg hatchery and started the production at the new state-of-the-art breeder farm with a total production capacity of 64 million hatching eggs. This will make us self-sufficient by the end of 2017. We have invested over RUB 3 billion into the project to date. The Tambov Turkey project, a joint venture between Cherkizovo Group and our partner, Spain’s Grupo Fuertes, became operational in 2016. This brand new facility represents a joint investment of approximately RUB 10 billion and has a live weight production capacity of approximately 50,000 tonnes per year. Another important achievement for us was the successful launch of our new state-of-the-art, in-house R&D centre, which represents a landmark project for the entire Russian food production industry. The quality and safety of food products is rapidly becoming one of the most important factors for consumers and, with this new R&D centre in place, we, as a Group, are fully committed to ensuring that our production process is the most efficient and safest in the industry. We also invested almost RUB 650 million in the construction of new infrastructure at our Mosselprom site, to create the largest poultry production facility in the Moscow region. Some 24 new poultry houses with technologically advanced facilities were completed this year and are expected to boost the Group‘s annual production volumes by 12,000 tonnes. Meanwhile, in the Pork division, we launched a new genetic improvement strategy at the beginning of 2016, designed to improve both overall pig health and efficiency by increasing liveability and weekly farrows. In 2016, we also began construction of the Kashira meat processing plant. This project marks the beginning of a new stage in our strategic development, as we look to create the largest facility of its kind in Europe equipped with the latest technology and correspondingly high levels of automation. Capital expenditure on the project is expected to total approximately RUB 6.7 billion, making it the largest food sector investment project to date in the Moscow region. LAUNCH OF NEW VALUE-ADDED PRODUCT LINES An important element of our strategy is the expansion of production capacity and the enhancement of our product range with higher value-added, higher- margin products for domestic and international consumers, leveraging our vertically integrated model. In 2016, we also developed a new range of branded products speciﬁcally for the Middle East and African markets to strengthen our international offering in line with our export expansion strategy and, at the same time, continued our efforts to increase export deliveries to the Middle East, African and Asian markets. Another important achievement for us during the year was receiving EU permission for the export of poultry products, which not only creates new export opportunities for us in terms export opportunities for us in terms of EU countries, but also opens up other of EU countries, but also opens up other markets to us outside the EU markets to us outside the EU that recognise the EU certiﬁcation. that recognise the EU certiﬁcation. As for the domestic market, we added As for the domestic market, we added the new, natural Clean label to our the new, natural Clean label to our Petelinka brand, which is additive and Petelinka brand, which is additive and preservative-free, and meets the growing preservative-free, and meets the growing consumer demand for healthy products. consumer demand for healthy products. We also launched a new range of ready- We also launched a new range of ready- to-cook pork products in 2016, becoming to-cook pork products in 2016, becoming one of the top three producers in Russia one of the top three producers in Russia in this very promising segment. in this very promising segment. EFFICIENCY AND QUALITY EFFICIENCY AND QUALITY CONTROL CONTROL Our operations now cover the whole Our operations now cover the whole value chain in line with our “Farm to value chain in line with our “Farm to Fork” approach. This allows us full Fork” approach. This allows us full control over the quality of ﬁnal products control over the quality of ﬁnal products and the efficiency of the production and the efficiency of the production process, while signiﬁcantly reducing process, while signiﬁcantly reducing our dependence on imports. We are our dependence on imports. We are conﬁdent that this will have a long- conﬁdent that this will have a long- term positive effect on our ﬁnancial term positive effect on our ﬁnancial performance. performance. Ensuring high quality production across all product ranges remains an absolute priority for us. In July last year, with this objective in mind, we began the deployment of our new state-of-the-art quality control system. This system represents a signiﬁcant investment for us and is intended to lead to the full centralisation of quality control practices across all divisions, and uniform compliance to the highest standards. To put this into perspective, we already conduct around 350,000 microbiological, and over 60,000 chemical tests per year as part of the Group-wide quality excellence drive. MANAGEMENT SYSTEMS During 2016, we implemented a number of initiatives aimed at streamlining business processes and enhancing overall operational efficiency in terms of marketing, distribution and logistics. In particular, in 2016, we announced the implementation of a transformational project, unique in its scale for the domestic agriculture industry. Our new SAP ERP solution on the HANA platform at our Petelino trading house is a centralised platform allowing us to deliver ultra-fresh products from slaughter to store within 24 hours. As a result of the SAP implementation, we are now able to track and quickly satisfy orders through our fully automated, real-time communications channels with the leading federal retail chains in Russia. Following the success of this ﬁrst phase of the SAP project at Petelino, we are planning to roll out a similar Group-wide uniﬁed sales system within the next few years. BUILDING FUTURE GROWTH ON A SOLID FOUNDATION Over the last decade, our main focus has been on developing a solid, vertically integrated structure for our business to provide a strong foundation for the next stage of growth. This past year has marked the end of this extensive phase of development, as a number of landmark projects have reached fruition. Going forward, we now expect to see signiﬁcant beneﬁts from the investment projects that we have completed in recent years, both in 2017 and the years ahead. We are unquestionably a leading player in the Russian agriculture industry, with a broad portfolio of well recognised and trusted brands, offering high quality products to our customers nationwide. From now on, while maintaining our strong customer focus, we intend to further streamline our operations, ensure greater efficiencies and synergies between our various vertically integrated business segments. To reﬂect our new enhanced positioning and support our new strategy, we have embarked on a comprehensive re-branding of the Group, involving a new logo and new corporate colours to be launched and rolled out across all business divisions in 2017. I strongly believe that the combination of our increased production capacity, state-of-the-art, highly vertically- integrated production facilities, newly- strengthened world-class Board and highly-skilled workforce, ensures that we are well-positioned to face the challenges that lie ahead. We therefore look to the future with conﬁdence and optimism in terms of our continued growth, our expansion into new international markets, our opportunity to positively impact international perceptions of the Russian food industry and, ultimately, our ability to become a leading player in the global food production industry. Sergey Mikhailov CEO 18 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 19 CONTENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Stepping Up the Operating Ladder With the introduction of the new state-of-the-art facilities, the creation of a unique Research and Development Centre, the launch and expansion of export deliveries and the ongoing commitment to quality and efficiency, Cherkizovo Group is well positioned to further capitalise on its leadership in the food market. Business model chain: Grain Grain Feed production Poultry Pork Meat processing Distribution Consumers Financial highlights STRATEGIC REPORT 20-43 Market Overview Our Strategy: Strategy Overview Business Model New markets Investment Programme Quality Control Research & Development Operational Review: Poultry Pork Meat Processing Grain 22 26 26 27 28 28 30 32 34 34 38 40 42 MARKET OVERVIEW Cherkizovo Group retained its leading position in the Russian meat processing market, with a market share of 7%, up 1 pp from 6% in 2015. STRATEGY & BUSINESS MODEL We use our leading market position to advance Russia’s agriculture sector through knowledge, sharing skills, making investments, helping to develop the legislative framework for the sector and applying leading global solutions and technological advances to our operations. INVESTMENT PROGRAMME QUALITY CONTROL Using a combination of the most advanced production and construction techniques, state-of-the-art technology, modern equipment and international expertise, we have developed highly efficient meat and grain production, meat processing facilities, and upgraded our sales and logistics operations. Our quality control system ensures that the Group’s production complies with all relevant Russian and international safety and hygiene requirements and standards. In mid-2016, Cherkizovo began the implementation of its centralised quality control system and created a new quality assurance department. RESEARCH & DEVELOPMENT We have always been early adopters of new technology and work with top industry experts to achieve our vision. In order to pursue this strategy, we created the unique European- standard, innovative R&D Centre. P. 22-25 P. 26-27 P. 28-29 P. 30-31 P. 32-33 20 CHERKIZOVO GROUP Annual Report 201 6 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 21 STRATEGIC REPORT Market Overview ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS US dollar to Russian rouble exchange rate dynamics, 2013-2017F Wheat production and export, 2013/14-2016/17* Consumption of key meat categories, 2014-2016, mln tonnes Meat consumption per capita, 2016, kg/year Declines in the share of imports, % Change in output of meat products and key substitutes, 2015/2016 66.8 61.3 61.2 38.4 31.8 Production, tonnes Share of exports Export, tonnes Poultry Beef Pork Meat consumption per capita, kg 59,080 61,040 52,091 72,500 36% 39% 18,568 22,800 42% 40% 25,540 29,000 72 10.3 2.3 3.3 4.6 69 10.1 2.1 3.4 4.7 70 10.3 1.9 3.6 4.8 Poultry Pork Beef 113 98 32% 82 75 70 75 13% 10% Beef (excl. boneless meat) 4% Pork (excl. boneless meat) 13% Poultry (incl. subproducts) 3% 22% 9% 6% 18% 7% 5% 2013 2014 2015 2016 2017F* 2013/2014 2014/2015 2015/2016 2016/2017 2014 2015 2016 Russia EU Canada Australia USA Biological Standard 2014 2015 2016 * - Forecast provided by Bloomberg Source: OANDA * - USDA forecast Source: USDA Source: Rosstat, Belstat, Federal Custom Service, EEU Source: USDA Source: Cherkizovo RUSSIAN ROUBLE STRENGTHENING The rouble recovered over the course of 2016, with the yearly average exchange rate standing at 66.8 RUB/USD. The currency stability that set in during the middle of the year had a two-fold impact on the agro-industrial sector in Russia. First, costs across the industry stabilised at the same time as Russia saw a record grain harvest. Second, negatively, it had an adverse effect on the livestock and poultry exports. HIGH WHEAT PRODUCTION AVAILABLE MEAT RESOURCES The record harvest in Russia led to a signiﬁcant increase in the volume of grain reserves. Wheat production grew by 19% to reach a record high level of 72.5 million tonnes in the 2016- 2017 agriculture season, compared to 61.4 million tonnes in the 2015-2016 season. Despite exceptional levels of grain production, the share of exported wheat is expected to decline slightly to 40% in 2016-2017, according to the USDA, from 42% in 2015-2016. This was primarily due to heightened competition on international markets and currency stabilisation on the domestic market. Against the backdrop of an increased grain supply, the Group beneﬁted from falling animal feed costs. During 2016, levels of meat consumption in Russia began to show signs of recovery, as industry leaders competed for market share by offering attractive prices to consumers. Total meat consumption (excluding goat and sheep meat) increased by 1.5% to 10.3 million tonnes in 2016, from 10.1 million tonnes in 2015. Meat consumption per capita grew by 1.4% to 70 kg in 2016, compared with 69 kg in 2015. This increase was primarily attributable to pork meat regaining the market share it lost over the last few years. Despite this growth, Russia continues to offer substantial long-term growth opportunities when compared to more developed markets, with meat consumption per capita of 75 kg to 113 kg in the EU and the USA respectively. The share of imports in Russian meat consumption declined during 2016, mainly due to increasing production volumes by domestic meat producers (excluding beef), as well as refocused meat exports by the Brazilian suppliers to other markets. This is evident across all types of meat. In poultry, the decrease was only 1%, from 6% in 2015 to 5% in 2016. The share of imported pork declined to 7% from 9% in 2015 and the share of beef fell to 18% from 22% in 2015. Brazil and Belarus remain the main meat suppliers to Russia. During 2016, meat products output reﬂected trends in consumer demand for affordable over premium products as a consequence of the continuing pressures on household budgets. As such, the production of sausages declined by 2% to 2.41 million tonnes last year, compared to 2.46 million tonnes in 2015. By contrast, the production of chilled, ready-to-cook meat products including cheaper cuts / broilers increased by 11% to 1.22 million tonnes in 2016 from 1.1 million tonnes in 2015. We believe that the expected economic recovery and growth in disposable income will drive demand for sausages. Sausage products -2% Chilled ready-to-eat products Frozen ready-to-eat products -1% Cooking meat products Canned meat -6% Canned cereal -9% Fish and ﬁsh products Liquid milk processed Cheese and curd Cheese and cheese products 11% 12% 3% 1% 0% 3% -10% -5% 0% 5% 10% 15% Source: Rosstat 22 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 23 STRATEGIC REPORT Market Overview (continued) ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Export of poultry (excluding chicken feet), 2014-2016, th. tonnes Monthly changes in real incomes, YoY, %, 2009-2016 Russian poultry market structure Russian pork market structure Change in average retail prices, 2015/2016 92 62 25 15% 10% 5% 0% -5% -10% Prioskolye Resurs Belgrankorm Cherkizovo Belaya Ptitsa Other Miratorg Cherkizovo Velikoluksky meat Rusagro Agro-Belogorie Other 63% 11% 10% 6% 5% 5% 70% 11% 5% 5% 5% 4% 2012 2014 2016E 2009 2010 2011 2012 2013 2014 2015 2016 Source: FCS, EEU Source: Rosstat Source: Russian Poultry Union Source: National Union of Pork Producers, Cherkizovo EXPORTS In 2016, total Russian export of poultry (excluding chicken feet) grew by 48% to 92,000 tonnes, compared to 62,000 tonnes in 2014. Export to the countries of the Eurasian Economic Union was stable at 42,000 tonnes, while export to other countries stood at 50,000 tonnes. FACTORS INFLUENCING CONSUMER CHOICE In 2016, consumer demand continued to decline. As a result, the key factor that has dictated consumer choice has been price. Consumer demand has switched to goods that have seen falling retail prices. THE GROUP’S MARKET POSITION Bread** In 2016, Cherkizovo Group retained its leading position in the Russian meat processing market, with a market share of 7%, up 1 pp from 6% in 2015. In the poultry sector, we remained in second position with a market share of 10%, up by 0,2 pp from 2015. In the pork segment, we held third position in the market with a market share of 5.2%, marginally down from 5.4% in 2015. Buckwheat Pasta*** Potatoes -22% Cucumbers Tomatoes Apples Bananas -2% -20% -10% -5% 0% 10% 20% ** - from rye ﬂour and mixed rye-wheat ﬂour *** - from premium wheat ﬂour Source: Rosstat 24 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 25 Chopped meat Beef (excl. boneless meat) 1% 1% Pork (excl. boneless meat) -6% -3% -2% Chicken (chilled and frozen) Chicken quarters Wiener sausage Bologna sausage Fish (fresh and chilled) Cheese (rennet, hard and soft) Chicken eggs (10) 3% 3% 9% 5% 2% 7% 5% 5% 3% 3% 21% STRATEGIC REPORT Our Strategy Cherkizovo Group has come a long way in order to become the largest vertically integrated meat and feed producer in Russia. We use our leading market position to advance Russia’s agriculture sector through knowledge, sharing skills, making investments, helping to develop the legislative framework for the sector and applying leading global solutions and technological advances to our operations. All of this creates additional value for all stakeholders in the industry. OUR STRATEGIC PRIORITIES PRODUCT PORTFOLIO AND ASSET DEVELOPMENT TECHNOLOGY, RESEARCH AND KNOWLEDGE LEADERSHIP EFFICIENT GROWTH ■ Well-balanced development of the brand portfolio with increasing share of value-added products ■ Strengthen in-house research and development facilities and industry expertise ■ Ensure qualitative expansion of business in all key segments via organic growth and M&A ■ Continue increasing the number of products and service quality with a focus on implementing robust biosecurity standards and practices ■ Implementation of investment programme through upgrading production assets and opening new facilities ■ Develop cooperation with Russian ■ Drive efficiency throughout entire and international food research and production experts to bring the most advanced global expertise to the domestic food market ■ Empower human capital and reward organisation, sourcing and value chain ■ Maintain high quality of management across the whole vertically integrated structure and adhere to the best practices of corporate governance excellence STRENGTHENING MARKET POSITION IN OUR KEY MARKETS ■ Maintain and strengthen market leadership in core Russian meat markets ■ Expand existing export supplies ■ Open new, international markets for our products FINANCIAL STABILITY ■ Reduce earnings/cash ﬂow volatility through vertical integration, diverse product line and exports ■ Maintain comfortable leverage level ■ Drive proﬁts and cash ﬂow, while delivering attractive returns to investors ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS BUSINESS MODEL Cherkizovo Group is the largest vertically integrated meat and feed producer in Russia. Our principle of ‘Quality from Farm to Fork’ is at the heart of our strategy. The Group’s farms grow crops that are used by our feed mills. Feed producing facilities are fully owned by the Group, ensuring the high quality of feed and biosafety for the livestock. Our work in selective breeding and genetics is aimed at preserving the best qualities of the breeds. In poultry farming, we strive to achieve complete self- sufficiency when it comes to hatching eggs. Our highly skilled employees oversee the whole cycle of pork and poultry breeding with adherence to the highest standards of animal welfare. Our sausage production facilities use only the freshest meat supplied by our own farms, ensuring the highest quality for our consumers. The ﬁnal link in our chain is our own ﬂeet of refrigerated trucks that promptly deliver chilled products to distributors, supermarket chains and other retail stores nationwide. Such a high degree of vertical integration not only gives us a competitive edge, but also ensures the full control of the entire production cycle, effective cost management and a high degree of responsiveness to rapidly changing consumer demand. Over the last few years, the model has proven to be successful and resilient against a background of challenging macroeconomic conditions and ﬂuctuating commodity prices, enabling the Group to deliver incremental returns to our shareholders and much needed support to the communities where we operate. The Group is managed as four business segments that combine common industry expertise, operational capability and market intelligence. Operational decisions are made at a local level by teams of highly skilled managers who are closer to the day-to-day running of the business and have a granular knowledge of their business segments. The head office is small and sees its main function to provide a framework in which the business unit managers can take the lead in implementing the strategic priorities set by the Board of Directors. It uses short lines of communication to provide prompt, inclusive and direct decision making and to ensure that all business activities are appropriately monitored and supported. Consumers ■ Covering up to 80% of the Russian population ■ New consumers on international markets Research and development ■ Using the latest technologies ■ Launch of Cherkizovo R&D centre Employee development ■ Professional growth opportunities ■ Industry leading experts Environment ■ Beyond compliance Communities ■ Socially responsible approach employer ■ A strategy of reducing the environmental footprint of operations ■ Support of local economies 26 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 27 STRATEGIC REPORT Our Strategy (continued) NEW MARKETS INVESTMENT PROGRAMME We see a targeted, international expansion of our exports to the Middle East, South East Asia and Africa as a signiﬁcant driver of future growth. Our leading domestic market position, combined with our robust production capacity and the strength of our balance sheet, positions us to be a leading Russian food exporter. During 2016, we made good progress in strengthening our overseas offering and customer base. During the year, the Group was also awarded a EU Export Compliance Certiﬁcate allowing us to export products to European Union countries. To support our strategy for international exports expansion still further, we signed a cooperation agreement with the Russian Export Centre (REC), giving us direct access to a large established network of potential export partners. The Group believes that diversifying our revenues geographically will strengthen our ﬁnancial and operational position and will help to ensure our long-term success and growth in Russia and abroad. Gaining access to new markets involves rigorous inspection of the Group’s production processes and technologies, as well as ensuring that we meet the strictest biosafety requirements. Our newly granted export licences are testament to the relentless work of our highly experienced and committed team across all of our operational divisions to meet the highest international product safety and quality industry standards. Cherkizovo Group has invested heavily in the construction, development and modernisation of production facilities over recent years. This signiﬁcant investment programme, ﬁnanced from proﬁts, additional debt capital and state subsidies, is already starting to pay off. In 2016, all of our investment projects continued to make progress on schedule. Using a combination of the most advanced production and construction techniques, state-of-the- art technology, modern equipment and international expertise, we have developed highly efficient meat and grain production, meat processing facilities, and upgraded our sales and logistics operations. We have accumulated signiﬁcant expertise in the construction of meat production facilities, combining international best practices with our own know-how. In the context of our export expansion strategy, we have ensured that our plants comply with the requisite quality and safety standards of our target export markets. We are focused on making constant improvements to all areas of our operations. We maintain a close dialogue with our peers as well as leaders in the global agricultural industry in order to ensure that we share ideas and remain at the forefront of the most advanced technologies and solutions. In addition, we have established our own corporate Research & Development Centre in order to consolidate and develop our industry knowledge and skills still further. Our corporate culture is deﬁned by our openness to discussion and the free exchange of ideas. This helps us to retain ﬂexibility and deploy the most effective solutions in the framework of our investment programme. An important element of our investment policy is supporting long-term cooperation with contractors and suppliers. This approach helps us to deliver the most ambitious investment programmes on time, in strict compliance will all applicable requirements and in line with the best international standards. Largest completed investment projects: 10 RUB bln INVESTMENTS IN TAMBOV TURKEY PROJECT 3.7 RUB bln INVESTMENTS IN ELETSPROM HATCHERY AND BROILER PRODUCTION FACILITY 1.7 RUB bln INVESTMENTS IN VORONEZH FEED MILL 1.4 RUB bln INVESTMENTS IN ELETS GRAIN STORAGE FACILITY ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Our investment projects in progress: ELETSPROM During 2016, Cherkizovo Group continued to develop Eletsprom, Russia’s largest poultry breeding facility. As part of the project, Cherkizovo launched a hatchery in the Lipetsk region with an annual capacity of 240 million eggs. The project ensures we can meet our import substitution goals in our egg hatching production. This has been a breakthrough project for the Russian food industry as a whole, as it has created a platform for the local egg hatching at a high volume. For Cherkizovo Group, the project brings a wide range of business advantages, including the expansion of our presence in the high-margin segment of poultry meat production as well as boosting the overall efficiency of the Poultry division and decreasing our dependency on imported deliveries of hatching eggs. The Group launched the ﬁrst parent stock cluster at Lipetsk in 2016 and there are currently three more parent stock sites nearing completion. The entire project, consisting of two replacement chick sites and four parent stock sites, will be fully completed in 2017. We use modern, state-of-the-art equipment at the facility, with high levels of automation, while complying with the highest sanitary and biosafety standards. 325 million hatching eggs per year, making it 92% self-sufficient in hatching eggs. Total investment in the project has exceeded RUB 3.7 billion. This project represented the ﬁrst time that stabilised soil technology was used in building poultry production facilities in Russia. This helped us to reduce the time required for construction by several months. We used the most advanced insulation and ventilation systems and applied the best international practices in the construction of the facilities. When the project is completed, the Group’s production capacity will reach 3.7 RUB bln TOTAL INVESTMENT IN THE PROJECT 92% SELF-SUFFICIENT IN HATCHING EGGS Hatching eggs: results and forecasts Hatching eggs (thousands) In-house 2016 2017f 2018f 2019f 274,603 300,314 325,222 325,222 Including 2 sites (at Butyrky) - 39,092 64,000 64,000 Bought from outside 99,464 54,978 30,070 30,070 Total 374,067 355,292 355,292 355,292 % of in-house hatching eggs 73% 85% 92% 92% KASHIRA MEAT PROCESSING PLANT In 2016, Cherkizovo Group began construction of a new, highly efficient meat processing plant in Kashira district, Moscow region. The project represents the largest food industry construction project in the Moscow region, with total capital expenditure expected to reach RUB 6.7 billion. The Group is planning to create the largest meat plant of its kind in Europe, with a daily production capacity of 80 tonnes and employing approximately 150 people. The Group intends to use modern equipment and energy-efficient technology as well as state-of-the-art IT system, with the full automation of all processing operations. We are also committed to ensuring the highest levels of product quality and biosafety. The plant, which is scheduled to open in 2018, will form part of the Group’s vertically integrated structure, processing mostly raw materials produced by Cherkizovo’s other divisions. 28 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 29 STRATEGIC REPORT Our Strategy (continued) PIG-BREEDING CLUSTER PROJECT SAP ERP SOLUTION Cherkizovo Group undertook one of the most notable projects in the Russian food industry last year, with the implementation of the SAP Enterprise Resource Planning (ERP) solution on the HANA platform at Petelino Trading House. The SAP ERP solution has streamlined business processes and improved efficiency at the Petelino Trading House, helping us to ensure delivery of ultra-fresh products from slaughter to store within 24 hours. The system provides us with accurate, real-time information and automates our communications with Russia’s federal retail chains. As a result, our supply chain is now tailored to meet the requirements of each of our customers. The system also gives us access to a new suite of analytical tools designed to upgrade our sales and marketing activities. The project, which is unique in scale in the entire Russian food sector, will be used in the creation of a uniﬁed, company-wide sales system. In 2016, we began development of a new pig-breeding cluster project in Lipetsk and Voronezh regions. The use of the latest technologies has helped us to cut construction costs by almost a third. The project comprised the construction of two facilities, each with seven ﬁnisher sites and an annual production capacity of 294,000 animals (35,000 tonnes of live weight). In 2016, we completed the construction of one sow farm in Lipetsk region and two ﬁnisher sites in Voronezh region. CORN PRODUCTION PROJECT (AHI) OREL GRAIN DRYER FACILITY A grain dryer facility was launched last year in Znamensk district, Orel region. It has been constructed using both foreign and Russian-made equipment and has a capacity of 200 tonnes of wheat or 110 tonnes of corn per hour. QUALITY CONTROL The highest standards of production quality remain an absolute priority for Cherkizovo Group. Our quality control system ensures that the Group’s production complies with all relevant Russian and international safety and hygiene requirements and standards. In mid-2016, Cherkizovo began the implementation of its centralised quality control system and created a new quality assurance department. The main purpose of the department is to integrate quality control procedures across the entire production chain, from growing grain to the manufacturing of meat products. With the new department and system in place, issues of quality control are centralised and subject to common standards. Promoting a quality control culture among all employees is one of the top elements of the new programme. The Group’s new R&D centre represents a key element of the new quality control system. During the year, Cherkizovo Group launched several new quality control programmes. The Group’s production now complies with the halal standards of the UAE and Egypt and we have started exporting our production to these Muslim countries. The Group is also in compliance with standards in China and other South-East Asian countries. Other new quality control programmes were launched to comply with the speciﬁc requirements of global restaurant chains, such as KFC and Burger King. In 2015, we began a new corn production project (AHI) in Lipetsk region aimed at increasing corn yields year- on-year. In 2016, the project has already proved highly successful. ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Key elements of the Quality Control System Contractor training Training of new contractors. Working with suppliers An audit of all new suppliers and regular audits of purchased production. Handling consumer complaints The Group has two hotlines for our clients. All claims are dealt with within seven days. Going forward we are planning to continue the integration and centralisation of the new Quality Control System to encompass each division of the Group. We will also focus on ensuring compliance with international quality standards. We are working on the implementation of a new feedback system to respond to consumer comments on product taste and quality. Key elements of the Quality Control System Production & Distribution Procurement External Relations ■ Certiﬁcation body ■ Authority ■ Support PR ■ HACCP & Sanitary programme ■ Training for plants and DCs management ■ Food safety audits ■ Handling consumer complaints ■ Crisis plan ■ Traceability programme ■ Detergents and disinfection ■ Group food safety and quality requirements ■ RM and PM supplier assessment ■ Critical supplier audits ■ Traceability programme ■ Material mock recall ■ Legislative requirements plan ■ Pest control What we do to ensure better quality control: Develop food safety policies to be introduced at each stage of production Ensure compliance with biosecurity principles Build a quality team including the most talented and skilled QA managers Carry out hygiene audits of suppliers Carry out a food safety risk assessment for each plant Ensure control of food safety and application of food quality indicators Hazard Analysis and Critical Control Points (HACCP) This is a systematic and preventive approach to safeguarding food from biological, chemical, and physical hazards in production processes. Mercury The automated system launched by the Federal Service for Veterinary and Phytosanitary Surveillance for the electronic certiﬁcation of production. It tracks all movements of product in Russia to enhance its veterinary and biological safety. Good Manufacturing Practices (GMP) These are the practices required to conform to the guidelines recommended by the agencies that control the authorisation and licencing for the manufacture and sale of food. These guidelines provide the minimum requirements that a food product manufacturer must meet to ensure that the products are of high quality and do not pose any risk to the consumer or wider public. Hygienic practices These practices regulate the regular cleaning of equipment and production areas, requiring the use of only top- quality detergents. Pest control This is a complex system and includes humane methods of preventing potential contamination from rodents, insects and birds. Laboratory control The system of regular laboratory analysis at all stages of the production process. Employee training Regular training of all employees to ensure that the highest standards of health and safety are met. 30 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 31 STRATEGIC REPORT Our Strategy (continued) RESEARCH AND DEVELOPMENT CENTRE We ﬁrmly believe that technological and scientiﬁc advances are critical to ensuring long term success in the agricultural industry. We have always been early adopters of new technology and work with top industry experts to achieve our vision. In order to pursue this strategy, we created the unique European-standard, innovatvie R&D centre. With the latest technology and testing methods, the R&D centre is able to carry out over 1,000 laboratory tests across all areas of agricultural activity, from soil analysis to quality control of ﬁnished goods. It is equipped to diagnose and prevent animal diseases at an early stage, test feed quality, detect changes in the quality of food and determine food energy values. It can measure the impact that quality standards and product ingredients have on human health. The R&D centre is at the core of our own Quality Control System, as it ensures a total control of the quality of our products at every stage of the production from farm to fork. It supervises the compliance of our products with the Technical Regulation of the Customs Union, GOST, ISO and other applicable requirements. The R&D centre can guarantee the biosecurity of products through the early detection of animal diseases, toxins and other substances dangerous to humans. The R&D centre’s team conducts extensive research in a wide range of areas such as biotechnologies, genomics, molecular biology, veterinary- sanitary examination and medicine. The ﬁndings help us to increase our productivity and efficiency levels. ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS OUR PARTNERS The R&D centre’s mission is to improve the quality of human life by helping to maintain a healthy lifestyle with a well balanced diet. The R&D centre also contributes to solving a broad range of issues affecting the industry as a whole, such as reviving Russia’s livestock herds and genetic improvement in poultry and pork production. THE R&D CENTRE STRUCTURE CENTRE FOR TESTING OF FEED AND ANIMAL PRODUCTS CENTRE FOR VETERINARY-SANITARY EXAMINATION CENTRE FOR GENETICS AND MOLECULAR BIOLOGY Physical and chemical analysis of feed Fnished and semi- ﬁnished products and ingredients research Soil, fertilisers and water quality research Amino acid analysis Biochip multiplex rapid analysis PCR-based diagnostics of animal diseases Microbiological and toxicological analysis Biochemical blood tests GMO detection and molecular-biological evaluation Genomics and DNA sequencing The R&D centre operates in line with the strictest Russian and international standards using the most advanced scientiﬁc equipment, some of which is unique in Russia. It employs highly qualiﬁed scientists who regularly expand their professional expertise with advanced training in Germany, France, the USA and other countries. In addition, the R&D centre acts as an industry-wide facility and its services are available to other industry players. The R&D centre develops innovative laboratory technologies for use in agriculture and works to establish and expand cooperation with other major Russian and international research institutions. In November 2016, Cherkizovo Group signed a cooperation agreement with the Skolkovo Technology Park, envisaging the creation of an acceleration centre for research in the agricultural biotechnology sector. Cherkizovo was the ﬁrst partner to join the park. In December 2016, the R&D centre received an ISO/IEC 17043:2010 (GOST ISO/IEC 17043-2013) certiﬁcate for provider work, which allows it to conduct tests for other laboratories. This accreditation underlines the R&D centre’s technical competence and the efficacy of its quality management system. 350 RUB mln INVESTED IN THE PROJECT Young aspiring team 1,500 m2 OF STATE-OF-THE-ART SCIENTIFIC FACILITIES 100 TYPES OF TESTS ARE CONDUCTED FOR AGRICULTURE, THE FOOD INDUSTRY AND MEDICINE 32 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 33 STRATEGIC REPORT Operational Review Poultry In 2016, poultry sales volumes rose by 6% to 500,321 tonnes, compared to 470,432 tonnes in 2015. ABOUT COMPANY ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Performance indicators, 2014-2016 Indicators 2014 2015 2016 ‘16/‘15, % Meat ﬁnished goods yield, % of live weight Feed conversion rate per kg of live weight Average growing period, days Average daily gain, g Liveability, % 82.7 1.76 37.1 54.5 92.9 84.0 1.69 37.2 56.9 93.4 84.5 1.66 36.7 57.5 94.6 0.7% (1.8%) (1.3%) 1.1% 1.3% This growth was largely attributable to a combination of improvements in productivity and the establishment of 24 new poultry houses at the Mosselprom production facility, aided by higher consumer demand for branded, processed and ready-to-cook products and in part resulting from the growth in exports. During the year, the Group continued to further implement its vertical integration strategy, with the ﬁrst cluster of a new parent stock-breeding farm completed in Elets in the Lipetsk region. This represents a key step towards import substitution, the Group’s further vertical integration and self-sufficiency in egg hatching. The average gross price per product achieved in 2016 was 94.94 RUB/kg, a slight improvement on the average gross price per product of 94.52 RUB/kg achieved in 2015. The Group also implemented a new and centralised Enterprise Resource Planning (ERP) technology platform simultaneously across 14 sites designed to streamline operations and increase productivity. In 2016, the Group began exporting poultry products to several new countries. For example, in August, we began exporting to Egypt and Tanzania. At the same time the Group launched the new Dajajti brand, which was especially created to serve the Halal poultry export market to Muslim countries. The Group was also awarded two signiﬁcant new export licences in 2016, receiving a poultry export licence for the United Arab Emirates in January and an EU poultry export licence in the fourth quarter of the year, the latter of which conﬁrmed the Group’s Vasilievskaya production facility’s compliance with the EU’s strict veterinary and sanitary requirements. During the year, the Group maintained its focus on ensuring strict compliance with the highest Russian and international biological safety standards at its facilities. In 2016, the Group also established a new laboratory designed to monitor the quality of incoming ingredients to our animal feed plants. This has allowed us to produce animal feed to the highest quality standards, resulting in the faster and healthier growth of our poultry. OUR PLANS During 2017, key initiatives are to further reduce costs in the Poultry division, while also improving the KPIs of the breeding programme. The Group also plans to increase the ready-to-eat share of total sales and expand cooperation with retail customers, such as the HoReCa segment. Sales by channels in 2016 Sales by brands in 2016 Modern retail Wholesale HoReCa Traditional retail Export Kurinoe Tsarstvo (Chicken Kingdom) Mosselprom Petelinka Vasilievsky Broiler Private label Lisko Broiler Others Non branded products 2% 2% 34% 9% Sales volume, th. tonnes Revenue, RUB mln 122.6 54.8 14.6 22.4 13.6 17,724.8 3,261.3 106.8 1,566.5 12,397.9 8,677.4 1,564.1 2,425.2 53% 240.9 29.0 2.3 Sales of ﬁnished products, th. tonnes Sales by channels in 2016 500 470 417 319 343 2012 2013 2014 2015 2016 Export Wholesale Modern Retail Other Traditional Retail HoReCa Sales volume, th. tonnes Revenue, RUB mln 16.4 1,518.6 1,194.7 15,827.0 202.0 1,001.9 3,981.2 24,200 16.1 206.6 6.8 52.4 Cherkizovo Group’s poultry production facilities in Central Russia, which utilise advanced veterinary security and production efficiency technologies, include the Mosselprom and Petelinskaya facilities near Moscow, the Vasilievskaya facility in Penza region, the Lisko Broiler facility in Voronezh region and the Kurinoe Tsarstvo facilities in Bryansk and Lipetsk Regions. The Group has a total of eight full cycle poultry manufacturing clusters located in the Moscow, Bryansk, Voronezh, Kursk, Lipetsk, Penza and Tula regions with a combined total live weight production capacity of over half a million tonnes per year, or more than 200 million broilers. Find out The Company’s division location on Map of Operations on page 10-11. 34 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 35 ABOUT COMPANY ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS STRATEGIC REPORT Turkey Tambov Turkey Tambov Turkey, a joint project with Grupo Fuertes, a major European agricultural company based in Spain, became fully operational in 2016. This project has established and solidiﬁed Cherkizovo Group’s position in the fast growing Russian turkey market, a segment offering substantial long-term growth potential. With Tambov Turkey expected to achieve full operating capacity in 2017, Cherkizovo will become one of the top-three turkey producers in Russia. The Group also plans to launch export sales of turkey products to the European Union, Asia and the Middle East as well as the CIS region. By the end of 2016, the number of livestock at the facility reached 660,000 birds. The Group supplied over 6,000 tonnes of turkey meat during 2016, with the ﬁrst consignment being delivered to retail outlets and HoReCa customers in autumn 2016. Cherkizovo’s turkeys differ from those currently available in Russia in its compact size and relatively small weight (7-9kg), which makes it perfect for home cooking. The Group has developed four turkey meat brands designed to reach all segments of the market. In February 2016, as part of the Tambov Turkey project, Cherkizovo Group commenced operations at its state-of- the-art hatchery, which has an annual capacity of 5.9 million eggs. The ﬁrst batch of 30,000 Grade Maker hatching eggs was imported from France. A grain elevator with capacity of 90,000 tonnes and a feed mill, with annual capacities of 180,000 tonnes and 90,000 tonnes respectively, along with a slaughter site, were constructed as part of the project. Tambov Turkey’s current annual live weight production capacity is 50,000 tonnes. We have room to double capacity if necessary to meet future demand. EVENT OF THE YEAR TAMBOV TURKEY HIGHLIGHTS TAMBOV TURKEY HIGHLIGHTS Grupo Fuertes, as project partner, is overseeing each stage of the production process from egg hatching to slaughter, ensuring that our turkey products fully comply with ISO 22000/FSSC 2200 European quality and biosafety standards. Grupo Fuertes also brings its expertise to feed production and the development of ready-to-eat products, where fully automated processes help the Group achieve high levels of production efficiency. Cherkizovo Group has invested around RUB 10 billion in the project to date. The investment by regional authorities has been delivered as promised: the roads have been built and gas and electricity have been supplied to all of our operating facilities. In 2016, the ﬁrst phase of the Tambov Turkey project won the ‘Event of the year. Russia 2015’ online vote held by publisher Vremya Rossii. The prize came in the agricultural category in recognition of the size of the investment, the level of innovation displayed by the project, as well as the number of jobs created. An integrated project An integrated project comprising all stages from comprising all stages from feed production to meat feed production to meat processing processing Expertise of Grupo Fuertes, Expertise of Grupo Fuertes, a leading European a leading European turkey producer and a turkey producer and a major Spanish agricultural major Spanish agricultural company company Construction launched in 2015, with full operational capacity planned for 2017 The lowest cost of sales in the market Product quality meets Product quality meets highest European highest European standards standards Modern equipment and machinery, state-of-the-art technology 10 th. ha LAND PLOT 50 th. tonnes TURKEY MEAT (LIVE WEIGHT) CAPACITY PER YEAR 350 km FROM THE MOSCOW REGION, EXCELLENT LOCATION x2 POTENTIAL OF DOUBLING CAPACITY TO MEET FUTURE DEMAND 36 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 37 STRATEGIC REPORT Operational Review Pork The Pork division delivered a strong performance in 2016, with production volumes increasing by 9% to a record-high 184,766 tonnes, compared to 169,563 tonnes in 2015. These new, state-of-the-art greenﬁeld pork facilities have enabled Cherkizovo Group to achieve industry-leading margins. The efficiency indicators are some 50-70% higher compared to previously designed pork farms. Following its renovation in 2016, the Dankov pig slaughter facility began operating at full capacity. With this capacity, Cherkizovo Group is now able to slaughter 80% of pigs at its own facilities, compared to 40% before the renovation was completed. In 2016, the Group also continued to devote particular attention to ensuring high biosafety standards with the result that infrastructure, technology and safety regulations across all of the Group’s facilities now adhere to the highest Russian and international safety standards. The Group’s new R&D centre commenced operations in 2016 with the goal of increasing the quality and biosafety of all Cherkizovo Group’s pork products. These excellent results were primarily attributable to a new genetic improvement strategy implemented at the beginning of the year and aimed at improving both pig health as well as productivity through increased liveability and weekly farrows. At the same time the establishment of two new wean-to- ﬁnish sites in the Voronezh region also contributed to increased production volumes. The Pork division suffered from pricing pressure in 2016, with average pork prices falling 10% during the year from 98.51 RUB/kg in 2015 to 88.28 RUB/kg in 2016. The decline in average pork prices was primarily attributable to the lower purchasing power of Russian consumers and an overall increase in pork production across the country during the year. In 2016, Cherkizovo Group implemented a new genetic improvement strategy which has eliminated several chronic diseases in the pig stock, improved overall animal health and has led to the ability to produce better tasting and higher quality meat at a reduced cost. The Group envisages that this strategy will allow us to make signiﬁcant increases in genetic potential over the medium term and this should also improve our international competitiveness. Cherkizovo Group is also focusing attention on gilt development units (GDU), where sows are allowed to develop their genetic potential to the maximum as the animal is grown until mature and ready to breed. The Group currently breeds approximately 1,800 gilts per week. In 2016, the Group continued the development of its pork facility clusters in Lipetsk and Voronezh regions, with the second phase of the Voronezh project being completed in June. When completed the cluster project will comprise two units with a total of 14 ﬁnisher facilities, two breeding facilities and a feed mill. One breeding and three ﬁnisher facilities were completed in 2016, while the Group began construction of seven further ﬁnisher facilities during the year with plans to build an additional three in 2017. Each unit has been built using state-of- the-art technology and is designed for 294,000 heads or 35,000 tonnes live weight per year. The Group beneﬁts from relatively low building costs for these facilities compared to industry norms, utilising a wooden framework similar to that used in house construction, which has also been shown to reduce pigs’ stress levels resulting in higher quality meat. The Group uses a type of screen in the construction of the ﬂoor, commonly used in the construction of airstrips. Its use is unique in the pork industry to date and ensures the efficient and safe collection of manure. ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Performance indicators, 2014-2016 Indicators Pigs weaned per crate per year Average hog weight, kg Feed conversion rate Finisher loss, % Products sold/sow, kg 2014 109.4 117.3 2.68 7.1 2,131 2015 2016 ‘16/‘15, % 115.9 121.4 2.61 8.0 2,138 119.0 119.0 2.66 8.3 2,597 2.7% (2.0%) 1.9% 3.8% 21.5% OUR PLANS Sales, th. tonnes In 2017, the Group plans to complete the construction of pork clusters in Voronezh and Lipetsk regions. As a result, by 2018, we expect to be able to increase pork product production volumes signiﬁcantly, as these two new production facilities, with a combined annual output of 70,000 tonnes, become operational. The Group plans to ﬁnish construction of ten further fattening facilities in 2017, allowing us to eventually reach production of 275,000 tonnes live weight per annum. We also anticipate sales of pork products rising to record levels in 2017, following the further improvement of our genetic system. Our medium-term strategy for the Pork division is to ensure its high performance through the utilisation of the most modern production facilities and one of the best feeding and nutritional programmes in the world. We aim to develop the most cost-efficient production of pork products to ensure our competitiveness on the world stage as we look to expand our export strategy. 178 170 163 185 104 2012 2013 2014 2015 2016 185 th. tonnes PRODUCTION VOLUME 15.9 RUB mln TOTAL SALES 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 accordance with the highest international standards. The excellent location of the pig breeding facilities contributes to their veterinary and biological safety, as well as the high quality of the pork produced. Each standard module facility consists of a sow farm for 5,800 sows, a nursery site for up to 20,000 animals and two ﬁnisher sites for 22,000 pigs each. Find out The Company’s division location on Map of Operations on page 10-11. 38 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 39 STRATEGIC REPORT Operational Review Grain The Grain division delivered record-breaking operational results in 2016. Harvest volume increased by 41% to the highest level to date, reaching around 468,000 tonnes of gross weight compared to around 333,000 tonnes the previous year. As a result, the grain sales reached around 339,000 tonnes in 2016, which is a 27% increase from 267,000 tonnes in 2015. The average crop yield of the cultivated land increased by 47% to 5.75 tonnes per hectare, while the tillable land area grew by 4% to 95 thousand hectares following the integration of previously abandoned land in Tambov region. This outstanding performance is attributable to a combination of factors, such as exceptionally good weather in the regions of operations, a gradual increase of the share of more cost- efficient corn in farming and higher yields in regions where the soil improvement programme is in place. The soil improvement programme was launched in 2015 and is aimed at reducing soil acidity harmful to crops and consequently improving soil nutrients, which in turn leads to higher yields. To increase the harvest, we have implemented moisture saving technologies such as soil deep loosening and liquid fertiliser. Among other cost saving initiatives implemented in 2016, was the adoption of organic fertilisers, which reduced the cost of the mineral fertilisers. As a result, the manure from the Group’s Poultry and Pork segments forms the main part of the organic fertiliser needs of the Grain division. As a Group, we are committed to achieving efficiency through technology, research and knowledge leadership. We keep working to identify and adopt cost-saving technologies, which help us to achieve the best crop yields among peers in the Central Black Earth region. In 2016, we researched and made a decision to invest in two initiatives – Precision Planting and the use of liquid nitrogen fertiliser. Precision Planting is an American innovative technology that enables us to plant crops more accurately at higher speeds. The system allows farmers to plant a row of crops like corn up to twice as fast compared to conventional machinery, while achieving top crop yields. The liquid nitrogen fertiliser, due to its low cost production is far more cost effective than granulated ammonium nitrate. In addition, its storage and handling does not require any additional investment. The ﬁnancial performance of the Grain division in 2016 was affected by the decline in the grain market. The average price of the product fell by 6% in 2016 as a result of a record harvest in Russia. The Group as a whole beneﬁted from this trend due to its vertically integrated model: 75% of the Grain division output was sold to other Group’s divisions at market price. During 2016, the Group continued to strengthen its leading position on the feed market through operating both of its feed mills in Voronezh and Bryansk region at full capacity. This led to an increase in production of high-quality feed to 1.57 million tonnes in 2016 from 1.50 million tonnes in 2015. OUR PLANS The Group’s strategic long-term objective is to increase its harvest volumes to 1,500,000 tonnes by 2020. This would ensure Group’s full self- sufficiency in terms of the grain for the internal animal feed production. In order to further improve our cost efficiency, we are planning to increase the share of the corn and soy in the crop mix to 80%, while reducing the production cost to 5 RUB/kg and to 12 RUB/kg respectively, as well as the corn processing cost to RUB 600 per tonne of product. In 2017, in line with our long-term strategy we anticipate to increase the Group’s harvest volumes by 20%. The new precision farming project aimed at improving the efficiency of resources is due to be rolled out across our farms. It is expected to contribute signiﬁcantly towards achieving the harvest volumes target. The Group also plans to increase the crop area in Tambov region by 5,000 hectares in 2017. ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Assets, 2014-2016 Assets 2014 2015 2016 ‘16/‘15, % Land bank, thousand ha Crop areas, thousand ha Feed mills, pcs Grain elevator capacity, thousand tonnes 140 58 8 588 140 85 9 854 140 81 9 854 n/c (4.7%) n/c n/c Crop Wheat Corn Barley Peas Sunﬂower Soy Total 2014 2015 2016 Yield, th. tonnes Cultivated area, th. ha Yield, th. tonnes Cultivated area, th. ha Yield, th.tonnes Cultivated area, th. ha 125 42 25 23 19 8 242 21 10 5 7 8 8 58 150 116 6 17 23 20 333 43 16 2 6 7 11 182 233 - 26 - 27 85 468 36 24 - 10 - 11 81 Gross yield and crop area, 2012-2016 Operational land bank, th. ha Gross yield, th. tonnes 339 th. tonnes GRAIN SALES IN 2016 500 400 300 200 100 0 3.1 RUB mln TOTAL SALES 100 80 60 40 20 0 2012 2013 2014 2015 2016 Cherkizovo Group started growing its own grain in 2011 after deepening its level of vertical integration. The Group has a land bank of more than 140,000 hectares, of which it owns nearly 60%. Approximately 92,000 hectares are located in the most fertile Central Black Earth regions such as Lipetsk, Orel, Tambov and Voronezh and were actively cultivated during 2016. Find out The Company’s division location on Map of Operations on page 10-11. 40 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 41 STRATEGIC REPORT Operational Review Meat Processing In 2016, sales in the Meat Processing division grew by 14% to 218,085 tonnes compared to 191,200 tonnes in 2015. The increase was primarily attributable to the growth in production of non-sausage products with the new pig slaughter facility at the Dankov meat processing plant running at full capacity in 2016, boosting both volume and product assortment. Average product price decreased by 3% in 2016 to 167.84 RUB/kg compared to 2015, with non-sausage products representing a greater proportion of sales. This reﬂects a common trend in the Russian market with consumers preferring natural meat and healthy food products. The Group intends to capitalise on this trend over the medium-term. Cherkizovo Group maintained its leadership in the smoked sausage segment of the Russian market in 2016 and plans to continue to increase the share of smoked sausage products in its sales. At the same time, we are focusing on value-added, ready-to-cook products, which are key revenue drivers for the Group. We will continue to monitor market trends closely and adjust our product portfolio accordingly, in line with shifts in demand in the domestic market. In 2016, for example, we developed a new mid-priced sausage product pipeline, under the ‘Fermerskaya’ brand, in response to growing demand in the medium price sausage segment. As the Group supplies its own raw meat to its modern production system, we are able to control processing at all key stages, while our ability to deliver from slaughter to store within 24 hours is one of our key strategic advantages. Over recent years, Cherkizovo Group has made substantial investments in upgrading its meat processing facilities. Modern high-performance European equipment has been installed throughout its facilities, with the result that all facilities are GOST R ISO 9001 – 2008 certiﬁed. OUR PLANS In the year ahead, Cherkizovo Group is focused on improving margins on meat processing products through increased sales of natural meat products compared to sausage products. At the same time, the Group plans to strengthen its leading position in the smoked sausage market by constructing the new Kashira meat processing facility in Moscow region, due for completion in 2018. This facility, which will use state-of-the-art technology and be fully automated, will be the largest producer of smoked sausage products in Europe, with an annual capacity of approximately 30,000 tonnes. The Group plans to invest a total of approximately RUB 6.7 billion in the project. ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Performance indicators, 2014-2016 Indicators 2014 2015 2016 ‘16/‘15, % Product sales per employee, tonnes Output per workshop employee, tonnes 31.3 40.6 40.7 51.7 45.8 62.0 12.5% 19.9% SALES TO THE LEADING FEDERAL RETAIL CHAINS, TONNES Ready-to-eat products Sausage and Ready- to-eat products Sausage products 2015 11,788 10,199 5,192 2016 13,182 14,730 6,071 5,031 5,032 2,958 3,297 1,498 3,816 3,312 1,738 39,963 47,880 X5 Retail Tander Dixy Auchan and Atak Lenta Metro O’key Total % 12 44 17 0 29 0 16 20 2015 2016 X5 Retail 8,853 16,896 3,985 3,899 4,159 1,224 1,755 295 3,505 3,894 1,825 2,696 Auchan and Atak Dixy Lenta Tander O’key Metro Total 2015 2016 X5 Retail 20,641 30,077 Tander 11,954 16,555 Dixy 9,351 9,576 % 91 (2) (16) 218 Auchan and Atak 4 Lenta 813 Metro 9,017 8,930 4,182 3,300 1,793 7,710 4,220 4,434 3 908 30,167 O’key 20,275 33,622 66 Total 60,238 81,503 Product sales, th. tonnes Product sales by channels in 2016 218 191 135 144 127 2012 2013 2014 2015 2016 Retail Chains HoReCa Distribution Myasnov Wholesale Exports Traditional Retail Meat Processing Sausage 3% 6% 1% 2% 6% 28% 44% 2% 3% 1% 4% 31% 15% % 46 38 2 (1) 84 28 147 35 The Cherkizovsky Meat Processing Plant in Northeast Moscow is the Group’s ﬂagship facility in the Meat Processing division. The division also includes: the Penzensky Meat and Poultry Processing Plant, which has its own slaughtering facility; the Ulyanovsky Meat Processing Plant; and the Otechestvenny Product Meat Processing Plant in Pravdinsk, Kaliningrad region. These plants produce several hundred tonnes of high-quality sausages, hams, deli meats, cutlets, vacuum-packed chilled products and ready-to-eat products every day. 54% Find out The Company’s division location on Map of Operations on page 10-11. 42 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 43 FINANCIAL REPORT Financial Report “In 2016, Cherkizovo’s rouble revenue increased by 7% year-on-year to RUB 82.4 billion. ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS The year 2016 was a challenging one for the agricultural sector in Russia. For Cherkizovo Group, the weakness in the rouble at the beginning of the year led to an increase in costs which, combined with low meat and grain prices last year, put some pressure on our margins, which overall registered a slight decline year-on-year. In spite of these challenging market conditions, I am pleased to report that we were able to demonstrate strong operational results across all business segments, especially in the Poultry and Meat Processing divisions, with the result that the Group’s total revenues increased 7% year-on-year to RUB 82.4 billion in 2016. Net operating cash ﬂow over the same period rose by an impressive 88% to RUB 9.4 billion compared with RUB 5.0 billion in 2015. This rise was primarily attributable to the improvement in working capital. In 2016, the Group rebalanced its debt structure, increasing the share of long- term debt to 63% of total debt from 39% in 2015 and, correspondingly, reducing the share of short-term debt to 37% from 61% in 2015. Overall, total debt fell by 6% year-on-year from RUB 41.2 billion as at the end of December 2015 to RUB 38.6 billion as at the end of December 2016. Our debt ratios also remained comfortably within all our covenant requirements. Total capital expenditure was RUB 9.9 billion in 2016, with the Pork division accounting for RUB 3.8 billion and the Poultry division RUB 2.9 billion. The remaining RUB 3.2 billion was spread across the other business divisions. BUSINESS REVIEW The Group is the largest, vertically integrated meat and feed producer in Russia, while we rank among the top three players in the country for pork and poultry. Our principal operations include: the production and sale of processed meat products, primarily in the European region of Russia; the breeding of broiler chickens; the processing and sale of chilled and frozen poultry products produced at our facilities in the Bryansk, Voronezh, Kursk, Lipetsk, Moscow, Penza and Tula Regions; the breeding of pigs at our facilities in the Vologda, Voronezh, Lipetsk, Moscow, Orel, Penza and Tambov Regions; the sale of live pigs; and the production of grain on the Group’s land bank. We also carry out trading and distribution activities, as well as producing feed, which is used at our pork and poultry facilities. The Group’s operations are structured as 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 ﬁfteen state- of the-art breeding facilities, while the Meat Processing division comprises six processing plants, producing sausages, hams, ready-to-eat meats and other meat products. This division also carries out associated sales and trading operations. In 2016, the Grain division had 81,000 hectares of land under cultivation. Cherkizovo Group operates nine feed mills to meet the needs of its divisions. All of our operating divisions are also involved in other non-core activities. The expenses of the management company are recorded under Corporate Expenditure. In 2016, Cherkizovo Group sold over 903,000 tonnes of meat products, outperforming all of our industry peers. According to the Russian Poultry Union, as well as our own estimates, we are the second largest poultry producer overall in Russia but have a market leading position in Moscow and Moscow region. According to the National Union of Pork Producers, we are also the third largest producer in Russia’s highly fragmented pork market. In 2016, total sales by volume in the Poultry division reached 500,000 tonnes of sellable weight, 218,000 tonnes in the Meat Processing division and 185,000 tonnes of live weight produced in the Pork division while grain sales totalled 339,000 tonnes. The Group also produced 1.57 million tonnes of feed for internal consumption. MARKET AND REGULATORY REVIEW Income tax beneﬁt According to the Russian Tax Code, agricultural producers beneﬁt from zero income tax. 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, the effective tax rate was 3.7% in 2016, compared to 2.5% in 2015, whereas the general corporate tax rate in Russia is 20%. Beginning in 2017, the Group is allowed to offset 50% of the taxable proﬁt produced by each subsidiary against any tax loss accumulated by the subsidiary carried forward. There is no expiration date for any tax losses carried forwards (after amendments to the Russian Tax Code effective 1 January 2017). Reimbursement of interest expense Agricultural enterprises are eligible for reimbursement of interest expense on investment and working capital loans taken before 31 December 2016, equal to the official Central Bank of Russia (CBR) reﬁnancing rate (the “reﬁnancing rate”) effective on the date of the loan agreement, where two thirds of the reﬁnancing rate is reimbursed by the State Budget and the remaining one third of the reﬁnancing rate us reimbursed by the regional authorities. From 1 January 2016, the reﬁnancing rate was equal to the key rate. Between 1 January and 10 June 2016, the key rate was ﬁxed at 11%; from 10 June 2016 to 16 September 2016, the key rate was ﬁxed at 10.5%; and from 19 September 2016 to 31 December 2016 the key rate was ﬁxed at 10%. 44 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 45 FINANCIAL REPORT Financial Report (continued) Following the stagnation in the economy in 2016 and the resulting signiﬁcant budget deﬁcit, the Russian Government has slowed down subsidy payments. In the fourth quarter of 2016, the Russian Government announced a new policy regarding subsidies to agricultural producers – starting from 1 January 2017 accredited banks will provide loans to agricultural producers at reduced rates not exceeding 5% per annum on rouble- denominated loans. The Government then provides a subsidy to the banks compensating them for the difference between the market and actual rates. Given the uncertainty surrounding the collectability of subsidies accrued under the previous policy, management has taken the view that only subsidies on qualifying loans that are conﬁrmed by the Ministry of Agriculture will be recognised in the accounts. The change in estimated amount of subsidies to be received has resulted in a decrease in the subsidies receivable balance and an increase in interest expense of RUB 1.3 billion. FOREIGN EXCHANGE DIFFERENCES Cherkizovo products are typically priced in roubles. A signiﬁcant portion of raw materials costs such as feed components and veterinary supplies are denominated in foreign currency. Other costs, such as payroll, transportation expenses and interest expense, are incurred in roubles. At the beginning of 2016, there was signiﬁcant rouble weakness and volatility against the leading global currencies. During ﬁrst and second quarters, the rouble was less volatile and started to strengthen against global currencies. According to the Central Bank of Russia, the official exchange rates as at 1 January 2016 were 72.93 rouble per US dollar and 79.64 rouble per euro while by 31 December 2016, these exchange rates were 60.66 and 63.81 respectively. As at 31 December 2016, 97% of our long-term and 100% of our short-term outstanding debt (excluding ﬁnance leases) consisted of rouble- denominated loans. PJSC CHERKIZOVO GROUP 2016 CONSOLIDATED RESULTS The year 2016 was very much one of two halves for the Group. Although we were able to achieve strong volume growth, we experienced particularly challenging market conditions with unusually low prices in early 2016. As market conditions and prices gradually improved throughout the year, we were able to deliver a strong set of operating results for the year as a whole, with Group revenue for 2016 of RUB 82.4 billion, an increase of 7% year on year, and driven largely by the Poultry and Meat Processing segments. Gross proﬁt fell by 7% in 2016 to RUB 17.9 billion from RUB 19.1 billion in 2015. The majority of this decrease can be attributed to the Poultry and Pork segments, where a signiﬁcant portion of costs are denominated in foreign currencies (mainly the US dollar) and are, therefore, affected by exchange rate movements. As a result of these higher costs, principally caused by adverse exchange rate ﬂuctuations in the beginning of the year, the gross margin consequently fell to 21.7% in 2016 from 24.9% in 2015. Operating expenses increased by 10% year-on-year to RUB 12.8 billion in 2016, compared to RUB 11.6 billion in 2015, as a result of higher payroll, taxes, transportation and other selling expenses. Adjusted EBITDA fell by 19% year-on-year to RUB 10.3 billion from RUB 12.6 billion in 2015. The adjusted EBITDA margin fell to 12.5% in 2016. Our focus in the year ahead remains on enhancing operational efficiency across all segments, and we are conﬁdent that our continuing efforts combined with the anticipated improvement in market conditions, will lead to an improvement in proﬁtability in 2017. Interest expense rose 14% year-on-year to RUB 4.5 billion in 2016. While the Group’s loan portfolio decreased by 6% to RUB 38.6 billion as at the end of 2016 (2015: RUB 41.2 billion), net interest expense for 2016 was RUB 3.7 billion, up 174% from RUB 1.4 billion in 2015 resulting from write-off of RUB 1.3 billion of unrecoverable interest subsidies. The Group accrued RUB 0.7 billion of subsidies in 2016, which are included in the net interest expense ﬁgure above and represent a year-on-year decrease of 71%, primarily due to the change in management’s estimates of subsidy recognition and the related write-off of subsidies receivable which are not expected to be recovered. See market and regulatory review section. Net proﬁt decreased by 68% in 2016 to RUB 1.9 billion compared to RUB 6.0 billion in 2015. This was primarily due to the write-off of RUB 1.3 billion of interest subsidies, which are not expected to be recovered, and to the write-off of RUB 0.3 billion of receivables due from insurance regarding ASF compensation. As a result, the net proﬁt margin fell to 2.3% in 2016 from 7.8% in 2015. In 2016, net operating cash ﬂow rose to RUB 9.4 billion compared with RUB 5.0 billion in 2015 as a result of the improvement in working capital (revision of payment terms with suppliers and better inventory management). ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Consolidated income statement data (in thousands of roubles) Sales incl. Sales volume discounts incl. Sales returns Net change in fair value of biological assets and agricultural produce Cost of sales Gross proﬁt Gross margin Operating expenses Operating Income Operating margin Proﬁt before income tax and non-controlling interests Proﬁt attributable to Group Cherkizovo Net proﬁt margin Weighted average number of shares outstanding Earnings per share Proﬁt attributable to Cherkizovo Group per share – basic and diluted (roubles) Consolidated Adjusted EBITDA reconciliation* Proﬁt before income tax and non-controlling interests Add: Interest expense, net of subsidies Interest income Foreign exchange (gain)/loss, net Depreciation and amortisation Net change in fair value of biological assets and agricultural produce Share of loss of a joint venture Write-off of receivables from insurance company Loss on disposal of subsidiaries Consolidated Adjusted EBITDA* Adjusted EBITDA Margin Year ended 31 December 2016 Year ended 31 December 2015 82,417,193 (5,886,114) (952,321) (340,063) (64,222,344) 17,854,786 21.7% (12,798,313) 5,056,473 6.1% 1,960,379 1,919,227 2.3% 43,855,590 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 43.76 136.98 1,960,379 3,738,315 (343,737) (621,087) 4,660,365 340,063 200,191 347,975 - 10,282,464 12.5% 5,871,749 1,364,766 (285,762) 646,802 3,826,525 1,163,727 - - 42,569 12,630,376 16.4% 46 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 47 FINANCIAL REPORT Financial Report (continued) 12 Months 2016 ended December 31, 2016 Consolidated Selected Financial Data (in thousands of roubles) Meat Processing Pork Poultry Grain Feed Corporate assets/ expenditure Inter- division Combined Total sales 31,667,448 15,920,146 47,724,031 3,055,762 28,727,843 126,251 (44,804,288) 82,417,193 including other sales 526,538 171,106 1,331,875 47,426 including sales volume discounts (4,545,908) - (1,340,206) - - - 126,251 (783,561) 1,419,635 - - (5,886,114) Intersegment sales (22,795) (12,634,006) (1,961,921) (1,956,712) (28,146,309) (82,545) 44,804,288 - Sales to external customers 31,644,653 3,286,140 45,762,110 1,099,050 581,534 43,706 - 82,417,193 Net change in fair value of biological assets and agricultural produce - 861,422 (288,114) (477,482) - - (435,889) (340,063) Cost of sales (26,141,947) (12,182,666) (40,049,212) (2,873,596) (28,109,353) (78,511) 45,212,941 (64,222,344) Gross proﬁt / (loss) 5,525,501 4,598,902 7,386,705 (295,316) 618,490 47,740 (27,236) 17,854,786 Operating expense (3,743,466) (782,107) (5,035,890) (267,828) (404,658) (2,645,471) 81,107 (12,798,313) Operating income / (expense) 1,782,035 3,816,795 2,350,815 (563,144) 213,832 (2,597,731) 53,871 5,056,473 Other income (expense), net 207,378 (289,198) (114,744) 4,885 319,704 820,560 (306,364) 642,221 Interest expense, net (245,885) (964,742) (1,076,908) (94,361) (930,799) (731,984) 306,364 (3,738,315) Proﬁt before income tax (division proﬁt) Adjustments for: 1,743,528 2,562,855 1,159,163 (652,620) (397,263) (2,509,155) 53,871 1 ,960, 379 Interest expense, net 245,885 964,742 1,076,908 94,361 930,799 731,984 (306,364) 3,738,315 Interest income (9,561) (33,764) (173,895) (1,710) (10,723) (420,448) 306,364 (343,737) Foreign exchange loss/(gain) (192,501) (22,285) 304,147 (3,026) (307,559) (399,863) 639,237 1,010,334 1,969,279 295,430 590,646 155,439 - - (621,087) 4,660,365 Depreciation and amortisation expense Net change in fair value of biological assets and agricultural produce Share of loss of a joint venture Write-off of receivables from insurance company - (861,422) 288,114 477,482 - - - 347,975 - - - - - - - - 435,889 340,063 200,191 - - - 200,191 347,975 Adjusted EBITDA 2,426,588 3,968,435 4,623,716 209,917 805,900 (2,241,852) 489,760 10,282,464 ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS POULTRY DIVISION In 2016, sales volumes increased 6% year-on-year to 500,321 tonnes of sellable weight, from 470,432 tonnes in 2015. This growth was driven primarily by higher production levels, which resulted from improvements in efficiency and the launch of new poultry houses at the Mosselprom production facility. The average price during 2016 was ﬂat compared to the previous year and stood at 94.94 RUB/kg*. Total sales for the division increased 7% year-on-year to RUB 47.7 billion (2015: RUB 44.6 billion). * Here and below, all average prices exclude VAT. Gross proﬁt fell by 12% year-on- year to RUB 7.4 billion from RUB 8.4 billion in 2015 due to higher costs for feed components, hatching eggs and veterinary supplies which are denominated in foreign currencies (mostly US dollars) and were, therefore, negatively impacted by adverse exchange rate movements during the year. The negative impact was most acute in the ﬁrst quarter of the year when the Russian rouble hit a new record low. The currency situation has since stabilised, although the average real exchange rate for 2016 was still 10% lower year-on-year. The gross margin for 2016 decreased to 15.5% from 18.9% in 2015. Operating expenses as a percentage of sales were slightly lower at 10.6%, compared to 11.4% in 2015. Operating income fell by 30% year-on-year to RUB 2.4 billion from RUB 3.3 billion in 2015, while the operating margin fell to 4.9% from 7.5% in the corresponding period of last year. Net proﬁt for the division was RUB 1.2 billion, a year-on-year drop of 67%. This was mainly a result of the higher costs of feed components and other direct materials, which were denominated in foreign currencies and were negatively impacted by the adverse exchange rate movements during the year. Adjusted EBITDA fell by 16% year-on- year to RUB 4.6 billion (2015: RUB 5.5 billion), while the adjusted EBITDA margin fell to 9.7% from 12.3% in 2015. Poultry division income statement data (in thousands of roubles) 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 Interest income Interest expense, net Other (expenses) income, net Division proﬁt Division proﬁt margin Year ended 31 December 2016 Year ended 31 December 2015 47,724,031 (1,961,921) 45,762,110 (288,114) (40,049,212) 7,386,705 15.5% (5,035,890) 2,350,815 4.9% 173,895 (1,076,908) (288,639) 1,159,163 2.4% 1,159,163 1,076,908 (173,895) 304,147 1,969,279 288,114 4,623,716 9.7% 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% 175,026 (628,523) 619,720 3,509,511 7.9% 3,509,511 628,523 (175,026) (614,651) 1,862,574 283,880 5,494,811 12.3% Total net division proﬁt Non-controlling interests Income taxes Proﬁt attributable to Cherkizovo Group 1,960,379 31,709 (72,861) 1,919,227 Poultry processing 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 Poultry processing division Adjusted EBITDA* Adjusted EBITDA Margin 48 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 49 FINANCIAL REPORT Financial Report (continued) ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS PORK DIVISION Production volumes in the Pork division increased by 9% year-on-year in 2016, to 184,766 tonnes. This was primarily due to a new genetics improvement strategy launched by the management at the beginning of the year to improve the health status of pigs and efficiency by increasing liveability and weekly farrows. The launch of two new wean-to-ﬁnish sites in Voronezh region also helped to boost production. In 2016, the average pork price decreased by 10% year-on-year to 88.28 RUB/kg. This fall was primarily a result of Russian consumers’ lower purchasing power and an overall increase in pork production across the country. Total sales in the Pork division fell by 4% in 2016 to RUB 15.9 billion compared to RUB 16.6 billion in 2015. This dip in sales was expected, and in line, with the 10% fall in the average price year-on-year. Gross proﬁt in 2016 stood at RUB 4.6 billion, a decrease of 1% from 2015 (2015: RUB 4.7 billion) while the gross margin rose to 28.9% from 28.1% in 2015. Operating expenses as a percentage of sales in 2016 were slightly higher compared to 2015 and stood at 4.9% (2015: 4.0%), the rise being primarily attributable to the increase in transportation expenses. Operating income fell by 5% year- on-year to RUB 3.8 billion from RUB 4.0 billion in 2015, while the operating margin fell to 24.0% from 24.1% in the previous year. Net proﬁt decreased by 28% year-on-year to RUB 2.6 billion (2015: RUB 3.6 billion). Adjusted EBITDA declined to RUB 4.0 billion, representing a year-on-year decrease of 37%. The adjusted EBITDA margin fell to 24.9% in 2016 from 37.9% in 2015. MEAT PROCESSING DIVISION During 2016, sales volumes in the Meat Processing division grew by 14% year- on-year to 218,085 tonnes from 191,200 tonnes in 2015, which was primarily due to production growth in non-sausage products. The average price in this segment fell by 3% year-on-year to 167.84 RUB/kg due to non-sausage products representing a greater share of sales. Overall total sales were 9% higher in 2016 and reached RUB 31.7 billion (2015: RUB 29.2 billion). Gross proﬁt increased by 28% year-on- year to RUB 5.5 billion, compared to RUB 4.3 billion in 2015, while the gross margin rose to 17.4% in 2016 from 14.8% in 2015. In 2016, operating expenses as a percentage of sales rose to 11.8%, compared to 10.5% in 2015, which was primarily due to higher transportation and payroll expenses. Operating income increased by 42% year-on-year to RUB 1.8 billion from RUB 1.3 billion in 2015, while the operating margin rose to 5.6% from 4.3% in 2015. The Meat Processing segment generated net proﬁt of RUB 1.7 billion in 2016, representing an increase of 96% compared to 2015 (2015: RUB 0.9 billion). In 2016, adjusted EBITDA demonstrated growth of 38% and reached RUB 2.4 billion (2015: RUB 1.8 billion), while the adjusted EBITDA margin rose to 7.7% in 2016, compared to 6.0% in 2015. Pork division income statement data Meat Processing division income statement data (in thousands of roubles) 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 Interest income Interest expense, net Other (expenses)/income, net Division proﬁt Division proﬁt margin Pork division Adjusted EBITDA reconciliation* Division proﬁt Add: Interest expense, net of subsidies Interest income Foreign exchange (gain)/loss Depreciation and amortisation Net change in fair value of biological assets and agricultural produce Write-off of receivables from insurance company Loss on disposal of subsidiaries Pork division Adjusted EBITDA* Adjusted EBITDA Margin Year ended 31 December 2016 Year ended 31 December 2015 (in thousands of roubles) Year ended 31 December 2016 Year ended 31 December 2015 15,920,146 (12,634,006) 3,286,140 861,422 (12,182,666) 4,598,902 28.9% (782,107) 3,816,795 24.0% 33,764 (964,742) (322,962) 2,562,855 16.1% 2,562,855 964,742 (33,764) (22,285) 1,010,334 (861,422) 347,975 - 3,968,435 24.9% 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% 11,102 (356,155) (84,954) 3,570,879 21.5% 3,570,879 356,155 (11,102) 71,822 869,643 1,387,143 - 42,569 6,287,109 37.9% Total Sales Interdivision sales Sales to external customers Cost of sales Gross proﬁt Gross margin Operating expenses Operating Income Operating margin Interest income Interest expense, net Other (expenses)/income, net Division proﬁt Division proﬁt margin Meat Processing division Adjusted EBITDA reconciliation* Division proﬁt Add: Interest expense, net of subsidies Interest income Foreign exchange (gain)/loss Depreciation and amortisation Meat Processing division Adjusted EBITDA* Adjusted EBITDA Margin 31,667,448 (22,795) 31,644,653 (26,141,947) 5,525,501 17.4% (3,743,466) 1,782,035 5.6% 9,561 (245,885) 197,817 1,743,528 5.5% 1,743,528 245,885 (9,561) (192,501) 639,237 2,426,588 7.7% 29,150,254 (32,016) 29,118,238 (24,835,957) 4,314,297 14.8% (3,060,987) 1,253,310 4.3% 10,405 (202,541) (173,722) 887,452 3.0% 887,452 202,541 (10,405) 205,719 467,157 1,752,464 6.0% 50 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 51 FINANCIAL REPORT Financial Report (continued) GRAIN DIVISION Sales in the Grain division, representing a variety of different crops, grew by 27% in 2016 to 338,808 tonnes compared to 267,371 tonnes in 2015. This increase was primarily driven by a 41% increase in the Group’s harvest to 467,916 tonnes, versus 332,866 tonnes in 2015. The average crop yield of the Group’s land under cultivation increased by 47% to 5.75 t/ha, while the Group’s tillable land area grew by 4% year-on-year to 94,814 ha. The average grain price for 2016 fell by 6% year-on-year to 8.83 RUB/kg as a result of a record harvest in the country. ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS LIQUIDITY AND CAPITAL RESOURCES capital, the Group’s capital is used to ﬁnance the following: Capital requirements During 2016, signiﬁcant progress was made to improve the Group’s working capital, evidenced by a strengthened net operating cash ﬂow position at the end of the year. In addition to the working ■ capital expenditure, primarily to further enhance our production segments; ■ repayment of debt. We anticipate capital expenditure 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 2016, 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. Grain division income statement data Maturities of long-term loans and borrowings (excluding ﬁnance leases), as of 31 December 2016 (in thousands of roubles) Total Sales Interdivision sales Sales to external customers Net change in fair value of biological assets and agricultural produce Cost of sales Gross (loss)/proﬁt Gross margin Operating expenses Operating (Loss)/Income Operating margin Interest income Interest expense, net Other (expenses)/income, net Division (loss)/ proﬁt Division proﬁt margin Grain processing division Adjusted EBITDA reconciliation* Division (loss)/proﬁt Add: Interest expense, net of subsidies Interest income Foreign exchange (gain)/loss Depreciation and amortisation Net change in fair value of biological assets and agricultural produce Grain processing division Adjusted EBITDA* Adjusted EBITDA Margin Year ended 31 December 2016 Year ended 31 December 2015 Maturities of long-term loans and borrowings 2017, RUB bn 2018, RUB bn 2019, RUB bn 2020, RUB bn 2021, RUB bn 2022, RUB bn >2022, RUB bn Total, RUB bn 3,055,762 (1,956,712) 1,099,050 (477,482) (2,873,596) (295,316) (9.7%) (267,828) (563,144) (18.4%) 1,710 (94,361) 3,175 (652,620) (21.4%) (652,620) 94,361 (1,710) (3,026) 295,430 477,482 209,917 6.9% 2,580,713 (2,117,129) 463,584 326,376 (1,827,087) 1,080,002 41.8% (242,294) 837,708 32.5% 330 (14,277) 15,225 838,986 32.5% 838,986 14,277 (330) 17,144 167,236 (326,376) 710,937 27.5% Total loans and borrowings 3.4 7.3 5.3 6.7 1.8 2.0 1.0 27.5 Debt structure, RUB bln Long-term debt Short-term debt 41.2 25.1 16.1 38.6 14.1 24.5 2015 2016 Debt As of 31 December 2016, net debt amounted to RUB 36.9 billion, compared to RUB 35.0 billion at the end of 2015. Total debt stood at RUB 38.6 billion as of 31 December 2016, a decrease of 6% from the end of 2015. As of 31 December 2016, long-term debt represented 63% of the debt portfolio and amounted to RUB 24.5 billion. Short-term debt stood at RUB 14.1 billion, or 37% of the portfolio. The effective cost of debt was 9.7% in 2016 (2015: 3.3%). Subsidised loans and credit lines made up 35% of the debt portfolio in 2016 (2015: 81%). Cash and cash equivalents totalled RUB 1.0 billion as of 31 December 2016. Capital expenditure The Group’s capital expenditure on property, plant, equipment and maintenance amounted to RUB 9.9 billion in 2016, representing a year- on-year decrease of 10%. Of that, RUB 2.9 billion was invested in the Poultry division, primarily in the construction of the hatchery and grain storage facility in the Lipetsk region (Eletsprom Project). In the Pork division, RUB 3.8 billion was invested in the purchase of equipment for the new ﬁnisher complexes in Voronezh region, as well as constructing new ﬁnisher complexes in Lipetsk region. RUB 1.5 billion was invested in the Meat Processing division for the construction of the Kashira meat processing plant in Moscow Region. 52 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 53 FINANCIAL REPORT Financial Report (continued) In the Grain division, RUB 1.2 billion was invested in the construction of a new grain drying facility. The feed division received RUB 0.2 billion of investment while the Cherkizovo Group also invested RUB 1.1 billion in the Tambov Turkey project in 2016. Subsidies In 2016, the Group accrued subsidies for interest reimbursement of RUB 0.7 billion, which offset interest expense (2015: RUB 2.6 billion). The Group received RUB 1.4 billion of subsidies in 2016, compared to RUB 2.0 billion in 2015. Cash ﬂows Net operating cash ﬂow for 2016 was RUB 9.4 billion, representing a signiﬁcant increase compared with RUB 5.0 billion in 2015. This was primarily attributable to the improvement in working capital (revision of payment terms with suppliers and better inventory management). Operating activities Net cash from operating activities grew by 88% to RUB 9.4 billion in 2016 compared to RUB 5.0 in 2015. In 2016, the Group reduced its working capital by RUB 2.6 billion year-on-year (2015: increase of RUB 5.7 billion). The key factors driving the change in working capital include: ■ А RUB 0.8 billion decrease in inventories (2015: an increase of RUB 4.6 billion) ■ A RUB 0.9 billion decrease in other receivables and other current assets (2015: growth of RUB 1.5 billion) ■ A RUB 0.8 billion decrease in advances paid (2015: an increase of RUB 0.5 billion) A year-on-year decrease in inventory was due to improvements in inventory management. A decrease in other receivables was due to write-off of unrecoverable interest subsidies. Capital expenditures, RUB bln Meat Processing Pork Poultry Other 5.8 0.04 3.3 2.0 0.5 5.1 0.6 2.4 1.2 0.9 6.7 0.9 2.6 2.5 0.7 11.0 3.4 4.4 1.9 1.3 9.9 1.7 2.9 3.8 1.5 2012 2013 2014 2015 2016 7.1 0 2.7 4.1 0.3 2011 5.2 0.1 2.6 2.4 0.1 2010 2016 9.4 (10.6) (3.3) (4.6) 2015 5.0 (10.1) 9.6 4.6 Since 31 December 2016, we have continued to meet our payment obligations to trade creditors using cash generated from operating activities and debt ﬁnancing. As at 31 December 2016, 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 19.6 billion (2015: RUB 27.3 billion). Cash ﬂows, RUB bln Net cash ﬂows from operating activities Net cash ﬂows used in investing activities Net cash (used in) / generated from ﬁnancing activities Net (decrease)/increase in cash and cash equivalents A decrease in advances paid was attributable to the implementation of a new payment policy with improved standard payment terms. Investing activities Net cash used in investing activities was RUB 10.6 billion in 2016, compared to RUB 10.1 billion in 2015. Financing activities In 2016, net cash used in ﬁnancing activities was equal to RUB 3.3 billion. Liquidity As at 31 December 2016, total cash and cash equivalents was RUB 1.0 billion (2015: RUB 5.6 billion), and working capital stood at RUB 5.5 billion (2015: RUB 2.2 billion). ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Group’s business. The Group’s ﬁrst quarter margins tend to be the lowest in the year as a result of the typical post- holiday drop in consumer spending and seasonally low meat consumption at the beginning of the year. Having completed the majority of our capital-intensive development phase, Cherkizovo Group is now looking at a more modest CAPEX in 2017. We are shifting our investment focus from development to a combination of maintenance, operational efficiency and the production of higher-margin, value-added products. In 2017, we will continue to build on our competitive advantages, as well as capitalising on both domestic market consolidation and selective international opportunities. Ludmila Mikhailova Chief Financial Officer of the bases for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies within our industry. ** Net debt is calculated as total debt minus cash and cash equivalents, short-term bank deposits and long-term bank deposits. In 2016, trade receivables grew to RUB 4.9 billion (2015: RUB 4.4 billion). As at 31 December 2016, our trade receivables from related parties totalled RUB 0.3 billion (2015: RUB 0.2 billion). As at 31 December 2016, trade receivables turnover averaged 21 days (2015: 20 days) while the allowance for doubtful accounts was RUB 0.05 billion (2015: RUB 0.05 billion). As at 31 December 2016, our trade payables increased to RUB 8.6 billion (2015: RUB 8.5 billion). Our payables to related parties was RUB 0.15 billion (2015: RUB 0.02 billion). As at the reporting date, our trade payables turnover averaged 49 days (2015: 41 days). As at 31 December 2016, advances paid, excluding the allowance for doubtful accounts, amounted to RUB 1.7 billion (2015: RUB 2.7 billion). Of total advances paid, RUB 0.2 billion was given to related parties (2015: RUB 0.1 billion). As at 31 December 2016, the allowance for doubtful accounts on advances paid was RUB 0.1. Our inventories consist primarily of raw materials and goods for resale, work in progress, and ﬁnished goods. As at 31 December 2016, inventories amounted to RUB 10.6 billion (2015: RUB 12.3 billion). As at 31 December 2016, the value of our livestock amounted to RUB 10.7 billion (2015: RUB 9.8 billion). Other receivables primarily include subsidies from the government, which decreased to RUB 1.1 billion in 2016 (2015: RUB 1.4 billion). OUTLOOK There are signs that the macroeconomic situation in Russia is starting to recover, with GDP expected to return to moderate growth during 2017. Consumer spending is expected to rise as inﬂation is forecast to be at a record low level. The investment climate is also improving and foreign direct investment is expected to continue its rebound from pre-recession levels. It is anticipated that the ﬁrst quarter of the year will be soft, as is often the case for Cherkizovo *Non-IFRS ﬁnancial measures. This report 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 Amortization (“Adjusted EBITDA”). Adjusted EBITDA is deﬁned as proﬁt for the period before income tax expense/beneﬁt, interest income and interest expense, net, foreign exchange loss/gain, depreciation and amortisation expense, net change in fair value of biological assets and agricultural produce, write-off of receivables from insurance company, share of loss of a joint venture and loss on disposal of subsidiaries. Adjusted EBITDA margin is deﬁned as Adjusted EBITDA as a percentage of our net revenues. Our adjusted EBITDA may not be similar to adjusted EBITDA measures of other companies; is not a measurement under IFRS accounting principles and should be considered in addition to, but not as a substitute for, the information contained in our consolidated statement of operations. We believe that adjusted EBITDA provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations, including our ability to fund discretionary spending such as capital expenditures, acquisitions and other investments and our ability to incur and service debt. While depreciation and amortization are considered operating costs under generally accepted accounting principles, 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 54 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 55 CONTENTS ABOUT COMPANY ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Stepping Up the Transparency Ladder In 2016, Cherkizovo Group enhanced its Corporate In 2016, Cherkizovo Group enhanced its Corporate Governance structure and moved towards greater Governance structure and moved towards greater transparency while making the role of independent director transparency while making the role of independent director on the Board more prominent. The newly elected members on the Board more prominent. The newly elected members of the Board and the strengthened Executive team bring a of the Board and the strengthened Executive team bring a wealth of international knowledge and experience to lead wealth of international knowledge and experience to lead the Group through its new, exciting development phase the Group through its new, exciting development phase for the beneﬁt of all its stakeholders. for the beneﬁt of all its stakeholders. CORPORATE GOVERNANCE 56-75 Shareholder Structure Corporate Governance System Directors Statement Board of Directors Board Committees Management Board Corporate Secretary Internal Control and Risk Management Disclosure to Auditors Investor and Shareholder Information Dividend Policy Bonds Investor Relations Shareholder Access to Information Sustainable Development Employee Policies Health, Safety and the Environment Community Relations and Charity 58 58 60 62 63 68 68 68 69 69 69 69 70 70 71 71 74 75 CORPORATE GOVERNANCE The Board of Directors and the Management are committed to the creation of shareholder value and following sound corporate governance practices that meet the expectations of all of our stakeholders. SHAREHOLDER SHAREHOLDER STRUCTURE STRUCTURE INVESTOR RELATIONS SUSTAINABLE DEVELOPMENT The Group’s biggest shareholders are The Group’s biggest shareholders are MB Capital Europe Ltd., Prosperity MB Capital Europe Ltd., Prosperity Capital Management Limited, Norges Capital Management Limited, Norges Bank and Grupo Fuertes. Bank and Grupo Fuertes. Cherkizovo recognises the importance of maintaining open and transparent communication with shareholders, bondholders and potential investors. We see sustainability as the main pillar of our future growth, underpinning the robustness and resilience of our business model. P. 58-68 P. 69 P. 70 P. 71-75 56 CHERKIZOVO GROUP Annual Report 201 6 www.cherkizovo.com www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 57 CORPORATE GOVERNANCE ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Corporate Governance DIRECTORS STATEMENT The Board of Directors and the Management are committed to the creation of shareholder value and following sound corporate governance practices that meet the expectations of all of our stakeholders. Therefore, we are pleased to present the Group’s annual report and audited ﬁnancial statements for the year ending 31 December 2016. During 2016, we further strengthened our Board to ensure our team brings together the world-class expertise needed to lead the Group through its next stage of development. Corporate governance system Cherkizovo Group has been a public company for over ten years. The Group’s ordinary shares are listed on the Moscow Exchange (Listing Level 1) and its Global Depository Receipts (GDRs) are listed on the London Stock Exchange (LSE), with a combined free ﬂoat of approximately 35% of total shares. To meet its ongoing obligations, the Group follows the guidelines of the Corporate Governance Code (2014), as approved by the Russian Government, and recommended to issuers by the Central Bank of Russia. CORPORATE GOVERNANCE STRUCTURE The document is available at: http://www.cbr.ru/Eng/sbrfr/ﬁles/ Corporate_Governance_Code.pdf Under Russian law, the Russian Civil Code governs the Group’s actions, as do the Law on Joint Stock Companies, other Russian laws and regulations, and its Charter. In addition, the Group is governed by its own internally approved regulations, including: ■ Regulations for the General Meeting of Shareholders ■ Regulations for the Board of Directors ■ Regulations for the Review Commission ■ Regulations for the Management Board ■ Regulations for the General Director ■ Regulations for the Board of Directors Audit Committee Review Commission ■ Regulations for the Board of Directors General Shareholder Meeting Board of Directors Chief Executive Officer Chairman of the Management Board Board Committees Investments and Strategic Planning Committee Personnel and Remuneration Committee Audit Committee Independent auditor Personnel and Remuneration Committee ■ Regulations on dividend policy ■ Regulations on insider information ■ Regulations on bonuses and allowances payable to members of the Board of Directors These documents are available at: http://cherkizovo.com/en/ company/corporate-governance/ documents/. In 2016, Cherkizovo Group took a number of steps designed to increase the role of independent directors and strengthening the Board and other governance systems in order to safeguard the interests of all shareholders. The new Board will now focus on developing the Group’s future development strategy and leveraging the Group’s vertically integrated structure to drive increases in operational efficiency. Management Board Corporate Secretary Reports to Appoints/Elects Recommends Going concern The Board of Directors is satisﬁed that the Group’s ﬁnancial statements have been prepared by applying the ‘going concern’ principle, and that the same principle is embedded in the 2017 budget and long-term plans of the Group. Dividends In 2016, Cherkizovo Group paid RUB 1 billion in dividends (RUB 22.75 per ordinary share). General Meeting of Shareholders The Group’s ultimate governing body is the General Meeting of Shareholders, which provides all shareholders with the opportunity to communicate directly with members of the Board and the Management team. The Annual General Meeting of Shareholders (AGM) provides a forum for shareholders to raise issues both formally and informally with the directors. The running order of the AGM includes the presentation and approval of PJSC Cherkizovo Group’s audited accounts, the election of directors and the appointment of auditors for the next year. Last year, the Group held its AGM on 22 April 2016. Seven members were either elected or re-elected to serve on the new Board of Directors including four new non-executive directors. See Board of Directors section on page 55 for more details. During 2016, only one General Meeting of Shareholders was held with the following agenda items: ■ Election of members to the Counting Comission ■ Approval of the Group’s annual report ■ Approval of the Group’s annual ﬁnancial statements ■ Review and approval of the Group’s proﬁt distribution and dividend payments for 2015 ■ Approval of the number of members to be included in the Group’s Board of Directors ■ Election of the Group’s Board of Directors ■ Election of members to the Group’s Review Commission ■ Approval of the Group’s auditor ■ Approval of the Group’s internal documents BOARD OF DIRECTORS In 2016, we reviewed the composition of the Board to ensure the combined expertise of our directors is aligned with the Group’s future plans. The new Board comprises seven members, including four new non- executive Directors. The Board was elected on 22 April 2016. The current Board brings together a group of talented individuals with a strong understanding of our industry, our sector and our strategic goals. We are conﬁdent that we now have the right team in place to drive future growth and exploit the full potential of our vertically integrated structure. The Board of Directors includes three independent directors: Elliot Brinton Jones, Emin Toﬁk Oglu Mammadov, elected to the Board in April 2016, and Vitaliy Podolskiy, re-elected to the Board in April 2016, all of whom meet the independent director criteria of the Russian and UK Corporate Governance Codes. Richard Paul Sobel and Rafael Fuertes were also elected to the Board in April 2016 as non-executive directors. Further signiﬁcant changes to the Board in 2016 included the election of Evgeny Mikhailov as Chairman of the Board of Directors. Previously head of the Investment Projects department at Cherkizovo Group, he was elected Chairman at the ﬁrst meeting of the Group’s new Board of Directors held on 17 May 2016. During the same session, the Board also passed a resolution to create a new position, deputy Chairman of the Board of Directors, to which Richard Sobel was elected. The role of the Board The Board is accountable to shareholders for the creation and delivery of a strong, sustainable ﬁnancial performance and long-term shareholder value. It meets these objectives by conﬁrming the Group’s strategy and ensuring that the necessary resources are in place to achieve these strategic goals. The Board also sets the Group’s key policies and reviews management and ﬁnancial performance. The full list of the Board’s responsibilities at: http://cherkizovo. com/en/company/corporate- governance/. The Board operates within a clearly established framework of controls and procedures and follows deﬁned lines of responsibility. This structure allows for the internal controls and external risks to be assessed and managed effectively. The Board of Directors is responsible for the general management of the Group, including determining its business priorities, convening the Annual and Extraordinary General Meeting of Shareholders and appointing the executive bodies of the Group, among other functions. The full list of Board competences is outlined in Art. 12.1,2 of the Charter available on the website at: http://cherkizovo.com/upload/ iblock/40d/40d48ca92e930d064 a23dbb9ec3bcad4.pdf According to the Group’s Charter, Board resolutions are adopted upon their approval by a majority vote of the Directors present at the 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 duly convened if the majority of the directors are present. 58 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 59 CORPORATE GOVERNANCE Corporate Governance (continued) Meetings of the Board are held as per the annual schedule and on an ad hoc basis whenever necessary, but no fewer than ﬁve times a year. Matters requiring decisions outside of the scheduled meetings are dealt with through additional meetings and conference calls. As of the date of publication of this report, the Board had met seven times since the beginning of the corporate year (April 22, 2016) to discuss all relevant matters within its remit. Information on the items reviewed at these Board meetings is disclosed in the form of press releases and these are available at: http://cherkizovo. com/en/press/ Election and Re-election According to the Group’s Charter, the entire Board of Directors is re-elected at every Annual General Meeting of Shareholders. 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 among two or more nominees. Directors may be removed from office by a majority vote at the Meeting of Shareholders at any time and without explanation. Members of the Board The Board of Directors was elected on 22 April 2016 and consists of seven members with a wide range of professional expertise. EVGENY MIKHAILOV RICHARD PAUL SOBEL Chairman of the Board Evgeny Mikhailov is the Chairman of the Board of Directors of Cherkizovo Group PJSC. From 2004, he was also a member of the Board of Directors and ﬁrst deputy CEO of AIC Mikhailovsky OJSC. In 2002, he worked as a ﬁnancial analyst at Morgan Stanley, and, in 2001, was an assistant to the vice president of US telecommunications company, aTelo Inc., in Washington DC. He graduated from the University of California (Los Angeles) in 2004 with a degree in Business Economics. SERGEY MIKHAILOV Chairman of the Investment and Strategic Planning Committee, CEO of Cherkizovo Group Sergey Mikhailov has been Chief Executive Officer and a member of the Board of Directors of Cherkizovo Group since 2006. Mr Mikhailov led Cherkizovo Group during its successful IPO on the London Stock Exchange in 2006, representing the ﬁrst Russian agricultural company to be listed on the LSE. In 2001, Mr Mikhailov was marketing director of Cherkizovo’s Meat Processing Plant. He was promoted to deputy chief executive officer of the plant in 2002 and, a year later, he became its CEO. In 1998, he founded the telecommunications company, aTelo, Inc., in the US and was its CEO until 2001. In 1998, he trained as a ﬁnancial analyst at Goldman Sachs before moving to Morgan Stanley in 1999. He graduated from Georgetown University (Washington DC) in 2000 with a degree in Finance and Economics. Deputy Chairman of the Board, non-executive director Richard Paul Sobel was elected to the Board of Directors of Cherkizovo Group in 2016. He is a recognised expert in the ﬁeld of direct investment. As one of the pioneers of the Russian private equity industry, Mr Sobel was a senior fund manager at Baring Asset Management (1994-1997) and at Alfa Capital Partners (2003-2011). He is the founder and manager of Altai Advisors, a consulting company which specialises in providing advice on potential investment opportunities in Russia, the CIS, Europe and the US. Previously, Mr Sobel was a consultant at Bain & Company in Boston, USA, and an investment executive in Moscow at Batterymarch Financial Management, the European Bank for Reconstruction and Development and CIBC Oppenheimer. He graduated from Stanford University and has an MBA from Harvard Business School. RAFAEL FUERTES Non-executive director Rafael Fuertes was elected to Cherkizovo Group’s Board of Directors in 2016. He has extensive experience in the agricultural industry, primarily in animal breeding, meat processing and crop farming. Mr Fuertes is the Chairman of the Board of Directors of Grupo Fuertes, a leading Spanish agricultural holding company, which is a minority shareholder of Cherkizovo Group, with a 5.06% stake, and is a partner in the Tambov Turkey joint venture. He graduated from University of Murcia, Spain. ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS 1 5 2 6 ELLIOT BRINTON JONES Independent non-executive director Elliot Brinton Jones was elected to Cherkizovo Group’s Board of Directors in 2016. He has a strong track record in the agricultural industry. Mr Jones is the owner of Jones and Jones Consulting and has over 16 years of experience in advising various poultry companies in the US and other countries on their strategic development. Prior to that, he worked for a number of US poultry and turkey production companies, including Foster Farms, Zacky Farms, Swift Dairy and Poultry Group. He graduated from the University of San Francisco. EMIN TOFIK OGLU MAMMADOV Chairman of the Personnel and Remuneration Committee, independent non-executive director Emin Toﬁk Oglu Mammadov was elected to Cherkizovo Group’s Board of Directors in 2016. He has broad experience in retail and consumer brand development in emerging markets. Mr Mammadov is President, Global Foodservice of Kraft Heinz Company. Prior to that, he led a number of large multinational corporations in India, South Africa, Middle East and China. He graduated from the Baku Institute of Social Management and Political Science, Azerbaijan, with a degree in International Relations. VITALIY PODOLSKIY Chairman of the Audit Committee, independent non-executive director Vitaliy Podolskiy joined Cherkizovo Group’s Board of Directors in June 2012. He has more than 17 years experience in the ﬁnancial and retail/FMCG sectors in the US, UK, Germany and Russia. From 2003 to 2006, he was CFO at one of Russia’s leading supermarket chains, Perekrestok. Between 2006 and 2008, following the merger with the leading discount chain, Pyaterochka, he became CFO and a member of the Management Board of X5 Retail Group N.V., which is listed on the London Stock Exchange and is the largest retail chain in Eastern Europe. In 2008, he joined the crisis management team at Euroset as First Vice President, Finance and Administration. 4 1. Evgeny Mikhailov 2. Sergey Mikhailov 3. Richard Paul Sobel 4. Rafael Fuertes 5. Elliot Brinton Jones 6. Emin Toﬁk oglu Mammadov 7. Vitaliy Podolskiy 3 7 From June to November 2009, he was CEO and deputy Chairman of the Board of Directors at the hypermarket chain, Mosmart CJSC (Russia), where he led a major restructuring. From 2008, he was a member of both the Board of Directors and the Audit and Personnel Committees at Rosinter Restaurants OJSC (Russia), Europe’s largest restaurant chain. From 2011, he was a member of the Board of Directors and Chairman of the Finance and Strategic Committee at RG Brands OJSC (Kazakhstan), a leading soft drink FMCG company in Central Asia. From 2012, he was on the Board of Directors of Caesar Satellite OJSC. He graduated from Moscow State University (Department of Journalism). He received an MBA in International Business and Finance from the University of Chicago. 60 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 61 CORPORATE GOVERNANCE Corporate Governance (continued) BOARD COMMITTEES The Board delegates the review of certain matters to three committees: the Audit Committee, the Personnel and Remuneration Committee, and the Investment and Strategic Planning Committee. These three committees serve as consultative and advisory bodies that deal with issues that are raised by the Board. The Committees are not considered as management bodies of the company. Committee meetings are held when required, with a minimum of a ﬁve times a year. They are held separate to the Board meetings and focus on issues that may require preliminary Board consideration. The decisions of each Committee are taken by a majority vote of all committee members taking part in the meeting. Each member has one vote. Each of the committees met six times from the beginning of the corporate year (April 22, 2016). The Board is satisﬁed that the Committees have sufficient skills, experience and resources to carry out their duties effectively. The respective committee chairmen report on their activities at the following Board meeting. Details of committee membership, roles and work are set out below: Audit Committee The Board of Directors established the Audit Committee in April 2006. Its exclusive functions are to assess candidates for the role of Group auditor, review the auditor’s reports and evaluate the effectiveness of internal control procedures, as well as suggest areas where these procedures could be improved. Membership of the committee is reviewed annually, with members selected from among the independent directors. In 2016, with the appointment of new independent directors, new members jointed the committee. As at 20 May 2016, Elliot Brinton Jones and Emin Toﬁk Oglu Mammadov joined the existing Chairman of the committee, Vitaliy Podolskiy. The Audit Committee adheres to a formal list of items to be considered at each committee meeting. Committee members: Vitaliy Podolskiy Chairman, independent non-executive director Elliot Jones Independent non-executive director Emin Mammadov Independent non-executive director Primary functions: ■ Ensure the completeness, accuracy and consistency of ﬁnancial statements ■ Ensure 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 of internal and external fraud (including unauthorised use of insider or conﬁdential information) and other violations, and oversee the implementation of any related measures approved by the Group’s management Full list of the Committee functions is available at: http://cherkizovo.com/ en/company/corporate-governance/ documents/ Personnel and Remuneration Committee The Personnel and Remuneration Committee was established in July 2010. Membership is reviewed annually and in 2016, Emin Toﬁk Oglu Mammadov was appointed as Chairman of the Personnel and Remuneration Committee and was joined on the committee by Vitaliy Podolskiy and newly-elected Board member, Elliot Brinton Jones. The Board approved the new version of Regulations for the Board of Directors Personnel and Remuneration Committee to conform to the Moscow Exchange Listing Rules. The committee adheres to a formal list of items to be considered at each committee meeting during the ﬁnancial year. Committee members: Emin Mammadov Chairman, independent non-executive director Elliot Jones Independent non-executive director Vitaliy Podolskiy Independent non-executive director Primary functions: ■ Formulating key aspects of the corporate HR policy ■ Approval of performance targets for the remuneration of Directors, members of the Management Board and the Chief Executive Officer ■ Perform the Board assessment procedure Full list of the Committee functions is available at: http://cherkizovo.com/ en/company/corporate-governance/ documents/ Investment and Strategic Planning Committee The Investment and Strategic Planning Committee was established in June 2012. Its membership is reviewed annually. Following the expansion of the Board in 2016, all four newly-elected non-executive directors, namely Elliot Jones, Emin Mammadov, Richard Sobel and Rafael Fuertes, were appointed as members of the committee with Sergey Mikhailov, the CEO of the Group, as its Chairman. The committee adheres to a formal list of items to be considered at each committee meeting during the ﬁnancial year. Committee members: Sergey Mikhailov Chairman, CEO of Cherkizovo Group ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Elliot Jones Independent non-executive director Emin Mammadov Independent non-executive director Richard Sobel Non-executive director Rafael Fuertes Non-executive director Primary functions: ■ 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 programmes Full list of the Committee functions is available at: http://cherkizovo.com/ en/company/corporate-governance/ documents/ Acting within the scope of its competence, the Committee works with the CEO, Management Board and relevant business divisions of the Group. MANAGEMENT BOARD The Group’s Management Board was established in June 2010 and was strengthened further in 2016 to 14 from 10 members as at the end of 2015. The Group’s Board of Directors approves both the size of the Management Board and selects the people to serve on the Management Board on the basis of proposals from the Chairman of the Management Board. The size of the Management Board should be optimal for constructive business discussions, as well as timely and effective decision- making. The Management Board is authorised to approve strategic plans, as well as the business priorities, and review the business performance of the Group and its subsidiaries and affiliates. The powers of Cherkizovo Group’s Management Board are set out in the Charter. SERGEY MIKHAILOV JOHN ROSS Chief Executive Officer Chief Operating Officer Sergey Mikhailov has been Chief Executive Officer and a member of the Board of Directors of Cherkizovo Group since 2006. Mr Mikhailov led Cherkizovo Group during its successful IPO on the London Stock Exchange in 2006, representing the ﬁrst Russian agricultural company to be listed on the LSE. In 2001, Mr Mikhailov was marketing director of Cherkizovo’s Meat Processing Plant. He was promoted to deputy chief executive officer of the plant in 2002 and, a year later, he became its CEO. In 1998, he founded the telecommunications company, aTelo, Inc., in the US and was its CEO until 2001. In 1998, he trained as a ﬁnancial analyst at Goldman Sachs before moving to Morgan Stanley in 1999. He graduated from Georgetown University (Washington DC) in 2000 with a degree in Finance and Economics. John Ross has been the Chief Operating Officer of Cherkizovo Group since October 2016 and reports directly to Sergey Mikhailov, Group CEO. For the last 25 years, John has been the head of a number of integrated, multi-plant production corporations as well as a member of the management team at major international poultry companies. Prior to joining Cherkizovo Group, John held the position of president at Arasco Food (Saudi Arabia). Before that he worked at Zacky Farms for over 20 years, joining the company as an operations manager and going on to become the president of the Group. His career began at the agricultural holding company, Cargill. He is a graduate of Kansas State University with a degree in Agriculture Mechanisation. 62 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 63 CORPORATE GOVERNANCE Corporate Governance (continued) ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS LUDMILA MIKHAILOVA SERGEY POLYAKOV MAKSIM ZUDIN ANDREY CHOLOKYAN YURY DYACHUK MARINA KAGAN Chief Financial Officer Head of Poultry Division Head of Agro Division Head of Meat Processing Division Head of Legal Department Head of Corporate Communications Ludmila Mikhailova has been the Group’s CFO since 2006. Between 2001 and 2004, she worked as a ﬁnancial analyst at McFarlane Gordon Inc, General Mills Co (Canada) and at ING Barings (UK). She then held a number of managerial positions at Cherkizovo Group and AIC Cherkizovsky. She is ranked among the Top 1,000 Managers in Russia. She graduated from the Financial Academy of the Government of the Russian Federation and received an MBA from York University, Canada. Sergey Polyakov has been CEO of the Poultry Division Management Company since 2014. From 2000 to 2008, he held management positions at the Sodruzhestvo Group. Prior to joining Cherkizovo Group, he worked at Obyedinennaya Zernovaya Kompaniya OJSC, where he carried out the functions of a CEO and was in charge of the company’s business activities. He was also CEO of PRODO from 2009 to 2011. He graduated with honours from the Economics Department of the European Humanities University. Maksim Zudin has been the head of the Agro Division of Cherkizovo Group since 2015. He is responsible for the strategic development of the Pork, Feed and Grain farming divisions. Prior to joining Cherkizovo Group, he was the Head of the oil production division at Solnechniye Produkti. Between 2003 and 2013, he was the Head of the Agro Division as well as a member of the management board at Razgulyai Group, where he was responsible for the Eastern branch. He is a graduate of Moscow State University with a degree in Mechanics and Mathematics. Andrey Cholokyan has been managing director of the Meat Processing segment of Cherkizovo Group OJSC since 2010. He was deputy CEO of Development and Marketing in the executive office of Lianozovsky Kolbasny Zavod from 2002. Prior to this, he held senior management positions at the Ostankinsky, Biryulevsky and Cherkizovsky meat processing plants. He is a graduate of the Moscow Technological Institute of the Meat and Dairy Industry and has a PhD in Economics. Yury Dyachuk has been head of the Group’s Legal Support and Real Estate Operations Department since 2006. He has 14 years of experience as a practising lawyer, and was head of the Group’s Legal Business Units for 12 years. In 2005, he was senior counsel and managed the restructuring of Cherkizovo Group, after being Head of the Legal Department of AIC Cherkizovsky since 2001. He was head of the Legal Department of Cherkizovsky Meat Processing Plant (CMPP) between 1996 and 2000, and was a member of the department from 1995 to 1996. He graduated from the Moscow State Law Academy in 1995 with a degree in Civil Law. Marina Kagan has served as Cherkizovo Group’s head of Corporate Communications since 2015. Marina began her career in London on BBC radio and television. Between 1998 and 2004, she advised Russian companies preparing for IPOs. In 2004, she was appointed Director of Corporate Communications at Wimm-Bill- Dann Foods OJSC and was a member of the management board. She later served as Vice President of Corporate Communications, Eastern Europe at PepsiCo. Prior to joining Cherkizovo, Ms Kagan held the position of Director of Corporate Communications at O’Key Group of Companies. She graduated from Westminster University, London. 64 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 65 CORPORATE GOVERNANCE Corporate Governance (continued) ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS ANDREY KHIZHNYAK ALEXEY SKOROBOGATOV VLADISLAV BELYAEV LEONID IZMAILOV ALEXANDER GUSAKOV VERA ELISEEVA Head of Sales and Marketing Head of Procurement and Logistics Head of IT Andrey Khizhnyak has been Head of Sales and Marketing since September 2013. He has 17 years of experience in marketing and sales management. Prior to joining Cherkizovo Group, he worked for a range of companies, including Obyedinennye Konditery LLC, Razgulyai Market LLC, and OST Group. Between 2001 and 2004, he was Head of Marketing at the Cherkizovsky Meat Processing Plant OJSC and AIC Cherkizovsky Trading Group OJSC. He was recognised as one of Russia’s top ﬁve business managers in 2010, and one of the top ten food marketing managers in 2007 by the Russian Managers Association. He graduated from the Moscow State Law Academy. Alexey Skorobogatov has been head of Procurement and Logistics at Cherkizovo Group OJSC since October 2011. From 2009 to 2011, he was regional head of Procurement at Danone Nutricia Baby Food, Eastern Europe, and between 2006 and 2009, he was head of Procurement at Wimm- Bill-Dann Foods OJSC. Prior to this, he worked at Mobilnye Telesistemy (MTS) OJSC, where he set up and headed the procurement and logistics department, which was later combined into a single logistics department. He is a graduate of the Pyatigorsk State Linguistic University. Vladislav Belyaev has been head of IT since February 2012. Between 2008 and 2012, he was head of the Enterprise Management Systems Department at Vimpel-Kommunikatsii OJSC. Prior to this, he held senior management positions at CafeMax CJSC and at Moskovskiy Industrialny Bank OJSC. He is a graduate of the Moscow Institute of Radio Engineering, Electronics, and Automation and Moscow State University. Head of the Investment Projects Department Leonid Izmailov has been the head of the Investment Projects Department at Cherkizovo Group since 2014. He is responsible for managing the construction process of major investment projects. Between 2010 and 2014, Leonid was the technical director and operational cluster director of AgroTerra LLC. Prior to this role, he held a number of senior management positions across a range of companies, including Russkiye Masla (now part of Kernel), Bunge, Unilever and Nestle Food. He graduated from Moscow State University with a degree in Chemistry. Head of Security Department Head of HR Alexander Gusakov has been the security director of Cherkizovo Group since February 2016. Vera Eliseeva was appointed chief people officer of Cherkizovo Group in May 2016. Mr Gusakov has over ten years of experience in corporate security. Prior to joining Cherkizovo Group, he worked for Henkel Rus, Zurich Insurance Group and Gazprom. Between 1981 and 2005, he worked in the state security services. He graduated from The Higher School of the Committee for State Security with a degree in Law. Prior to joining Cherkizovo Group, Vera served as head of Organisational Development with a major ﬁnance and retail holding company, vice president and director of the Personnel Department at MTS Bank, and Head of the Organisational Department and a Member of the Management Board at the mobile retailer, Svyaznoy. Before that, she headed up the personnel management division for Wimm-Bill-Dann Foods OJSC. She is a graduate of the Moscow State Institute of International Relations (MGIMO) and has an MBA degree from California State University, East Bay (Hayward). 66 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 67 CORPORATE GOVERNANCE Corporate Governance (continued) CORPORATE SECRETARY In line with the best international corporate governance practices, the Board of Directors created the new role of Corporate Secretary in 2012 to support the Board’s functions and document ﬂow. Valery Kuprienko was appointed Corporate Secretary for the current term of the Board (April 2016 – April 2017), but subsequently stepped down. In November 2016, the Board appointed Anastasia Bakhmacheva to this role. INTERNAL CONTROL AND RISK MANAGEMENT The Board of Directors has overall responsibility for maintaining an adequate internal control and risk management system at the Group, as well as reviewing its effectiveness. Internal control is also exercised by the Review Commission in compliance with the Charter and the Regulation on the Review Commission. The Review Commission coordinates ﬁnancial and business audits at the Group, 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 Review Commission are elected by the General Meeting of Shareholders for one year. The CEO or other members of the Board of Directors are not permitted to be members of the Review Commission. Disclosure procedures within Cherkizovo Group follow the guidelines set out 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 insider information relating to the Group and was updated in 2015. Cherkizovo Group complies with European Union’s Market Abuse Regulation (MAR). The company maintains a list of insiders with the help of Insider manager program, which is licensed by the Financial Conduct Authority of Great Britain (FCA) and is disclosing insider information according to the requirements of MAR. Cherkizovo Group’s senior management has made itself familiar with the requirements of MAR. The Group has prepared a new document, the Information policy of PJSC Cherkizovo Group, formulating the responsibility for compliance with MAR, as well as internal documents regulating the procedure of transactions involving PJSC Cherkizovo Group’s securities. Review Commission The Group’s Charter and respective regulation govern the work of the Review Commission. It oversees and coordinates audits of the Group’s ﬁnancial and economic activities. Its principal duties are to ensure that the Group’s activities comply with the applicable Russian legislation, do not infringe on the rights of shareholders, and that accounting and reporting do not contain material misstatements. ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Investor and Shareholder Information The members of the commission are elected for one year at the General Meeting of Shareholders and may not include the chief executive officer or any other members of the Board. DISCLOSURE TO AUDITORS As far as each of the directors is aware, there is no material information undisclosed to the Group’s auditors. Each of the directors has taken all steps required of them to obtain all material information and provide it to the Group’s auditors. The Groups’ current auditors, Deloitte & Touche CIS ZAO, were appointed on March 2016 and are due for re- appointment in 2017. Shareholder structure, % SHAREHOLDER STRUCTURE MB Capital Europe Ltd. Prosperity Capital Management Limited Norges Bank Grupo Fuertes Other 7.74% 5.06% 4.89% 21.30% 61.01% Igor Babaev and his family control 65% of Cherkizovo Group’s issued share capital, mainly through MB Capital Europe Ltd. The Group’s free ﬂoat* is 35%. As at 31 December 2016, Prosperity Capital Management (21.30%) and Norges Bank Limited (4.89%) were among the top ﬁve shareholders. * 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. Stock price dynamics in 2016, RUB 1200 1100 1000 900 800 700 23.10.2015 31.01.2016 10.05.2016 18.08.2016 26.11.2016 06.03.2017 Source: Moscow Exchange GDR price vs. Industry Index in 2016 PJSC CHERK S Food Producers 5% 0% -5% -10% -15% -20% -25% Feb Apr Jun Aug Oct Dec Source: London Stock Exchange 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. Common Shares The Group has listed its common shares on Moscow exchange (MOEX) in 2006. During 2016, the price declined by 26% from RUB 1,040 to RUB 773 against a market background of further declines in consumer demand in Russia. As of 31 December 2015 on close 12-month high 12-month low As of 31 December 2016 on close 12-month average price on close 12-month average daily trade volume, shares Source: Moscow Exchange 1,040 1,098 738 773 874 2,346 GDRs The Group’s global depositary receipts (GDRs) have been traded on the London Stock Exchange (LSE) since 2006. Every three receipts represent two common shares. In 2016, the GDR price declined by 11% from US$ 9.26 to US$ 8.6 as of the end of December 2016, in line with the Food Producers Index. As of 31 December 2015 on close 12-month high 12-month low As of 31 December 2016 on close 12-month average price 12-month average daily trade volume, shares Source: LSE 9.26 9.88 7.52 8.6 8.61 10,394 68 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 69 CORPORATE GOVERNANCE ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Investor and Shareholder Information (continued) Sustainable Development SHAREHOLDER ACCESS TO INFORMATION We ensure shareholders have the details of the Group’s results and other news releases through the London Stock Exchange’s Regulatory News Service. The news releases are published on the Press Centre section of the Group’s website at: http://cherkizovo. com/en/press/ All ﬁnancial reports and presentations are available at: http://cherkizovo.com/en/investors/. DIVIDEND POLICY BONDS The Board of Directors of the Group approved the Dividend Policy in April 2015. It is based on the principle of the rational distribution of proﬁt, taking into account the interests of the shareholders and investment capital required for the future development of business of the Group. In considering the payment of dividends, the Board will, with the assistance of the Investment and Strategic Planning committee, take into account the current ﬁnancial status of the Group and the amount of the proposed dividend, which shall be at least 20% of the consolidated net proﬁt for the reporting period, in accordance with Russian Accounting Standards. The General Meeting of Shareholders makes the ﬁnal resolution approving the payment of dividends. The full version of the Divided Policy of the Group is available at: http:// cherkizovo.com/dividendpolicy-en. pdf In 2016, Cherkizovo Group paid RUB 1 billion in dividends (RUB 22.75 per ordinary share). The Group’s only corporate bond issue, the BO-001P-01 series (registration number 4B02-01-10797-A-001P), with an annual coupon rate of 12.5%, was issued in October 2015 for a total amount of RUB 5 billion with a ﬁve-year maturity. The bonds are traded on the Moscow Exchange and, as of 30 December 2016, its yield to maturity was 11.47%. In April 2016, Cherkizovo Group redeemed its BO-04 series semi-annual coupon bonds for a total of RUB 3 billion. The bonds were issued in March 2013. INVESTOR RELATIONS The Group continued to operate in a challenging macroeconomic environment during 2016, but we have noted encouraging signs for a potential recovery, with the stabilisation of oil prices and interest rates, as well as the slow-down in the devaluation of the Russian currency. Overall, Russia, continues to experience a degree of negative shareholder sentiment. The Cherkizovo Group recognises the importance of maintaining open and transparent communication with shareholders, bondholders and potential investors, especially in these testing times. We do this through meetings, presentations, investor conferences and ad hoc events with institutional investors and sell-side analysts. Cherkizovo Group aims to ensure its sustainable growth in an ever-changing environment. We see sustainability as the main pillar of our future growth, underpinning the robustness and resilience of our business model. Our corporate governance practices and stakeholder engagement principles encompass the interests of all parties and are continuously reviewed and taken into account across all levels of our operational activities. Our operations are far reaching and encompass a broad variety of stakeholders, including our employees, shareholders, partners, governments, local authorities and communities, peers and competitors, as well as our customers in Russia and abroad. In 2016, we continued to engage with all of our stakeholders to identify and discuss policy issues relevant to sustainability of the Group’s business model. We maintain constant dialogue with all interested parties in order to develop strategic approaches that meet the requirements of our stakeholders. EMPLOYEE POLICIES Cherkizovo Group is one of the leading employers in the Russian agricultural sector. We create jobs across the whole value chain from grain farming, meat production and processing to distribution and other segments of the food industry. The Group adheres to the strictest Russian and international employment standards and follows best practices when it comes to providing the most comfortable work environment and opportunities for professional development for our employees. As at the end of 2016, the Group employed 22,800 people across all of its facilities. Recruitment We recognise the importance of attracting, developing and retaining highly skilled and qualiﬁed professionals, as well as nurturing young talent to ensure the continuing and sustainable success of our business. Our People Management policy is designed to deliver on this. The Group ﬁnds and recruits accomplished experts and managers, while also actively engaging and developing young talent from a graduate entry level. In addition, our operations also require production staff with no previous experience. During 2016, we continued to work with educational institutions in the regions where we operate, including the Timiryazev Agricultural Academy, the Voronezh State Agricultural University and others. We welcome students to apply for internships, on-the-job training programmes and pre-degree apprenticeship. In addition, Cherkizovo Group launched the Youth Programme last year, and it has already helped our facilities recruit more than 40 graduates. Each business segment within Cherkizovo Group has its operational speciﬁcs and its own requirements for new personnel, but the Group as a whole adheres to the same principles of ﬁnding and retaining the best professionals in the industry as well as top graduate talent. Our leadership across some of the key segments of the Russian food industry, combined with our ambitions to become a major international food supplier, drive our demand for highly skilled and ambitious professionals. 70 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 71 ABOUT COMPANY ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS CORPORATE GOVERNANCE Sustainable Development (continued) Сherkizovo presentation for MADI students In 2016, Cherkizovo Group held a talk on employment opportunities in the Group for the students of the Moscow Automobile and Road Construction State Technical Institute (MADI). MADI’s high calibre graduates, offering a range of mechanics, logistics specialists, traffic controllers and transportation economics expertise are of particular interest to the Group’s operations. 22.8 th. EMPLOYEES ACROSS ALL FACILITIES IN CHERKIZOVO GROUP 40 GRADUATES WERE RECRUITED BY THE GROUP AFTER YOUTH PROGRAMME Training and Development Cherkizovo Group seeks to be a leader in innovation in the agricultural sector and places great importance on the use of the most advanced solutions and technologies. This approach involves the continuous development of the expertise and skills of our employees. The Group has a large-scale training programme and educational courses in place to foster the professional growth of all our staff. Also, we have developed a comprehensive system of mentoring, which is designed to transfer the experience and skills to the new employees. We regularly participate in trade conferences and other industry events across the globe to ensure we are on par with the global food industry leaders. The Group pays particular attention to the continuous improvement of management skills. We have developed a series of dedicated programmes for our senior and middle level management covering all key management disciplines, such as human resources management and development of soft skills. In 2016, we launched the Management Competency Model, developed to ensure a consistent approach to the selection of talented managers. During 2016, the Group held the second “Cherkizovo People” Strategic Management Conference. Managers from across all of the business segments attended the event to exchange ideas and continue discussions on current opportunities, trends, strategic direction and the Group’s long-term growth plans to ensure its market leadership in the coming years. In addition to the regular and ad hoc training programmes, the Group launched its Distance Learning programme. The project was piloted in the Meat Processing division in 2015 and continued throughout 2016. All courses can be accessed and completed via dedicated in-house software, which is also used to regular monitor the learning progress. It is planned to roll out the Distance Learning programmes across the whole Group. Compensation and beneﬁts Compensation and beneﬁts Cherkizovo Groups offers its employees Cherkizovo Groups offers its employees competitive remuneration packages on competitive remuneration packages on par with the average salary levels in the par with the average salary levels in the relative region of operations. The Group relative region of operations. The Group also has in place a system of rewards also has in place a system of rewards and compensation for outstanding and compensation for outstanding achievements. achievements. The Group fully complies with Russian The Group fully complies with Russian legal requirements for providing social legal requirements for providing social support to its employees and runs a support to its employees and runs a series of additional social programmes series of additional social programmes aimed at ensuring social protection for aimed at ensuring social protection for our staff and their families. The Group our staff and their families. The Group offers transparent compensation system, offers transparent compensation system, paid sick leave and annual holiday, paid sick leave and annual holiday, paid three-year parental leave with paid three-year parental leave with guaranteed return to the workplace, guaranteed return to the workplace, as well as a number of other beneﬁts as well as a number of other beneﬁts ranging from an additional paid holiday ranging from an additional paid holiday allowance based on the length of service allowance based on the length of service to ﬁnancial assistance for important to ﬁnancial assistance for important events in our employees lives, such events in our employees lives, such as getting married or having a baby. as getting married or having a baby. The majority of our operations have on-site staff canteens serving daily hot meals, free transfers to sites, as well as subsidised travel to health resorts and children’s summer camps for employees and their families. The Group pays particular attention to the health of employees and provides regular health checks and on- demand access to the on-site medical professionals at the Group’s facilities. Internal communications Our corporate culture is based on the principles of transparency, leadership, openness to innovations and respect. We are focused on developing and nurturing our corporate culture and sharing our vision and values with every member of our team. The opinion of each employee is very important to us therefore we encourage the free exchange of view and ideas. We share our corporate news with our employees across all facilities through a monthly internal newspaper and a corporate intranet portal, which facilitates further exchange of knowledge and ideas across the Group. In 2015, we launched the “Your Opinion Counts” survey designed to measure and improve employees’ engagement with the business. The results of the Survey helped us to ﬁne-tune our engagement initiatives in 2016. Cross-cultural communications Cherkizovo Group is fully committed to implementing the best international practices across our operations and managerial functions and sees an ongoing dialogue between our employees and industry experts from other countries as essential to delivering on this pledge. The Cross-Cultural Communication and Expat Induction Programme helps our employees from other countries become acquainted with the practices and speciﬁcs of our facilities. The programme was initially launched at our Grain division, and the work is underway to roll it out across the Group. 72 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 73 CORPORATE GOVERNANCE Sustainable Development (continued) HEALTH, SAFETY AND THE ENVIRONMENT As a leader in the Russian agricultural industry and one of the largest employers in the country, with production facilities nationwide, we pay particular attention to the health and safety of our employees and our impact on the environment. The Group not only complies with all legal requirements for ensuring safety in the workplace, biological and veterinary security, natural resource management, and environmental protection, it also goes further by running a wide range of programmes focused on sustainable growth and excellence in Health, Safety and Environment (HSE) issues. We have the strictest requirements for maintaining biological safety at all our production sites. Each facility is fully equipped with all the necessary tools to minimise biological risks that are natural for the meat production and processing. We monitor and prevent environmental risks using the latest equipment and technologies, as well as constantly monitoring our environmental impact. To ensure the high quality of our products, we carry out inspections at every stage of the production cycle, from the feed production to the breeding of young stock, to processing and sales. The Group has programmes in place aimed at minimising its negative environmental impact and reducing consumption of energy and natural resources. Each of our facilities set targets on reducing air pollution, waste generation and energy consumption, in line with the Russian legislation and internal regulatory requirements. In addition, we comply with the requirements in terms of establishing buffer zones around our production facilities. We monitor environmental conditions at production facilities, regularly assess and take measures to prevent and minimise any negative HSE COMPLIANCE IN MEAT PRODUCTION Comfort We maintain optimum conditions for all livestock by controlling air temperature and circulation, lighting and humidity. Traceability We control systems that run through all stages of the production process, from the feed production to the breeding, processing and sales, to ensure the high quality of our products. Balanced feeding We produce our own feed with a balanced formula of proteins, microelements, vitamins, and amino acids to ensure the our livestock receives the optimum energy source. Specialisation and separation of facilities by territory We carry out all production stages at individual sites separated by at least a ﬁve-kilometre sanitary protection zone. Separating production sites helps prevent the spread of the diseases between different generations of animals and between breeding and production stock. All-in / All-out principle Each production site has animals of the same generation only. The sites are thoroughly cleaned and disinfected between production processes. Preventive measures We strictly monitor production processes at our facilities to ensure they comply with the highest international standards. The measures include strict control of access to all production sites, limiting the number of visitors, prohibiting staff from moving between sites, maintaining effective operation of all veterinary and sanitary stations, handling clinical examination and veterinary care of all stock. Environmental protection We monitor effluent discharges, air pollution, water and energy consumption at all our facilities. impact on the environment in the regions where we operate. For example, as part of our zero-waste production programme, manure from pork production facilities has been certiﬁed as a natural fertiliser that can be used by Grain farming division. ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS COMMUNITY RELATIONS AND CHARITY Cherkizovo Group plays an important role in the life of the local communities in the regions where it operates. The Group’s companies are among the largest taxpayers in the agricultural industry in the central regions of Russia. We maintain close relationships with the local authorities and communities. In addition to ongoing cooperation with communities, the Group regularly runs various charitable projects for local orphanages, schools, cultural and sporting organisations. Each of the Group’s facilities provides support to socially vulnerable groups as part of a strategy of responsible citizenship. LETTERS TO FATHER FROST EASTER GIFTS As part of our charity programme, we support children from the Ark social rehabilitation centre, near Elets. Every year the kids are encouraged to write letters to Farther Frost, Russia’s Santa Claus. In response to these letters we bring New Year gifts and arrange a fancy dress party, helping to create a festive mood for the children. We support local orphanages and other facilities for children, providing ﬁnancial assistance, arranging visits and gift giving to celebrate holidays. In April 2016, our Lipetsk Chicken Kingdom team visited the Eduard Belan Children’s Support Centre to celebrate the Easter holiday with the children, and they brought the kids Easter cakes and sweets. NEW YEAR GIFTS FOR CHILDREN CHILDREN’S DAY WEEKEND VOLUNTARY WORK In 2016, the Group’s employees held an inaugural corporate New Year Charity event to raise money for children suffering from cancer. The Group matched the donations of employees. Such initiatives not only raise much- needed funds and the awareness of worthy causes, but also promote a culture of compassion across the Group. Each summer, we arrange a celebration on Children’s Day. In 2016 we also held a Group-wide drawing contest for the children of our employees. Over 300 kids participated in the competition and sent in drawings portraying their parents at work. The Group’s Poultry division regularly holds weekend events where our employees volunteer their time at schools and orphanages in local towns. In line with this voluntary ethos, the Group organised a series of events and barbecues in spring of 2016 in Bryansk, Kursk, Liski, Penza, Lipetsk and Tula. Teams of our employees helped local children to clean their schoolyards, plant trees and then arranged a barbecue for the kids. Everyone involved greatly appreciated the opportunity to share in the spring holidays with the kids. 74 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 75 CONTENTS ABOUT COMPANY ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS In spite of the challenging market conditions, Cherkizovo In spite of the challenging market conditions, Cherkizovo Group was able to demonstrate strong operational results Group was able to demonstrate strong operational results across all business segments, increasing total revenue 7% across all business segments, increasing total revenue 7% year-on-year to RUB 82.4 billion in 2016, with net operating year-on-year to RUB 82.4 billion in 2016, with net operating cash ﬂow over the same period rising by an impressive cash ﬂow over the same period rising by an impressive 88% to RUB 9.4 billion. The Group rebalanced its debt 88% to RUB 9.4 billion. The Group rebalanced its debt structure with total debt falling by 6% year-on-year to RUB structure with total debt falling by 6% year-on-year to RUB 38.6 billion as at the end of December 2016. Our debt 38.6 billion as at the end of December 2016. Our debt ratios also remained comfortably within all of our covenant ratios also remained comfortably within all of our covenant requirements. requirements. Consolidated Financial Statements Consolidated Financial Statements for the year ended 31 December 2016 and Independent Auditor’s Report Consolidated statement of changes in equity Consolidated statement of cash ﬂows Notes to the consolidated ﬁnancial statements Contact information 84 88 90 139 Statement of management responsibilities for the preparation and approval of the consolidated ﬁnancial statements Independent auditor’s report Consolidated ﬁnancial statements for the year ended 31 December 2016 Consolidated statement of proﬁt or loss and other comprehensive income Consolidated statement of ﬁnancial position 78 79 83 83 84 76 CHERKIZOVO GROUP Annual Report 201 6 www.cherkizovo.com www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 77 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Statement of management responsibilities for the preparation and approval of the consolidated ﬁnancial statements (For the year ended 31 December 2016) 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 2016, and the consolidated results of its operations, cash ﬂows and changes in equity for the year then ended, in compliance with International Financial Reporting Standards (“IFRS”). In preparing the consolidated ﬁnancial statements, management is responsible for: ■ Properly selecting and applying accounting policies; ■ Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; ■ Providing additional disclosures when compliance with the speciﬁc requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s consolidated ﬁnancial position and ﬁnancial performance; ■ Making an assessment of the Group’s ability to continue as a going concern. Management is also responsible for: ■ Designing, implementing and maintaining an effective system of internal controls throughout the Group; ■ Maintaining adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the consolidated ﬁnancial position of the Group, and which enable them to ensure that the consolidated ﬁnancial statements of the Group comply with IFRS; ■ Maintaining statutory accounting records in compliance with local legislation and accounting standards; ■ Taking such steps as are reasonably available to them to safeguard the assets of the Group; and ■ Preventing and detecting fraud and other irregularities. The consolidated ﬁnancial statements of the Group for the year ended 31 December 2016 were approved by Management on 1 March 2017. On behalf of the Management: Sergey Mikhailov Chief Executive Officer Ludmila Mikhailova Chief Financial Officer Independent Auditor’s Report (To the Board of Directors and Shareholders of PJSC Cherkizovo Group) OPINION We have audited the consolidated ﬁnancial statements of PJSC Cherkizovo Group (the “Company”) and its subsidiaries (collectively – the “Group”), which comprise the consolidated statement of ﬁnancial position as at 31 December 2016, and the consolidated statement of proﬁt or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash ﬂows for the year then ended, and notes to the consolidated ﬁnancial statements, including a summary of signiﬁcant accounting policies. In our opinion, the accompanying consolidated ﬁnancial statements present fairly, in all material respects, the consolidated ﬁnancial position of the Group as at 31 December 2016, and its consolidated ﬁnancial performance and its consolidated cash ﬂows for the year then ended in accordance with International Financial Reporting Standards (“IFRSs”). BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (“ISAs”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (the “IESBA Code”) together with the ethical requirements that are relevant to our audit of the consolidated ﬁnancial statements in the Russian Federation, and we have fulﬁlled our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgment, were of most signiﬁcance in our audit of the consolidated ﬁnancial statements of the current period. These matters were addressed in the context of our audit of the consolidated ﬁnancial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Why the matter was determined a key audit matter How the matter was addressed in the audit RECOVERABILITY OF GOVERNMENT SUBSIDIES At 31 December 2016 the amount of subsidies receivable for interest expense reimbursement was RUB 1,104,972 thousand (2015: RUB 1,417,074 thousand). In the fourth quarter of 2016 the Group changed the estimate regarding the timing of subsidy recognition which resulted in the write-off of the full balance of subsidies receivable accrued on qualifying loans that were not conﬁrmed for subsidizing by the regional bodies of the Ministry of agriculture of the Russian Federation (RUB 1,285,474 thousand). Further details are provided in Notes 4 and 21 to the consolidated ﬁnancial statements. We focused on this area as a key audit matter because the management of the Group had to apply signiﬁcant judgement in assessing the recoverability of the subsidies receivable balance. For subsidies receivable we performed the following audit procedures to assess recoverability of the balance: ■ we veriﬁed the appropriateness of the change in the accounting estimate by reference to the negative changes in the macroeconomic environment, deviation from the historical pattern of signiﬁcant portion of subsidies being collected in the fourth quarter of the year and a new policy on subsidy assignment to agricultural producers announced by the government in the fourth quarter of 2016 and effective from 1 January 2017; ■ on a sample basis we veriﬁed that compliance criteria for recognition of subsidies were met; ■ on a sample basis we veriﬁed that the Group received proofs of subsidizing from the regional bodies of the Ministry of agriculture of the Russian Federation; ■ we analytically recalculated the subsidies accrual for 2016 and checked the accuracy of the subsidy rates and calculation of the subsidized shares of the borrowed funds; ■ we analysed the subsidies receivable balance by regions of the Russian Federation to identify abnormal concentration, which may indicate potential recoverability issues for subsidies from that particular region. 78 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 79 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Independent Auditor’s Report (continued) (To the Board of Directors and Shareholders of PJSC Cherkizovo Group) Why the matter was determined a key audit matter How the matter was addressed in the audit OTHER INFORMATION VALUATION OF BIOLOGICAL ASSETS At 31 December 2016 the carrying values of current and non-current biological assets were RUB 10,712,481 thousand and RUB 1,926,714 thousand respectively (2015: RUB 9,829,675 thousand and RUB 1,597,495 thousand). Biological assets are stated at fair value less estimated costs to sell. The Group recognized a fair value adjustment of RUB 3,877,070 thousand at 31 December 2016 (2015: RUB 3,303,761 thousand). Further details are provided in Notes 4 and 15 to the consolidated ﬁnancial statements. We focused on this area as a key audit matter because the assessment of the fair value using valuation techniques involves complex and signiﬁcant judgements about future poultry and pork prices and other assumptions, involving additional uncertainty due to the current volatility of poultry and pork prices in the market. We performed audit procedures on all valuation models relating to material types of biological assets. Our audit procedures included veriﬁcation of management’s assumptions used in the models. The assumptions to which the models were most sensitive and most likely to lead to material mistakes in valuation were: ■ future selling prices and ■ projected cost per head/ kg. We challenged management’s assumptions in the models with reference to historical data and, where applicable, external benchmarks, noting that the assumptions used fell within an acceptable independently determined range. We compared the current performance up to the date of the audit report with the forecasts to ensure no signiﬁcant changes had occurred after the testing had been performed. We tested the accuracy of the models with the assistance of our own specialists and carried out audit procedures on management’s sensitivity calculations. We tested the appropriateness of the related disclosures provided in the consolidated ﬁnancial statements. In particular, we focused on the disclosure of key unobservable inputs and the related sensitivity analysis. RELATED PARTY TRANSACTIONS As described in Note 29 “Related Parties” to the consolidated ﬁnancial statements, the Group enters into various signiﬁcant transactions with related parties. The transactions include sales and purchases of inventories, provision of services, and sales and purchases of property, plant and equipment. The transactions with related parties exceeding certain criteria are approved by the Board of Directors. We consider the transactions with related parties to be a key audit matter because the Audit Committee regularly discusses transactions with related parties and the terms on which these transactions have been conducted, in addition to the regulatory, investors’ and management’s interest in this area, especially in determining appropriate pricing for such transactions. Our audit procedures included obtaining an understanding of key controls around the process of approval and authorization of related party transactions. Our substantive audit procedures included testing, on a sample basis, the transactions with related parties by reviewing supporting documentation. We also challenged management’s conclusion that the transactions were done on an arm’s length basis by means of reviewing a sample of agreements and comparing the related party transactions prices to those quoted by comparable companies and market data, where available. We also checked the completeness and accuracy of the related parties disclosure by reference to the audited data. Management is responsible for the other information. The other information comprises the information included in the Annual report, but does not include the consolidated ﬁnancial statements and our auditor’s report thereon. The Annual report is expected to be made available to us after the date of this auditor’s report. Our opinion on the consolidated ﬁnancial statements does not cover the other information and we will not express any form of assurance conclusion thereon. In connection with our audit of the consolidated ﬁnancial statements, our responsibility is to read the other information identiﬁed above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated ﬁnancial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. When we read the Annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED FINANCIAL STATEMENTS Management is responsible for the preparation and fair presentation of the consolidated ﬁnancial statements in accordance with International Financial Reporting Standards (“IFRSs”), and for such internal control as management determines is necessary to enable the preparation of consolidated ﬁnancial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated ﬁnancial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s ﬁnancial reporting process. AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the consolidated ﬁnancial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to inﬂuence the economic decisions of users taken on the basis of these consolidated ﬁnancial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: ■ identify and assess the risks of material misstatement of the consolidated ﬁnancial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; ■ obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control; ■ evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management; 80 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 81 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Independent Auditor’s Report (continued) (To the Board of Directors and Shareholders of PJSC Cherkizovo Group) ■ conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast signiﬁcant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated ﬁnancial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern; ■ evaluate the overall presentation, structure and content of the consolidated ﬁnancial statements, including the disclosures, and whether the consolidated ﬁnancial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and signiﬁcant audit ﬁndings, including any signiﬁcant deﬁciencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated to those charged with governance, we determine those matters that were of most signiﬁcance in the audit of the consolidated ﬁnancial statements of the current period, which constitute the key audit matters included herein. 1 March 2017 Moscow, Russian Federation Rinat Khasanov, Director (license no. 03-000790) ZAO Deloitte & Touche CIS The Entity; PJSC Cherkizovo Group Audit Firm: ZAO “Deloitte&Touche CIS” Primary State Registration Number: 1057748318473 Certiﬁcate of registration in the United State Register № 1057748318473 of 22.09.2005, issued bu Moscow Interdistrict Inspectorate of Russian Ministry of Taxation №46. Adress: 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 United State Register № 77 004840299 of 13.11.2002, issued by Moscow Interdistrict Inspectorate of Russian Ministry of Taxation №39. Member of Self-regulated organization of auditors “Russian Union of auditors” (Association), ORNZ 11603080484. . Consolidated statement of proﬁt or loss and other comprehensive income (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) 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 Share of loss of a joint venture Operating proﬁt Interest income Interest expense, net Other income (expenses), net Proﬁt before income tax Income tax (expense) beneﬁt Proﬁt for the year and total comprehensive income Proﬁt and total comprehensive income attributable to: Cherkizovo Group Non-controlling interests Earnings per share Weighted average number of shares outstanding – basic and diluted: Net income attributable to Cherkizovo Group per share – basic and diluted (in Russian roubles): Notes 2016 2015 5 15 6 7 16 8 9 10 82,417,193 77,032,622 (340,063) (1,163,727) (64,222,344) (56,720,216) 17,854,786 19,148,679 (13,008,713) (11,947,142) 410,591 (200,191) 332,489 - 5,056,473 7,534,026 343,737 285,762 (3,738,315) (1,364,766) 298,484 (583,273) 1,960,379 5,871,749 (72,861) 149,060 1,887,518 6,020,809 1,919,227 (31,709) 6,007,482 13,327 43,855,590 43,855,590 43.76 136.98 82 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 83 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Consolidated statement of ﬁnancial position (As at 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) Notes 31 December 2016 31 December 2015 Notes 31 December 2016 31 December 2015 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 11 12 13 14 15 16 17 10 15 18 19 20 21 22 23 64,445,256 60,436,029 443,676 557,191 432,771 557,191 1,949,663 1,603,903 1,926,714 510,000 2,061,472 641,365 479,624 508,140 1,617,833 300,000 1,301,663 641,365 331,300 430,811 73,523,101 67,652,866 10,712,481 9,829,675 10,602,118 12,258,555 1,904,786 4,942,884 1,721,691 1,393,473 1,002,203 534,838 2,835,987 4,444,991 2,733,842 1,782,019 5,560,824 612,566 32,814,474 40,058,459 106,337,575 107,711,325 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 24 24 24 25 26 10 440 (78,033) 440 (78,033) 5,588,320 5,588,320 47,503,411 46,582,955 53,014,138 52,093,682 1,026,280 1,055,392 54,040,418 53,149,074 24,469,704 16,118,747 58,131 420,299 14,379 67,131 405,097 96,185 24,962,513 16,687,160 26 14,122,997 25,093,017 8,608,271 8,461,657 27 562,584 1,061,629 849,400 1,394,940 734,823 443,018 1,445,128 790,344 1,372,176 269,751 27,334,644 37,875,091 52,297,157 54,562,251 106,337,575 107,711,325 84 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 85 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Consolidated statement of changes in equity (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) Share capital Treasury shares Balances at 1 January 2015 Proﬁt for the year and total comprehensive income Acquisition of non-controlling interests Dividends Amount Number of shares 440 - - - 43,963,773 - - - Amount (78,033) - - - Number of shares Additional paid-in capital Retained earnings Total shareholder’s equity Non-controlling interests (108,183) 5,591,204 43,968,239 - 6,007,482 (2,884) - 49,481,850 6,007,482 (2,884) - (3,392,766) (3,392,766) 1,057,073 13,327 (15,008) - - - - Balances at 31 December 2015 440 43,963,773 (78,033) (108,183) 5,588,320 46,582,955 52,093,682 1,055,392 Proﬁt for the year and total comprehensive income Additional non-controlling interests arising on set up of new subsidiaries Dividends - - - - - - - - - - - - - - - 1,919,227 1,919,227 - - (31,709) 2,597 (998,771) (998,771) - (998,771) Balances at 31 December 2016 440 43,963,773 (78,033) (108,183) 5,588,320 47,503,411 53,014,138 1,026,280 54,040,418 86 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 87 Total equity 50,538,923 6,020,809 (17,892) (3,392,766) 53,149,074 1,887,518 2,597 FINANCIAL STATEMENTS Consolidated statement of cash ﬂows (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS CASH FLOWS FROM OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES 2016 2015 2016 2015 Proﬁt before income tax Adjustments for: Depreciation and amortization Bad debt expense Foreign exchange (gain) loss, net Interest income Interest expense, net Net change in fair value of biological assets and agricultural produce Gain on disposal of property, plant and equipment, net Gain on disposal of non-current biological assets, net Write-off of receivables from insurance company Share of loss of a joint venture Other adjustments, net Operating cash ﬂows before working capital and other changes Decrease (increase) in inventories Increase in biological assets Increase in trade receivables Decrease (increase) in advances paid Decrease (increase) in other receivables and other current assets Increase in other non-current assets Increase in trade payables Increase in tax related liabilities (other than income tax) Increase (decrease) 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 1,960,379 5,871,749 Purchase of property, plant and equipment (8,569,640) (9,415,480) 4,660,365 3,826,525 Purchase of intangible assets Purchase of non-current biological assets 231,981 (621,087) (343,737) 3,738,315 340,063 (8,054) 32,062 646,802 (285,762) 1,364,766 1,163,727 (49,793) 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 (1,110,778) (555,633) 34,013 755,422 (960,000) - (210,000) 6,273 (432,481) (273,343) 220,832 537,051 (450,000) (156,855) (300,000) 183,895 (402,456) (282,827) Net cash used in investing activities (10,610,343) (10,086,381) 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 Disposal (acquisition) of non-controlling interests Net cash (used in) generated from ﬁnancing activities Net (decrease) increase 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 11,862,021 (5,363,445) 9,218,443 (5,110,160) 21,834,999 21,686,431 (30,652,746) (12,736,663) (998,771) (3,392,766) 1,127 (17,892) (3,316,815) 9,647,393 (4,558,621) 4,553,270 5,560,824 1,007,554 1,002,203 5,560,824 347,975 200,191 (28,059) - - (108,612) 10,075,876 12,178,637 770,364 (4,648,048) (202,031) (477,366) 796,090 947,249 (70,105) 675,348 41,155 142,585 (1,586,899) (466,088) (522,982) (1,450,027) (28,022) 3,607,415 17,693 (651,507) 12,699,165 6,450,172 255,850 219,758 (4,895,763) (3,530,632) 1,433,471 (124,186) 2,019,481 (166,521) 9,368,537 4,992,258 88 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 89 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) 1. NATURE OF THE BUSINESS General information PJSC Cherkizovo Group (the “Company”) is a public joint stock company incorporated in Russia. The registered office of the Company is 5, Lesnaya st., building B, Moscow, 125047, Russia. The Company’s parent is MB Capital Europe Ltd., which is registered in Cyprus and owned approximately 61% of the Company’s shares at 31 December 2016 and 2015. The ultimate controlling party of PJSC Cherkizovo Group is Babaev / Mikhailov family who jointly control MB Capital Europe Ltd. At 31 December 2016 and 2015 the Group included the following principal companies: Name of company Legal form Nature of business % 31.12.2016 % 31.12.2015 OJSC Cherkizovsky Meat Processing Plant (JSC CMPP) Open Joint Stock Company Meat processing plant LLC PKO Otechestvennyi Product Limited Liability Company Meat processing plant JSC Cherkizovo-Kashira Joint Stock Company Meat processing plant LLC TPC Cherkizovo Limited Liability Company Procurement company CJSC Petelinskaya OJSC Vasiljevskaya Closed Joint Stock Company Raising poultry Open Joint Stock Company Raising poultry OJSC Kurinoe Tsarstvo Open Joint Stock Company Raising poultry CJSC Kurinoe Tsarstvo Bryansk Closed Joint Stock Company Raising poultry CJSC Mosselprom LLC Lisko Broiler Closed Joint Stock Company Raising poultry Limited Liability Company Raising poultry LLC Petelino Trade House Limited Liability Company Trading company: distribution of poultry CJSC Botovo Closed Joint Stock Company Pig breeding LLC Cherkizovo-Pork* Limited Liability Company Pig breeding LLC Kuznetsovsky Kombinat Limited Liability Company Pig breeding LLC Cherkizovo-Grain Production Limited Liability Company Grain crops cultivation 95% 95% 95% 95% 88% 100% 100% 100% 100% 100% 88% 76% 100% 100% 100% 95% 95% 95% 95% 88% 100% 100% 100% 100% 100% 88% 76% 100% 100% 100% * In December 2015, 7 companies of pork segment: LLC Lipetskmyaso, LLC RAO Penzenskaya Grain Company (PZK), LLC Orelselprom, LLC Resurs, LLC Agroresurs-Voronezh, LLC TD Myasnoe Tsarstvo and LLC Tambovmyasoprom were merged into LLC Cherkizovo-Pork. Subsequently in November and December 2016 LLC Cherkizovo-Feed Production and LLC Voronezhmyasoprom were also merged into LLC Cherkizovo-Pork. The business of the Group The Group’s operations are spread over the full production cycle from grain and feed production and breeding to meat processing and distribution. The operational facilities of the Group include six meat processing plants, ﬁfteen pig production complexes, eight poultry production complexes, six combined fodder production plants and four grain farming complexes and a swine nucleus unit. The Group also operates three trading houses with subsidiaries in several major Russian cities. The Group’s geographical reach covers Moscow, the Moscow region, the regions of Saint Petersburg, Kaliningrad, Penza, Lipetsk, Vologda, Ulyanovsk, Chelyabinsk, Tambov, Krasnodar, Ekaterinburg, Rostov-na-Donu, Briansk, Voronezh, Belgorod, Kursk, Orel and Kazan. The Group is represented in the European part of Russia through its own distribution network. Operating environment Emerging markets such as Russia are subject to different risks than more developed markets, including economic, political and social, and legal and legislative risks. Laws and 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. Starting from 2014, sanctions have been imposed in several packages by the U.S. and the E.U. on certain Russian officials, businessmen and companies. This led to reduced access of the Russian businesses to international capital markets. The above mentioned events have led to reduced access of the Russian businesses to international capital markets, increased inﬂation, slackening of the economic growth rates and other negative economic consequences. The impact of further economic developments on future operations and ﬁnancial position of the Group is difficult to determine at this stage. 2. SIGNIFICANT ACCOUNTING POLICIES Statement of compliance These consolidated ﬁnancial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”). Basis of preparation The entities of the Group maintain their accounting records in accordance with laws, accounting and reporting regulations of the jurisdictions in which they are incorporated and registered. Accounting policies and ﬁnancial reporting procedures in these jurisdictions may differ substantially from those generally accepted under IFRS. Accordingly, the consolidated ﬁnancial statements, which have been prepared from the Group’s statutory basis accounting records, reﬂect adjustments necessary for such ﬁnancial statements to be presented in accordance with IFRS. The consolidated ﬁnancial statements have been prepared under the historical cost convention, except for biological assets measured at fair value less estimated point-of-sale costs; and assets and liabilities of subsidiaries acquired and recorded in accordance with IFRS 3 “Business combinations” (“IFRS 3”). Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated ﬁnancial statements is determined on such a basis, except for leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as net realizable value in IAS 2 or value in use in IAS 36. In addition, for ﬁnancial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the signiﬁcance of the inputs to the fair value measurement in its entirety, which are described as follows: ■ Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can 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, either The Group owns locally recognised brands, which include Cherkizovo (“Черкизово”), Pyat Zvezd (“Пять Звезд”), Petelinka (“Петелинка”), Kurinoe Tsarstvo (“Куриное Царство”) and Imperia Vkusa (“Империя вкуса”) and has a diverse customer base. directly or indirectly; ■ Level 3 inputs are unobservable inputs for the asset or liability. At 31 December 2016 and 2015 the number of staff employed by the Group approximated 22,775 and 21,690, respectively. 90 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 91 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) Functional and presentation currency The functional currency of the Company, and each of its subsidiaries, is the Russian rouble. These consolidated ﬁnancial statements are also presented in Russian roubles which is the presentation currency used by the Group. Foreign currency transactions In preparing the ﬁnancial statements of each individual group entity, transactions in currencies other than the entity’s functional currency (foreign currencies) are recognised at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non- monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences on monetary items are recognised in proﬁt or loss in the period in which they arise. Going concern These consolidated ﬁnancial statements have been prepared on the assumption that the Group will continue as a going concern in the foreseeable future, which implies the realization of assets and settlement of liabilities in the normal course of business. The Group continues to monitor its existing liquidity needs on an on-going basis. Management believes that the Group will have sufficient operating cash ﬂows and borrowing capacity to continue as a going concern in the foreseeable future. Basis of consolidation The consolidated ﬁnancial statements incorporate the ﬁnancial statements of the Company and entities controlled by the Company (its subsidiaries). Control is achieved when the Company: ■ Has power over the investee; ■ Is exposed, or has rights, to variable returns from its involvement with the investee; ■ Has the ability to use its power to affect its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the Company has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all relevant facts and circumstances in assessing whether or not the Company’s voting rights in an investee are sufficient to give it power, including: ■ The size of the Company’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; ■ Potential voting rights held by the Company, other vote holders or other parties; ■ Rights arising from other contractual arrangements; ■ Any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Speciﬁcally, income 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 ceases to control the subsidiary. Proﬁt or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non- controlling interests. Total comprehensive income of 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. When necessary, adjustments are made to the ﬁnancial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash ﬂows relating to transactions between members of the Group are eliminated in full on consolidation. Business combinations (from third parties) Acquisitions of businesses from third parties are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognized in proﬁt or loss as incurred. At the acquisition date, the identiﬁable assets acquired and the liabilities assumed are recognized at their fair value at the acquisition date, except for: ■ Deferred tax assets or liabilities and liabilities or assets related to employee beneﬁt arrangements are recognized and measured in accordance with IAS 12 Income Taxes and IAS 19 Employee Beneﬁts respectively; ■ Liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with IFRS 2 Share-based Payment at the acquisition date; and ■ Assets (or disposal groups) that are classiﬁed as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with that Standard. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held interest in the acquiree (if any) over the net of the acquisition- date amounts of the identiﬁable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identiﬁable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognized immediately in proﬁt and loss as a bargain purchase gain. Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the recognised amounts of the acquiree’s identiﬁable net assets. The choice of 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 another IFRS. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognized, to reﬂect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognized as of that date. The measurement period is the period from the date of acquisition to the date the Group obtains complete information about facts and circumstances that existed as of the acquisition date – and is subject to a maximum of one year. Acquisitions of entities under common control Acquisitions of entities under common control are accounted for on the basis of predecessor carrying values, which results in the historical book value of assets and liabilities of the acquired entity being combined with that of the Group. For common control transactions the consolidated historical ﬁnancial statements of the Group are retrospectively restated to reﬂect the effect of the acquisition as if it occurred at the beginning of the earliest period presented. Consideration paid is reﬂected as a decrease in additional paid in capital. Goodwill Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business (see accounting policy on Business combinations (from third parties) above) less accumulated impairment losses, if any. 92 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 93 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) For the purposes of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (or groups of cash- generating units) that is expected to beneﬁt from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated ﬁrst to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in proﬁt or loss. An impairment loss recognised for goodwill is not reversed in subsequent periods. On disposal of the relevant cash- generating unit, the attributable amount of goodwill is included in the determination of the proﬁt or loss on disposal. Investments in joint venture A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The Group reports its interests in joint venture using the equity method of accounting, whereby an investment in an associate or a joint venture is initially recognised in the consolidated statement of ﬁnancial position at cost and adjusted thereafter to recognise the Group’s share of the proﬁt or loss and other comprehensive income of the associate or joint venture. When the Group’s share of losses of an associate or a joint venture exceeds the Group’s interest in that associate or joint venture (which includes any long- term interests that, in substance, form part of the Group’s net investment in the associate or joint venture), the Group discontinues recognising its share of further losses. Additional losses are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture. An investment in an associate or a joint venture is accounted for using the equity method from the date on which the investee becomes an associate or a joint venture. The requirements of IAS 39 are applied to determine whether it is necessary to recognise any impairment loss with respect to the Group’s investment in an associate or a joint venture. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount, Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases. When a group entity transacts with a joint venture of the Group, proﬁts and losses resulting from the transactions with the joint venture are recognised in the Group’s consolidated ﬁnancial statements only to the extent of interests in the joint venture that are not related to the Group. Property, plant and equipment Owned assets Property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Land is not depreciated. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials, direct labour, and any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site in which they are located. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. Gains and losses on disposal of an item of property, plant and equipment are recognized net in other income in proﬁt or loss. Repairs and maintenance The cost of replacing part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is probable that future economic beneﬁts embodied within the part will ﬂow to the Group and its cost can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of day-to-day servicing of property, plant and equipment are recognized in proﬁt or loss as incurred. Depreciation Depreciation is recognized to write off the cost of assets (other than freehold land and properties under construction) less their residual values over their useful lives, using the straight-line method. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. The estimated useful lives for the current and comparative periods are 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 Depreciation methods, useful lives and residual values are reassessed at each reporting date, with the effect of any changes in accounting estimate recognized on a prospective basis. Investment property Investment properties represent buildings and land held to earn rentals and/or for capital appreciation (including property under construction for such purposes). Investment properties are measured at cost, including transaction costs, less accumulated depreciation and impairment losses. Land is not depreciated. Depreciation is recognized in proﬁt or loss on a straight-line basis over the estimated useful lives (10-40 years) of each building. An investment property is derecognised upon disposal or when the investment property is permanently withdrawn from use and no future economic beneﬁts are expected from the disposal. Any gain or loss arising on derecognition of the property (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in proﬁt or loss in the period in which the property is derecognised. Intangible assets Intangible assets represent acquired trademarks and computer software. All trademarks have been determined to have an indeﬁnite life. Intangible assets with ﬁnite useful lives are carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each 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. Impairment of tangible and intangible assets other than goodwill 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 recoverable amount is estimated. Intangible assets with indeﬁnite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. 94 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 95 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) 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 sell. In assessing value in use, the estimated future cash ﬂows are discounted to their present value using a pre-tax discount rate that reﬂects current market assessments of the time value of money and the risks speciﬁc to the asset for which the estimates of future cash ﬂows have not been adjusted. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inﬂows from continuing use that are largely independent of the cash inﬂows of other assets or groups of assets (the “cash-generating unit”). The goodwill acquired in a business combination acquisition, for the purposes of impairment testing, is allocated to cash-generating units that are expected to beneﬁt from the synergies of the combination. An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised immediately in proﬁt or loss. Impairment losses recognized in respect of 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. When an impairment loss subsequently reverses, the carrying amount of the asset (or a cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. a reversal of an impairment loss is recognised immediately in proﬁt or loss. Inventories Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on the weighted average principle and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs included in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress cost includes an appropriate share of production overheads based on normal operating capacity. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Biological assets and agricultural produce Biological assets of the Group consist of livestock (pigs and poultry) and unharvested crops (grain crops and other plantations). Based on the above policy, the principal groups of biological assets and agricultural produce are stated as follows: Biological assets 1) Broilers Broilers comprise poultry held for chicken meat production. The fair value of broilers is determined by reference to the cash ﬂows that will be obtained from sales of ﬁnished chickens, with an allowance for costs to be incurred and risks to be faced during the remaining transformation process. 2) Breeders (laying hens and replacement ﬂock) Breeders comprise poultry held for regeneration of broilers. The fair value of breeders is determined by reference to the cash ﬂows that will be obtained from sales of hatchery eggs, with an allowance for costs to be incurred and risks to be faced during the remaining productive period. 3) Market hogs Market hogs comprise of pigs held for pork meat production. The fair value of broilers is determined by reference to the cash ﬂows that will be obtained from sales of ﬁnished pigs, with an allowance for costs to be incurred and risks to be faced during the remaining transformation process. 4) Sows Sows comprise pigs held for regeneration of market hogs population. The fair value of sows is determined by reference to the cash ﬂows that will be obtained from sales of weaned piglets, with an allowance for costs to be incurred and risks to be faced during the remaining productive period. 5) 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 since little biological transformation has taken place due to the seasonal nature of the crops. Subsequent to the year-end unharvested crops in ﬁelds are measured at fair value, which is determined by reference to the cash ﬂows that will be obtained from sales of harvested crops, with an allowance for costs to be incurred at the point of sale and risks to be faced during the remaining transformation process. The Group recognizes a biological asset or agricultural produce when the Group controls the asset as a result of past events, it is probable that future economic beneﬁts associated with the asset will ﬂow to the Group, and the fair value or cost of the asset can be measured reliably. Agricultural produce 1) Dressed poultry and pork Biological assets are stated at fair value less estimated costs to sell at both initial recognition and as of the reporting date, with any results recognized in proﬁt or loss. Costs to sell include all costs that would be necessary to sell the assets, including costs necessary to get the assets to market. The difference between fair value less costs to sell and total production costs is allocated to biological assets held in stock as of each reporting date as a fair value adjustment. The change in this adjustment from one period to another is recognized as “Net change in fair value of biological assets and agricultural produce” in proﬁt or loss. Agricultural produce harvested from biological assets is recognised in inventory and measured at its fair value less costs to sell at the point of harvest. a gain or loss arising on initial recognition of agricultural produce at fair value less 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”. The fair value of dressed poultry and pork is determined by reference to market prices at the point of harvest. 2) Crops The fair value of crops is determined by reference to market prices at the point of harvest. The Group’s biological assets are classiﬁed into bearer and consumable biological assets depending upon the function of a particular group of biological assets in the Group’s production process. Consumable biological assets are those that are to be harvested as agricultural produce, and include broilers, market hogs and unharvested crops. Bearer biological assets include poultry breeders and sows. Revenue recognition The Group derives its revenue from four main sources: sale of processed meat, poultry, pork and grain crops. Revenue is recognised when the products are shipped or when goods are received by its customer, title and risk of ownership has passed, the price to the buyer is ﬁxed or determinable and recoverability is reasonably assured. 96 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 97 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) In accordance with the Group’s standard sales terms, title is transferred and the customer assumes the risks and rewards of ownership upon shipment. However, on contracts with certain large retail chains, title transfers upon acceptance of goods by the customer at delivery. Sales made under these contracts are recognized upon acceptance by customer. Sales are recognised at the fair value of the consideration received or receivable, net of VAT, discounts and returns. The Group grants discounts to customers primarily based on the volume of goods purchased. Discounts are based on monthly, quarterly, or annual target sales. Discounts are offered in the meat processing segment and in the poultry segment. The discounts are graduated to increase when actual sales exceed target sales. The Group offers product guarantees to its customers, providing them with an option to return damaged and non conforming goods and goods of initial improper quality. The period that goods may be returned is set to a maximum of one month from the date of shipment. Returns are accounted for as deductions to sales in the period to which sales relate. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognized in proﬁt or loss in the period in which they are incurred. Government grants In accordance with Russian legislation, enterprises engaged in agricultural activities receive certain government grants. Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received. The largest of such government grants relate to reimbursement of interest expense on qualifying loans (“interest subsidies”). The Group records interest subsidies as an offset to interest expense during the period to which they relate. The Group also receives government grants based on square of cultivated land and volumes of meat or eggs produced and fodder purchased. These grants are less systematic and therefore in general the Group recognizes them only when receives the grant or it is highly probable that the grant will be received. These grants are recorded as reductions to cost of sales during the period to which they relate. In addition to that, from time to time the Group receives government grants for compensation of certain capital expenditures. These grants are non-systematic and therefore the Group recognizes them only when receives the grant. These grants are recorded as reductions to costs capitalized during the period to which they relate. Employee beneﬁts Remuneration to employees in respect of services rendered during the reporting period is recognized as an expense in that reporting period. The Group does not have any material long-term employee beneﬁts. The Group contributes to the State Pension Fund of the 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. These contributions to the State Pension Fund of the Russian Federation are recognized in the consolidated statement of proﬁt or loss and other comprehensive income when employees have rendered services entitling them to the contribution. The Group does not maintain any supplemental post-retirement beneﬁt plans for its employees. Taxation Income tax expense represents the sum of the tax currently payable and deferred tax. Current tax The tax currently payable is based on taxable proﬁt for the year. Taxable proﬁt differs from ‘proﬁt before tax’ as reported in the consolidated statement of proﬁt or loss and other comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group’s current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the consolidated ﬁnancial statements and the corresponding tax bases used in the computation of taxable proﬁt. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable proﬁts will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from the initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither the taxable proﬁt nor the accounting proﬁt. Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable proﬁts against which to utilise the beneﬁts of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable proﬁts will be available to allow all or part of the asset to be recovered. Leases Leases are classiﬁed as ﬁnance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classiﬁed as operating leases. Assets held under ﬁnance leases are recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum lease payments, each determined at inception of the lease. The corresponding liability is included in the balance sheet as lease liability. Lease payments are apportioned between interest expense and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Interest expense is 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). Cash and cash equivalents Cash and cash equivalents represent cash on hand and in bank accounts and short-term highly liquid investments having original maturities of less than three months. Provisions A provision is recognized if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outﬂow of economic beneﬁts will be required to settle the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash ﬂows estimated to settle the present obligation, its carrying amount is the present value of those cash ﬂows (when the effect of the time value of money is material). Share capital Ordinary shares are classiﬁed as equity and are recorded at the par value of proceeds received. Where shares are issued above par value, the proceeds in excess of par value are recorded in additional paid-in capital, net of direct issue costs. Treasury shares Where the Company or its subsidiaries purchase the Company’s equity instruments, the consideration paid, including any directly attributable incremental costs, net of income taxes, is deducted from equity attributable to the Company’s owners until the equity instruments are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’s owners. 98 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 99 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) Dividends Dividends are recognized as a liability and deducted from equity at the reporting date only if they are declared before or on the reporting date by the shareholders at a general meeting. Dividends are disclosed when they are proposed before the reporting date or proposed or declared after the reporting date but before the consolidated ﬁnancial statements are authorized for issue. Financial instruments Financial assets and ﬁnancial liabilities are recognised when a group entity becomes a party to the contractual provisions of the instruments. Financial assets and ﬁnancial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of ﬁnancial assets and ﬁnancial liabilities (other than ﬁnancial assets and ﬁnancial liabilities at fair value through proﬁt or loss) are added to or deducted from the fair value of the ﬁnancial assets or ﬁnancial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of ﬁnancial assets or ﬁnancial liabilities at fair value through proﬁt or loss are recognised immediately in proﬁt or loss. Financial assets Financial assets are classiﬁed into the following speciﬁed categories: ﬁnancial assets ‘at fair value through proﬁt or loss’ (FVTPL), ‘held-to-maturity’ investments, ‘available-for-sale’ (AFS) ﬁnancial assets and ‘loans and receivables’. The classiﬁcation depends on the nature and purpose of the ﬁnancial assets and is determined at the time of initial recognition. At the reporting dates, the Group had only ﬁnancial assets classiﬁed as ‘loans and receivables’. Effective interest method The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. Loans and receivables Loans and receivables are non-derivative ﬁnancial assets with ﬁxed or determinable payments that are not quoted in an active market. Loans and receivables (including trade and other receivables, bank balances and cash) are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the effect of discounting is immaterial. Impairment of ﬁnancial assets Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the ﬁnancial asset, the estimated future cash ﬂows of the investment have been affected. For ﬁnancial assets carried at amortised cost, the amount of the impairment loss recognised is the difference between the asset’s carrying amount and the present value of estimated future cash ﬂows, discounted at the ﬁnancial asset’s original effective interest rate. The carrying amount of the ﬁnancial asset is reduced by the impairment loss directly for all ﬁnancial assets with the exception of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in proﬁt or loss. 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 event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through proﬁt or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. Individually signiﬁcant ﬁnancial assets are tested for impairment on an individual basis. The remaining ﬁnancial assets are assessed collectively in groups that share similar credit risk characteristics. Derecognition of ﬁnancial assets The Group derecognises a ﬁnancial asset when the contractual rights to the cash ﬂows from the asset expire, or when it transfers the ﬁnancial asset and substantially all the risks and rewards of ownership of the asset to another party. On derecognition of a ﬁnancial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognised in other comprehensive income and accumulated in equity is recognised in proﬁt or loss. Financial liabilities Financial liabilities are classiﬁed as either ﬁnancial liabilities ‘at FVTPL’ or ‘other ﬁnancial liabilities’. At the reporting dates, the Group had only ﬁnancial liabilities classiﬁed as ‘other ﬁnancial liabilities’. Other ﬁnancial liabilities Other ﬁnancial liabilities (including borrowings and trade and other payables) are initially recognised at fair value less transaction costs. Subsequently they are measured at amortised cost using the effective interest method. Derecognition of ﬁnancial liabilities The Group derecognises ﬁnancial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire. The difference between the carrying amount of 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 The Group has adopted all IFRS and Interpretations that are relevant to its operations and effective for annual reporting periods beginning on 1 January 2016. The adoption did not have a material impact on the Group’s consolidated ﬁnancial statements. 100 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 101 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) IFRS and IFRIC interpretations in issue but not yet effective At the date of authorization of these consolidated ﬁnancial statements, the following standards and interpretations have been published that are mandatory for the Group’s accounting periods beginning on or after 1 January 2016 or later periods and which the entity has not early adopted: Standards and Interpretations IFRS 9 “Financial Instruments” IFRS 15 “Revenue from Contracts with Customers” IFRS 16 “Leases” Amendments to IAS 7 – Disclosure Initiative Amendments to IFRS 10 and IAS 28 – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture Amendments to IAS 12 – Recognition of Deferred Tax Assets for Unrealised Losses Amendments to IFRS 2 – Classiﬁcation and Measurement of Share-based Payment Transactions Amendments to IAS 40 – Transfers of Investment Property IFRIC 22 Foreign Currency Transactions and Advance Consideration Annual Improvements to IFRSs 2014-2016 Cycle IFRS 9 “Financial Instruments” Effective for annual periods beginning on or after 1 January 2018 1 January 2018 1 January 2019 1 January 2017 Date to be determined by the IASB 1 January 2017 1 January 2018 1 January 2018 1 January 2018 1 January 2018 IFRS 9 issued in November 2009 introduced new requirements for the classiﬁcation and measurement of ﬁnancial assets. IFRS 9 was subsequently amended in October 2010 to include requirements for the classiﬁcation and measurement of ﬁnancial liabilities and for derecognition, and in November 2013 to include the new requirements for general hedge accounting. Another revised version of IFRS 9 was issued in July 2014 mainly to include a) impairment requirements for ﬁnancial assets and b) limited amendments to the classiﬁcation and measurement requirements by introducing a ‘fair value through other comprehensive income’ (FVTOCI) measurement category for certain simple debt instruments. The key requirements of IFRS 9 are: ■ Classiﬁcation and measurement of ﬁnancial assets. All recognised ﬁnancial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement are required to be subsequently measured at amortised cost or fair value. Speciﬁcally, debt investments that are held within a business model whose objective is to collect the contractual cash ﬂows, and that have contractual cash ﬂows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods. Debt instruments that are held within a business model whose objective is achieved both by collecting contractual cash ﬂows and selling ﬁnancial assets, and that have contractual terms that give rise on speciﬁed dates to cash ﬂows that are solely payments of principal and interest on the principal amount outstanding, are generally measured at FVTOCI. All other 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 irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognised in proﬁt or loss. ■ Classiﬁcation and measurement of ﬁnancial liabilities. With regard to the measurement of ﬁnancial liabilities designated as at fair value through proﬁt or loss, IFRS 9 requires that the amount of change in the fair value of the ﬁnancial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch in proﬁt or loss. Changes in fair value attributable to a ﬁnancial liability’s credit risk are not subsequently reclassiﬁed to proﬁt or loss. Under IAS 39, the entire amount of the change in the fair value of the ﬁnancial liability designated as fair value through proﬁt or loss is presented in proﬁt or loss. ■ Impairment. In relation to the impairment of ﬁnancial assets, IFRS 9 requires an expected credit loss model, as opposed to an incurred credit loss model under IAS 39. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reﬂect changes in credit risk since initial recognition. In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognised. ■ Hedge accounting. The new general hedge accounting requirements retain the three types of hedge accounting 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 non-ﬁnancial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an ‘economic relationship’. Retrospective assessment of hedge effectiveness is also no longer required. Enhanced disclosure requirements about an entity’s risk management activities have also been introduced. The standard is effective from 1 January 2018 with early application permitted. The impact of adoption of these standards and interpretations in the preparation of the consolidated ﬁnancial statements in future periods is currently being assessed by management. Management expects to complete the assessment and disclose the impact of adoption in the consolidated ﬁnancial statements for the year ended 31 December 2017. IFRS 15 Revenue from Contracts with Customers In May 2014, IFRS 15 was issued which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 Construction Contracts and the related interpretations when it becomes effective. The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reﬂects the consideration to which the entity expects to be entitled in exchange for those goods and services. Speciﬁcally, the standard provides a single, principles based ﬁve-step model to be applied to all contracts with customers. The ﬁve steps in the model are as follows: ■ ■ 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 ■ Recognise revenue when (or as) the entity satisﬁes a performance obligation. Under IFRS 15, an entity recognises revenue when or as a performance obligation is satisﬁed, i.e. when ‘control’ of the goods or services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been added in IFRS 15 to deal with speciﬁc scenarios. Furthermore, extensive disclosures are required by IFRS 15. The impact of adoption of these standards and interpretations in the preparation of the consolidated ﬁnancial statements in future periods is currently being assessed by management. Management expects to complete the assessment and disclose the impact of adoption in the consolidated ﬁnancial statements for the year ended 31 December 2017. 102 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 103 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) IFRS 16 Leases IFRS 16 Leases brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and ﬁnance leases. Lessor accounting however remains largely unchanged and the distinction between operating and ﬁnance leases is retained. Under IFRS 16 a lessee recognises a right-of-use asset and the 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 use their incremental borrowing rate. As with IAS 17, lessors classify leases as operating of ﬁnance in nature. a lease is classiﬁed as a ﬁnance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. Otherwise, a lease is classiﬁed as an operating lease. For ﬁnance leases a lessor recognises ﬁnance income over the lease term, based on a pattern reﬂecting a constant periodic rate of return on the net investment. a lessor recognises operating lease payments as income on a straight-line basis or, if more representative of the pattern in which beneﬁt from use of the underlying asset is diminished, another systematic basis. 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 a lessee. However, it is not practicable to provide a reasonable estimate of the effect of IFRS 16 until a detailed review has been completed. Management expects to complete the assessment and disclose the impact of adoption in the consolidated ﬁnancial statements for the year ended 31 December 2017. Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture The amendments to IFRS 10 and IAS 28 deal with situations where there is a sale or contribution of assets between an investor and its associate or joint venture. Speciﬁcally, the amendments state that gains or losses resulting from the loss of control of a subsidiary that does not contain a business in a transaction with an associate or a joint venture that is accounted for using the equity method, are recognised in the parent’s proﬁt or loss only to the extent of the unrelated investors’ interests in that associate or joint venture. Similarly, gains and losses resulting from the remeasurement of investments retained in any former subsidiary (that has become an associate or a joint venture that is accounted for using the equity method) to fair value are recognised in the former parent’s proﬁt or loss only to the extent of the unrelated investors’ interests in the new associate or joint venture. The effective date of the amendments has yet to be set by the IASB; however, earlier application of the amendments is permitted. The impact of adoption of these amendments in the preparation of the consolidated ﬁnancial statements in future periods is currently being assessed by management. Amendments to IAS 7 Disclosure Initiative The amendments require an entity to provide disclosures that enable users of ﬁnancial statements to evaluate changes in liabilities arising from ﬁnancing activities. The amendments apply prospectively for annual periods beginning on or after 1 January 2017 with earlier application permitted. The management of the Group does not anticipate that the application of these amendments will have a material impact on the Group’s consolidated ﬁnancial statements. Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses The amendments clarify the following: ■ Decreases below cost in the carrying amount of a ﬁxed-rate debt instrument measured at fair value for which the tax base remains at cost give rise to a deductible temporary difference, irrespective of whether the debt instrument’s holder expects to recover the carrying amount of the debt instrument by sale or by use, or whether it is probable that the issuer will pay all the contractual cash ﬂows; ■ When an entity assesses whether taxable proﬁts will be available against which it can utilise a deductible temporary difference, and the tax law restricts the utilisation of losses to deduction against income of a speciﬁc type (e.g. capital losses can only be set off against capital gains), an entity assesses a deductible temporary difference in combination with other deductible temporary differences of that type, but separately from other types of deductible temporary differences; ■ The estimate of probable future taxable proﬁt may include the recovery of some of an entity’s assets for more than their carrying amount if there is sufficient evidence that it is probable that the entity will achieve this; ■ In evaluating whether sufficient future taxable proﬁts are available, an entity should compare the deductible temporary differences with future taxable proﬁts excluding tax deductions resulting from the reversal of those deductible temporary differences. The amendments apply retrospectively for annual periods beginning on or after 1 January 2017 with earlier application permitted. The impact of adoption of these amendments in the preparation of the consolidated ﬁnancial statements in future periods is currently being assessed by management. IFRIC 22 Foreign Currency Transactions and Advance Consideration The Interpretation clariﬁes that when an entity pays or receives consideration in advance in a foreign currency, the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income is the date of the advance consideration, i.e. when the prepayment or liability in respect of the income received in advance was recognised. If there is more than one advance payment or receipt the date of the transaction for each payment of receipt of advance consideration should be determined. The amendments apply to annual periods beginning on or after 1 January 2018 with earlier application permitted. Entities may elect to apply amendments either retrospectively or prospectively. The management of the Company does not anticipate that the application of this IFRIC will have a material impact on the Group’s consolidated ﬁnancial statements as the Group currently uses the approach prescribed in IFRIC 22. Amendments to IAS 40 Transfers of Investment Property The amendments are intended to clarify that an entity can only reclassify a property to/ from investment property when, and only when, there is evidence that a change in the use of the property has occurred. The amendments emphasise that a change in management’s intentions alone would not be enough to support a transfer of property. The standard has a list of circumstances that evidence a change in use, which is perceived by some as being exhaustive, the amendments make it clear that they are only examples. The amendments apply to annual periods beginning on or after 1 January 2018 with earlier application permitted. Entities may elect to apply them either retrospectively (if it is possible without the use of hindsight) or prospectively. The management of the Group does not anticipate that the application of these amendments will have a material impact on the Group’s consolidated ﬁnancial statements. 4. KEY SOURCES OF ESTIMATION UNCERTAINTY Management has made a number of judgments, estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated ﬁnancial statements in conformity with IFRSs. The estimates and associated assumptions are based on historical experience and other factors that are considered relevant. Actual results may differ from those estimates. Additional information relating to contingencies and commitments is disclosed in Note 30. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that may have a signiﬁcant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁnancial year. 104 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 105 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) Biological assets Biological assets are recorded at fair values less costs to sell. Fair value of the Group’s biological assets was determined by using valuation techniques, as there were no observable market prices near the reporting date for biological assets of the same physical conditions. Fair value is determined using Level 3 of fair value hierarchy and the following key unobservable inputs: Description Fair value as at 31 December 2016 Valuation technique Broilers 2,243,036 Discounted cash ﬂows Breeders held for hatchery eggs production 1,512,225 Discounted cash ﬂows Sows 1,902,652 Discounted cash ﬂows Market hogs 5,504,933 Discounted cash ﬂows Unobservable inputs Average weight of one broiler – kg Poultry meat price – roubles Projected production costs – roubles per kg Number of hatchery eggs produced by one breeder Hatchery egg price – roubles Projected production costs of hatchery egg – roubles Average number of piglets produced by one sow Market price of weaned piglet – roubles Discount rate Average weight of one market hog – kg Pork meat price – roubles per kg Projected production costs – roubles per kg Crops yield – ton/Ha Unharvested crops (except for year- end) 509,012 Discounted cash ﬂows Selling price Projected production costs Value of unobservable inputs Relationship of unobservable inputs to 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 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 2.2 97.3 71.3 161 13.4 7.1 26.8 1,631 13.8% 118.2 86.0 63.0 Not applicable for year- end Not applicable for year- end Not applicable for year- end Among the unobservable inputs stated above, there are several key assumptions that the Group estimates to determine the fair values of biological assets: ■ Expected crops yield (except for year-end); ■ Expected selling prices; ■ Projected production costs and costs to sell; ■ Discount rate. Although some of these assumptions are obtained from published market data, a majority of these assumptions are estimated based on the Group’s historical and projected results. Should key assumptions used in determination of fair value of biological assets have been 10% higher or lower with all other variables held constant, the fair value of biological assets at the reporting date would be higher or (lower) by the following amounts: Expected selling prices Projected production costs and costs to sell Discount rate 31 December 2016 10% increase 10% decrease 1,874,732 (1,202,920) (42,455) (1,794,247) 1,123,164 43,243 Recognition of subsidies receivable The Group recognizes government grants when there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received. Historically, the Group recognized government grants related to reimbursement of interest expense (“interest subsidies”) when management veriﬁed that the loan agreement qualify for subsidizing, because the historical experience showed that this is the point of time when the recoverability of the subsidy became probable. Following stagnation of the economic growth rates and signiﬁcant budget deﬁcit in Russia in 2015 and 2016 the government slowed down subsidy payments in 2016 and in the fourth quarter 2016 announced a new policy on subsidy assignment to agricultural producers - starting from 1 January 2017 accredited banks will provide loans to agricultural producers at reduced rates not exceeding 5% per annum on RUR-denominated loans. The government will then provide a subsidy to the banks compensating the difference between market and factual rates. Considering the negative change in the environment as well as increase in uncertainty regarding collectability of subsidies accrued under the previous policy, management reassessed the timing of the interest subsidy recognition and determined that only subsidies on qualifying loans that are conﬁrmed by Ministry of agriculture shall be recognized. Typically, the Group considers that conﬁrmation is received only when a portion of the subsidy relating to a qualifying loan is collected. The change in estimate resulted in decrease of subsidies receivable balance and increase in interest expense for the year ended 31 December 2016 for 1,285,474 (interest expense subsidies offset the related interest expense). The remaining balance of subsidies receivable at 31 December 2016 consists of only subsidies on qualifying loans that are conﬁrmed by Ministry of agriculture, however, there is still uncertainty regarding recoverability of these receivables. Management believes that it is probable that the balance will be collected based on its interpretations of current legislation. However, the relevant authorities may have differing interpretations, and the effects could be signiﬁcant. 106 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 107 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) Useful lives of property, plant and equipment The Group assesses the remaining useful lives of items of property, plant and equipment at least at each ﬁnancial year-end. If expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate in accordance with IAS 8 “Accounting policies, 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 expense for the period. There have been no signiﬁcant changes in estimates of useful lives of property, plant and equipment during the periods included in these consolidated ﬁnancial statements. Impairment of trademarks All trademarks owned by the Group have been determined to have an indeﬁnite life because the patent securing the Group’s title can be renewed an unlimited number of times and therefore are tested for impairment annually, or more frequently when there is an indication that they may be impaired. Determining whether a trademark is impaired requires an estimation of the recoverable value of the asset, being higher of fair value of value in use. Fair value, which is determined using a relief from royalty method based on 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 than expected, a material impairment loss may arise. Where the recoverable amount determined on a fair value basis indicates impairment, the Group must also compute a value in use in order to determine if the asset is impaired. The carrying amount of trademarks at 31 December 2016 was 1,215,509 (31 December 2015: 1,215,509). No impairment loss was recognised during 2016 and 2015. Details are set out in Note 14. Impairment of property, plant and equipment The Group reviews at each reporting date the carrying amounts of property, plant and equipment to determine whether there is any indication that assets are impaired. This process involves judgment in evaluating the cause for any possible reduction in value, including a number of factors such as changes in current competitive conditions, expectations of growth in the industry, increased cost of 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 such indications exist, management makes an estimate of the asset’s recoverable amount to ensure that it is not less than its carrying value. If the asset’s fair value is not readily determinable or is less than asset’s carrying value plus costs to sell, management necessarily applies its judgment in determining the appropriate cash-generating unit to be evaluated, estimating the appropriate discount rate and the timing and value of the relevant cash ﬂows for the value in-use calculation. Allowance for impairment of receivables and advances to suppliers Management maintains an allowance for impairment of receivables and advances to suppliers in the form of an allowance account equal to estimated losses resulting from the inability of customers and other debtors to make required payments. When evaluating the adequacy of this allowance account, management bases its estimates on the ageing of accounts receivable balances and historical write-off experience, customer creditworthiness and changes in customer payment patterns. If the ﬁnancial condition of customers were to deteriorate, actual write-offs might be higher than expected. As of 31 December 2016 and 2015 the allowance for impairment of receivables was recognized in the amount of 59,480 and 77,840, respectively (see Notes 20, 21) and the allowance of advances to suppliers was recognized in the amount of 81,608 and 113,686, respectively. 5. OPERATING SEGMENTS The Group’s operations are divided into ﬁve segments by types of products produced: poultry, pork, meat processing, grain and feed. Substantially all of the Group’s operations are located within the Russian Federation. All segments have different segment managers responsible for the segments’ operations. The chief operating decision maker (the Chief Executive Officer) is individual responsible for allocating resources to and assessing the performance of each segment of the business. The meat processing segment is involved in the production of a wide range of meat products, including sausages, ham and raw meat. The pork and poultry segments produce and offer distinctive products, such as semi-ﬁnished poultry products, raw meat and other poultry meat products in the poultry segment and raw pork meat in the pork segment. The grain segment is involved in the farming of wheat and other crops. The feed segment is involved in the production of feed for internal use by pork and poultry segments. All ﬁve segments are involved in other business activities, including production of dairy, sale of non-hatchery eggs and other services, which are non-core business activities. The Group evaluates segment performance based on Adjusted EBITDA. Adjusted EBITDA is deﬁned as proﬁt for the period before income tax expense/beneﬁt, interest income and interest expense, net, foreign exchange loss/gain, depreciation and amortisation expense, net change in fair value of biological assets and agricultural produce, write-off of receivables from insurance company, share of loss of a joint venture and loss on disposal of subsidiaries. This is the measure reported to the chief operating decision maker for the purposes of resource allocation and assessment of segment performance. The Group accounts for inter-segment sales and transfers as if the sales or transfers were to third parties. The accounting policies of the reportable segments are the same as the Group’s accounting policies described in Note 2. 108 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 109 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) Segment information for the year ended at 31 December 2016 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 / (loss) before income tax 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 Write-off of receivables from insurance company Share of loss of a joint venture Adjusted EBITDA Supplemental information: Meat-processing 31,667,448 526,538 (4,545,908) (22,795) 31,644,653 - (26,141,947) 5,525,501 (3,743,466) 1,782,035 207,378 (245,885) 1,743,528 245,885 (9,561) (192,501) 639,237 - - - Pork 15,920,146 171,106 - (12,634,006) 3,286,140 861,422 (12,182,666) 4,598,902 (782,107) 3,816,795 (289,198) (964,742) 2,562,855 964,742 (33,764) (22,285) 1,010,334 (861,422) 347,975 - Poultry 47,724,031 1,331,875 (1,340,206) (1,961,921) 45,762,110 (288,114) (40,049,212) 7,386,705 (5,035,890) 2,350,815 (114,744) (1,076,908) 1,159,163 1,076,908 (173,895) 304,147 1,969,279 288,114 - - Grain 3,055,762 47,426 - (1,956,712) 1,099,050 (477,482) (2,873,596) (295,316) (267,828) (563,144) 4,885 (94,361) (652,620) 94,361 (1,710) (3,026) 295,430 477,482 - - Feed Total operating segments 28,727,843 127,095,230 - - (28,146,309) 581,534 - 2,076,945 (5,886,114) (44,721,743) 82,373,487 95,826 (28,109,353) (109,356,774) 618,490 (404,658) 213,832 319,704 (930,799) (397,263) 930,799 (10,723) (307,559) 590,646 - - - 17,834,282 (10,233,949) 7,600,333 128,025 (3,312,695) 4,415,663 3,312,695 (229,653) (221,224) 4,504,926 (95,826) 347,975 - Corporate Intersegment Total consolidated 126,251 126,251 - (82,545) 43,706 - (78,511) 47,740 (2,645,471) (2,597,731) 820,560 (731,984) (2,509,155) 731,984 (420,448) (399,863) 155,439 - - 200,191 (44,804,288) (783,561) - 44,804,288 - (435,889) 45,212,941 (27,236) 81,107 53,871 (306,364) 306,364 53,871 (306,364) 306,364 - - 435,889 - - 82,417,193 1,419,635 (5,886,114) - 82,417,193 (340,063) (64,222,344) 17,854,786 (12,798,313) 5,056,473 642,221 (3,738,315) 1,960,379 3,738,315 (343,737) (621,087) 4,660,365 340,063 347,975 200,191 2,426,588 3,968,435 4,623,716 209,917 805,900 12,034,556 (2,241,852) 489,760 10,282,464 Expenditure for segment property, plant and equipment Income tax expense (beneﬁt) 1,456,365 79,442 3,751,235 71,961 2,938,689 (67,967) 1,204,436 8,978 191,254 50,983 9,541,979 143,397 328,777 (70,536) - - 9,870,756 72,861 * Operating expenses include selling, general and administrative expense, other operating income, net and share of loss of a joint venture. ** Other income (expense), net presents interest income and other income/expense as a combined line item. 110 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 111 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) Segment information for the year ended at 31 December 2015 comprised: Meat-processing Pork Poultry 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 / (loss) before income tax 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) 29,150,254 416,945 (3,954,954) (32,016) 29,118,238 - (24,835,957) 4,314,297 (3,060,987) 1,253,310 (163,317) (202,541) 887,452 202,541 (10,405) 205,719 467,157 - - 1,752,464 1,339,934 (110,423) 16,579,185 172,835 - (11,502,192) 5,076,993 (1,387,143) (10,529,115) 4,662,927 (662,041) 4,000,886 (73,852) (356,155) 3,570,879 356,155 (11,102) 71,822 869,643 1,387,143 42,569 6,287,109 1,932,674 6,698 44,590,211 1,511,443 (1,388,201) (2,640,958) 41,949,253 (283,880) (35,901,044) 8,405,287 (5,061,999) 3,343,288 794,746 (628,523) 3,509,511 628,523 (175,026) (614,651) 1,862,574 283,880 - 5,494,811 4,390,494 (8,040) * Operating expenses include selling, general and administrative expense, other operating income, net and share of loss of a joint venture. ** Other income (expense), net presents interest income and other income/expense as a combined line item. Items included within Corporate mainly include payroll and other expenses of the holding company. No single customer contributed 10% or more to the Group’s revenue for both 2016 and 2015. Segment assets and liabilities are not disclosed, as this information is not provided to the chief operating decision maker. Grain 2,580,713 57,512 - (2,117,129) 463,584 326,376 (1,827,087) 1,080,002 (242,294) 837,708 15,555 (14,277) 838,986 14,277 (330) 17,144 167,236 (326,376) - 710,937 812,359 5,962 Feed 27,855,810 - - Total operating segments 120,756,173 2,158,734 (5,343,155) (27,458,461) (43,750,756) 397,349 - 77,005,417 (1,344,647) (27,033,691) (100,126,894) 822,119 (590,873) 231,246 (96,885) (192,010) (57,649) 192,010 (25,059) 129,179 399,855 - - 19,284,632 (9,618,194) 9,666,438 476,247 (1,393,506) 8,749,179 1,393,506 (221,922) (190,787) 3,766,465 1,344,647 42,569 Corporate Intersegment Total consolidated 27,205 27,205 - - 27,205 - (13,484) 13,721 (2,089,879) (2,076,158) (314,189) (430,748) (2,821,095) 430,748 (523,438) 837,589 60,060 - - (43,750,756) (647,109) - 43,750,756 - 180,920 43,420,162 (149,674) 93,420 (56,254) (459,569) 459,488 (56,335) (459,488) 459,598 - - (180,920) 77,032,622 1,538,831 (5,343,155) - 77,032,622 (1,163,727) (56,720,216) 19,148,679 (11,614,653) 7,534,026 (297,511) (1,364,766) 5,871,749 1,364,766 (285,762) 646,802 3,826,525 1,163,727 - 42,569 638,336 14,883,657 (2,016,136) (237,145) 12,630,376 2,034,685 4,421 10,510,146 (101,382) 459,969 (47,678) - - 10,970,115 (149,060) 112 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 113 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) 6. COST OF SALES 8. INTEREST EXPENSE, NET Cost of sales for the years ended 31 December 2016 and 2015 comprised: Interest expense, net for the years ended 31 December 2016 and 2015 comprised: Raw materials and goods for resale Personnel (excluding pension costs) Depreciation Utilities Pension costs Other Total cost of sales 2016 44,264,751 7,996,612 4,213,810 3,480,318 1,477,768 2,789,085 2015 39,911,889 6,962,848 3,454,254 3,174,341 1,286,236 1,930,648 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 64,222,344 56,720,216 Total government grants for compensation of interest expenses Raw materials and goods for resale include as an offset subsidies received from local governments in the amount of 67,787 and 33,902 for the years ended 31 December 2016 and 2015, respectively. These subsidies were received based on square of cultivated land and volumes of meat and eggs produced. Total interest expense, net 9. OTHER EXPENSES, NET 7. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the years ended 31 December 2016 and 2015 comprised: Other expenses, net for the years ended 31 December 2016 and 2015 comprised: 2016 4,920,223 54,349 (492,099) 4,482,473 (1,070,023) 325,865 (744,158) 3,738,315 2016 621,087 25,372 (347,975) 298,484 2015 3,976,055 49,231 (92,545) 3,932,741 (2,616,550) 48,575 (2,567,975) 1,364,766 2015 (646,802) 63,529 - (583,273) Foreign exchange gain (loss) Other income, net Write-off of receivables from insurance company Total other expense, net 10. INCOME TAX All of the Group’s taxes are levied and paid in the Russian Federation. 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 2016 and 2015 were as follows: Current tax expense Deferred tax beneﬁt Total income tax (expense) beneﬁt 2016 (205,983) 133,122 (72,861) 2015 (93,882) 242,942 149,060 Personnel (excluding pension costs) Transportation Taxes (other than income tax) Pension costs Advertising and marketing Materials and supplies Rent expenses Depreciation and amortization Security services Audit, consulting and legal fees Information technology and communication services Utilities Change in bad debt allowance and other write-off Veterinary services Insurance Repairs and maintenance Bank charges Other Total selling, general and administrative expenses 2016 4,541,506 1,656,604 752,460 698,965 676,903 666,390 458,576 446,535 431,931 322,062 300,026 237,292 231,981 147,531 130,138 72,467 25,676 1,211,670 13,008,713 2015 4,216,641 1,442,255 687,737 675,212 657,163 902,606 673,789 372,271 427,248 191,010 231,153 222,247 32,063 126,251 103,208 106,012 30,212 850,064 11,947,142 114 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 115 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) The income tax beneﬁt (expense) can be reconciled to the theoretical tax provision at the statutory rate for the years ended 31 December 2016 and 2015 as follows: Proﬁt before income tax Proﬁt before income tax of entities taxed at zero rates (agricultural entities and other tax regimes) 2016 1,960,379 2,601,653 2015 5,871,749 7,495,350 Loss before income tax of generally taxed entities (641,274) (1,623,601) Statutory income tax rate (agricultural entities and other tax regimes) Statutory income tax rate (general) Theoretical income tax beneﬁt 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 Other Income tax expense (beneﬁt) 0% 20% (128,255) 122,313 - 78,803 72,861 0% 20% (324,720) 103,359 47,953 24,348 (149,060) The following amounts, determined after appropriate offsetting, are presented in the consolidated statement of ﬁnancial position as of 31 December 2016 and 2015: Deferred tax asset Deferred tax liability Net deferred tax asset (liability) 31 December 2016 31 December 2015 479,624 (420,299) 59,325 331,300 (405,097) (73,797) The movement in the net deferred tax liability for the year ended 31 December 2016 comprised: Property, plant and equipment and investment property Trade receivables Other assets and liabilities Tax loss carry forward Net deferred tax liability 31 December 2015 Recognised in proﬁt or loss 31 December 2016 (563,093) (92,840) 144,585 437,551 (73,797) 25,376 (5,315) (93,201) 206,262 133,122 (537,717) (98,155) 51,384 643,813 59,325 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 1 January 2015 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) Starting from 2017 the Group can offset only 50% of taxable proﬁt of each subsidiary against tax loss carry forwards accumulated by the subsidiary and the Group’s tax loss carry forwards have no date of expiration (after amendments to the Russian Tax Code effective 1 January 2017). 11. PROPERTY, PLANT AND EQUIPMENT, NET The following table represents movements in property, plant and equipment for the years ended 31 December 2016 and 2015: Land Buildings, infrastructure and leasehold improvements Machinery and equipment Vehicles Other Construction in progress Total Cost Balance as at 1 January 2015 Additions Disposals Disposal of subsidiary 2,563,605 36,971,546 19,356,462 3,547,983 146,047 7,590,035 70,175,678 82,969 (29,344) (188) 4,769,768 3,567,109 837,617 (59,216) (96,188) (268,031) (151,602) (22,159) (11,473) 61,177 (1,931) (81) 1,268,643 10,587,283 (17,596) (39,210) (527,720) (169,299) As at 31 December 2015 2,617,042 41,585,910 22,633,381 4,222,525 205,212 8,801,872 80,065,942 Additions Disposals 143,306 (12,201) 3,440,362 3,487,031 781,968 52,341 441,998 8,347,006 (106,341) (382,483) (114,006) (13,152) (19,091) (647,274) As at 31 December 2016 2,748,147 44,919,931 25,737,929 4,890,487 244,401 9,224,779 87,765,674 Accumulated depreciation or impairment loss Balance as at 1 January 2015 Depreciation charge Eliminated on disposals Eliminated on disposal of subsidiary As at 31 December 2015 Depreciation charge Eliminated on disposals As at 31 December 2016 Carrying amounts - - - - - - - - (6,552,580) (8,258,922) (1,520,374) (85,448) (1,321,935) (1,872,860) (429,257) (25,554) 8,027 62,408 201,937 147,349 10,305 4,987 1,931 73 (7,804,080) (9,919,540) (1,797,295) (108,998) (1,478,315) (2,179,253) (558,541) (41,858) 88,707 367,507 104,142 7,106 (9,193,688) (11,731,286) (2,251,694) (143,750) - - - - - - - - (16,417,324) (3,649,606) 359,244 77,773 (19,629,913) (4,257,967) 567,462 (23,320,418) At 31 December 2015 2,617,042 33,781,830 12,713,841 2,425,230 96,214 8,801,872 60,436,029 At 31 December 2016 2,748,147 35,726,243 14,006,643 2,638,793 100,651 9,224,779 64,445,256 Net book values of buildings, infrastructure and leasehold improvements include 89,585 and 122,484 of leased buildings and infrastructure as of 31 December 2016 and 2015, respectively. Net book values of vehicles and machinery and equipment include 437,571 and 349,636 of leased equipment as of 31 December 2016 and 2015, respectively. Advances paid for acquisition and construction of property, plant and equipment are included in construction in progress in the amount of 1,878,755 and 2,611,365 as at 31 December 2016 and 2015, respectively. 116 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 117 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) 12. INVESTMENT PROPERTY The Group’s investment property consists of commercial units located in Vostochnoe Biryulevo region of Moscow and land plots. The changes in the carrying amount of investment property for the years ended 31 December 2016 and 2015 were as follows: The recoverable amount of both cash-generating units is determined based on a value in use calculation, which uses cash ﬂow projections based on ﬁnancial budgets approved by the management. The management believes that any reasonably possible change in the key assumptions on which recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the cash-generating unit. Land Buildings Total 14. INTANGIBLE ASSETS Cost Balance as at 1 January 2015 Reconstruction and modernisation Transfer into other non-current assets Sale of land plots As at 31 December 2015 Reconstruction and modernisation As at 31 December 2016 Accumulated depreciation or impairment loss Balance as at 1 January 2015 Depreciation charge As at 31 December 2015 Depreciation charge As at 31 December 2016 Carrying amounts At 31 December 2015 At 31 December 2016 489,679 - (100,801) (113,929) 274,949 - 274,949 - - - - - 274,949 274,949 183,814 28,232 - - 212,046 17,487 229,533 (48,565) (5,659) (54,224) (6,582) (60,806) 157,822 168,727 673,493 28,232 (100,801) (113,929) 486,995 17,487 504,482 (48,565) (5,659) (54,224) (6,582) (60,806) 432,771 443,676 For disclosure purpose only, the Group determined the fair value of the buildings as at 1 January 2014 (the date of transition to IFRS) based on the income approach. The fair value is equal to approximately 1 billion roubles and it did not signiﬁcantly change in subsequent years. The Group recognised the following amounts in respect of the investment property in proﬁt or loss: Rental income from investment property Direct operating expenses arising from investment property that generated rental income during the year Operating proﬁt from investment property 13. GOODWILL 2016 171,648 (134,733) 36,915 2015 188,009 (90,018) 97,991 There have been no changes in the carrying amount of goodwill for the years ended 31 December 2016 and 2015. Goodwill has been allocated for impairment testing purposes to the following cash-generating units, being also operating segments of the Group, and represents the lowest level at which goodwill is monitored for impairment by management: ■ Meat-processing – 250,247 thousand roubles; ■ Poultry – 306,944 thousand roubles. The following table represents movements of intangible assets for the years ended 31 December 2016 and 2015: Computer software Indeﬁnite life trademarks Other intangible assets Total Cost Balance at 1 January 2015 384,302 1,215,509 Additions Balance at 31 December 2015 Additions 230,845 615,147 469,996 - 1,215,509 - 30,847 42,498 73,345 85,637 1,630,658 273,343 1,904,001 555,633 Balance at 31 December 2016 1,085,143 1,215,509 158,982 2,459,634 Accumulated amortisation and impairment loss Balance at 1 January 2015 Amortisation expense Balance at 31 December 2015 Amortisation expense Balance at 31 December 2016 Carrying amounts At 31 December 2015 At 31 December 2016 (101,429) (147,371) (248,800) (169,588) (418,388) - - - - - (16,491) (34,807) (51,298) (40,285) (91,583) (117,920) (182,178) (300,098) (209,873) (509,971) 366,347 666,755 1,215,509 1,215,509 22,047 67,399 1,603,903 1,949,663 Computer software Software is amortised over its useful life ranging from 2 to 10 years. Indeﬁnite life trademarks Kurinoe Tsarstvo (“Куриное Царство”) trademark The carrying value of the Kurinoe Tsarstvo trademark was 744,935 as of 31 December 2016 and 2015. As of 31 December 2016 and 2015, management tested the Kurinoe Tsarstvo trademark for impairment and determined that the trademark was not 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 beyond that period have been extrapolated using a steady 3.6% per annum growth rate, which is the projected long-term average general inﬂation in Russia. 118 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 119 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) The key assumptions used for impairment testing purposes are set out below. The following table represents movements in sows: In percent Discount rate Terminal value growth rate Royalty rate Trademark revenue growth rate (average of next ﬁve years) 31 December 2016 31 December 2015 18.8% 3.6% 3.3% 4.7% 18% 5% 3.3% 8% The Group expected and achieved a major increase in sales under that trademark in 2015 driven by massive advertising campaign in Central part of Russia and increase in production capacity after Lisko acquisition. The values assigned to the key assumptions represented management’s assessment of future trends in the relevant industries and were based on historical data from both external and internal sources. The management believes that any reasonably possible change in the key assumptions on which recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the trademark. Cherkizovo (“Черкизово”) trademark The carrying value of the Cherkizovo trademark was 435,737 as of 31 December 2016 and 2015. As of 31 December 2016 and 2015, management tested the Cherkizovo trademark for impairment and determined that the trademark was not impaired. The fair value was determined using a relief from royalty method based on current year actual sales by trademark and royalty rate of 3.3%. Potential royalty from one-year sales covers the carrying value of the trademark and therefore the Group did not make a detailed calculation for the whole life of the trademark. The management believes that any reasonably possible change in the key assumptions on which recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the trademark. 15. BIOLOGICAL ASSETS Non-current biological asset The balances of non-current biological assets were as follows: 31 December 2016 31 December 2015 Units Carrying amount Units Carrying amount Sows, heads Cattle, heads 90,959 1,902,652 434 24,062 Total bearer non-current biological assets 91,393 1,926,714 76,640 423 77,063 1,597,495 20,338 1,617,833 Balance at 1 January 2015 Increase due to purchases and breeding costs of growing livestock Decrease due to sale Loss arising from changes in fair value less estimated point-of-sales costs Balance at 31 December 2015 Increase due to purchases and breeding costs of growing livestock Decrease due to sale Loss arising from changes in fair value less estimated point-of-sales costs Balance at 31 December 2016 Amount 1,749,344 432,481 (537,051) (47,279) 1,597,495 1,110,778 (755,422) (50,199) 1,902,652 Current biological asset and related work-in progress All current biological assets are consumable except for breeders, which are bearer biological assets. The balances of current biological assets were as follows: 31 December 2016 31 December 2015 Units Carrying amount Units Carrying amount 870,402 870,402 5,504,933 5,504,933 799,184 799,184 4,232,255 4,232,255 Pork Market hogs, heads Poultry Broilers, heads 28,828,752 2,243,036 29,890,640 Breeders, heads (bearer biological assets) 2,440,969 1,512,225 2,402,262 Hatchery eggs, quantity Other Unharvested crops, hectares Work-in progress related to cultivation of crops Total current biological assets and related work-in progress 31,269,721 3,755,261 32,292,902 20,972,292 224,085 21,195,577 414 25,682 31,586 509,012 687,604 10,712,481 435 26,482 1,728,769 2,602,867 4,331,636 287,676 30,028 406,427 541,653 9,829,675 120 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 121 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) The following table represents movements in the most material classes of the current biological assets: The main crops of the Group’s agricultural production and output were as follows (in thousands of tonnes): Pork Broilers Breeders Unharvested crops and related WIP Total Balance at 1 January 2015 4,870,838 1,860,688 1,892,419 444,534 9,068,479 Increase due to purchases and gain arising from cost inputs 11,154,812 33,041,422 1,083,897 2,293,804 47,573,935 Transfer to consumable biological assets - 810,452 (810,452) - - Decrease due to sale or harvest of assets (16,406,350) (38,968,269) Disposal of pigs due to African Swine Fever (271,610) - - - (2,523,201) (57,897,820) - (271,610) Gain arising from changes in fair value less estimated point-of-sales costs 4,884,565 4,984,476 437,003 732,943 11,038,987 Balance at 31 December 2015 4,232,255 1,728,769 2,602,867 948,080 9,511,971 Increase due to purchases and gain arising from cost inputs 12,403,964 38,125,785 1,053,872 3,737,790 55,321,411 Transfer to consumable biological assets - 948,803 (948,803) - - Decrease due to sale or harvest of assets (15,749,040) (43,279,009) Disposal of pigs due to African Swine Fever (6,281) - - - (3,250,078) (62,278,127) - (6,281) Gain (loss) arising from changes in fair value less estimated point-of-sales costs 4,624,035 4,718,688 (1,195,711) (239,176) 7,907,836 Balance at 31 December 2016 5,504,933 2,243,036 1,512,225 1,196,616 10,456,810 Reconciliation of net change in fair value of biological assets and agricultural produce for the years ended 31 December 2016 and 2015 are as follows: Corn Winter wheat Spring wheat Pea Soya bean 2016 183 136 37 26 24 The production output of pork and poultry segments of the Group were as follows (in thousands of tonnes): Pork meat Poultry meat 2016 185 500 2015 111 106 42 17 17 2015 169 470 Key inputs in fair value measurement of biological assets together with sensitivity to reasonably possible changes in those inputs are disclosed in Note 4. 16. INVESTMENTS IN JOINT VENTURE During the year ended 31 December 2012 the Group, together with Grupo Corporativo Fuertes, S.L., established a joint venture, LLC Tambovskaya Indeika. The joint venture’s primary business is breeding of turkey. The joint venture started construction of an integrated full cycle turkey production complex in 2013 and started operations in November 2016. Summarised ﬁnancial information in respect of the Group’s joint venture and its reconciliation to the carrying amount of the interest in the joint venture are set out below. The summarised ﬁnancial information below represents amounts shown in the joint venture’s ﬁnancial statements prepared in accordance with IFRSs adjusted by the Group for equity accounting purposes. 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 2016 2015 31 December 2016 31 December 2015 (3,303,761) (4,974,784) Cash and cash equivalents (681,645) (174,349) 3,877,070 (231,727) (340,063) 3,303,761 681,645 (1,163,727) Other current assets Non-current assets Trade and other payables Short-term borrowings Other current liabilities Long-term borrowings Other 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 14,952 1,167,530 8,426,574 (244,500) (1,033,401) (176,295) (7,844,353) (118,963) 191,544 50% 95,772 1,965,700 2,061,472 195,016 697,494 6,192,398 (4,700) - (9,702) (6,359,617) (118,963) 591,926 50% 295,963 1,005,700 1,301,663 *the Notes are considered to represent an ‘in substance’ equity interest in the joint venture. The Group, together with the second venturer, expect to legally convert the Notes to an equity investment in the joint venture in 2017. 122 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 123 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) Revenue Loss for the year and total comprehensive loss for the year The Group’s share of loss of a joint venture The above loss for the year includes the following: Depreciation and amortisation Interest income Interest expense Income tax 17. LONG-TERM DEPOSITS IN BANKS Deposits in Gazprombank Total long-term deposits in banks 18. INVENTORIES Raw materials Spare parts Work in-process Finished goods Total inventory 19. TAXES RECOVERABLE AND PREPAID Value added tax Other taxes Total tax recoverable and prepaid, net 2016 626,605 (400,383) (200,191) 2016 60,270 (21,707) 3,098 (2,838) CCY RUR Effective rate, % Maturity 31 December 2016 31 December 2015 8% 2019 641,365 641,365 641,365 641,365 31 December 2016 31 December 2015 7,784,431 693,730 333,379 1,790,578 9,655,054 742,454 311,393 1,549,654 10,602,118 12,258,555 31 December 2016 31 December 2015 1,694,821 209,965 1,904,786 2,570,134 265,853 2,835,987 20. TRADE RECEIVABLES, NET Trade receivables Less: allowance for doubtful trade receivables Total trade receivables, net 31 December 2016 31 December 2015 4,988,952 (46,068) 4,942,884 4,492,507 (47,516) 4,444,991 The following table summarizes the changes in the allowance for doubtful trade receivables for the years ended 31 December 2016 and 2015: 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 21. 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 2016 47,516 29,876 (31,324) 46,068 2015 99,071 20,239 (71,794) 47,516 31 December 2016 31 December 2015 1,100,598 4,374 301,913 (13,412) 1,417,074 4,916 390,353 (30,324) 1,393,473 1,782,019 The following table summarizes the changes in the allowance for doubtful other receivables for the years ended 31 December 2016 and 2015: 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 2016 30,324 25,484 (42,396) 13,412 2015 8,270 23,163 (1,109) 30,324 124 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 125 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) 22. CASH AND CASH EQUIVALENTS 25. NON-CONTROLLING INTERESTS 31 December 2016 31 December 2015 The following table summarises the information relating to each of the Group’s subsidiaries that has material NCI, before any intra- group eliminations: RUR-denominated cash at banks EURO-denominated cash at banks USD-denominated cash at banks Bank deposits Cash in hand Total 227,208 3,411 65,759 700,951 4,874 1,002,203 468,173 74 84,997 5,002,812 4,768 5,560,824 Bank deposits are denominated in roubles and have original maturity of less than 3 months. 23. OTHER CURRENT ASSETS Prepaid expenses Prepaid interest expense Receivables from insurance company Loans receivable Other assets Total other current assets 31 December 2016 31 December 2015 151,388 372,470 - 10,892 88 534,838 182,551 - 319,987 105,919 4,109 612,566 In the last week of December 2014 and in January 2015, African Swine Fever (further – ASF) was discovered at Group’s units in Orel region, which has a big population of wide boars and high ASF risks. Pigs from that unit were sent to Voronezh unit for fattening, which caused a transmission of the disease. As a result of the ASF outbreak, the Group closed two units in the Orel and Voronezh regions and slaughtered and disposed of approximately 50,000 heads of pigs. All of the disposed animals were insured and the Group expected to receive full compensation equal to their cost and therefore accrued the amount of expected compensation as receivables from insurance company at 31 December 2015. Subsequently in 2016, the Group lost a court case against the insurance company and wrote-off the related receivables. 24. SHAREHOLDER’S EQUITY Share capital As of 31 December 2016 and 2015, issued shares of the Company had a par value of 0.01 roubles. The total number of authorized shares was 54,702,600 and the number of issued shares was 43,963,773. All issued and outstanding shares have equal voting rights. The Company is authorized to issue preferred shares not exceeding 25% of its ordinary share capital. No such shares are currently issued. Dividends In accordance with Russian legislation, earnings available for dividends are limited to retained earnings of the Company, calculated in accordance with statutory rules in local currency. On April 2016 dividends of approximately 22.77 Russian roubles per share (998,771 in total) were approved at the extraordinary shareholders’ meeting and have been fully paid during the year ended 31 December 2016. On 6 April 2015 and 29 September 2015 dividends of approximately 54.60 and 22.75 roubles 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. As at 31 December 2016 and for 2016 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 increase in cash and cash equivalents 11.8% 1,999,701 3,129,030 (126,014) (1,014,595) 3,988,122 470,598 5,750,462 (884,547) (884,547) (104,377) 588,622 (181,676) (391,648) 15,298 4.9% 5,498,317 5,037,466 (1,466,801) (8,954,936) 114,046 5,633 31,861,303 (1,706,366) (1,706,366) (84,274) 539,779 (698,639) 48,558 (110,302) 7,498,018 8,166,496 (1,592,815) (9,969,531) 4,102,168 476,231 37,611,765 (2,409,081) (2,409,081) (179,671) 1,128,401 (880,315) (343,090) (95,004) As at 31 December 2015 and for 2015 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 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 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 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) 1,511,101 121,419 126 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 127 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) 26. BORROWINGS This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings, which are measured at amortised cost. For more information about the Group’s exposure to interest rate, foreign currency and liquidity risk, see Note 29. Terms and conditions of outstanding loans were as follows: Principal payments are due from 2017 to 2022. The amount outstanding of loans was 12,624,909 and 9,190,801 as of 31 December 2016 and 31 December 2015, respectively. Rosselkhozbank Borrowings from Rosselkhozbank consist of twenty four rouble and one euro denominated long-term lines of credit with ﬁxed interest rates ranging from 10.00% to 15.00% per annum. Principal payments are due from 2017 to 2023. The amount outstanding was 2,274,894 and 3,218,894 as of 31 December 2016 and 31 December 2015, respectively. Nominal interest rate EIR* Adjusted EIR** Year of maturity 31 December 2016 31 December 2015 Current Non-current Current Non-current Bank VTB Bonds Bank loans Factoring Other borrowings Interest payable Finance lease liabilities Total borrowings 12.50% 12.50% 12.50% 2020 - 5,000,000 2,500,000 5,000,000 1.20%-15.00% 10.81% 7.21% 2017-2024 13,079,826 19,099,708 21,845,147 10,830,813 10.81%-11.56% 10.81% 10.81% - - - 2017 2023 628,933 - 303,310 - - 10,947 - 10,947 298,588 - 363,084 - 8.57%-16.62% 14.16% 14.16% 2017-2024 115,650 359,049 81,476 276,987 14,122,997 24,469,704 25,093,017 16,118,747 * EIR represents the weighted average interest rate on outstanding loans. ** 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 8 for further disclosure of government subsidies related to interest on borrowings. As of 31 December 2016, the Group’s borrowings are denominated in the following currencies: 37,867,221 in Russian roubles and 725,480 in Euro. As of 31 December 2015, the Group’s borrowings were denominated in the following currencies: 40,874,513 in Russian roubles and 337,251 in Euro. Interest on the majority of borrowings is paid on a monthly or quarterly basis, with the exception of bonds, for which the interest is paid on a semi-annual basis. Bonds Bonds due in October 2020 In October 2015, the Group placed 5,000,000 bonds in roubles at par value (1,000 roubles at the issuance date) with a maturity date in October 2020. The coupon rate on the bonds, payable semi-annually, is set at 12.5% per annum. The Group accounts for these instruments at amortized cost. Bank loans Sberbank of Russia Borrowings from the Sberbank of Russia consist of one long-term euro denominated bank loan with an interest set at 2.50% per annum, fourteen long-term and eleven short-term rouble denominated lines of credit with interest ranging from 9.50% to 13.10% per annum. Principal payments are due from 2017 to 2024. The amount outstanding was 10,678,385 and 15,950,933 as of 31 December 2016 and 31 December 2015, respectively. Gazprombank Borrowings from Bank VTB consist of one long-term euro denominated loan with an interest set at 2.01% per annum, four long-term and three short-term rouble denominated lines of credit with interest ranging from 10.00% to 12.25% per annum. Principal payments are due from 2017 to 2018. Amount outstanding was 1,798,954 and 2,644,099 as of 31 December 2016 and 31 December 2015, respectively. Alfa bank Borrowings from Alfa Bank consist of two long-term euro denominated loan with an interest rate of 4.10% per annum, thirteen long- term rouble denominated loans and one short-term rouble denominated loan with an interest ranging from 8.76% to 10.80% per annum. Principal of the long-term loan is due on maturity from 2017 to 2019. The amount outstanding was 4,803,644 and 1,627,648 as of 31 December 2016 and 31 December 2015, respectively. Unused lines of credit The total amount of unused credit on lines of credit as of 31 December 2016 is 33,627,605. The unused credit can be utilized from 2017 to 2020 with expiration of available amounts varying as follows: 10,183,972 expires by 30 April 2017, 15,830,262 expires by 31 December 2018, 3,202,000 expires by 30 April 2019, 4,411,371 expires by September 2020. Collateral under borrowings Shares of and participating interests in the following Group companies are pledged as collateral under certain borrowings: as of 31 December 2016: JSC Vasiljevskaya LLC Cherkizovo Pork LLC Kuznetsovsky kombinat LLC Kurinoe Tsarstvo – Bryansk JSC Kurinoe tsarstvo LLC Lisko Broiler 31 December 2016 31 December 2015 51% 25% 100% 99% 100% 99% 51% 25% 100% 99% 100% 99% Non-current biological assets with a carrying value of 114,050 and 152,246 were pledged as security under certain borrowings as of 31 December 2016 and 2015, respectively. Current biological assets with a carrying value of 380,765 and 485,251 were pledged as security under certain borrowings as of 31 December 2016 and 2015, respectively. Property, plant and equipment with a carrying value of 12,770,216 and 16,563,987 was pledged as security under loan agreements as of 31 December 2016 and 2015, respectively. Borrowings from Gazprombank consist of two long-term euro denominated loans with interest ranging from 1.20% to 3.40% per annum, eight long-term and twenty six short-term rouble denominated loans with interest ranging from 9.50% to 12.60% per annum. Notes receivable, net with a carrying value of 510,000 and 300,000 were pledged as security under loan agreements as of 31 December 2016 and 2015, respectively. 128 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 129 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) Certain signiﬁcant loan agreements with the Sberbank of 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 2016. Finance leases liabilities The Group uses certain ﬁxed assets under leasing contracts that qualiﬁed for treatment as ﬁnance leases. The lower of the incremental borrowing rate and the rate implicit in the lease agreement was used in capitalising the leases. Financial lease liabilities are payables as follows: As at 31 December 2015 and for 2015 Not later than 1 year Between 1 and 5 years Later than 5 years At 31 December 2015 Future minimum lease payments Portion related to interest Present value of minimum lease payments At 31 December 2016 Future minimum lease payments Portion related to interest Present value of minimum lease payments 27. TAX RELATED LIABILITIES Value added tax Payroll related taxes Property tax Personal income tax withheld Land tax Transportation tax Other taxes Total tax related liabilities 125,255 43,779 81,476 171,607 55,927 115,680 290,264 85,587 204,677 401,733 94,677 307,056 86,401 14,091 72,310 52,012 5,982 46,030 31 December 2016 31 December 2015 379,843 258,464 113,517 63,186 10,484 2,599 21,307 849,400 313,552 213,792 165,934 69,858 12,392 5,673 9,143 790,344 28. 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 2016 and 2015 are as follows: 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 31 December 2016 31 December 2015 Carrying value Fair value Carrying value Fair value 510,000 641,657 111,663 504,034 631,034 111,663 300,000 641,365 96,379 296,044 601,369 96,379 4,942,884 4,942,884 4,444,991 4,444,991 1,393,473 1,393,473 10,892 10,892 1,782,019 425,906 1,782,019 425,906 Cash and cash equivalents 1,002,203 1,002,203 5,560,824 5,560,824 8,612,772 8,596,183 13,251,484 13,207,532 Financial liabilities not measured at fair value Amortised cost: Borrowings, other than ﬁnance lease* 38,118,002 36,304,998 40,853,301 39,545,901 Financial lease liabilities Trade payables Payables for non-current assets Payroll related liabilities Other payables and accruals 474,699 436,848 358,463 336,368 8,608,271 8,608,271 8,461,657 8,461,657 1,061,629 1,061,629 1,394,940 1,394,940 362,395 362,395 1,445,128 1,372,176 269,751 1,445,128 1,372,176 269,751 50,019,936 48,169,081 52,760,476 51,430,981 * at 31 December 2016 the Group used 11.7% as market rate of cost of debt for the fair value estimation (for borrowings nominated in RUB). That rate of the cost of debt excludes the effect of subsidies (12.9% at 31 December 2015). Financial risk management The main risks arising from the Group’s ﬁnancial instruments are capital risk management, interest rate risk, credit risk and liquidity risk. Management considers that foreign currency risk is not material to the Group, because the Group has no material outstanding balances denominated in foreign currencies. The Group’s management identiﬁes measures and manages ﬁnancial risks in accordance with the Group’s policies and procedures. 130 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 131 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) Capital risk management 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. The management of the Group reviews the capital structure on a regular basis. As part of this review, management considers the cost of capital and the risks associated with each class of capital. Credit risk Credit risk refers to the risk that counterparty may default on its contractual obligations resulting in ﬁnancial loss to the Group. Financial assets which potentially subject the Group to credit risk consist primarily of trade and other receivables, long-term deposits, notes receivable and cash in current and deposit accounts with banks and other ﬁnancial institutions. 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 31 December 2016 31 December 2015 641,365 510,000 111,663 4,942,884 1,393,473 10,892 997,329 8,607,606 641,365 300,000 96,379 4,444,991 1,782,019 425,906 5,556,056 13,246,716 Trade receivables 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 2016 31 December 2015 858,116 774,955 307,474 302,699 285,520 2,414,120 4,942,884 725,702 742,947 208,630 262,253 367,084 2,138,375 4,444,991 Trade receivables disclosed above include amounts (see below for aged analysis) that are past due at the end of the reporting period for which the Group has not recognised an allowance for doubtful debts because there has not been a signiﬁcant change in credit quality and the amounts are still considered recoverable. The ageing of trade receivables that were not impaired was as follows: 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 31 December 2016 31 December 2015 4,165,808 729,529 31,725 15,822 - 4,082,044 321,957 18,677 7,086 15,227 4,942,884 4,444,991 Other receivables Other receivables disclosed above mainly consists of subsidies receivable from regional Ministries of agriculture. Timing of collection depends on availability of budget funds and on average is approximately 6 months. In 2016 management carefully reviewed the recoverability of the balance and reassessed timing of subsidy recognition, see Note 4. At 31 December 2016, the amount of subsidies receivable outstanding more than one year was 508,460 (at 31 December 2015: 199,034). Cash and cash equivalents and long-term deposits The credit risk on cash and cash equivalents and long-term deposits is limited because these funds are placed only with banks with high credit ratings assigned by international credit-rating agencies. All balances on bank accounts are neither overdue nor impaired. The table below shows the rating and cash and cash equivalents balances with major banks at the reporting dates: Bank 1 Bank 2 Bank 3 Other banks Total cash and cash equivalents at banks Rating agency Rating Fitch Ratings Moody’s Standard & Poor’s - BB+ BBB- BB+ - 31 December 2016 31 December 2015 739,814 237,541 1,362 18,612 2,034,351 490,328 3,003,177 28,200 997,329 5,556,056 The table below shows the rating and long-term bank deposits balances at the reporting dates: The average credit period on sales of goods is 30 days. No interest is charged on trade and other receivables. Before accepting any new customer, the Group uses an internal credit scoring system to assess the potential customer’s credit quality and deﬁnes credit limits by customer. Limits and scoring attributed to customers are regularly reviewed. Gazprombank Total long-term bank deposits Rating agency Rating Fitch Ratings BB+ 31 December 2016 31 December 2015 641,365 641,365 641,365 641,365 132 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 133 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. FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) The following tables detail the Group’s expected maturity for its ﬁnancial assets, except for cash and cash equivalents. The tables below have been drawn up based on the undiscounted contractual maturities of the ﬁnancial assets, including interest that will be earned on those: Interest rate risk Changes in interest rates impact primarily loans and borrowings by changing either their fair value (ﬁxed rate debt) or their future cash ﬂows (variable rate debt). The Group adopts a policy of limiting its exposure to changes in interest rates by borrowing on a ﬁxed rate basis and therefore the interest rate risk is not considered material to the Group. Effective interest rate, % Less than 6 months 6 months- 1 year 1-3 years More than 3 years Total 29. RELATED PARTIES Parties are generally considered to be related if one party has the ability to control the other party or can exercise signiﬁcant inﬂuence over the other party in making ﬁnancial or operational decisions, as deﬁned by IAS 24 Related Party Disclosures. In considering each possible related party relationship, attention is directed to the substance of the relationship not merely the legal form. Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties. The Company and its subsidiaries enter into various transactions with related parties such as the sale and purchase of inventory. Transactions with key management personnel Key management personnel of the Group are all members of Board of Directors and members of Management Board. The remuneration of key management personnel during the years ended 31 December 2016 and 2015 were as follows: Salaries and bonuses Share-based payments 2016 321,396 - 2015 285,681 2,612 Trading transactions with entities under common control Trading transactions with related parties comprise mostly of purchases of grain crops from and rendering of storage services to TZK NAPKO, Agrarnaya Gruppa and CJSC Penzamyasoprom. The Group also sells sausages, raw meat and poultry to a retail chain “Myasnov”. Trade receivables, trade payables and advances issued are associated with such transactions. The Group expects to settle such balances in the normal course of business. 8% 9%-9.5% 6,227,010 25,666 14,005 - 425,906 - 25,666 14,005 - - - 761,433 328,010 - - - - - 96,379 6,227,010 812,765 356,020 96,379 - 425,906 6,692,587 39,671 1,089,443 96,379 7,918,080 Long-term deposits in banks 8% Notes receivable, net 6.35%-9.5% Other non-current assets Other current assets Total 6,336,357 25,666 21,250 - 10,892 - 25,666 21,250 - - - 710,100 530,889 6,190 - - - - 105,473 - 6,336,357 761,432 573,389 111,663 10,892 6,394,165 46,916 1,247,179 105,473 7,793,734 The following are the contractual maturities of ﬁnancial liabilities, including estimated interest payments: Effective interest rate, % Less than 6 months 6 months- 1 year 1-3 years More than 3 years 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 At 31 December 2016 Trade and other receivables At 31 December 2015 Borrowings, other than ﬁnance lease Trade and other payables Payables for non-current assets Payroll related liabilities Total At 31 December 2016 Borrowings, other than ﬁnance lease 3.39%– 15% 14,818,169 12,952,502 11,438,923 10,701,330 49,910,924 Balances with companies under common control are summarized as follows: Finance lease obligations 10.91%– 15.3% 62,642 62,642 248,992 126,121 500,397 31 December 2016 31 December 2015 8,731,408 1,445,128 1,372,176 - - - - - - - - - 8,731,408 1,445,128 1,372,176 Trade receivables Other non-current assets Advances paid 26,429,523 13,015,144 11,687,915 10,827,451 61,960,033 Advances paid for property, plant and equipment 1.2%– 15% 7,933,038 9,137,930 25,008,128 5,818,571 47,897,667 Finance lease obligations 8.57%– 16.62% 85,803 85,803 346,809 106,936 625,351 Trade and other payables Payables for non-current assets Payroll related liabilities 8,970,666 1,061,629 1,394,940 - - - - - - - - - 8,970,666 1,061,629 1,394,940 Total 19,446,076 9,223,733 25,354,937 5,925,507 59,950,253 Other current assets Other receivables Trade payables Advances received Other payables Long-term payables to shareholders 256,179 80,723 3,620 18,843 - 1,762 5,443 11 1,349 - 243,453 57,083 2,269 - 2,927 19,014 18,093 450 53 9,138 134 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 135 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) Transactions with companies under common control are summarized as follows: Sales Rent income Purchases of security services Purchases of property, plant and equipment Purchases of goods and other services 31 December 2016 31 December 2015 2,555,161 184,936 - 38,231 949,904 2,593,693 159,218 21,810 267,459 1,173,837 Trading transactions with joint ventures The Group purchases day-old chicks from its joint venture Bioler Budushchego LLC. The Group also purchases turkey meat from LLC Tambovskaya Indeika for its subsequent resale through distribution network of the Group. The Group also sells mixed fodder to LLC Tambovskaya Indeika. Trade receivables, trade payables and advances issued are associated with such transactions. The Group expects to settle such balances in the normal course of business. Balances with joint ventures are summarized as follows: Balances Trade receivables Advances paid Other receivables Other non-current assets Other current assets Trade payables Advances received Transactions with joint ventures are summarized as follows: Balances Sales Sales of property, plant and equipment Rent income Purchases of goods and other services 30. COMMITMENTS AND CONTINGENCIES 31 December 2016 31 December 2015 23,620 167,951 226 66,839 - 140,337 30,211 2016 337,875 - 16,471 733,654 21 135,641 - 28,293 3,400 4,557 63,722 2015 5,539 666,349 1,030 246,715 Legal As of 31 December 2016 and 2015, several Group companies reported negative net assets in their statutory ﬁnancial statements. In accordance with the Civil Code of the Russian Federation, a liquidation process may be initiated against a company reporting negative net assets. Management believes that it is remote that the liquidation process will be initiated against those companies. From time to time and in the normal course of business, claims against the Group are received from customers and counterparties. Management is of the opinion that no material unaccrued losses will be incurred and accordingly no provision has been made in these consolidated ﬁnancial statements. Taxation Laws and regulations affecting businesses in the Russian Federation continue to change rapidly. These changes are characterized by different interpretations and arbitrary application by the authorities. Management’s interpretation of such legislation as applied to the activity of the Group may be challenged by the relevant regional and federal authorities. The tax authorities in the Russian Federation frequently take an assertive position in their interpretation of the legislation and assessments and as a result, it is possible that transactions and activities may be challenged. It is therefore possible that signiﬁcant additional taxes, penalties and interest may be assessed. Under certain circumstances reviews may cover longer periods. Where uncertainty exists, the Group has accrued tax liabilities as management’s best estimate of the probable outﬂow of resources which will be required to settle such liabilities. Management believes that it has provided adequately for tax liabilities based on its interpretations of tax legislation. However, the relevant authorities may have differing interpretations, and the effects could be signiﬁcant. In 2015, amendments were introduced into the Russian tax legislation in respect of taxation of proﬁt of controlled foreign companies. According to these changes, undistributed proﬁts of the Group foreign subsidiaries, qualifying as controlled foreign companies, should be included in the income tax base of the controlling entities in particular cases. The Group is formulating its tax planning strategy with regard to the foreign subsidiaries. Environmental remediation costs The Group’s management believes that the Group is in compliance with applicable legislation and is not aware of any potential environmental claims; therefore, no liabilities associated with such costs are recorded as of 31 December 2016 and 2015. Capital commitments Capital commitments by each operating segments are as follows: Commitments for the acquisition of property, plant and equipment Meat-processing Pork Poultry Grain Feed Total capital commitments 31 December 2016 125,472 1,661,874 381,740 170,316 107,649 2,447,052 At 31 December 2016, the Group had capital projects in progress at LLC Cherkizovo Pork, OJSC Kurinoe Tsarstvo and JSC Cherkizovo-Kashira. 136 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 137 FINANCIAL STATEMENTS ABOUT COMPANY STRATEGIC REPORT FINANCIAL REPORT CORPORATE GOVERNANCE FINANCIAL STATEMENTS Notes to the consolidated ﬁnancial statements (continued) (For the year ended 31 December 2016) (in thousands of Russian roubles, unless otherwise indicated) Operating lease commitments Obligations under non-cancellable operating lease agreements for the ﬁve years ending 31 December 2021 and thereafter are as follows: Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years Total operating lease commitments 31 December 2016 217,307 952,938 1,197,047 2,367,292 Agricultural market risk As a rule, grain prices exhibit rather high seasonal ﬂuctuation. 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 factors which are beyond the control of the Group, including weather, planting intentions, government (Russian and foreign) farm programs and policies, changes in global demand resulting from population growth and higher 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 2016 the Group secured major part of its livestock and property, plant and equipment 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. Shareholder Information CONTACTS PJSC Cherkizovo Group 5B Lesnaya St., Moscow 125047, Russia White Square Office Centre Tel.: +7 495 660 2440 Website: www.cherkizovo.com Email: info@cherkizovo.com REGISTRATION NUMBER 1057748318473 of 22 September 2005 REGISTRAR JSC “Noviy Registrator” 30-1 Buzheninova St. Moscow 107996, Russia Tel.: +7 495 980 1100, +7 499 519 0262 AUDITORS Deloitte and Touche CIS 5B Lesnaya St., Moscow 125047, Russia White Square Office Centre 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 138 CHERKIZOVO GROUP Annual Report 2016 www.cherkizovo.com www.cherkizovo.com Annual Report 2016 CHERKIZOVO GROUP 139

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