MHP Annual Report 2008 | Quarterlytics

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I M Y R O N V S K Y H L I B O P R O D U C T > A N N U A L R E P O R T 2 0 0 8 MYRONIVSKY HLIBOPRODUCT > ANNUAL REPORT 2008 10 YEARS AND 10 THINGS TO KNOW ABOUT MHP WHO WE ARE MHP (Myronivsky Hliboproduct) is one of Ukraine’s leading agro- industrial companies. Founded in 1998, the group primarily focuses on rearing chickens, and on producing and selling high-quality chicken products – principally under the “Nasha Ryaba” brand. MHP is a truly vertically-integrated company: in its determination to become self-sufficient, it grows crops for fodder, and owns grain storage facilities and feed mills. The group’s newest facility, the Myronivka chicken farm, will become fully operational during 2009. Expected to be Europe’s largest chicken production facility by volume, Myronivka will ensure that MHP – which employs more than 19,000 people – will continue to be at the forefront of Ukraine’s domestic food production industry. OVERVIEW 1 10 years and 10 things to know about MHP 12 At a glance 14 Stucture, our markets, where we operate 15 Chairman’s statement BUSINESS REVIEW 16 Chief Executive’s review > Delivering as promised 17 Key performance indicators (KPIs) 18 Delivering our strategy 20 Poultry > Delivering high-quality protein 24 Grain > Delivering high-quality chicken feed 26 Other agricultural activities > Delivering diversiﬁcation 28 Managing risk 30 Corporate responsibility report 31 Financial review MANAGEMENT AND GOVERNANCE 36 Board of directors 37 Corporate governance 39 Directors’ report FINANCIAL STATEMENTS AND NOTES 40 Statement of management’s responsibilities for the preparation and approval of the ﬁnancial statements 41 Independent auditors’ report 42 Consolidated balance sheets 43 Consolidated income statements 44 Consolidated statements of changes in shareholders’ equity 45 Consolidated statements of cash ﬂows 47 Notes to the consolidated ﬁnancial statements OTHER INFORMATION 85 Corporate information OVERVIEW 10 YEARS AND 10 THINGS TO KNOW ABOUT MHP Myronivsky Hliboproduct Annual Report 2008 1 OVERVIEW 1MHP: ONE OF UKRAINE’S LEADING AGRO-INDUSTRIAL COMPANIES MHP is one of the world’s most competitive poultry rearing and processing companies. Our unique and sustainable business model ensures that we will continue to prosper, regardless of economic conditions. > 1998 Yuriy Kosyuk initiated the establishment of MHP. The company took a controlling stake in the Myronivsky Plant for Manufacturing Groats and Feeds (MFC) to become one of Ukraine’s leading domestic grain traders. 2 Myronivsky Hliboproduct Annual Report 2008 2 MHP: WE HOLD CLOSE TO 40% OF THE MARKET FOR COMMERCIALLY-PRODUCED CHICKEN In each month in 2008, the group had the capacity to process more than 9 million chickens to produce 19,000 tonnes of meat. In a country which has one of Europe’s lowest rates of meat consumption, there are huge opportunities to increase sales of this healthy and economical source of protein. > 1999 MHP acquired and modernised the Peremoga poultry farm, and began rearing chickens. Myronivsky Hliboproduct Annual Report 2008 3 OVERVIEW 3 MHP: VERTICAL INTEGRATION ENABLES US TO CONTROL COSTS On the principle of “if you want something done well, do it yourself” MHP grows its own grain to supply its fodder mills; produces feed for its two breeder farms and four chicken farms; undertakes the entire production cycle, from chicks to mature birds to finished product; distributes in its own fleet of trucks; and sells much of its product through a network of franchised stores. > 2001 Poultry farm Druzhba Narodiv Nova joined the group. Agricultural LLC Starynska Ptahofabryka, which specialises in breeding stock, joined the group. 4 Myronivsky Hliboproduct Annual Report 2008 4 MHP: OUR “NASHA RYABA” BRAND SELLS AT A PREMIUM PRICE For the past five years the “Nasha Ryaba” brand of chilled chicken has achieved more than 90% brand recognition, enabling it to be sold at a premium over its closest competitor. > 2002 MHP launched its chilled chicken brand, “Nasha Ryaba”. Myronivsky Hliboproduct Annual Report 2008 5 OVERVIEW 5 MHP: WE EXPAND SALES OPPORTUNITIES THROUGH A FRANCHISE NETWORK Our direct franchise network enables us to diversify our sales outlets and to resist pressures on pricing from major retailers. >2003 MHP began to develop a network of franchised stores to sell its poultry products. 6 Myronivsky Hliboproduct Annual Report 2008 6 MHP: WE USE SUNFLOWER PROTEIN IN OUR CHICKEN FEED MHP is the only company in the world which has reduced the cost of chicken feed by replacing imported soy with locally-produced sunflower protein. Sunflower oil, the by-product of sunflower cake, is exported and generates US dollar revenue; sunflower husks are burnt to generate steam energy at our MFC facility and are also used for bedding in our chicken barns. > 2004 MHP brought an oil-press plant into operation. Myronivsky Hliboproduct Annual Report 2008 7 OVERVIEW 7 MHP: GROWING GRAIN PROTECTS US FROM FLUCTUATING COMMODITY PRICES MHP’s efficient production of crops on approximately 180,000 hectares of fertile “black soil” land helps it to stabilise the price of feed for its poultry flocks. > 2005 MHP began to build its grain-growing business. 8 Myronivsky Hliboproduct Annual Report 2008 8 MHP: WE ARE NOW INTRODUCING VALUE-ADDED FOOD PRODUCTS MHP’s two meat-processing plants, and its convenience-food plant, are equipped with the most modern European equipment. In 2008, they produced around 16,000 tonnes of sausages and meat products (113% increase year-on-year) and 9,670 tonnes of pre-cooked convenience food (137% increase year-on-year). > 2006 The group’s vast range of convenience products was united under one trademark when the “Lehko!” brand was launched. Myronisvsky Meat Processing Plant, “Lehko”, began operating and became Ukraine’s largest specialist producer of convenience food. On 30 November, MHP completed a US$250 million offer of high-yield notes. Myronivsky Hliboproduct Annual Report 2008 9 OVERVIEW 9 MHP: MYRONIVKA IS EXPECTED TO BE EUROPE’S LARGEST CHICKEN FARM Myronivka is being constructed to meet the continuing growth in demand for chicken and chicken products. It will enable the group to increase its annual production capacity to 340,000 tonnes by 2010. by 70%.> 2007 Phase 1 of the Myronivka chicken farm was launched in the middle of the year. When it reached full production in October 2007, the group’s output increased 10 Myronivsky Hliboproduct Annual Report 2008 10 MHP: THE FIRST UKRAINIAN MARKET AGRO-INDUSTRIAL COMPANY TO LIST ON THE LONDON > 2008 In May 2008, MHP made an Initial Public Offering of its ordinary shares in the form of global depositary receipts (GDRs) to be listed on the London Stock Exchange. The group acquired an 80% interest in the meat-producing company, Ukrainian Bacon. Myronivsky Hliboproduct Annual Report 2008 11 OVERVIEW AT A GLANCE MHP has a clear strategy to enable it to maintain its position as one of the leading agro-industrial companies in Ukraine. Vertical integration enables us to control the cost and supply of the ingredients for chicken feed and, thereby, to deliver improved proﬁtability. Strategic overview MHP’s strategy is to maintain and develop its position as one of Ukraine’s leading agro-industrial companies while, at the same time, strengthening its position as the country’s leading poultry producer. The construction of our Myronivka complex will enable us to increase our annual chicken production capacity to 340,000 tonnes by 2010 – around 50% above production in 2008 – and to beneﬁt from economies of scale. To supply Myronivka, we will continue to increase our breeding and hatching facilities, and expand our capacity for producing chicken feed. We aim to improve productivity in our grain-growing operations, enabling us to increase our self-sufﬁciency in grain for fodder, even in the face of our growing demand. We will also continue to develop our distribution network and customer base, to develop new products and, thereby, to improve our sales margins. Financials throughout this report are for continuing operations. Financial highlights • MHP’s listing on the London Stock Exchange raised US$161 million • MHP grew signiﬁcantly as a result of expanding its Poultry and Related Operations segment • Strong ﬁnancial results: EBITDA increased by 88% • Revenue from export of sunﬂower oil covered most of the interest on our foreign-currency debt • Proﬁtability almost doubled Operational highlights • Production increased as a result of a full year of operation of Phase I of Myronivka • Vertical integration resulted in stable production costs • Adding sunﬂower protein to chicken feed reduced our fodder costs • Acquisition of 80% of meat- processing company, Ukrainian Bacon • Production of value-added products increased Sales US$m 802,910 474,437 07 08 Percentage increase 2007-2008 +69% Gross proﬁt US$m Percentage increase 2007-2008 237,527 123,660 07 08 EBITDA* US$m 312,211 166,438 07 08 +92% Percentage increase 2007-2008 +88% EBITDA* margin % Percentage increase 2007-2008 35 39 07 08 * See EBITDA deﬁnition on page 35. +11% 12 Myronivsky Hliboproduct Annual Report 2008 POULTRY AND RELATED OPERATIONS GRAIN GROWING OPERATIONS OTHER AGRICULTURAL OPERATIONS $660m $49.8m $93.1m Sales in 2008 Sales in 2008 Sales in 2008 KEY PRODUCTS • Chilled chicken, whole or in portions • Frozen chicken, whole or in portions • Pre-cooked convenience food • Sunﬂower oil KEY PRODUCTS • Corn • Sunﬂowers • Rape • Wheat BRANDS • Nasha Ryaba • Lehko! poultry complexes STRATEGY • Construction of new, full-cycle • Myronivka complex – expected to be one of the biggest poultry farms in Europe; the second phase is scheduled to be fully operational in late 2009 STRATEGY • Increase efﬁciency; maximise farms’ potential through use of modern farming techniques for fodder • Focus on self-sufﬁciency in grain • Prepare MHP to be in best position for potential change in legislation (pre-emptive rights to acquire land) KEY PRODUCTS • Sausages • Cooked meat • Premium fresh beef • Foie gras • Fruit BRANDS • Druzhba Narodiv • Certiﬁed Angus • Foie gras STRATEGY • Increase MHP’s presence in value- added products, such as processed meat and convenience food • Introduce new types of sausage and meat products four poultry farms KEY FACTS • 157 million hatching eggs produced in 2008 at two breeder farms • 119 million birds grown in 2008 at • 225,000 tonnes of chicken produced • 690 million tonnes of fodder produced • 11 distribution centres • 320 refrigerated trucks • Approximately 2,000 branded franchise outlets • Production of convenience food at three mills increased by 137% to 9,670 tonnes in 2008 • MHP is self-sufﬁcient in sunﬂower protein and corn – the principle input costs • The sunﬂower press produced 93,000 tonnes of oil storage capacity Ukrainian average hectares of land under their control KEY FACTS • Six arable farms have 180,000 • 620,000 cubic metres of grain • MHP’s yields are higher than the • 735,000 tonnes of crops harvested • Ukraine’s “black earth” land is • Crops rotated to protect the quality • Good climate – plenty of rain extremely fertile of the land in 2008 and sunshine KEY FACTS • 80% interest in meat-processing company Ukrainian Bacon acquired in 2008 • Production of sausages and cooked meat up by 113% in 2008 • Two meat processing plants • One mixed farm – rears pigs, cattle, grows crops and processes sausages and cooked meat our “Certiﬁed Angus” brand • The mixed farm also rears beef for • One goose farm – produces geese • One fruit farm – primarily grows for our “Foie Gras” brand apples, but also several other fruits Myronivsky Hliboproduct Annual Report 2008 13 OVERVIEW STRUCTURE, OUR MARKETS, WHERE WE OPERATE MHP S.A. RHL OJSC Myronivsky Hliboproduct POULTRY RELATED OPERATIONS GRAIN-GROWING OPERATIONS OTHER AGRICULTURAL OPERATIONS STARYNSKA Chicken breeder farm ZERNOPRODUCT Grain DRUZHBA Beef, pork, meat processing UKRAINIAN BACON Sausages, cooked meat SNATYNSKA Geese CRIMEA FRUITS Fruit LYPIVKA Grain UROZHAY Grain AGROFORT Grain STARYNSKA Grain DOBROPILSKY Grain Grain storage facilities SHAHTARSKA Chicken breeder farm PEREMOGA Chicken farm DRUZHBA NOVA Chicken farm ORIL LEADER Chicken farm CJSC MYRONIVSKA Chicken farm MFC Fodder mill, convenience food TKZ Fodder mill KATERYNOPILSKY ELEVATOR Fodder mill Our markets DEMAND FOR OUR PRODUCTS IS INCREASING MHP’s products are sold throughout Ukraine, with sales being particularly strong in the east and the south of the country. We sell through our large franchise network, direct to supermarkets, and to industrial customers. Currently, only about 5% of our products are exported – principally to Kazakhstan – but we expect to increase that proportion over the next three to ﬁve years. In the meantime, however, there is a great deal of scope in Ukraine, which has one of the world’s lowest rates of meat consumption per capita. We expect current economic conditions to result in a decline in meat-eating overall, but for chicken consumption, which is an economical – and healthy – source of protein, to increase. WE OPERATE THROUGHOUT UKRAINE LUTSK LVIV RIONE CHERNIHIV KIEV SUMY TERNOPIL VINNYTSYA UZHHOROD IVANO- FRANKIVSK CHERNIVTSI CHERKASY UMAN KYROVOGRAD DNIPROPE TROVSK LUCANSK DONETSK KHARKIV Breeding Chicken farms Convenience foods Fodder ODESSA ZAPORIZHZHYA NIKOLALV KHERSON SIMFEROPOL KERCH Other agricultural activities SEVASTOPOL YALTA Kiev Kyiv region Zernoproduct Starynska Poultry Farm Myronivsky Plant for Manufacturing Groats and Feeds (MFC) Myronivsky Meat Processing Plant “Lehko” Agrofort Cherkasy region Katerynopilsky Elevator Peremoga Nova Urozhay ZVB (Ferroconcrete products) Myronivska Poultry Farm Dnipropretrovsk region Oril-Leader Donetsk region Dobropilsky Shahtarska Nova Ukrainian Bacon Kherson region Tavriysky Crimea Druzhba Narodiv Nova (chicken farm) Crimea Fruits Company Druzhba Narodiv Agricultural (crops, cattle, meat processing) Ivano-Frankivsky region Snyatynska Nova 14 Myronivsky Hliboproduct Annual Report 2008 OVERVIEW CHAIRMAN’S STATEMENT I am pleased to report that, in 2008, MHP made great strides in its strategy of expanding its activities and building on its position as one of Ukraine’s leading agro-industrial companies. The company’s listing on the London Stock Exchange is evidence of its determination to continue to invest in, and develop, its business. During the year, MHP substantially increased its poultry production capacity – the ﬁrst step in its aim of achieving an annual output of 340,000 tonnes by 2010. Greater capacity has the added beneﬁt of reducing unit costs and, thereby, increasing proﬁtability. To support a larger production capacity while, at the same time, maintaining quality and controlling costs through vertical integration, MHP increased the size and productivity of its breeding, hatching and rearing farms, became largely self-sufﬁcient in ingredients for chicken feed during the year, and continued to ﬁnd uses for the by-products of its production process. It expanded its meat processing facilities when it acquired an 80% interest in Ukrainian Bacon, and it divested some small non-core businesses. Results and dividend policy EBITDA increased by 88% to US$312 million; EBITDA margin was up from 35% to 39%; and sales and gross proﬁt both increased – sales by 69% (to US$803 million) and gross proﬁt by 92% (to US$238 million). Net proﬁt, however, reduced to US$5 million (2007: US$47 million) as the result of a loss of approximately US$187 million on exchange rate translation – our loans are in US dollars, but our earnings are in our local currency, UAH, which devalued approximately 50% against the US dollar during the year. sell more: our chilled chicken is fresher, tastier and cheaper than imported frozen poultry, and it is markedly more affordable than beef or pork. In addition, we have extended our product range since we introduced convenience foods in 2006, and Ukrainian Bacon enabled us to produce more than 100% more sausages and cooked meat than in 2007. Securing feed supplies The cost of ingredients for chicken feed could have the greatest potential for increasing our production costs: poor growing seasons, worldwide, result in increased prices and decreased availability. Our strategy of growing our own crops, in what is an ideal agricultural climate, has made us largely immune from external market forces. We operate a traditional crop rotation system. This enables us to protect the properties of the earth, but also to sell those crops which we do not use for feed. Corporate governance MHP, registered in Luxembourg, complies with Luxembourg’s voluntary corporate governance regime and has adopted a clear and transparent corporate governance framework. Of our seven directors three, including myself, are independent non-executives. Each director contributes a different, and valuable, set of skills to the management of the company. Our people We believe our 19,000 employees make us the largest employer in Ukraine’s agricultural sector. Their skill and commitment is an important factor in our success. Each of the four members of our senior management team brings speciﬁc skills and knowledge to their role. I thank them all for their hard work and look forward to continuing to work with them. Looking ahead Our performance in a challenging economic environment gives me great conﬁdence. I look forward to MHP continuing to grow and to succeed in its ambition of becoming not only Ukraine’s leading agro-industrial company, but also one of the largest in Europe. We will not pay dividends for 2008, but will continue to invest net proﬁts into enlarging the business. Charles E Adriaenssen Chairman The market The economy in the world in general, and Ukraine in particular, is going through difﬁcult times. We believe, however, that this is likely to be to our advantage. Meat consumption in Ukraine is increasing – although the country still has one of the world’s lowest consumptions per capita – and approximately 20% of meat is imported. This creates the opportunity for us to Myronivsky Hliboproduct Annual Report 2008 15 BUSINESS REVIEW: CHIEF EXECUTIVE’S REVIEW DELIVERING AS PROMISED At the time of our IPO, in May 2008, I said we were conﬁdent in our ability to expand and diversify. My view has not changed. Our sole reason for raising funds through the listing was to enable us to increase our investment in our business and, by doing that, to take advantage of the growing demand for chicken in Ukraine. Since 2004 we have been Ukraine’s largest producer of chicken by volume. Our most recent investment in our Miyronivka chicken farm has improved our leading position. When the second stage of the Myronivka chicken farm is completed during 2009, we expect this will make it Europe’s biggest chicken farm. Our strategy From the outset, it was our strategy to become a leading producer of poultry, a source of high-quality protein which we could produce economically and sell at an affordable price on the Ukrainian market. To enable us to achieve that, we instituted a vertically integrated system: we rear our own chickens – from eggs to fully- grown birds – we feed them with our own fodder made primarily from crops we have grown, we distribute the ﬁnished products in our own transport, and sell much of our production through our branded franchise network. The future Our intention is to expand our poultry and grain businesses, and to increase vertical integration. It was clear at the time of the IPO that we had sufﬁcient resources to continue to operate our business proﬁtably but it has always been our strategy to grow and expand. Since we founded MHP in 1998, we have made a series of strategic acquisitions and investments to create what the group is today – one of Ukraine’s leading agro-industrial businesses. Our Myronivka farm will enable us to increase chicken production to 340,000 tonnes a year, and we intend to expand our Starynska breeding facility to give us an aggregate capacity of 230-250 million hatching eggs a year. We are also considering building additional chicken facilities in the near future. We will increase the efﬁciency of our grain growing activities by applying the latest farming methods, and are also leasing further tracts of land. This will not only enable us to gain greater control over the cost of fodder, but will also put us in the best position for the expected change in legislation under which we will have pre-emptive rights to acquire the land. In a further move to control input costs, we will continue to seek and use sources of alternative energy, including co-generation technology. In addition, we are looking at achieving a greater presence in value-added foods, such as processed meat and convenience foods. We will focus on promoting our branded products, will expand our distribution network to cover most regions of Ukraine, and will continue to resist pressure on prices from the large supermarkets by selling around 50% of our products through our franchise network. We have the land, the facilities, the skills and the resources to achieve everything we have planned, and more. As a well-established business, and the lowest-cost domestic producer, we believe we are relatively insulated from competition. We take immense care to control quality and costs, and it would take new competitors a great deal of time and investment to be able to challenge our position. We believe that our target of winning an even greater share of the market is realistic and we look to the future with conﬁdence. Yuriy Kosyuk Chief Executive Ofﬁcer 16 Myronivsky Hliboproduct Annual Report 2008 BUSINESS REVIEW KEY PERFORMANCE INDICATORS (KPIS) Revenue* US$m 802.9 474.4 07 08 * from continuing operations Gross margin % 26.1 29.6 07 08 EBITDA US$m 312.2 166.4 07 08 EBITDA margin % 35.1 38.9 07 08 Land under MHP’s control hectares 148,500 180,000 07 08 Poultry production by volume tonnes 175.3 225.6 07 08 Brand recognition 90+% Source: GFK 2008 Market share % 35.0 38.8 08 Source: Company estimates based on Ukrainian Statistics Committee data 07 Myronivsky Hliboproduct Annual Report 2008 17 BUSINESS REVIEW DELIVERING OUR STRATEGY We have realised our strategy, to become Ukraine’s leading producer of poultry, by creating a truly integrated business. Now, with close to 40% of commercial production, we are the undisputed leader in the Ukranian poultry market. In recent years, the shortfall in supply has been made up with imports: in 2008, 450,000 tonnes – 19% of all meat consumed – was imported, and much of that was poultry. Now, after several years of fast growth, the Ukrainian economy is decelerating: during 2008, inﬂation rose to 22% while the hyrvna depreciated by around 50%. This has made imported meat increasingly expensive – and for many people unaffordable. It is clear, therefore, that on the grounds of cost and availability, MHP’s chicken – produced in Ukraine and on a commercial scale – is the most attractive and affordable source of protein. It costs 50% less than pork or beef, and is cheaper, fresher and tastier than imported frozen poultry. A truly integrated business The market Meat production in Ukraine tonnes 000 690 674 522 2007 +16% -5% -14% 799 643 451 2008 Source: GFK, Ukrainian Statistics Committee ■ Poultry ■ Pork ■ Beef S U N OIL$ FL O W E R R E S I L I T R E F A I N F T N O R U R G S P R O W E L E I N R R O W E E S Y G Y R L T D E N E K D D O F F K N S U U S H R E N E L L U O H I L H I C P C C N T I O U R I B T D I S A I L T E R 1 2 3 4 5 6 7 8 9 C O N F O V E O D NIE N C E $ The dollar revenue from the export of sunﬂower oil – a by-product of manufacturing sunﬂower cake – services the debt on our foreign-currency loans. With the purchase in 1999 of Peremoga, we began to build our poultry business. Now we own four prinicipal chicken farms and two breeder facilities. To ensure that we can supply them with high- quality feed, we need to control the cost of fodder by protecting ourselves from ﬂuctuations in world grain prices. Since 2005, we have grown an increasing proportion of the crops we need, and have acquired or constructed fodder mills and grain storage facilities. We are the only company in the world to replace Ukrainian industrial meat production industrial producers % of total 79% 76% 70% 32% 29% 28% 31% 32% 33% n 2008 n 2007 n 2006 Beef Pork Poultry Source: GFK, Ukrainian Statistics Committee Cattle and pigs livestock evolution heads million Pigs 7.3 -12.3% 6.4 Cattle 5.7 5.1 -10.5% 2007 2008 2007 2008 Source: Ukrainian Statistics Committee Ukraine has a poulation of 46 million, but it also has one of Europe’s lowest consumptions of meat per capita. Demand has been increasing but, despite Ukraine being an agricultural country, commercial production of meat has failed to keep pace. Householders and small farmers still account for 75% of the cattle and pigs reared in Ukraine, and for nearly 50% of all meat produced. There are still no major commercial producers of beef or pork. 18 Myronivsky Hliboproduct Annual Report 2008 expensive soy protein with sunﬂower protein, and to facilitate that we constructed an oil press. To complete the circle, we operate distribution centres in 11 major Ukrainian cities, deliver to customers in our own ﬂeet of refrigerated trucks, and have established a network of franchised shops to sell our products. Chicken sales Our wide range of chilled chicken products is sold under our ﬂagship “Nasha Ryaba” brand, which dominates the market. The range also includes nine vacuum-packed products which have a longer shelf-life. Marinated chicken, whole or in portions, is sold under the “Nasha Ryaba Appetising” range, which we introduced in 2004. Now, with the exception of a proportion of sunﬂower seed which we buy in, we are almost entirely self-sufﬁcient. After the sunﬂower seeds are pressed to make cake for fodder, some of the husks are burnt to provide steam heat for the plant, others are used for bedding in the chicken barns. The proﬁt we make from exporting the sunﬂower oil – the by-product of pressing the seeds – services the debt on our foreign-currency loans. Finally, when the chicken barns are cleaned the combined sunﬂower husks and chicken droppings are used to fertilise the ﬁelds on which we grow crops. While rearing chicken and growing crops for chicken feed is, and will continue to be, our principal focus, we are increasingly turning our attention to the production of value-added food products. In 2006, we began producing convenience food, and are now Ukraine’s leading convenience-food company, and in 2008 our acquisition of an 80% interest in Ukrainian Bacon dramatically increased our capacity to produce sausages and cooked meat. Fodder Our fodder is produced from corn, sunﬂower seeds, peas and soy beans, at our own mills. It is steam treated to ensure that it is free from contamination and is delivered to our farms in our own trucks. Value-added food We produce pre-cooked convenience food, a relatively new concept in Ukraine. Sold under our “Lehko!” brand, through distributors, supermarkets and to foodservice companies, it is gaining in popularity. Grain We grow corn, sunﬂowers, wheat and rape. The corn and sunﬂower seed are used in our fodder mills, the wheat and rape are sold to third parties. We rotate crops and include a fallow period to allow the soil to recover, and to minimise the need for chemical fertilisers and pesticides. The land we lease is primarily in the “black earth” region of Ukraine. It is extremely fertile, and combines with Ukraine’s adequate rainfall and sunshine to create ideal growing conditions. In addition, we raise pigs, geese – we sell goose and foie gras – and breed and raise pedigree cattle to supply our “Certiﬁed Angus” brand. A farm in Crimea grows and sells a wide range of fruit. Other Agricultural Operations Our other operations include sausages and cooked meat, beef, goose and foie gras, and fruit. A structure designed for growth MHP is structured in three segments: Poultry and Related Operations, Grain Growing Operations and Other Agricultural Operations. Poultry We own four principal chicken farms, two breeder farms – which include facilities for producing hatching eggs – three fodder mills, and a number of storage facilities for sunﬂower seed and grain. Each farm incorporates a processing plant. Our 11 distribution centres and refrigerated delivery vehicles enable us to deliver our products, chilled as well as frozen, to our customers. We operate at 100% capacity and sell 100% of our output. Our new Myronivka chicken farm, the second phase of which will be completed during 2009, includes a new hatchery and a modern processing plant. The hatchery will be able to hatch 150 million eggs a year, and the processing plant will have an average monthly volume of around 9 million chickens. Myronivka has already enabled us to increase production to more than 200,000 tonnes of chicken a year. Sausages and cooked meat Our Druzhba facility in the Crimea produces pork and beef sausages, wieners and frankfurters, smoked and semi-smoked sausages, and ham. These are principally sold wholesale to foodservice customers and supermarkets. In July 2008 we added to our capacity when we took an 80% holding in Ukrainian Bacon, which produces products under the mass-market brands “Europroduct” and “Baschinsky”. Beef We sell beef under our “Certiﬁed Angus” brand. Chilled, vacuum packed and matured, it is sold to foodservice customers and supermarkets. Goose and foie gras MHP is Ukraine’s only commercial producer of goose and foie gras. Our goose is sold through supermarkets and food stores, our foie gras is sold, chilled and frozen, under our “Foie Gras” brand. Fruit A wide range of fruit, grown at our Crimea Fruits farm, is sold to supermarkets and wholesalers. Myronivsky Hliboproduct Annual Report 2008 25 Myronivsky Hliboproduct Annual Report 2008 19 BUSINESS REVIEW: POULTRY DELIVERING HIGH-QUALITY PROTEIN MHP’s poultry farms operated at full capacity during 2008. They produced approximately 225,000 tonnes of chicken, an increase of 30% on the previous year. The ﬁrst phase of our Myronivka farm, which began operating in the middle of 2007 and reached full capacity in October that year, made a signiﬁcant contribution to our output. An efﬁcient production process We currently operate four chicken farms – Myronivka, in the Cherkasy region, Druzhba Nova in the Crimea, Oril-Leader in the Dnipropetrovsk region, and Peremoga, also in the Cherkasy region. Each consists of a number of independent units and each incorporates a hatchery and a processing plant as well as chicken barns. Breeding, hatching and growing We begin the process when we buy day-old Cobb 500 chicks from a specialist breeder in Germany. The chicks are taken to one of our breeder farms, Starynska or Shahtarska, where they are grown for around 20 weeks, before being transferred to one of our rearing sites to produce eggs. Starynska, in the Kiev region, has four facilities which can grow 540,000 birds simultaneously, and eight rearing sites, which can house 980,000 hens at one time. In 2008, as a result of expanding the farm to supply our new Myronivka complex, Starynska produced more than 110 million hatching eggs. 20 Myronivsky Hliboproduct Annual Report 2008 Survival rate % Conversion rate kgs fodder to produce 1 kg increase in live weight 93% 95% 2.05 1.90 07 08 07 08 Shahtarska, in the Donetsk region, has the capacity to grow 195,000 young birds at one time in its three facilities, and to house 360,000 hens simultaneously for producing hatching eggs at its six rearing sites. In 2008, it produced approximately 47 million eggs. We take the eggs – certiﬁed by the State veterinary authorities – from the breeder ﬂocks to the closed hatcheries at our chicken farms. There they are kept in incubators, which control temperature, humidity and air circulation, for 21 days. The newly-hatched chicks are vaccinated against Newcastle Disease and bronchitis, and are transferred to sterilised barns at the same farm. Light, temperature, air circulation, feed and water are all carefully controlled to ensure stable growth, but MHP does not use any chemicals or steroids in the production process. Feed is carefully balanced to include all the fat, protein, vitamins and minerals the chicks need and is adjusted regularly as they grow. Within six to seven weeks, the birds have reached 2.5 kgs and are ready for processing. A vertically integrated process The biggest potential for ﬂuctuating costs in an operation such as MHP’s, is the price of materials for feed. We have overcome this problem by growing the vast majority of our own crops and producing our own fodder. We grow corn and sunﬂower seeds to produce fodder. Feed production and storage The feed products are stored at our Katerynopilsky and MFC Oril-Leader storage facilities which, between them, have a capacity of approximately 620,000 cubic metres. We mix our own fodder at our three fodder mills, MFC, near Kiev, TKZ, in southern Ukraine, and Katerynopilsky, in the Cherkasy region. MFC, which produced 274,000 tonnes of feed in 2008, includes a fodder mill, a protein mill, ﬁve grain stores and a cereals mill. Its two production lines – one a Sprout Matador from Denmark, the other a Buhler from Switzerland – can each produce 220,000 tonnes a year. The protein mill has the capacity to produce 560 tonnes of sunﬂower cake and 440 tonnes of sunﬂower oil a day; the cereal mill is used to peel peas and oats. TKZ supplies Druzbha Nova. Its Sprout Matador production line, which has a capacity of 220,000 tonnes a year, produced 180,000 tonnes in 2008. Our Katerinopilsky facility principally supplies Myronivka. Its two Sprout Matador production lines, installed in 2007, together have an annual capacity of 600,000 tonnes. In 2008, they produced 261,000 tonnes of fodder, but with the second stage of Myronivka in full production for 2009, this will increase. Processing The chickens are killed, dressed and chilled, either whole or in portions, again on the same site. To preserve ﬂavour and texture, we use the most up-to-date technology in the chilling process. Packaged chicken is kept at 2oC before being delivered to customers, while any meat which is surplus to immediate requirements is frozen. The majority, approximately 85%, of our chilled chicken is sold under our “Nasha Ryaba” brand through a franchise network and supermarkets. Close to 40% market share in 2008 Average sale price increased by 44% EBITDA increased by 126% Myronivsky Hliboproduct Annual Report 2008 25 Myronivsky Hliboproduct Annual Report 2008 21 BUSINESS REVIEW: POULTRY DELIVERING HIGH-QUALITY PROTEIN CONTINUED Value-added food MHP is Ukraine’s leading producer of innovative convenience food. The modern production lines at our MMPP facility currently produce nearly 1,000 tonnes of products a month – a three-fold increase from 2007 – ranging from uncooked marinated meat to pre-cooked recipes. Sixty per cent of the ﬁnished products, which are blast frozen to protect their ﬂavour, are sold through distributors, the rest are sold through supermarkets and to the foodservice trade. Maintaining quality and biosecurity We employ a broad range of biosecurity measures at all our facilities to minimise the risk, and transmission, of disease. All chickens are kept indoors, access to facilities is strictly controlled, employees and vehicles are disinfected before entering production areas, and a team of around 70 vets monitors the health of the stock. Wild birds in the vicinity of our farms are monitored on a weekly basis to identify any potential signs of bird ﬂu. Under a multi-site farming system, units at each facility are positioned at least 1 km away from one another to prevent the spread of any disease between them, and individual barns within a unit are approximately 50 metres away from one another. To enable barns to be cleaned thoroughly before a new generation of chickens is introduced, chicks hatched at the same time are raised together as a group and are not mixed with birds of other ages. Bedding is a by-product of our fodder production process – no straw or hay is added – and is thermally treated and disinfected before use. To maintain the quality of our products, we operate an efﬁcient traceability system which enables us to link every batch of chicken we produce to its original facility and, thereby, to track the production process from start to ﬁnish. Druzhba Nova, our second-largest farm, was certiﬁed under HACCP (Hazard Analysis and Critical Control Point) methodology in 2006, and we expect Oril-Leader and Peremoga Nova to be certiﬁed in 2009. We have implemented a QMS (Quality Management System) and an FSMS (Food Safety Management System) at our MMPP facility. QMS achieved ISO 9001 and FSMS ISO 22000 in February 2008. We plan to obtain certiﬁcation for Snyatynska and Druzhba during 2009, and Myronivka in 2010. 22 Myronivsky Hliboproduct Annual Report 2008 24 Myronivsky Hliboproduct Annual Report 2008 Chicken tonnes Live weight kg per bird 172,650 225,000 2.5 2.5 07 08 07 08 We are looking at building additional production facilities in the near future. This would enable us to achieve further economies of scale, to decrease our operating costs per unit and to meet the demand for high-quality, affordable chicken, which we are conﬁdent will continue to increase. Distribution and sales We control the distribution of our products through our own network of 320 refrigerated trucks and 11 distribution centres. Our trucks take products from the farms to the distribution centres and from there to one of about 2,000 branded franchise outlets and to other customers. The 50%, approximately, of our products which are sold through franchises give us a number of advantages: these include the ability to control quality on the shelf, to generate better cash ﬂow (franchisees have to observe a short payment period), to ensure our products are available to meet demand, and to be ﬂexible in marketing and pricing. A strategy of expansion The Myronivka complex is part of our strategy of expansion. By late 2009, when the second phase will become operational, the farm will be the largest in Ukraine, and is expected to be one of the largest in Europe. As with all our production facilities, Myronivka is self-contained: it incorporates a hatchery, which will have a capacity of 150 million hatching eggs a year; will have 24 chicken-barn sites; and its up-to-date processing plant will have the capacity to process 9 million chickens a week. Myronivsky Hliboproduct Annual Report 2008 25 Myronivsky Hliboproduct Annual Report 2008 23 BUSINESS REVIEW: GRAIN DELIVERING HIGH-QUALITY CHICKEN FEED We protect ourselves from ﬂuctuating prices by growing crops and manufacturing our own feed. We grow corn and sunﬂowers, for fodder; wheat and rape for sale on the open market. Grain prices tend to be volatile: the size of the harvest depends on the weather and that, in turn, affects demand, worldwide. Storage and transport add to the cost, as do tariffs imposed by our own or other governments. To protect us from these elements, we made the decision to become self-sufﬁcient in materials for chicken feed. With the exception of a proportion of sunﬂower seed, we succeeded in this strategy in 2008. Ukraine’s black soil is extremely fertile and its temperate climate provides plenty of sunshine and rain. In 2008, on more than 130,000 hectares of land we rotated crops of corn, wheat, sunﬂowers and rape. Those crops which we do not use for fodder are grown to enable us to operate a crop-rotation system and, when they are sold on the open market, they provide additional revenue. We minimise the use of chemical fertilisers and pesticides, and we use the bedding and chicken droppings from the chicken barns as fertiliser. Our farms, Zernoproduct and Lypivka in the Vinnytsya region, Agrofort and Starynska in the Kiev region, and Urozhay in the Cherkasy region, are managed by an experienced team. In 2008, we increased the land under our control to 180,000 hectares (from 148,500 hectares in 2007). On the approximately 130,000 hectares which were under cultivation, 46,000 hectares were used for growing corn, and yielded 7.0 tonnes per hectare; 32,500 hectares were used for growing wheat, and yielded 6.3 tonnes per hectare; 11,900 were used for sunﬂowers, 24 Myronivsky Hliboproduct Annual Report 2008 Crop yield: MHP v Ukraine average tonnes per hectare 7.0 6.3 4.2 3.8 2.8 1.5 3.5 1.8 ■ MHP ■ Ukraine average Corn Wheat Sunﬂowers Rape and yielded 2.8 tonnes per hectare; and on the remaining 14,000 hectares, we grew rape which yielded 3.9 tonnes per hectare. As part of our crop rotation system a proportion of land was left to lie fallow. We store the harvested grain at our Katerynopilsky, MFC and Oril-Leader storage facilities. Katerynopilsky has a capacity of 231,500 cubic metres, MFC holds 228,000 cubic metres, and Oril-Leader 160,000 cubic metres. Expanding our capacity Our longer-term strategy is to expand our grain cultivation by bringing more high-yielding plots of land under our control, particularly in areas close to our existing operations. In the short- to medium-term we plan to improve yield by modernising our farms and technology, in the ﬁrm belief that increased production will aid us in our plans to increase our chicken production. It will also enable us to capitalise on increasing prices for the products we sell to third parties. Under existing legislation we have pre-emptive rights to buy the land we lease. When the moratorium on sales of agricultural land in Ukraine is lifted, we would consider the commercial viability of purchasing the land on a case-by-case basis. MHP grain operations 735,179 131,000 475,892 101,386 07 08 Production tonnes 08 Cropped hectares approximate 07 ■ Corn ■ Wheat ■ Sunﬂowers ■ Rape ■ Fallow ■ Other MHPs yield is 60% higher than the Ukrainian average Crops harvested from 28% more land in 2008 MHP will use the majority of 2008’s harvest in 2009 Myronivsky Hliboproduct Annual Report 2008 25 BUSINESS REVIEW: OTHER AGRICULTURAL OPERATIONS DELIVERING DIVERSIFICATION Our Other Agricultural Operations division produces a range of fresh and prepared meat products, and fruit. During 2008 we acquired an 80% interest in Ukrainian Bacon to enable us to meet increasing demand for sausages and cooked meat. Increasing production During 2008, production of sausages and cooked meat increased by 113% to 16,000 tonnes, more than double that sold in 2007. Our 80% interest in Ukrainian Bacon, acquired in July 2008, was responsible for more than 60% of this increase. Sales are through convenience and local stores, supermarkets, distributors and the foodservice industry. Sausages and cooked meat We produce and sell various types of pork and beef sausages, smoked and semi-smoked sausages, and ham at our Druzhba Nova complex in the Crimea, and at Ukrainian Bacon in the Donetsk region. Druzhba, an integrated facility for meat production has been fully operational since 2007. It rears around 20,000 head of cattle and 34,000 pigs a year, and grows corn, wheat and barley on 15,000 hectares of irrigated land for its own feed needs. It processes the meat at its fully-automated, modern factory, which produces approximately 40 tonnes of sausages and cooked meat a day. Ukrainian Bacon currently produces around 50 tonnes of sausages and cooked-meat products a day under the “Europroduct” and “Baschinsky” brands. We expect to be able to increase output to 200-250 tonnes a day. 26 Myronivsky Hliboproduct Annual Report 2008 24 Myronivsky Hliboproduct Annual Report 2008 Sausages and cooked meat tonnes Sausages and cooked meat average prices UAH per kg 16,000 16.06 18.23 7,500 07 08 07 08 Producing varied products Beef MHP’s Druzhba farm, breeds pedigree Aberdeen-Angus cattle which are used for our Certiﬁed Angus brand. Goose and foie gras MHP produces goose and foie gras at its Snyatynska complex. The facility comprises parent stock rearing and growing facilities, a hatchery, 38 geese houses and a processing plant. The parent stock at the farm was initially imported from France and Hungary. The Babolna Grey Landes breed has a high hatching capacity and feeds well, producing high-fat liver. We are looking at the possibility of exporting foie gras to Europe. Fruit The group grows apples, pears, peaches, grapes, strawberries, plums and cherries – which are primarily sold to supermarkets – at its farm in Crimea, where the climate is similar to that of Northern Italy. Around 50% of the farm’s 2,110 hectares of land are devoted to apple orchards. Monitoring the market Our activities in this division, including the rearing of cattle and pigs, enable us to keep our ﬁnger on the pulse of the market, to monitor changes in demand and to introduce innovative products to meet them. Production of sausages and cooked meats up 113% in 2008 Sales increased by 82% to US$93 million Myronivsky Hliboproduct Annual Report 2008 25 Myronivsky Hliboproduct Annual Report 2008 27 BUSINESS REVIEW MANAGING RISK MHP has effective policies in place to manage and, where possible, to avoid risk. Some of the risks it faces are common to all commercial operations, others are inherent to farming in general and chicken farming in particular. The principal risks in the group’s operations are macro-economic risks; ﬁnancial risks, including credit, liquidity, currency exchange and interest rate risk; and operating risks, including ﬂuctuations in demand and market prices, avian ﬂu and other diseases, ﬂuctuations in grain prices, increased cost for, or disruptions in, fuel and gas prices, and the weather. Macro-economic risks Conditions in Ukraine MHP’s business is, to a large extent, dependent on Ukraine’s general economy. After seven of years of growth in real GDP, and a commensurate rise in household incomes, in 2008 the economy was affected by the worldwide recession and the hryvna depreciated by 52% against the US dollar during the year. We believe, however, that the economic crisis will not be to our detriment: instead of buying expensive imported meat – pork and beef retail at 50% more than chicken – consumers will increasingly choose to buy locally-produced chicken and, as Ukraine’s largest producer of chicken and chicken products, we will beneﬁt from this change in buying habits. Liquidity risk MHP has a detailed budgeting and cash forecasting process to help it ensure that it has adequate funds available to meet payments due. Our target is to maintain our current ratio, deﬁned as the proportion of current assets to current liabilities, at more than 1:1. Currency exchange risk The majority of our debt is in US dollars. We do not use derivatives, which are neither available nor routinely used in Ukraine, to manage our exposure to the risk of ﬂuctuations in exchange rates. We earn around 15% of our total revenue in US dollars through the sale of sunﬂower oil – a by-product of processing seed for fodder. These earnings represent a hedge against exchange risk and very nearly service our dollar-denominated loans. In addition, our policy of growing the majority of our own ingredients for feed, rather than having to rely on imports, helps to reduce our exposure. Interest rate risk MHP borrows both on ﬁxed and variable bases. The majority of our loans from foreign banks are tied to LIBOR or EURIBOR and are generally at lower interest rates than are available in Ukraine. Changes in rates do, however, affect the cost of our borrowings and the value of our ﬁnancial instruments, and could affect our proﬁt and loss, and shareholders’ equity. We mitigate the risk by having more than 50% of our debt at ﬁxed rates. Banking system risks The economic crisis has resulted in the failure of some Ukrainian banks and others coming under control of the National Bank. We have deposits in one of the State Banks, as well as in some domestic banks. We also have loans from some domestic banks which, in all cases, are larger than our deposits with them. Operational risks Fluctuations in demand and in market prices Demand ﬂuctuates from time to time for a number of reasons, including seasonality, price, consumer preferences, and the price and availability of other types of meat. Falls in demand can generally be overcome with modest price reductions. Financial risks Credit risk MHP controls its exposure to credit risk by limiting the credit allowed to any one customer or group of customers. No single customer represents more than 8% of total sales. Major groups of customers, including franchises and supermarkets, are allowed credit of between ﬁve and 30 days. Credit limits are approved and monitored regularly by MHP’s management, which assesses the recoverability of amounts receivable – for poultry at 30 days after the end of the credit period, for other sales at 60 days after the end of the credit period. We believe that demand for chicken in Ukraine will continue to increase. Per capita consumption is still low compared with other European countries and other meat, such as beef and pork, which is not readily available is far more expensive kg for kg. Avian ﬂu and other livestock diseases In the past ﬁve years, avian ﬂu has affected wild birds and poultry ﬂocks in a number of countries around the world. It was ﬁrst discovered in Ukraine in December 2005 and was still present in the Crimea and Sumy regions in 2008. We operate strict biosecurity measures, including disinfectant washes, culling wild birds in the immediate vicinity of our farms, and vaccinating all employees who have direct contact with our chickens. 28 Myronivsky Hliboproduct Annual Report 2008 Fluctuations in grain prices Because grain forms a signiﬁcant portion of fodder, ﬂuctuations in world prices could have the potential to affect our production costs. We have, to a large extent, overcome this by growing 100% of the corn we need and by replacing protein from expensive imported soybeans with that from sunﬂower seeds. We grow a proportion of our own sunﬂowers and buy the balance from domestic suppliers. As a hedge against ﬂuctuating prices, we enter into forward contracts for feed ingredients, and for selling our grain, such as rape and wheat. Increased cost for, or disruptions in, gas and fuel supplies MHP uses natural gas and fuel to produce and distribute its products. While gas and fuel represent only about 8% of our overall costs, both are imported and, as a result, continuity of supply is uncertain and prices ﬂuctuate. In the longer term, our aim is to increase our use of co-generation and alternative energy technology. We have already begun this process. When we process sunﬂower seeds we are left with a huge amount of husks; we burn some to generate the steam heat for the processing plant and also convert a proportion into briquettes, which we export for generating energy. Weather The yield we gain from our crops depends on the climate. The weather in Ukraine – generally temperate, with plenty of sunshine in the summer and adequate rainfall – combines with the country’s extremely fertile earth to be conducive to agriculture. In addition, our management of the land, and the technology we use, enables us to achieve a yield which is approximately double the norm for Ukraine. Myronivsky Hliboproduct Annual Report 2008 29 BUSINESS REVIEW CORPORATE RESPONSIBILITY REPORT Remuneration We operate a two-tier remuneration scheme: a ﬁxed salary and a performance-related bonus. Fixed salaries comply with employment legislation; performance-related bonuses depend on the efﬁciency and quality of production achieved by each employee, as well as by the facility at which the employee works. They are paid as a ﬁxed sum on an annual basis. Pensions Pensions are based on salary, as required by legislation. We make voluntary post-retirement payments to certain key employees on a case-by-case basis. Holidays All employees are entitled to a minimum of 24 days’ paid holiday, plus Public holidays. Maternity leave Employees are entitled to 70 working days’ paid leave before the birth of their child and 56 working days after the birth. Education We have a programme aimed at attracting and retaining qualiﬁed young people. We sponsor specialised agricultural education for our employees’ children, offer summer employment to students from Ukraine’s leading agricultural colleges, and provide rent-free accommodation for new young employees who join us after taking part in our programme. The environment MHP complies with government regulations under which all Ukrainian meat producers are required to gain approval for the installation of new machinery or the introduction of new technologies. A number of our activities are subject to various laws and regulations on protecting the environment. The various chemicals we use and the waste we produce could, for example, have a negative impact on the wildlife and vegetation close to our facilities if they were discharged improperly. We make annual payments – effectively an environmental tariff – to the State to compensate for any pollution we generate. These payments, which are adjusted each year, are based on expected emissions and would increase signiﬁcantly if actual levels were higher. We have never incurred material environmental penalties nor have we been subject to material environmental investigations. Companies which use packaging in their operations are expected to create their own recycling systems or to make regular payments to the State to cover the cost of recycling. We do not produce a signiﬁcant amount of packaging and our products are predominantly sold in returnable containers. Genetically modiﬁed materials MHP does not use genetically modiﬁed materials in its fodder or its products. Steroids, antibiotics and other substances MHP does not use steroids in its chicken production; it uses antibiotics only to the extent permitted by legislation. Pesticides and agro-chemicals MHP’s crop-rotation process enables it to minimises the use of pesticides and agro-chemicals. To the extent that we use either, we comply with the legislation which governs their use. Employees The majority of our employees belong to trades unions, or labour or workers’ syndicates, and collective bargaining agreements are in place at most of our companies. Our facilities operate year- round and there is little seasonal ﬂuctuation in our labour force. Worksite safety We have instituted programmes to improve worksite safety and working conditions, including training employees. We inspect our equipment regularly and have a labour protection department which is responsible for ensuring that we comply with health and safety requirements. 30 Myronivsky Hliboproduct Annual Report 2008 FINANCIAL REVIEW MHP, one of Ukraine’s leading agro-industrial companies, focuses on producing chicken and chicken products, and processed meat products, and on growing grain. As the leading poultry producer in Ukraine, according to the State Committee on Statistics of Ukraine (SCSU) MHP accounted for approximately 39% of all chicken commercially produced in the country in 2008. We also have one of the country’s largest portfolios of agricultural land: we have approximately 180,000 hectares under our control, of which approximately 150,000 hectares were under cultivation in 2008. In addition, we produce and sell sunﬂower oil as a by- product of producing chicken feed, as well as sausages, cooked meat, convenience food, goose, foie gras, fruit and other agricultural products. Operations Our operations are structured into three segments: Poultry and Related Operations, Grain Growing Operations, and Other Agricultural Operations. Poultry and Related Operations segment produces and sells chicken and chicken products, sunﬂower oil, convenience food, mixed fodder and other related products. In 2008 it accounted for 82.2% of sales (2007: 81.1%). Grain-Growing Operations segment, produces feed grain for our own operations; a proportion is also sold to third parties. In 2008, grain sold to third parties was responsible for 6.2% of MHP’s total revenues (2007: 8.1%). Other Agricultural Operations segment produces and sells sausages and cooked meat, produced by Druzhba and Ukrainian Bacon, as well as goose, foie gras, fruit and other agricultural products. It accounted for 11.6% of 2008 sales (2007: 10.8%). Results Continuing operations Revenue Net change in fair value of biological assets and agricultural produce Cost of sales Gross proﬁt Gross margin Selling, general and administrative expenses Government grants recognised as income Other operating expenses Other operating income Operating proﬁt before loss on impairment of property, plant and equipment EBITDA EBITDA margin Loss on impairment of property, plant and equipment Operating proﬁt Finance costs, net Finance income Foreign exchange losses, net Other expenses Gain realised from acquisitions and changes in non-controlling interest in subsidiaries, net Other income Other expenses, net Proﬁt before tax Income tax expense 2008 US$000 2007 US$000 Change` 802,910 474,437 69% 6,327 14,241 (56%) (571,710) (365,018) 237,527 30% 123,66 26% (80,495) 107,663 (10,022) 600 (51,599) 56,289 (7,275) 1,306 57% 92% 13% 56% 91% 38% (54%) 255,273 122,381 109% 312,211 166,438 35% 39% 88% 11% (11,767) (10,238) 15% 243,506 112,143 117% (51,663) 6,695 (187,127) (784) (49,482) – 4% N/A (13,059) 1,333% 7% (734) 4,482 1,085 1,285 669 249% 62% (227,312) (61,321) 271% 16,194 50,822 (68%) (1,279) (428) 199% Proﬁt for the year from continuing operations 14,915 2% Net income margin 50,394 11% (70%) (83%) In 2008, MHP’s consolidated revenue from continuing operations increased by 69.2% to US$802.9 million (2007: US$474.4 million) – a reﬂection of the strong performance of the company’s poultry division. Gross proﬁt from continuing operations was US$237.5 million (2007: US$123.7 million). Gross margin increased by 13.5% to 29.6% (2007: 26.1%). EBITDA increased by 87.6% year-on-year to US$312.2 million (2007: US$166.4 million); EBITDA margin increased year-on- year to 38.9% (2007: 35.1%). Net proﬁt for the year from continuing operations at US$14.9 million (2007: US$50.4 million) was adversely affected by non-cash foreign exchange losses of US$187.1 million, principally as a result of the revaluation of the company’s foreign-currency debt. This was a result of the signiﬁcant depreciation of the hryvna and a subsequent revaluation of the company’s balance sheet. Myronivsky Hliboproduct Annual Report 2008 31 BUSINESS REVIEW FINANCIAL REVIEW CONTINUED Income statement 2008 by segment Other Poultry agricultural Un- Grain allocated US$000 US$000 US$000 US$000 Total 680,393 94,370 67,430 (1,268) (17,653) (20,362) – 842,193 – (39,283) 660,031 93,102 49,777 – 802,910 (442,326) (91,492) (37,892) (571,710) 17,854 (1,137) (10,390) – 6,327 235,559 473 1,495 – 237,527 In 2008, MHP beneﬁted from various forms of State support, which resulted in signiﬁcant tax savings, as well as from substantial direct government grants and interest subsidies. We received an aggregate of US$107.7 million (2007: US$56.3 million) in government support, including VAT refunds of US$59.3 million (2007: US$21.4 million) and direct subsidies per 1kg of live weight of US$46.1 million (2007: US$29.6 million). On 31 October 2008, The Verkhovna Rada of Ukraine adopted Law No 639-VI “On Immediate Measures to be taken to prevent Negative Consequences of Financial Crisis”. In accordance with this law certain tax rules and policies for agricultural producers were amended, these include: (63,152) (8,958) – (8,385) (80,495) 86,696 11,389 9,578 107,663 • extending VAT payments beneﬁts; and • extending the term of the ﬁxed agricultural tax (this tax exemption had previously been effective until 31 December 2009). (3,938) (2,720) (334) (2,430) (9,422) Revenue Total revenue Inter-segment eliminations Sales to external customers CoGS* Net change in fair value of biological assets and agricultural produce Gross proﬁt Selling, general and administrative expenses Government grants, recognised as income Other operating income/ expenses Segment result/operation proﬁt before loss on impairment The new law, 5922-V1, 04.02.09 (to come into effect 17.03.09), does not restrict the duration of VAT and proﬁt tax beneﬁts for agricultural producers, and will be in effect indeﬁnitely. Foreign currency exchange rates MHP’s operating assets are located in Ukraine and its revenues and costs are principally denominated in hryvnas. Approximately 15% of our revenue and all ﬁnancial costs are denominated in foreign currencies, primarily US dollars. During 2008 the hryvna depreciated approximately 50%, which had a negative effect on the full-year net proﬁt. Management believes that MHP’s exposure to currency exchange rate ﬂuctuations as a result of foreign currency costs is almost completely offset by its US dollar revenue earned from the export of sunﬂower oil and export of meat and sunﬂower husks. In total, during 2008, the company generated US$120.0 million of revenue in foreign currencies. Acquisitions Ukrainian Bacon In July 2008 MHP acquired an 80% interest in Ukrainian Bacon. The amount paid to date amounts to US$25.0 million, the majority of which was to settle Ukrainian Bacon’s existing liabilities. Ukrainian Bacon currently produces approximately 50 tonnes of sausages and cooked meat products a day under the “Europroduct” and “Baschinsky” brands, but we plan to increase that to 200-250 tonnes a day within the next three to ﬁve years. Since the company was acquired on, and consolidated as from, July 2008, revenue from its operations is included in the income statement only from that date. Functional currency The functional currency for the Group’s companies is the Ukrainian hryvna (UAH). Since 30 September 2008, however, for convenience of users of ﬁnancial statements, MHP Group has presented its ﬁnancial statements in US dollars (US$). 255,165 184 10,739 (10,815) 255,273 EBITDA Loss on impairment Operating proﬁt Finance cost Finance income Foreign exchange losses Gains from acquisitions Other income/expenses 296,395 – 255,165 – – – – – Proﬁt before tax Income tax expenses Net proﬁt from continuing operations 7,567 19,064 (10,815) 312,211 – (9,114) (11,767) (2,653) (2,469) 10,739 19,929 243,506 – (51,663) – 6,695 – (187,127) 4,482 – 301 – – – – – – – – – – – 16,194 (1,279) 14,915 * CoGS to external customers, as adjusted for intersegment sales results Discontinued operations In December 2008, in line with its stated strategy of focusing on chicken production and strengthening its vertical integration, the company agreed to sell its stake in LLC Agroﬁrma Kyivska (“Agroﬁrma Kyivska”). Agroﬁrma Kyivska’s principal activity (the cultivation of potatoes) was non-core and, in 2008, returned a loss of US$3.5 million, (2007: US$3.5 million). Further development would have required signiﬁcant investment. Agroﬁrma Kyivska’s operations, which accounted for revenues of US$3.9 million, were classiﬁed as discontinued operations in 2008 and are shown separately in the 2008 income statement. The loss on the disposal of Agroﬁrma Kyivska’s operations was US$6.2 million. State support for agricultural production in Ukraine In view of the agricultural sector’s importance to the national economy, as well as the need to improve living conditions in rural areas, support for the sector is a major priority for the Ukrainian government. During 2008, State support was provided in various forms, including special tax regimes (zero corporation tax), tax privileges (VAT refunds), direct subsidies per 1kg of live weight and compensation for ﬁnance costs under loans from Ukrainian banks. 32 Myronivsky Hliboproduct Annual Report 2008 The relevant exchange rates were: As of As of 31 December Average 31 December for 2008 2008 2007 for 2007 Average 31 December Average 2006 for 2006 As of UAH/US$ UAH/€ 7.7000 10.8555 5.2693 7.7114 5.0500 5.0500 7.4195 6.9192 5.0500 5.0500 6.6509 6.3389 Translation to the presentation currency has been conducted in line with the requirements of IAS 21 “The Effects of Changes in Foreign Exchange Rates”: • assets and liabilities for each balance sheet are translated at the closing rate at the date of the balance sheet; • income and expenses for each income statement are translated at exchange rates at the dates of the transactions; and • all resulting exchange differences are recognised as a separate component of equity. For practical reasons, the Group translated items of income and expenses for each period presented in the ﬁnancial statements using the average rates of exchange which, it estimates, reasonably approximate to the relevant exchange rates at the dates of the transactions. Poultry and Related Operations Revenue – chicken meat – sunﬂower oil – convenience food – other related poultry CoGS* IAS 41 standard gains Gross proﬁt Gross margin EBITDA EBITDA margin 2008 US$m US$000 2007 US$m US$000 660,031 384,865 501,013 283,835 109,974 67,028 20,696 8,344 28,348 25,658 (442,326) (292,929) 7,754 99,960 25.9% 296,395 131,360 34.1% 17,854 235,559 35.7% 44.9% Growth rate 71% 77% 64% 148% 10% 51% 130% 136% 38% 126% 32% * CoGS to external customers, as adjusted for intersegment sales results MHP’s revenue in its Poultry and Related Operations division is principally generated from sales of chicken and, to a lesser extent, of sunﬂower oil (a by-product of its sunﬂower protein production), convenience food, mixed fodder and other related products. The division’s revenue accounted for 82.2% of MHP’s total revenue from continuing operations (2007: 81.1%) and 94.9% of its EBITDA (2007: 78.9%). Revenue from sales of chicken is primarily from sales of chilled chicken, whole or in portions, ancillary products (such as hearts and livers) and frozen chicken. During 2008, consumer demand continued to be high and our existing poultry production facilities all continued to operate at full capacity. As a result, our revenue is principally driven by two factors: the output capacity of our production facilities and increases in prices. In 2008, MHP produced 225,000 tonnes of adjusted weight chicken (245,000 tonnes processed weight) (2007:190,775 tonnes adjusted weight; 172,650 tonnes processed weight). Chicken sales to third parties on an adjusted-weight basis increased by 26% to 215,000 tonnes in 2008 (2007: 170,000 tonnes). This growth was primarily a result of the launch of the ﬁrst phase of the Myronivka chicken complex in the middle of 2007, which reached its full production capacity in October 2007. On an adjusted-weight basis calculated in line with industry standards, the average sale price for our chicken products and by-products increased year-on-year by 44%, to UAH12.03, excluding VAT, per kg compared with 2007. Revenue from sales of chicken increased by 76.5% to US$501.0 million (2007: US$283.8 million) as a result of greater volumes being sold and increased prices. MHP produces sunﬂower oil as a by-product of using sunﬂower seeds in the manufacture of chicken feed. Almost 100% of the sunﬂower oil it produces is exported. US dollar revenue from the sale of sunﬂower oil increased by 64.2% to US$110.0 million (2007: US$67.0 million). This was the result of increased sales, principally as a result of producing more fodder to meet the needs of our expanding chicken production, and increased prices. In 2008 we sold 93,300 tonnes of sunﬂower oil (2007: 88,100 tonnes). Revenue from sales of convenience food increased by 148% to US$20.7 million (2007: US$8.3 million), which comprised 3.1% of the Poultry division’s sales in 2008 (2007: 2.2%). The increase was principally the result of a 137% growth in volume. Revenue from other poultry-related sales, including the sale of excess fodder, was US$28.3 million (2007: US$25.7 million). The cost of raw materials and other inventory in the Poultry division is primarily for feed grain and other items associated with production, such as vitamin additives, utilities, payroll and related expenses, and depreciation. Feed grain and sunﬂower protein represent the major portion of the Poultry division’s costs. Feed grain, primarily corn, is produced by the group’s Grain Growing division and sold between the divisions at prices generally consistent with average market prices at the time of harvesting; sunﬂower protein is also produced internally. The division’s revenue increased by 71.5% in 2008, despite the cost of sales increasing by 51% to US$442.3 million (2007: US$292.9 million). The division’s high level of vertical integration resulted in its gross proﬁt increasing by 135.7% year-on-year to US$235.6 million (2007: US$99.7 million). Gross margin increased to 35.7% (2007: 25.9%). An increase in the average price of chicken, combined with stable costs, resulted in the division’s EBITDA increasing by 125.6% to US$296.4 million (2007:US$131.4 million). Myronivsky Hliboproduct Annual Report 2008 33 BUSINESS REVIEW FINANCIAL REVIEW CONTINUED Grain Growing Operations Revenue – wheat – rape – other crops CoGS* IAS 41 standard gains Gross proﬁt Gross margin EBITDA EBITDA margin 2008 US$000 2007 US$000 Growth rate 49,777 23,218 22,907 3,652 (37,892) (10,390) 1,495 3.0% 19,064 38.3% 38,490 13,048 4,130 21,312 (16,424) 2,334 24,400 63.4% 34,010 88.4% 29% 78% 455% (83)% 131% (545)% (94)% (95)% (44)% (57)% * CoGS to external customers, as adjusted for intersegment sales results MHP grows four major crops: corn and sunﬂowers, which are used in its own operations; rape and wheat, which are sold to third parties in the Ukrainian domestic market. In 2008, the division harvested 131,000 hectares of crops. MHP currently uses the majority of the grain it produces in its own operations. Revenue from the Grain division is attributable to the sale of a certain quantity of grain to third parties. Revenue from the sale of feed grain to third parties was US$49.8 million in 2008 (2007: US$38.5 million) and included the sale of rape, wheat, barley, and soy beans. The division’s costs primarily relate to raw materials, including seed, fertiliser and pesticides, payroll and related expenses, and the depreciation of agricultural machinery, equipment and buildings. The division’s gross proﬁt decreased to US$1.5 million (2007: US$24.4 million) as a result of record low market prices for corn. In 2008, the proﬁt the division generated from the sale of rape and wheat was offset by a net change in corn inventories under IAS 41, which resulted in record low corn prices at the time of harvesting. The company uses 100% of the corn it grows to produce fodder for the Poultry segment. As a result, the Grain division’s 2008 proﬁt will be distributed to the Poultry division in 2009, since the majority of 2008’s harvest will be used by the Poultry division during 2009. In general, the price of corn has no impact on our business since we use the crop we grow in our production process. Divisional EBITDA decreased by 43.9% to US$19.1 million (2007: US$34.0 million) while EBITDA margin decreased to 38.3% (2007: 88.4%) on an external sales basis. Other Agricultural Operations Revenue – meat processing – other CoGS IAS 41 standard gains Gross proﬁt Gross margin EBITDA EBITDA margin 2008 US$000 2007 US$000 Growth rate 93,102 66,122 26,980 (91,492) (1,137) 473 0.5% 7,567 8.1% 51,082 82% 34,523 92% 16,559 63% (55,665) 64% 4,153 (127)% (430) 210% (0.8)% 163% (22.1)% 9,716 19.0% (57.4)% 34 Myronivsky Hliboproduct Annual Report 2008 MHP’s revenue in its Other Agricultural Operations division is generated from the sale of sausages and cooked meat, produced by Druzhba and Urkainian Bacon, and sales of beef, goose, foie gras, milk and fruit. Druzhba’s operations include meat processing, and breeding cattle and pigs for use in its meat-processing operations. It also grows grain on 15,000 hectares of land and has its own fodder facility. An 80% interest in Ukrainian Bacon’s operations was acquired by MHP in July 2008 as a part of the company’s diversiﬁcation strategy – aimed at taking advantage of opportunities in expanding markets – and an increase in the production of value-added products. Based in the Donetsk Region, Ukrainian Bacon produces sausages and cooked meat; more than 50% of the meat used in the production of the sausages is chicken. Revenue from Other Agricultural Operations was US$93.1 million (2007: US$51.1 million) an 82.3% increase year-on-year. This was primarily attributable to an increase in sales volume. Sausage and cooked meat production increased by 113.0% to 16,000 tonnes (2007: 7,500 tonnes). More than 60% of this growth resulted from the acquisition of Ukrainian Bacon. Average sausage and cooked meat prices increased by 14% during the year to UAH18.23 per kg (2007: UAH16.06 per kg), excluding VAT. Revenue from meat processing was US$66.1 million (2007: US$34.5 million). This represented 71.0% of the division’s sales (2007: 67.6%). The cost of raw materials and other inventory used, primarily consists of seeds, fertilisers, pesticides and veterinary medicines. In addition, costs include payroll expenses; depreciation of agricultural machinery, equipment and buildings; and fuel, electricity and natural gas used in the production process. Divisional costs increased by 64.3% to US$91.5 million (2007: US$55.7 million) as a result of increased production. Divisional gross proﬁt increased to US$0.5 million in 2008 (2007: US$(0.4) million). Divisional EBITDA decreased by 22.1% to US$7.6 million (2007: US$9.7 million) and EBITDA margin decreased to 8.1% (2007: 19.0%), primarily as a result of the revaluation of biological assets used in the production of fruit and foie gras. Liquidity and capital resources MHP’s cash ﬂow from operating activities principally resulted from operating proﬁt adjusted for non-cash items, such as depreciation, and for changes in working capital. Net cash generated from operating activities was US$122.7 million (2007: US$98.6 million). Stronger cash ﬂow was driven primarily by higher prices and greater sales volumes. In 2008, the total in working capital was US$140.6 million. The main contributors to working capital were: • a US$52.0 million increase in corn and sunﬂower inventories; • a US$39.8 million increase in VAT-related tax account receivables resulting from signiﬁcant capital expenditure in 2008; • a US$23.1 million increase on biological assets, prinicipally in expenditure on grain-growing production (costs associated with preparing land for the 2009 season) as a result of more hectares of land being used; • a US$25.5 million increase in trade accounts receivable as a result of higher prices, greater supermarket sales, and an increase in sales of meat and convenience food products which have a longer shelf life. US$109 million short-term debt includes a US$35 million revolving committed credit line facility with ING Bank (Ukraine) which matures in 2010; a US$20 million loan from OTP bank, was reﬁnanced in January 2009 and maturity was extended to 2010; and a US$54 million debt which matured in the second half of 2008. The increase in company debt during 2008 was as a result of additional short-term loans to support an increase in working capital and an additional ﬁnance lease for agricultural machinery. Debt Cash ﬂows Funds from operations Increase in working capital Cash from operating activities CAPEX Including non-cash investments Assets sale and other Deposits Cash from investment activities Cash from ﬁnancial activities Effects of exchange rates on cash 2008 US$000 2007 US$000 263,274 107,826 (140,556) (9,261) 122,718 98,565 (265,206) (171,311) 56,266 15,689 (8,055) (107,411) (25,481) 63,929 3,238 (15,581) (213,620) 141,866 (6,980) Growth rate 144% 25% 55% 99% Total debt, US$000 – Eurobond – Ukrainian bonds – Loans covered ECA – Financial leases and vendor ﬁnancing – ST loans* – Other debt Cash and bank deposits Net debt 31 December 31December 2007 US$000 2008 US$000 516,681 467,382 246,903 – 78,697 69,597 109,000 12,484 79,414 437,267 243,604 39,604 86,596 44,441 53,137 – 20,143 447,239 Total change in cash 43,984 (34,327) (228)% In 2008 our total capital expenditure, of US$265.2 million, included the construction of phase 2 of the Myronivka poultry facility, the acquisition of additional agricultural machinery for our arable farms, and the expansion of our meat-processing facilities. CAPEX Mironivka complex Grain growing Meat processing Administrative and distribution Other agricultural projects Maintenance CAPEX Total: 2008 US$000 2007 US$000 99,267 101,898 48,468 14,123 29,251 7,985 46,571 15,956 14,125 15,823 27,524 15,526 265,206 171,311 As at 31 December 2008, the company’s total debt was approximately US$516.7 million, most of which was denominated in US dollars. The average weighted cost of debt is below 10%. US$250 million of the debt is in Eurobonds, which are not redeemable until November 2011. US$79 million of our long-term debt is principally represented by bank loans to ﬁnance agreements with vendors of equipment; it matures at various times up to the end of 2013. US$70 million represents ﬁnancing for the lease of agricultural machinery and equipment used in our grain growing activities and for vehicles for distribution, and has maturities up to 2012. EBITDA from continuing operations 312,211 166,438 Debt/EBITDA Net debt/EBITDA 1.65 1.40 2.81 2.69 * excludes short-term portion of long-term debt Current trading Consumer demand for poultry continues to be high and the company’s production facilities are all operating at full capacity. As a result of lower corn prices and our substitution of sunﬂower protein for imported soybean protein, we expect poultry production costs in the ﬁrst quarter of 2009 to be lower than in same period in 2008. Since most of Ukrainian Bacon’s products are sold to the mass market, in which consumer demand continues to grow, MHP continues to increase the quantity of sausages and cooked meat it produces. EBITDA EBITDA does not represent operating income or net cash provided by operating activities as those items are deﬁned by IFRS and should not be considered as an alternative to operating income or cash ﬂow from operations or indicative of whether cash ﬂows will be sufﬁcient to fund our future cash requirements. EBITDA is not a measure of proﬁtability because it does not include costs and expenses for depreciation and amortisation, net ﬁnance costs and income taxes and foreign exchange gains and losses (net), other expenses and other income, gain realised from acquisitions and changes in non-controlling interests in subsidiaries (net) and loss on impairment of property, plant and equipment. Myronivsky Hliboproduct Annual Report 2008 35 MANAGEMENT AND GOVERNANCE BOARD OF DIRECTORS Dr John C Rich, age 56 Non-executive Director Dr Rich joined the board in 2006. He is the Managing Director of Australian Agricultural Nutrition and Consulting Pty Ltd (AANC) and is a specialist agri-business consultant for the IFC and IFC invested clients. From 1990 to 2003, he was an executive director of Austasia Pty Ltd, an agri-business conglomerate which has operations in Australia, South East Asia and China, and from 1995 to 2002 was a director of AN-OSI Pty Ltd, a company that specialised in supply-chain management for feedlot beef, poultry and dairy operations in Asia and Europe. Dr Rich holds a BSc and a BVSc from the University of Sydney, is a member of the Australian College of Veterinary Scientists and a registered ﬁnancial member of the Australian College of Veterinary Surgeons. He has completed a number of post-graduate courses in agricultural and food-related industries. John Grant, age 63 Non-executive Director Chairman of the Audit Committee Mr Grant is Chairman of Torotrak plc and Hasgo Group Limited, and is a non-executive director of Melrose plc, Pace plc and The Royal Automobile Club Limited. He was previously Chairman of Peter Stubs Limited, the Royal Automobile Club Motor Sports Association Limited and a non-executive director of National Grid plc and Corac Group plc. From 1992 to 1996, he was Finance Director of Lucas Industries plc and Lucas Varity plc, and before that was Director of Corporate Strategy for the Ford Motor Company. Mr Grant holds a BSc in economics from Queen’s University, Belfast, and an MBA from Cranﬁeld School of Management. Charles E Adriaenssen, age 52 Non-executive Chairman Chairman of the Nominations and Remunerations Committee Mr Adriaenssen joined the board as Chairman in 2006. He is founder and Chairman of CA & Partners SA, a consulting and management training company, Chairman of Outhere SA, an independent European classical music publisher, and Chairman of Bastille Investments, a private investment company. He is a director of Rayvax Holdings SA and, between 2004 and 2008, was a non-executive director of EPS SA, the holding company of the Belgian brewer, Inbev. Between 1982 and 1995 he was a diplomat in Belgium’s Foreign Service. Mr Adriaenssen holds a BA in philosophy from the University of Vienna and a law degree from the University of Antwerp. Yuriy Kosyuk, age 40 Chief Executive Ofﬁcer Mr Kosyuk founded MHP in 1998 and is also the CEO of JSC MHP. In 1995 he founded the Business Centre for the Food Industry (BCFI) and was President until 1999. BCFI operated in the domestic and export markets for grain and other agricultural products. Mr Kosyuk graduated as a processing engineer in meat and milk production from the Kiev Food Industry Institute in 1992. Viktoria B Kapelyushnaya, age 39 Chief Financial Ofﬁcer Ms Kapelyushnaya, who is also Financial Director of JSC MHP, joined MHP in 1998 and was elected to the board in 2006. She was previously Deputy Chief Accountant, then Chief Accountant, of BCFI. She holds diplomas in meat processing engineering, 1992, and ﬁnancial auditing, 1998, from the Kiev Institute of Food Industry. Artur Futyma, age 39 Director of Development Mr Futyma joined MHP in 1998 and was elected to the board in 2007. He was previously at BCFI. He is responsible for developing and managing new projects, and was a director of MHP’s agricultural department between 2001 and 2007. He graduated from the Kiev Institute of Food Industry in 1992 with a diploma in food machinery engineering. Yevhen H Shatokhin, age 33 Director of Sales and Marketing Mr Shatokhin joined the MHP board in 2007. He was previously General Director of Druzhba. He graduated from the National University Kiev-Mohyla Academy in 1998 with a diploma in history and political science, and from the Kharkiv State Veterinary Academy in 2006 with a diploma in mechanical engineering. 36 Myronivsky Hliboproduct Annual Report 2008 CORPORATE GOVERNANCE MHP is registered in Luxembourg. Its shares are listed on the London Stock Exchange. The company complies with the non-binding principles on corporate governance contained in “Ten principles of corporate governance of the Luxembourg stock exchange” approved in April 2006. MHP has a clear and transparent corporate governance framework and provides adequate disclosure. Board of directors During the year, the Board comprised Charles E Adriaenssen, Non-executive Chairman, elected 30 May 2006 Yuriy A Kosyuk, Chief Executive Ofﬁcer, elected 30 May 2006 Viktoria B Kapelyushnaya, Chief Financial Ofﬁcer, elected 30 May 2006 Artur Futyma, elected 12 September 2007 Yevhen Shatokhin, elected 30 May 2006 Dr John C Rich, Non-executive Director, elected 30 May 2006 John Grant, Non-executive Director, elected 30 May 2006 Members of the Board are elected by a majority vote of shareholders at the annual general meeting (AGM), may be elected for a six-year period and may be re-elected an unlimited number of times. Of the Board’s seven directors, elected for a three-year term, three are independent. Each director has signed a letter of appointment with the company which applies for as long as he or she remains a director. The letters do not provide for any beneﬁts on termination of directorship and, in the case of Mr Adriaenssen, Dr Rich and Mr Grant, provide for payment of compensation and the reimbursement of certain expenses. Ms Kapelyushnaya, Mr Futyma and Mr Shatokhin do not receive compensation for their service as directors and any expenses incurred are reimbursed by JSC MHP or the relevant subsidiary. The terms and conditions for Mr Kosyuk’s appointment as Chief Executive Ofﬁcer (CEO) were agreed and signed on 21 June 2006. The terms are for the duration of his ofﬁce and do not provide for any beneﬁts on termination of his directorship. Mr Kosyuk may, however, resign from his position as Chief Executive Ofﬁcer only subject to a prior three-months’ notice. The terms contain conﬁdentiality obligations applicable to Mr Kosyuk for a period of ﬁve years after termination of his ofﬁce. The amount of remuneration and beneﬁts paid by the company to the persons responsible for the day-to-day management of the company is reported by the Board of Directors to the AGM. The amount of remuneration and beneﬁts of all members of the Board of Directors, including the Chief Executive Ofﬁcer, regardless of whether such remuneration is paid by the company or by any other entity within the group, is established by the Nominations and Remuneration Committee. In addition, the amount of remuneration paid to non-executive directors is approved by the AGM. Nominations and Remuneration Committee Charles E Adriaenssen, Chairman John Grant Dr John C Rich The committee’s responsibilities include the consideration of the award of stock options to any member of the Board of directors and all matters relating to the remuneration and beneﬁts paid to all members of the Board, including the CEO, regardless of whether that is paid by the company or any other entity in the group. It is also responsible for, among other things, reviewing the composition of the Board, making recommendations to the Board with regard to any changes, and is also authorised to carry out any other functions that may, from time to time, be delegated to it by the Board. Decisions are taken by a majority vote. In the event of an equal vote, the Chairman of the committee has the casting vote. Audit Committee John Grant, Chairman Viktoria B Kapelyushnaya Dr John C Rich The committee is authorised to carry out its functions as may, from time to time, be delegated to it by the Board of Directors, relating to the oversight of audit functions, ﬁnancial reporting and internal control principles, and the appointment, compensation, retention and oversight of the company’s independent auditors. Decisions are taken by a majority vote. In the event of an equal vote, the Chairman of the committee has the casting vote. Internal control/risk management MHP complies with the corporate governance code of the Luxembourg Stock Exchange. The Audit Committee is responsible for overseeing internal control and risk management, and for monitoring its effectiveness. Myronivsky Hliboproduct Annual Report 2008 37 MANAGEMENT AND GOVERNANCE CORPORATE GOVERNANCE CONTINUED Compensation of key management personnel Total compensation of the group’s key management personnel (excluding compensation to Yuriy Kosyuk) included in selling, general and administrative expenses in the accompanying consolidated income statements, amounted to US$9,273,000 (2007: US$2,245,000). Total compensation consists of contractual salary and performance bonuses. Key management personnel totalled 32 (2007: 31). Litigation statement on the directors and ofﬁcers At the date of this annual report, no member of the Board of Directors or of MHP’s senior management had, for at least ﬁve years: 1 any convictions relating to fraudulent offences; 2 been a senior manager or a member of the administrative or supervisory bodies of any company at the time of, or preceding, any bankruptcy, receivership or liquidation; or 3 been subject to any ofﬁcial public incrimination and/or sanction by any statutory or regulatory authority (including any designated professional body) nor had ever been disqualiﬁed by a court from acting as a member of the administrative, management or supervisory bodies of a company, or from acting in the management or conduct of the affairs of a company. Share options At the date of this annual report, neither the company nor JSC MHP has a share option plan and no share options have been granted to members of the Board of Directors, members of the company’s senior management or employees. MHP may consider establishing various compensation structures and granting share options in the future. 38 Myronivsky Hliboproduct Annual Report 2008 DIRECTORS’ REPORT The directors present their annual report and audited ﬁnancial statements for the year ended 31 December 2008. • to continue to develop its distribution network and customer base; and Principal activities and review of the business MHP is one of the leading agro-industrial companies, and the largest producer of chicken, in Ukraine. The business, run on a vertically-integrated principle with the objective of making it self-sufﬁcient, is structured into three segments: Poultry and Related Operations, Grain-Growing Operations, and Other Agricultural Operations. Poultry segment This division produces and sells chicken products, sunﬂower oil, mixed fodder and convenience foods. It incorporates four chicken and two breeder farms, feed mills, and convenience foods facilities. • to continue its agro-industrial diversiﬁcation. The management believes there is ample opportunity for growth as customers choose to buy domestically-produced chicken, which is cheaper and fresher than imported meat. Going concern After reviewing the 2009 budget and longer-term plans, the directors are satisﬁed that, at the time of the approval of the ﬁnancial statements, it was appropriate to adopt the going concern basis in preparing the ﬁnancial statements of the group. Grain segment This division grows crops for fodder, and for sale to third parties, on 180,000 hectares of land. It incorporates a number of arable farms and grain storage facilities. Dividends We do not intend to pay dividends for 2008, but plan to invest all net proﬁts into the business. We ﬁrmly believe that this will be to the long-term beneﬁt of the company and its shareholders. Other Agricultural Operations segment This division produces and sells beef, goose and foie gras, fruit, and sausages and cooked meat. It incorporates two mixed farms, a goose farm and facilities for producing prepared meat products. Directors in the year The following served as directors of the company during the year ended 31 December 2008. More information about the operations of the business is set out in the Chairman’s Statement on page 15, the Chief Executive Ofﬁcer’s review on page 16, and the Business review on pages 18-27. Future developments The group’s strategy is: • to expand its capacity to produce chicken and chicken products in a domestic market which has a 46 million population and one of the world’s lowest rates of meat consumption per capita; • to expand its grain production to provide stability in the ingredients for fodder; • to increase the efﬁciency of its grain production through modernisation and use of up-to-date technology; • to reduce costs and improve quality control by increasing vertical integration; • to maintain, and improve, its high biosecurity standards; • to promote and develop its strong brands through consumer- driven innovation; • to increase its presence in value-added food products, such as processed meat and convenience food; Charles E Adriaenssen, Non-executive Chairman Yuriy Kosyuk, Chief Executive Ofﬁcer Viktoria B Kapelyushnaya, Chief Financial Ofﬁcer Artur Futyma, Deputy CEO Yevhen H Shatokhin, Deputy Chairman, Head of Sales Dr John C Rich, Non-executive Director John Grant, Non-executive Director The directors’ biographies are on page 36 of this report. Election and re-election of directors Details of the procedure for election and re-election of directors is in the Corporate governance report on pages 37-38 of this report. Annual General Meeting (AGM) The AGM will be held at the company’s registered ofﬁce in Luxembourg at 12 noon on 27 April 2009. Disclosure of information to auditors So far as each director is aware, there is no relevant audit information of which the group’s auditors are unaware. Each director has take all steps that he/she ought to have taken in his/her duty as a director in order to make himself/herself aware of any relevant audit information, and to establish that the group’s auditors are aware of that information. Myronivsky Hliboproduct Annual Report 2008 39 FINANCIAL STATEMENTS AND NOTES STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 The following statement, which should be read in conjunction with the independent auditors’ responsibilities stated in the report of the independent auditors set out on page 41, is made with a view to distinguishing the respective responsibilities of management and those of the independent auditors in relation to the ﬁnancial statements of MHP SA and its subsidiaries (the “Group”). Management is responsible for the preparation of the consolidated ﬁnancial statements that present fairly the consolidated ﬁnancial position of the Group as of 31 December 2008, 2007 and 2006, the consolidated results of its operations, cash ﬂows and changes in equity for the years then ended, in accordance with International Financial Reporting Standards (“IFRS”). In preparing the consolidated ﬁnancial statements, management is responsible for: • selecting suitable accounting principles and applying them consistently; • making judgments and estimates that are reasonable and prudent; • stating whether IFRS have been followed, subject to any material departures disclosed and explained in the consolidated ﬁnancial statements; and • preparing the consolidated ﬁnancial statements on a going concern basis, unless it is inappropriate to presume that the Group will continue in business for the foreseeable future. Management, within its competencies, is also responsible for: • designing, implementing and maintaining an effective system of internal controls, throughout the Group; • maintaining statutory accounting records in compliance with local legislation and accounting standards in the respective jurisdictions; • taking steps to safeguard the assets of the Group; and • detecting and preventing fraud and other irregularities. The accompanying consolidated ﬁnancial statements of the Group for the year ended 31 December 2008, 2007 and 2006 are the responsibility of the Group’s management. The consolidated ﬁnancial statements of the Group for the year ended 31 December 2008, 2007 and 2006 were authorised for issue on 9 April 2009 by: Yuriy Kosyuk Chief Executive Ofﬁcer Viktoria Kapelyushnaya Chief Financial Ofﬁcer 40 Myronivsky Hliboproduct Annual Report 2008 INDEPENDENT AUDITORS’ REPORT To the shareholders of MHP S.A. 8-10, rue Mathias Hardt Luxembourg Report on the consolidated ﬁnancial statements Following our appointment by the General Meeting of the Shareholders, we have audited the accompanying consolidated ﬁnancial statements of MHP S.A., which comprise the balance sheet as at December 31, 2008, the income statement, statement of changes in equity and cash ﬂow statement for the year then ended, and a summary of signiﬁcant accounting policies and other explanatory notes. Board of directors’ responsibility for the consolidated ﬁnancial statements The board of directors is responsible for the preparation and fair presentation of these consolidated ﬁnancial statements in accordance with International Financial Reporting Standards as adopted by the European Union. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of consolidated ﬁnancial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on these consolidated ﬁnancial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted by the Institut des réviseurs d’entreprises. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated ﬁnancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated ﬁnancial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated ﬁnancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated ﬁnancial statements 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 entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the board of directors, as well as evaluating the overall presentation of the consolidated ﬁnancial statements. We believe that the audit evidence we have obtained is sufﬁcient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated ﬁnancial statements give a true and fair view of the ﬁnancial position of MHP S.A. as of December 31, 2008 and of its ﬁnancial performance and its cash ﬂows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union. Report on other legal and regulatory requirements The consolidated annual report, which is the responsibility of the board of directors, is consistent with the consolidated ﬁnancial statements. Deloitte S.A. Réviseur d’entreprises Sophie Mitchell Partner April 9, 2009 Myronivsky Hliboproduct Annual Report 2008 41 FINANCIAL STATEMENTS AND NOTES CONSOLIDATED BALANCE SHEETS AS OF 31 DECEMBER 2008, 2007 AND 2006 ASSETS Non-current assets Property, plant and equipment, net Prepayments for property, plant and equipment Deferred tax assets Long-term VAT recoverable, net Non-current biological assets Other non-current assets Total non-current assets Current assets Inventories Biological assets Agricultural produce Natural gas in stock Other current assets, net Taxes recoverable and prepaid, net Trade accounts receivable, net Short-term bank deposits Cash and cash equivalents Total current assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY Equity attributable to equity holders of the Parent Share capital Additional paid-in capital Revaluation reserve Cumulative translation differences Retained earnings Minority interest Total equity Non-Current Liabilities Long-term bank borrowings Bonds issued Long-term ﬁnance lease and vendor ﬁnancing obligations Other long-term payables Deferred tax liabilities Total non-current liabilities Current liabilities Trade accounts payable Accounts payable for property, plant and equipment Other current liabilities Short-term bank borrowings and current portion of long-term bank borrowings Current portion of bonds issued Interest accrued Current portion of ﬁnance lease obligations Deferred income Total current liabilities Total liabilities Contingencies and contractual commitments Total liabilities and shareholders’ equity On behalf of the Board Yuriy Kosyuk Chief Executive Ofﬁcer Notes 2008 US$000 2007 US$000 2006 US$000 7 8 9 10 11 12 10 13 14 15 16 17 18 19 20 21 22 8 23 22 24 20 21 22 25 26 517,564 22,269 2,047 9,112 29,480 6,458 586,930 38,118 84,095 42,765 – 15,370 46,338 31,531 25,342 54,072 624,756 5,883 2,705 1,742 42,096 8,013 487,771 46,246 – 7,855 26,689 4,601 685,195 573,162 42,645 90,785 31,680 – 16,321 45,400 20,363 10,055 10,088 57,091 51,594 21,244 4,841 16,464 41,574 17,727 2,000 44,415 337,631 924,561 267,337 256,950 952,532 830,112 284,505 178,815 9,410 (222,699) 82,480 332,511 13,706 346,217 57,456 246,903 47,972 400 6,160 358,891 22,170 8,116 32,992 130,241 – 3,520 21,625 789 219,453 578,344 251,311 60,059 9,410 6,292 80,962 408,034 11,372 251,311 56,973 536 6,292 39,425 354,537 12,331 419,406 366,868 65,878 243,604 30,538 2,005 6,506 56,054 281,503 17,828 1,474 2,289 348,531 359,148 25,116 9,626 18,085 73,855 39,604 4,102 13,903 304 13,725 11,847 8,754 55,988 – 3,851 9,283 648 184,595 104,096 533,126 463,244 924,561 952,532 830,112 Viktoria Kapelyushnaya Chief Financial Ofﬁcer The notes on pages 47 to 84 form an integral part of these consolidated ﬁnancial statements. Independent auditors’ report is on page 41. 42 Myronivsky Hliboproduct Annual Report 2008 CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 CONTINUING OPERATIONS Revenue Net change in fair value of biological assets and agricultural produce Cost of sales Gross proﬁt Selling, general and administrative expenses Government grants recognised as income Other operating expenses Other operating income Operating proﬁt before loss on impairment of property, plant and equipment Loss on impairment of property, plant and equipment Operating proﬁt Finance costs, net Finance income Foreign exchange losses, net Other expenses Gain realised from acquisitions and changes in non-controlling interest in subsidiaries, net Other income Other expenses, net Proﬁt before tax Income tax expense Proﬁt for the year from continuing operations DISCONTINUED OPERATIONS (Loss)/proﬁt for the year from discontinued operations, net of income tax Net proﬁt for the year Attributable to: Equity holders of the Parent Minority interest Earnings per share From continuing operations (US$ per share): Basic Diluted From continuing and discontinued operations (US$ per share): Basic Diluted Notes 28,4 4 29 30 25 31 7 32 27 2 8 5 35 2008 US$000 2007* US$000 2006* US$000 802,910 6,327 (571,710) 237,527 (80,495) 107,663 (10,022) 600 255,273 (11,767) 474,437 14,241 (365,018) 310,997 9,329 (209,996) 123,660 (51,599) 56,289 (7,275) 1,306 122,381 (10,238) 110,330 (35,074) 46,678 (6,405) 906 116,435 – 243,506 112,143 116,435 (51,663) 6,695 (187,127) (784) (49,482) – (13,059) (734) (36,516) – (5,628) (830) 4,482 1,085 1,285 669 26,470 938 (227,312) (61,321) (15,566) 16,194 (1,279) 14,915 50,822 (428) 100,869 (573) 50,394 100,296 (9,722) 5,193 (3,601) 5,409 46,793 105,705 1,518 3,675 40,870 5,923 100,549 5,156 0.11 0.11 0.01 0.01 0.44 0.44 0.41 0.41 0.95 0.95 1.01 1.01 * Amounts have been retroactively restated as a result of the discontinued operations discussed in Note 5. On behalf of the Board Yuriy Kosyuk Chief Executive Ofﬁcer Viktoria Kapelyushnaya Chief Financial Ofﬁcer The notes on pages 47 to 84 form an integral part of these consolidated ﬁnancial statements. Independent auditors’ report is on page 41. Myronivsky Hliboproduct Annual Report 2008 43 FINANCIAL STATEMENTS AND NOTES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 1 January 2006 Net proﬁt for the year Total recognised income and expense for the period Acquisition of entities under common control (Note 2) Acquisition of non-controlling interest in subsidiaries (Note 2) Increase in minority interest due to sale of shareholding (Note 2) Increase in minority interest due to business combination (Note 2) Establishment of new entities (Note 2) Withdrawal of subsidiary’s share capital by minority shareholder Contribution to share capital and additional paid-in capital The Group’s reorganisation (Note 2) Attributable to Equity Holders of the Parent Additional paid-in Revaluation reserve capital US$000 US$000 Retained earnings US$000 Translation difference US$000 Total US$000 536 – 170,682 100,549 6,292 – 232,217 100,549 Minority interest US$000 33,230 5,156 Total equity US$000 265,447 105,705 – – – – – – – – – 100,549 – – – – – – – (231,806) – – – – – – – – – 100,549 5,156 105,705 22,060 (4,675) 17,385 – – – – – (25,476) (25,476) 321 321 3,116 478 3,116 478 (327) (327) 398 (687) – 508 398 (179) Share capital US$000 54,707 – – – – – – – – – – – 22,060 – – – – – 50 196,554 348 34,565 31 December 2006 251,311 56,973 536 39,425 6,292 354,537 12,331 366,868 Net proﬁt for the year Effect of revaluation of property, plant and equipment (Note 7) Deferred tax charged directly to revaluation reserve (Note 8) Total recognised income and expense for the period Effect of sale of subsidiary to the Principal Shareholder, net of income tax effect (Note 2) Effect of sale of building to the Principal Shareholder, net of income tax effect (Note 6) Acquisition and changes in non-controlling interest in subsidiaries (Note 2) Increase in minority interest due to increase in share capital of subsidiary – – – – – – – – – – – – – 40,870 11,124 (2,250) – – 8,874 40,870 430 405 2,251 – – – – – – – – 667 – – – – – – – – 40,870 5,923 46,793 11,124 (2,250) – – 11,124 (2,250) 49,744 5,923 55,667 430 (3,039) (2,609) 405 – 405 2,251 (4,147) (1,896) 667 304 971 31 December 2007 251,311 60,059 9,410 80,962 6,292 408,034 11,372 419,406 Net proﬁt for the year Cumulative translation difference Total recognised income and expense for the period Increase in share capital (net of issue costs) (Note 19) Acquisition and changes in non-controlling interest in subsidiaries (Note 2) – – – – – – 33,194 118,756 – – – – – – – 1,518 – – (228,991) 1,518 (228,991) 3,675 – 5,193 (228,991) 1,518 (228,991) (227,473) 3,675 (223,798) – – – – 151,950 – 151,950 – (1,341) (1,341) 31 December 2008 284,505 178,815 9,410 82,480 (222,699) 332,511 13,706 346,217 On behalf of the Board Yuriy Kosyuk Chief Executive Ofﬁcer Viktoria Kapelyushnaya Chief Financial Ofﬁcer The notes on pages 47 to 84 form an integral part of these consolidated ﬁnancial statements. Independent auditors’ report is on page 41. 44 Myronivsky Hliboproduct Annual Report 2008 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 OPERATING ACTIVITIES Proﬁt before tax from continuing and discontinued operations Adjustments to reconcile proﬁt to net cash provided by operations Depreciation of property, plant and equipment Finance costs, net Finance income Effect of fair value adjustments Loss on disposal of discontinued operation Gain realised from acquisitions and changes in non-controlling interest in subsidiaries, net Non-operating foreign exchange loss, net Change in allowance for irrecoverable amounts and direct write-offs Impairment of property, plant and equipment Loss/(gain) on disposal of property, plant and equipment Other non-cash items Operating proﬁt before working capital changes (Increase)/decrease in inventories (Increase)/decrease in biological assets Increase in agricultural produce Decrease in natural gas stock Increase in other current assets Increase in taxes recoverable and prepaid (Increase)/decrease in trade accounts receivable (Decrease)/increase in other long-term payables (Decrease)/increase in trade accounts payable Increase/(decrease) in other current liabilities Increase/(decrease) in deferred income Cash generated by operations Finance costs paid Interest received Income tax paid Net cash generated by operating activities INVESTING ACTIVITIES Purchases of property, plant and equipment Purchases of other non-current assets Proceeds from sale of building to the Principal Shareholder Proceeds from disposal of subsidiary, net of cash disposed Proceeds from disposals of property, plant and equipment Purchases of non-current biological assets Financial aid provided in relation to acquisition of subsidiaries and acquisition of non-controlling interest in subsidiaries Short-term deposits placement Withdrawals of short-term deposits Loans (provided to)/repaid by employees, net Loans (provided to)/repaid by related parties, net Contributions to share capital of subsidiaries by minority shareholders Long-term ﬁnancial aid to related parties Acquisition of subsidiaries, net of cash acquired Net cash used in investing activities 2008 US$000 2007 US$000 2006 US$000 6,472 47,187 107,999 57,394 51,663 (6,695) (4,945) 6,193 (4,482) 187,127 5,873 11,767 1,145 – 44,814 49,482 – (11,095) – (1,285) 13,059 5,215 10,238 (660) (777) 23,843 36,516 – (11,790) – (26,470) 5,628 2,650 – 426 (722) 311,512 156,178 138,080 (12,106) (23,066) (44,603) – (726) (39,759) (25,480) (2,523) (976) 6,278 2,405 14,446 (34,138) (8,879) 3,675 (3,422) (150) (3,862) 531 11,391 11,491 (344) (17,737) 702 (8,831) 2,308 (3,504) (28,291) 5,137 (129) (10,228) (9,804) (1,396) 170,956 146,917 66,307 (51,861) 5,976 (2,353) (47,633) 769 (1,488) (33,067) 614 (779) 122,718 98,565 33,075 (179,695) (2,688) – (17) 3,957 (1,462) (17,432) (57,711) 42,130 (1,022) (136) – – 456 (100,149) (3,398) 4,005 4,798 6,529 (11,498) – (11,442) 3,387 (1,053) 673 737 – – (204,494) (2,845) – – 1,003 (21,017) – (2,000) 1,421 549 854 – (3,913) 809 (213,620) (107,411) (229,633) Myronivsky Hliboproduct Annual Report 2008 45 FINANCIAL STATEMENTS AND NOTES CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 FINANCING ACTIVITIES Proceeds from loans received Repayment of bank loans Proceeds from corporate bonds issued Repayment of corporate bonds issued Transaction costs related to corporate bonds issued Finance lease payments Other ﬁnancing received Issue of share capital, net of issue costs Net cash (used in)/generated by ﬁnancing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Effect of translation to presentation currency and exchange rate changes on the balance of cash and cash equivalents held in foreign currencies Cash and cash equivalents at end of the year On behalf of the Board Yuriy Kosyuk Chief Executive Ofﬁcer 2008 US$000 2007 US$000 2006 US$000 274,618 (238,716) – (41,288) – (18,544) 13,846 151,950 156,084 (166,284) – – (2,106) (13,175) – – 271,418 (315,482) 289,604 – (6,290) (5,206) – 398 141,866 (25,481) 234,442 50,964 10,088 (34,327) 37,884 44,415 6,531 (6,980) 54,072 – – 10,088 44,415 Viktoria Kapelyushnaya Chief Financial Ofﬁcer The notes on pages 47 to 84 form an integral part of these consolidated ﬁnancial statements. Independent auditors’ report is on page 41. 46 Myronivsky Hliboproduct Annual Report 2008 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 1 DESCRIPTION OF FORMATION AND THE BUSINESS Description of formation – MHP SA (the “Parent” or “MHP SA”), a limited liability company registered under the laws of Luxembourg, was formed on 30 May 2006. MHP SA was formed to serve as the ultimate holding company of OJSC “Myronivsky Hliboproduct” (“MHP”) and its subsidiaries. The registered address of MHP SA is 8-10, rue Mathias Hardt, L-1717 Luxembourg, Grand-Duchy of Luxembourg. In the course of the corporate reorganisation related to the establishment of MHP SA, Raftan Holding Limited (“RHL”) was established as a sub-holding company under MHP SA, and through a series of transactions became the immediate parent of MHP. As a result of these transactions (collectively referred to as the “Corporate Reorganisation”) MHP SA indirectly owned 99.8% of MHP (see Note 2 for a discussion of the impact on the consolidated ﬁnancial statements related to the Corporate Reorganisation”). References to the “Group” for the periods prior to the formation of MHP SA are references to MHP and its subsidiaries and for the periods after the formation of MHP SA are to MHP SA and its subsidiaries. The primary subsidiaries and the principal activities of the companies forming the Group as of 31 December 2008, 2007 and 2006 were as follows (for details of changes see Note 2): Operating entity MHP SA RHL MHP Myronivsky Zavod po Vygotovlennyu Krup i Kombikormiv (“MZVKK”) Peremoga Nova (“Peremoga”) Druzhba Narodiv Nova (“Druzhba Nova”) Oril-Leader (“Oril”) Tavriysky Kombikormovy Zavod (“TKZ”)** Ptahofabryka Shahtarska Nova (“Shahtarska”) Myronivska Pticefabrica (“Myronivska”) Starynska Ptahofabryka (“Starynska”) Ptahofabryka Snyatynska Nova (“Snyatynska”) Zernoproduct Katerynopilsky Elevator Druzhba Narodiv (“Druzhba”) Agroﬁrma Kyivska (“Kyivska”) Crimean Fruit Company (“Crimean Fruit”) NPF Urozhay (“Urozhay”) Agrofort (“AGF”) Zernoproduct-Lypivka (“ZPL”) Ukrainian Bacon (“UB”) Country of registration Year established/ acquired Luxembourg Republic of Cyprus Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine 2006 2006 1998 1998 1999 2002 2003 2004 2003 2004 2003 2005 2005 2005 2006 2006 2006 2006 2006 2006 2008 Principal activity Holding company Sub-holding company Management, marketing and sales Fodder and sunﬂower oil production Chicken farm Chicken farm Chicken farm Fodder production Breeder farm Chicken farm Breeder farm Geese breeder farm Fodder grain cultivation Fodder production and grain storage Cattle breeding, plant cultivation Cattle breeding Fruits grain cultivation Fodder grain cultivation Fodder grain cultivation Fodder grain cultivation Meat processing Effective ownership interest*, % 2008 Parent 100 2007 Parent 100 2006 Parent 100 99.9 88.5 99.9 99.9 99.9 99.9 99.9 99.9 84.9 99.9 89.9 99.9 99.0 n/a 81.9 89.9 86.1 63.0 79.9 99.8 84.7 99.8 99.8 99.8 99.9 99.8 99.8 84.8 99.8 89.8 99.8 95.3 75.8 81.8 89.8 86.0 62.9 n/a 99.8 84.7 99.8 99.8 99.8 29.4 99.8 99.8 84.8 99.8 89.8 99.8 87.6 75.8 81.8 89.8 86.0 62.9 n/a * Effective voting rights in subsidiaries did not differ from effective ownership rights. Direct ownership interest in subsidiaries by the Parent differs from the effective ownership interest due to cross holdings between subsidiaries. ** The Group consolidated TKZ in 2006 as, in substance, activities of TKZ were conducted on behalf of the Group, so that the Group beneﬁted from TKZ operations, and the Group was exposed to risks incidental to the activities of TKZ. In November 2006, TKZ’s majority shareholder withdrew US$411 thousand of its investment in TKZ resulting in a change in a minority interest. In April 2007, RHL acquired 70.6% of the participatory interests in TKZ from Allied Tech LLC for a cash consideration of US$200 thousand, which resulted in a decrease in minority interest of US$2,451 thousand. The resulting excess of the book value of the minority interest over cash consideration paid of US$2,251 thousand was recognised in these consolidated ﬁnancial statements as an adjustment to shareholders’ equity. Description of the business – The principal business activities of the Group are agricultural operations (poultry and related operations), cultivation and selling fruits and producing beef and meat products ready for consumption (other agricultural operations) and grain growing. The Group’s poultry and related operations integrate all functions related to the production of chicken, including hatching, fodder manufacturing, raising chickens to marketable age (“grow-out”), processing and marketing of branded chilled products and include the production and sale of chicken products, sunﬂower oil, mixed fodder and convenience food products. Other agricultural operations comprise the production and sale of beef, goose meat, foie gras, sausages, fruits, potatoes and feed grains. Grain growing comprises the production and sale of grains and sugar beets. The Group’s operational facilities are located in different regions of Ukraine, including Kyiv, Cherkasy, Dnipropetrovsk, Donetsk, Ivano-Frankivsk, Vinnytsya, Kherson regions and Autonomous Republic of Crimea. Prior to 2007, the Group also had natural gas related operations which were discontinued in the ﬁrst quarter of 2007 (see Note 5). Myronivsky Hliboproduct Annual Report 2008 47 FINANCIAL STATEMENTS AND NOTES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 2 THE GROUP’S FORMATION, ACQUISITIONS AND CHANGES IN OWNERSHIP INTEREST IN SUBSIDIARIES Corporate Reorganisation – As described in Note 1, in 2006 the Corporate Reorganisation was completed in order to establish MHP SA as the ultimate holding company. As the Corporate Reorganisation did not have a direct result on MHP or its subsidiaries and the underlying business has operated for all periods, the consolidated ﬁnancial statements have been prepared to present all years on a comparative basis. There has been no accounting impact from the Corporate Reorganisation except as follows: • Share capital, additional paid-in-capital and retained earnings: For the periods prior to the Corporate Reorganisation, share capital and additional paid in capital is that of MHP. Upon the Corporate Reorganisation share capital was changed to that of MHP SA and additional paid-in capital was determined as the excess of the net assets of the Group as of the date of the Corporate Reorganisation over cost of investment as part of the Corporate Reorganisation. The cost of the investment represents the cash contributed to establish MHP SA and RHL and the value of the contributed shares of MHP to RHL. The Group has elected to record the offset to the capital and additional paid in capital against retained earnings. • Minority Interest: There were certain minority shareholders of 0.4% of MHP at the time of the reorganisation that did not exchange their shares in MHP for shares in MHP SA. As a result, the Group has established a minority interest associated with these minority shareholders. In connection with this Corporate Reorganisation, MHP also entered into an agreement to acquire ownership in Kyivska and Druzhba resulting in an expansion of the Group’s operations and an increase in the value of the Group (see “Kyivska and Druzhba” below). Acquisitions from entities under common control and subsequent purchase of minority interest from third parties Kyivska and Druzhba During 2006, the Group entered into share purchase agreements to acquire 52.0% of voting common shares of Kyivska for cash consideration of US$91 thousand and to purchase 60.5% of Druzhba from Kyivska for US$198 thousand. At the time of the share purchase agreements, Druzhba owned a 99.9% interest in Crimean Fruit Company and a 22.6% interest in Druzhba Nova. Net assets of Druzhba and Kyivska as of the date of acquisition were as follows: Property, plant and equipment, net Accounts receivable from the Group Non-current biological assets Investment in Druzhba Nova Other non-current assets Inventories and agricultural produce Current biological assets Trade accounts receivable, net Cash and cash equivalents Total assets Long-term bank borrowings and other long-term payables Short-term bank borrowings Accounts payable to the Group Trade accounts payable Other current liabilities Deferred income Total liabilities Net assets/(liabilities) acquired Net liabilities attributable to 52.0% ownership interest of Kyivska Net assets attributable to 60.5% ownership interest of Druzhba Decrease in minority interest in Druzhba Nova Purchase price Druzhba’s consolidated carrying amounts US$000 26,151 22,578 6,939 4,475 2,152 5,315 13,261 9,921 703 91,495 (9,754) (4,500) (36,264) (1,009) (1,615) – Kyivska’s carrying amounts US$000 5,021 932 2,569 – 930 1,886 1,352 14,992 6 27,688 (591) – (39,367) (117) (2,989) (231) (53,142) (43,295) 38,353 (15,607) – 23,189 14,767 (198) (15,607) – – (91) Difference between purchase price and net assets/(liabilities) acquired recorded in shareholders’ equity 37,758 (15,698) Cash acquired Net cash inﬂow arising on the acquisition 703 703 6 6 As a result of the Druzhba acquisition in March 2006, the Group obtained an additional 13.7% effective ownership in Druzhba Nova, resulting in a decrease of minority interest by US$19,242 thousand as of the date of acquisition. 48 Myronivsky Hliboproduct Annual Report 2008 2 THE GROUP’S FORMATION, ACQUISITIONS AND CHANGES IN OWNERSHIP INTEREST IN SUBSIDIARIES CONTINUED In accordance with the Group’s accounting policy, assets and liabilities of these entities were recognised at the pre-acquisition carrying values. The excess of the carrying value of the assets over consideration paid of US$22,060 thousand was recorded in shareholders’ equity. The results of Kyivska and Druzhba were consolidated by the Group from the date of acquisition of control. As the minority shareholder does not have any obligation to fund losses of Kyivska, the Group has recognised 100% of the net liabilities and has not established a minority interest. In June 2006, the Group purchased an additional 23.8% ownership in Kyivska from a minority shareholder for a cash consideration of US$2 thousand increasing its ownership to 75.8%. In June 2006, MHP acquired 82.0% of voting shares in Crimean Fruit Company from Druzhba for US$162 thousand. The remaining shares of Crimean Fruit Company were sold to the General Director of Crimean Fruit Company for US$18 thousand. The difference between the consideration paid and the fair value of the net assets acquired, after reversing minority interest, of US$261 thousand, was recognised in these consolidated ﬁnancial statements in “Gain realised from acquisitions, disposals and changes in non-controlling interest in subsidiaries, net”. In September 2006, the Group acquired an additional 27.3% shareholding in Druzhba from third parties for US$764 thousand. As a result of the transaction, the Group acquired additional effective interest of 6.2% in Druzhba Nova. The excess of the fair value of the acquired share of Druzhba’s and Druzhba Nova’s net assets over purchase price, after reversing the minority interest, of US$20,959 thousand was recognised in these consolidated ﬁnancial statements in “Gain realised from acquisitions, disposals and changes in non-controlling interest in subsidiaries, net”. In October 2006, MHP purchased 22.6% shares of Druzhba Nova from Druzhba resulting in an increase in its total ownership of Druzhba Nova to 100.0%. The difference between the purchase price of US$158 thousand and the net assets acquired, after reversing the minority interest, of US$4,499 thousand was recognised in these consolidated ﬁnancial statements in “Gain realised from acquisitions, disposals and changes in non-controlling interest in subsidiaries, net”. During the year ended 31 December 2007, through a series of transactions, the Group increased its effective ownership in Druzhba to 95.3%. These transactions resulted in the recognition of US$1,285 thousand in these consolidated ﬁnancial statements in “Gain realised from acquisitions, disposals and changes in non-controlling interest in subsidiaries, net”. In August 2008, Druzhba decreased its share capital by repurchasing shares from a number of its minority shareholders, which resulted in an increase of the Group’s effective ownership in Druzhba from 95.3% to 98.9%. Consideration payable to the minority shareholders in exchange for the shares was determined based on the respective shareholder’s share in the net assets of Druzhba, as recorded in the statutory ﬁnancial statements as of the date of transaction, and was payable in cash or in kind, depending on the agreements reached with each shareholder. The excess of the fair value of the acquired share over the consideration payable of US$161 thousand was recognised in these consolidated ﬁnancial statements in “Gain realised from acquisitions and changes in non-controlling interest in subsidiaries, net”. In December 2008, prior to the sale of its interest, the Group increased the share capital of Kyivska, which resulted in an increase in the Group’s effective ownership to 99.7%. The transaction did not have effect on the minority interests due to negative net assets of Kyivska as of the date of the transaction. The Group subsequently sold its interest in Kyivska prior to the year end. Acquisitions from third parties Urozhay In October 2006, the Group acquired from a third party 89.8% interest in Urozhay for US$595 thousand. Urozhay specialises in fodder grain cultivation. This transaction has been accounted for under the purchase method of accounting. The fair value of the net assets acquired was as follows: Property, plant and equipment, net Other non-current assets Other investments Inventories, biological assets and agricultural produce Trade accounts receivable, net Cash and cash equivalents Total assets Other long-term payables Short-term bank borrowings Trade accounts payable Other current liabilities Total liabilities Net assets acquired Fair value of net assets attributable to 90.0% ownership interest Cash consideration paid Cash acquired Net cash outﬂow arising on the acquisition US$000 893 6 33 6,146 4,146 100 11,324 (32) (990) (9,265) (376) (10,663) 661 595 (595) 100 (495) The revenue and ﬁnancial results of Urozhay for the year ended 31 December 2006 were insigniﬁcant. Myronivsky Hliboproduct Annual Report 2008 49 FINANCIAL STATEMENTS AND NOTES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 2 THE GROUP’S FORMATION, ACQUISITIONS AND CHANGES IN OWNERSHIP INTEREST IN SUBSIDIARIES CONTINUED Ukrainian Bacon In July 2008, the Group acquired from a third party a 80.0% interest in Ukrainian Bacon, a meat processing company. The transaction was accounted for under the purchase method of accounting. The Group’s effective ownership interest in Ukrainian Bacon upon the acquisition and as of 31 December 2008 was 79.9%. The fair value of the net assets acquired was as follows: Property, plant and equipment, net Prepayments for property, plant and equipment Other non-current assets Taxes recoverable and prepaid, net Other current assets, net Trade accounts receivable, net Accounts receivable from the Group Inventories Cash and cash equivalents Total assets Deferred tax liabilities Trade accounts payable Accounts payable to the Group Other current liabilities Total liabilities Net assets acquired Fair value of net assets attributable to 80% ownership interest Fair value of the consideration payable Gain realised upon acquisition Cash consideration paid Cash acquired Net cash inﬂow arising on the acquisition US$000 28,737 662 302 3,492 2,605 107 732 1,408 456 38,501 (2,630) (7,501) (20,344) (2,989) (33,464) 5,037 4,030 (469) 3,561 – 456 456 The gain realised upon acquisition was recognised within “Gain realised from acquisitions and changes in non-controlling interest in subsidiaries, net” for the year ended 31 December 2008. Prior to and in connection with the acquisition, in order to ﬁnance working capital deﬁcit of Ukrainian Bacon, the Group provided short-term interest-free returnable ﬁnancial aid to Ukrainian Bacon for the total amount of US$17,432 thousand, as well as provided extended payment terms on ordinary trade transactions in the amount of US$2,180 thousand as of the date of acquisition. Other acquisitions MHP During 2006, the Group acquired an additional shareholding in MHP from minority shareholders, which resulted in the Group owning 99.8% of MHP as of 31 December 2006. The related excess of the fair value of share of net assets acquired over the purchase price of US$752 thousand was recognised in these consolidated ﬁnancial statements in “Gain realised from acquisitions, disposals and changes in non-controlling interest in subsidiaries, net” for the year ended 31 December 2006. In September 2008 the Group increased the share capital of MHP, which resulted in the Group owning 99.9% in MHP as of 31 December 2008. The gain on the transaction in the amount of US$718 thousand was recognised in these consolidated ﬁnancial statements in “Gain realised from acquisitions, disposals and changes in non-controlling interest in subsidiaries, net”. MZVKK During the year ended 31 December 2008, through a series of transactions, the Group increased its effective share in MZVKK from 84.7% to 88.5%. The excess of the fair value of the share of the net assets acquired over the purchase price in the amount of US$42 thousand was recognised in these consolidated ﬁnancial statements in “Gain realised from acquisitions, disposals and changes in non-controlling interest in subsidiaries, net”. Other The Group made other insigniﬁcant acquisitions during each of the periods presented. These acquisitions have been accounted for based on the Group’s accounting policies. The impact of these acquisitions was not signiﬁcant to the consolidated ﬁnancial statements of the Group. 50 Myronivsky Hliboproduct Annual Report 2008 2 THE GROUP’S FORMATION, ACQUISITIONS AND CHANGES IN OWNERSHIP INTEREST IN SUBSIDIARIES CONTINUED “Pro forma” results of Acquisitions – The “pro forma” revenues and results for the year ended 31 December 2006, had the transactions related to Kyivska and Druzhba as discussed above been entered into on 1 January 2006, would have been US$318,746 thousand and US$101,496 thousand, respectively. The “pro forma” earnings per share would have been US$0.96 per share and US$1.01 per share from continuing and discontinued operations, respectively. The “pro forma” revenues and results for the year ended 31 December 2008, had the acquisition of Ukrainian Bacon been completed on 1 January 2008, would have been US$809,358 thousand and US$3,793 thousand, respectively. The “pro forma” earnings per share would have been US$0.11 and US$0.01 per share from continuing and discontinued operations, respectively. These “pro forma” revenues and results do not reﬂect any adjustments related to other transactions. The “pro forma” results represent an approximate measure of the performance of the combined Group on an annualised basis. The unaudited “pro forma” information does not purport to represent what the Group’s ﬁnancial position or results of operations would actually have been if these transactions had occurred at such dates or to project the Group’s future results of operations. Establishment of new subsidiaries – In September 2006, the Group established ZZG, a mink production company contributing US$4,395 thousand into its share capital. In November 2006, ZZG’s minority shareholder, LLC Elite, contributed assets comprising the mink production complex in exchange for 41% of the participatory interests in ZZG. The assets contributed by LLC Elite were recorded at fair value at the date of contribution. Assets contributed by LLC Elite in ZZG were as follows: Property, plant and equipment, net Non-current biological assets (mink) Total assets US$000 694 2,360 3,054 In February 2006, the Group, together with a third party, established a new subsidiary Zernoproduct-Lypivka engaged in grain-growing activities. The Group’s share was fully paid in cash for US$869 thousand; share capital contribution by the third party was paid in kind by property, plant and equipment. As of 31 December 2006, the Group’s effective interest in Zernoproduct-Lypivka was 62.9%. In September 2006, the Group, together with a third party, established Agrofort, which is engaged in grain-growing activities with participatory interest of 86.2% and 13.8%, respectively. The Group share was fully paid in cash; share capital contribution by the third party was paid in kind by property, plant and equipment. Disposal of subsidiaries ZZG In April 2007, the Group sold its shares in ZZG to its Principal Shareholder for a cash consideration of US$4,798 thousand. The excess of the consideration received by the Group over the carrying value of the net assets of ZZG of US$430 thousand was recorded in shareholders’ equity. Assets and liabilities of ZZG as of the date of disposal were as follows: Property, plant and equipment, net Non-current biological assets (mink) Accounts receivable and other current assets, net Current liabilities (including payables to the Group of US$325) Net assets disposed Net assets attributable to 59% ownership in ZZG Sale price Gain recorded in shareholders’ equity Cash consideration received Cash disposed Net cash inﬂow arising on the disposal US$000 2,392 3,006 2,368 (363) 7,403 4,368 (4,798) (430) 4,798 – 4,798 The ﬁnancial results of ZZG for the years ended 31 December 2007 and 2006 were insigniﬁcant. ZZG assets and liabilities were presented in these consolidated ﬁnancial statements within the other agricultural business segment. Myronivsky Hliboproduct Annual Report 2008 51 FINANCIAL STATEMENTS AND NOTES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 2 THE GROUP’S FORMATION, ACQUISITIONS AND CHANGES IN OWNERSHIP INTEREST IN SUBSIDIARIES CONTINUED Kyivska In December 2008, the Group sold its voting rights in Kyivska to a third party for a consideration of US$974 thousand, receivable in cash during the period from 2011 till 2017. The fair value of the consideration receivable was determined at US$341 thousand, which is the present value of the expected future cash ﬂows. Assets and liabilities of Kyivska as of the date of disposal were as follows: Property, plant and equipment, net Biological assets Agricultural produce Amounts receivable from the Group Inventories Taxes recoverable and prepaid, net Cash and cash equivalents Total assets Accounts payable to the Group Trade accounts payable Other current liabilities Total liabilities Net assets disposed Group’s share in net assets disposed (99.8%) Fair value of consideration receivable Loss on disposal Cash consideration received Cash disposed Net cash outﬂow arising on the disposal US$000 3,709 1,723 1,507 8,300 224 1,123 17 16,603 (9,315) (501) (240) (10,056) 6,547 6,534 (341) (6,193) – (17) (17) The disposal of Kyivska was accounted for in these consolidated ﬁnancial statements as a discontinued operation (Note 5). The loss realised on disposal of Kyivska in the amount of US$6,193 thousand was recognised in these consolidated ﬁnancial statements in “Loss for the year from discontinued operations”. Kyivska assets and liabilities were presented in these consolidated ﬁnancial statements within the other agricultural business segment. 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation and accounting − The consolidated ﬁnancial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and Interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”). The operating subsidiaries of the Group maintain their accounting records under Ukrainian Accounting Standards (“UAS”). UAS principles and procedures may differ from those generally accepted under IFRS. Accordingly, the consolidated ﬁnancial statements, which have been prepared from the Group entities’ UAS records, reﬂect adjustments necessary for such ﬁnancial statements to be presented in accordance with IFRS. The consolidated ﬁnancial statements of the Group are prepared on the historical cost basis, except for revalued amounts of property, plant and equipment, biological assets, agricultural produce, natural gas in stock and certain ﬁnancial instruments. Adoption of new and revised International Financial Reporting Standards − Three Interpretations issued by the International Financial Reporting Interpretations Committee are effective for the current period. These are: IFRIC 11 “IFRS 2: Group and Treasury Share Transactions”, IFRIC 12 “Service Concession Arrangements”, IFRIC 14 “IAS 19 – The Limit on a Deﬁned Beneﬁt Asset, Minimum Funding Requirements and their Interaction”. The adoption of these Interpretations has not led to any changes in the Group’s accounting policies. 52 Myronivsky Hliboproduct Annual Report 2008 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED At the date of authorisation of these consolidated ﬁnancial statements, the following Standards and Interpretations, as well as amendments to the Standards, were in issue but not yet effective: Standard/Interpretation IAS 1 “Presentation of Financial Statements” (Revised September 2007) IAS 23 “Borrowing Costs” (Revised March 2007) IFRS 1 “First-time Adoption of International Financial Reporting Standards (Revised November 2008) IFRS 3 “Business Combinations” (Revised January 2008) IFRS 8 “Operating Segments” IFRIC 13 “Customer Loyalty Programmes ” IFRIC 15 “Agreements for the Construction of Real Estate” IFRIC 16 “Hedges of a Net Investment in a Foreign Operation” IFRIC 17 “Distributions of Non-cash Assets to Owners” IFRIC 18 “Transfers of Assets from Customers” Amendments to IAS 27 “Consolidated and Separate Financial Statements” (January 2008) Amendment to IAS 39 “Financial Instruments: Recognition and Measurement” – Eligible Hedged Items (July 2008) Amendment to IAS 39 “Financial Instruments: Recognition and Measurement” – Effective Date and Transition (November 2008) Amendment to IFRS 7 “Financial Instruments: Disclosures” (March 2009) Amendments to IFRIC 9 “Reassessment of Embedded Derivatives” and IAS 39 “Financial Instruments: Recognition and Measurement” * Standards and Interpretations not endorsed by the European Union. Effective for annual accounting period beginning on or after: 1 January 2009 1 January 2009 1 July 2009* 1 July 2009* 1 January 2009 1 July 2008 1 January 2009* 1 October 2008* 1 July 2009* 1 July 2009* 1 July 2009* 1 July 2009* 1 July 2008* 1 January 2009* 30 June 2009* The management is currently evaluating the impact of the adoption of IFRS 8 “Operating Segments”, IAS 27 “Consolidated and Separate Financial Statements” and IFRS 3 “Business Combinations” (Revised January 2008). For other Standards and Interpretations management anticipates that their adoption in future periods will have no material effect on the consolidated ﬁnancial statements of the Group. Use of estimates and assumptions − The preparation of the ﬁnancial statements requires management of the Group to make judgments, estimates and assumptions that affect the application of the standards and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. These consolidated ﬁnancial statements include Group’s management estimates on value of assets, liabilities, income, expenses and commitments recognised. The most signiﬁcant estimates related to the following: • Determination of the fair value of the biological assets; • Fair values of assets and liabilities acquired in business combinations; • Impairment of items of property, plant and equipment; • Allowances for irrecoverable accounts receivable and taxes recoverable; • Estimates of the useful lives of property, plant and equipment; • Determination of whether deferred tax assets are realisable; • Allowance for obsolete and slow-moving raw materials and spare parts. Although the estimates were based on the best information available as of 31 December 2008, future events may require these estimates to be modiﬁed (increased or decreased) in subsequent years. This may result in the recognition of expense in a future period related to amounts from prior periods. Any change in accounting estimates would be recognised prospectively in the corresponding consolidated income statement. Critical accounting judgements in applying accounting policies − The following are the critical judgements, apart from those involving estimates (see above), that the management has made in the process of applying the Group’s accounting policies and that have the most signiﬁcant effect on the amounts recognised in the consolidated ﬁnancial statements: • Determination of the Group’s functional currency; • Consolidation of special purpose entities on the basis of effective control; • Determination of reportable segments; • Determination of whether signiﬁcant risks and rewards associated with ownership of assets were transferred to the Group. Myronivsky Hliboproduct Annual Report 2008 53 FINANCIAL STATEMENTS AND NOTES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Functional and presentation currency − The functional currency of MHP SA and each of its subsidiaries is the Ukrainian Hryvnia (“UAH”). Transactions in currencies other than the functional currency of the Group are treated as transactions in foreign currencies. Such transactions are initially recorded at the rates of exchange ruling on the dates of the transactions. Monetary assets and liabilities denominated in such currencies are translated at the rates prevailing on the balance sheet date. All realised and unrealised gains and losses arising on exchange differences are included in the consolidated income statement for the period. In the current year, the Group has chosen to present its consolidated ﬁnancial statements in US dollars (“US$”). The decision was taken for convenience of the users of ﬁnancial statements. The results and ﬁnancial position of the Group are translated into the presentation currency using the following procedures: • Assets and liabilities for each consolidated balance sheet presented are translated at the closing rate as of the date of that balance sheet; • Income and expenses for each consolidated income statement are translated at exchange rates at the dates of the transactions; • All resulting exchange differences are recognised as a separate component of equity. The relevant exchange rates were: UAH/US$ UAH/EUR As of 31 December 2008 As of Average 31 December for 2008 2007 As of Average 31 December 2006 for 2007 7.7000 10.8555 5.2693 7.7114 5.0500 7.4195 5.0500 6.9192 5.0500 6.6509 Average for 2006 5.0500 6.3389 Basis of consolidation − The consolidated ﬁnancial statements incorporate the ﬁnancial statements of the Parent and entities controlled by the Parent (its subsidiaries). Control is achieved when the Parent has the power to govern the ﬁnancial and operating policies of an investee, either directly or indirectly, so as to obtain beneﬁts from its activities. The ﬁnancial statements of subsidiaries are included in the consolidated ﬁnancial statements of the Group from the date when control effectively commences. All signiﬁcant inter-company transactions, balances and unrealised gains/(losses) on transactions are eliminated on consolidation, unless when the intragroup losses indicate an impairment that requires recognition in the consolidated ﬁnancial statements. Where necessary, adjustments are made to the ﬁnancial statements of subsidiaries to bring the accounting policies used in line with those adopted by the Group. The Group consolidates a special purpose entity under the provisions of SIC 12, “Consolidation – Special Purpose Entities” when, in substance, the activities of such an entity are being conducted on behalf of the Group, so that the Group beneﬁts from the entity’s operations, and the Group is exposed to risks incidental to the activities of this entity. Accounting for acquisitions − The acquisitions of subsidiaries from third parties are accounted for using the purchase method. On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values. The interest of minority shareholders of subsidiaries acquired from third parties is stated at the minority’s proportion of the fair values of the assets and liabilities recognised. The excess of the cost of acquisition over the fair value of the Group’s share of the net identiﬁable assets of the acquired subsidiary at the date of acquisition is recognised as goodwill. Any excess of the fair value of the share in net identiﬁable assets over the cost of acquisition is recognised immediately in the consolidated income statement. The acquisition of an additional interest in entities controlled by the Group are accounted for based on the fair value of the net assets at the date of acquisition. Accounting for transactions with entities under common control − The assets and liabilities of subsidiaries acquired from entities under common control are recorded in these consolidated ﬁnancial statements at pre-acquisition carrying values. Any difference between the carrying value of net assets of these subsidiaries, and the consideration paid by the Group is accounted for in these consolidated ﬁnancial statements as an adjustment to shareholders’ equity. The results of the acquired entity are reﬂected from the date of acquisition. Any gain or loss on disposals to entities under common control are reﬂected as a component of shareholders’ equity. Discontinued operations − Non-current assets and disposal groups are classiﬁed as held for sale if their carrying amounts will be recovered through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classiﬁcation. Non-current assets and disposal groups classiﬁed as held for sale are measured at the lower of the assets’ carrying amount and fair value less costs to sell. 54 Myronivsky Hliboproduct Annual Report 2008 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED If the criteria of classiﬁcation of the disposal group held for sale are met after the balance sheet date, the disposal group is not presented as held for sale in those ﬁnancial statements when issued. However, when those criteria are met after the balance sheet date but before the authorisation of the ﬁnancial statements for issue, the Group discloses the respective information in notes to the ﬁnancial statements. Non-current assets or disposal groups to be abandoned are not classiﬁed as held for sale as the carrying amount will be recovered principally through continuing use. Non-current assets or disposal groups to be abandoned include non-current assets or disposal groups that are to be used to the end of their economic life or to be closed rather than sold. The assets or disposal groups to be abandoned are reported as discontinued operations in the period at which they are abandoned. Property, plant and equipment − Property, plant and equipment are carried at historical cost, or at the cost of construction, less accumulated depreciation and accumulated impairment losses, except for grain storage facilities, which are carried at revalued amounts, being their fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. The historical cost of an item of property, plant and equipment comprises (a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; (b) any costs directly attributable to bringing the item to the location and condition necessary for it to be capable of operating in the manner intended by the management of the Group; (c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which the Group incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. Subsequently capitalised costs include major expenditures for improvements and replacements that extend the useful lives of the assets or increase their revenue generating capacity. Repairs and maintenance expenditures that do not meet the foregoing criteria for capitalisation are charged to the consolidated income statement as incurred. Revaluations are performed with sufﬁcient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the balance sheet date. If the asset’s carrying amount is increased as a result of a revaluation, the increase is credited directly to equity as a revaluation reserve. However, such increase is recognised in the consolidated income statement to the extent that it reverses a revaluation decrease of the same asset previously recognised in the consolidated income statement. If the asset’s carrying amount is decreased as a result of a revaluation, the decrease is recognised in the consolidated income statement. However, such decrease is debited directly to the revaluation reserve to the extent of any credit balance existing in the revaluation reserve in respect of that asset. Depreciation on revalued assets is charged to the consolidated income statement. On the subsequent sale or retirement of a revalued asset, the attributable revaluation surplus remaining in the revaluation reserve is transferred directly to retained earnings. No transfer is made from the revaluation reserve to retained earnings except when an asset is derecognised. Depreciation of property, plant and equipment is charged so as to write-off the depreciable amount over the useful life of an asset and is calculated using a straight line method. Useful lives of the groups of property, plant and equipment are as follows: Buildings and structures Grain storage facilities Machinery and equipment Utilities and infrastructure Vehicles and agricultural machinery Ofﬁce furniture and equipment 15-35 years 20-35 years 10-15 years 10 years 5-15 years 3-5 years Depreciable amount is the cost of an item of property, plant and equipment, or revalued amount, less its residual value. The residual value is the estimated amount that the Group would currently obtain from disposal of the item of property, plant and equipment, after deducting the estimated costs of disposal, if the asset was already of the age and in the condition expected at the end of its useful life. The depreciable amount of assets held under ﬁnance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease. The residual value, the useful lives and depreciation method are reviewed at each ﬁnancial year-end. The effect of any changes from previous estimates is accounted for as a change in an accounting estimate. The gain or loss arising on a sale or disposal of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in consolidated income statement. Construction in progress comprises costs directly related to construction of property, plant and equipment including an appropriate allocation of directly attributable variable overheads that are incurred in construction. Construction in progress is not depreciated. Depreciation of the construction in progress, on the same basis as for other property, plant and equipment items, commences when the assets are available for use, i.e. when they are in the location and condition necessary for them to be capable of operating in the manner intended by the management. Myronivsky Hliboproduct Annual Report 2008 55 FINANCIAL STATEMENTS AND NOTES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED At each balance sheet date, the Group reviews the carrying amounts of its property, plant and equipment to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identiﬁable cash ﬂows (cash-generating units). Recoverable amount is the higher of fair value less costs to sell and value in use. 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. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in the consolidated income statement, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (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 (cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in the consolidated income statement, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. Income taxes − Income taxes have been computed in accordance with the laws currently enacted in jurisdictions where operating entities are located. Income tax is calculated based on the results for the year as adjusted for items that are non-assessable or non-tax deductible. It is calculated using tax rates that have been enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the consolidated ﬁnancial statements and the corresponding tax basis used in the computation of taxable proﬁt. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable proﬁts will be available against which deductible temporary differences can be utilised. Deferred tax is charged or credited to the consolidated income statement, except when it relates to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity. Deferred income tax assets and liabilities are offset when: • The Group has a legally enforceable right to set-off the recognised amounts of current tax assets and current tax liabilities; • The Group has an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously; • The deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority in each future period in which signiﬁcant amounts of deferred tax liabilities and assets are expected to be settled or recovered. Thirteen of the Group companies (poultry farms and other entities engaged in agricultural production) beneﬁt substantially from the status of an agricultural producer. These thirteen companies are exempt from income taxes and pay the Fixed Agricultural Tax instead (Note 8). Inventories and natural gas stock for own usage − Inventories and natural gas stock for own usage of the Group are stated at the lower of cost and net realisable value. Cost comprises raw materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present locations and condition. Cost is calculated using the FIFO (ﬁrst-in, ﬁrst-out) method. Net realisable value is determined as the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Agriculture-related production process results in production of joint products: main and by-products. A by-product arising from the process is measured at net realisable value and this value is deducted from the cost of the main product. Commodities − The Group’s commodities are principally acquired by the Group with the purpose of selling in the near future and generating a proﬁt from ﬂuctuations in price. Commodities held by the Group for resale represent natural gas in stock and are measured at each balance sheet date at fair value. Biological assets and agricultural produce − Agricultural activity is deﬁned as a biological transformation of biological assets for sale into agricultural produce or into additional biological assets. The Group classiﬁes hatchery eggs, live poultry and other animals and plantations as biological assets. The Group recognises 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. Biological assets are stated at fair value less estimated point-of-sale costs at both initial recognition and as of the balance sheet date, with any resulting gain or loss recognised in the consolidated income statement. Point-of-sale costs include all costs that would be necessary to sell the assets, including costs necessary to get the assets to market. 56 Myronivsky Hliboproduct Annual Report 2008 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED The difference between fair value less estimated point-of-sale costs and total production costs is allocated to biological assets held in stock as of each balance sheet date as a fair value adjustment. The change in this adjustment from one period to another is recognised in “Net change in fair value of biological assets and agricultural produce” in the consolidated income statements. Agricultural produce harvested from biological assets is measured at its fair value less estimated point-of-sale costs at the point of harvest. A gain or loss arising on initial recognition of agricultural produce at fair value less estimated point-of-sale costs is included in the consolidated income statement in the period in which it arises. Based on the above policy, the principal groups of biological assets and agricultural produce are stated as follows: Biological Assets i) Broilers Broilers comprise poultry held for chicken meat production. Fair value of broilers is determined by reference to the cash ﬂows that will be obtained from sales of 44-day aged chickens, with an allowance for costs to be incurred and risks to be faced during the remaining transformation process. ii) Breeders The fair value of breeders is determined using the discounted cash ﬂow approach based on hatchery eggs market prices. iii) Cattle and pigs Cattle held for regeneration of livestock population and animals raising for milk and beef and pork meat production. The fair value of livestock is determined based on market prices of livestock of similar age, breed and genetic merit. Cattle, for which market-determined prices or values are not available and for which alternative estimates of fair value are determined to be clearly unreliable, are measured using the present value of expected net cash ﬂows from the asset discounted at a current market-determined pre-tax rate. iv) Orchards Orchards consist of plants used for fruits production. Fruit trees achieve the normal productive age in the second to ﬁfth year. The fair value of orchards which have attained normal productive age is determined using the discounted cash ﬂow approach. v) Crops in ﬁelds The fair value of crops in ﬁelds 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 and risks to be faced during the remaining transformation process. Agricultural Produce i) Dressed poultry, beef and pork The fair value of dressed poultry, beef and pork is determined by reference to market prices at the point of harvest. ii) Fodder grain, potatoes and fruits The fair value of fodder grain, potatoes and fruits is determined by reference to market prices at the point of harvest. Changes in accounting estimates related to biological assets – In 2006, the Group changed the accounting estimates in respect to valuation of broilers and breeders as follows: Before 2006, the Group accounted for breeders of the age less than 50 days at cost, considering little biological transformation at this stage. The cost basis was used for the immature portion of biological assets as it was not possible to estimate fair value with a sufﬁcient degree of accuracy. The Group signiﬁcantly developed its methods for fair valuations of breeders and starting from 2006 is revaluing all breeders based on discounted cash ﬂow approach. Starting from 2006, the Group changed estimates in respect to the fair valuation model for the broilers livestock. The Group started to use discounting of net cash ﬂows that will be obtained from sales of 44-day chickens for all age groups of broilers. In 2007, the Group changed the accounting estimates in respect to valuation of milk cows as follows: Before 2007, the Group accounted for milk cows of age less than two years at cost, considering little biological transformation until the assets reach their productive age. The Group was not able to reliably estimate the fair value of immature milk cows due to unavailability of sufﬁcient historical data supporting major assumptions and assessment of risks attributable to the biological transformation process. Starting from 2007, the Group estimates fair value less estimated point-of-sale costs for all milk cows using discounted cash ﬂow techniques. The changes in these accounting estimates resulted in a gain of US$150 thousand during the year ended 31 December 2007 (2006: US$6,738 thousand) recognised in “Net change in fair value of biological assets and agricultural produce” in the consolidated income statements. 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 hatchery eggs and live broiler poultry intended for the production of meat, as well as milk cows. Bearer biological assets include poultry held for hatchery eggs production, orchards, breeding bulls and pork. Myronivsky Hliboproduct Annual Report 2008 57 FINANCIAL STATEMENTS AND NOTES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Financial instruments − Financial assets and ﬁnancial liabilities are recognised on the Group’s consolidated balance sheet when the Group becomes a party to the contractual provisions of the instrument. Regular way purchases and sales of the ﬁnancial assets and liabilities are recognised using settlement date accounting. The settlement date is the date that an asset is delivered to or by an entity. Settlement date accounting refers to (a) the recognition of an asset on the day it is received by the entity, and (b) the derecognition of an asset and recognition of any gain or loss on disposal on the day that it is delivered by the entity. The accounting policies for initial recognition and subsequent measurement of ﬁnancial instruments are disclosed in the respective accounting policies set out below in this Note. Accounts receivable − Accounts receivable are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method. Short-term accounts receivable, which are non-interest bearing, are stated at their nominal value. Appropriate allowances for estimated irrecoverable amounts are recognised in the consolidated income statement when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset’s carrying amount and the present value of estimated future cash ﬂows discounted at the effective interest rate computed at initial recognition. Cash and cash equivalents − Cash and cash equivalents include cash on hand, cash with banks, deposits and marketable securities with original maturity of less than three months. Bank borrowings, corporate bonds issued and other long-term payables − Interest-bearing borrowings, bonds and other long-term payables are initially measured at fair value net of directly attributable transaction costs, and are subsequently measured at amortised cost using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption amount is recognised over the term of the borrowings and recorded as ﬁnance costs. Derivative ﬁnancial instruments − Derivative ﬁnancial instruments are initially measured at fair value on the contract date and are re-measured to fair value at subsequent reporting dates. The Group does not enter into ﬁnancial instruments that would be accounted for as derivatives. Changes in the fair value of derivative ﬁnancial instruments are recognised in the consolidated income statement as they arise. Trade and other accounts payable − Accounts payable are measured at initial recognition at fair value and are subsequently measured at amortised cost using the effective interest rate method. 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 received by the Group under ﬁnance leases are recognised as assets of the Group at their fair value at the date of acquisition or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the consolidated balance sheet as a ﬁnance lease obligation. Lease payments are apportioned between ﬁnance charges and a reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the consolidated income statement and classiﬁed as ﬁnance costs. Rental income or expenses under operating leases are recognised in the consolidated income statement on a straight-line basis over the term of the lease. Provisions − Provisions are recognised when the Group has a present legal or constructive obligation (either based on legal regulations or implied) as a result of past events, and it is probable that an outﬂow of resources will be required to settle the obligation and a reliable estimate of the obligation can be made. Revenue recognition − The Group generates revenue primarily from the sale of agricultural products to end customers. Revenue is recognised when the signiﬁcant risks and rewards of ownership of the goods have passed to the buyer, the amount of revenue can be measured reliably and it is probable that collection will occur. The point of transfer of risk, which may occur at delivery or shipment, varies for contracts with different types of customers. Revenue of the natural gas operations is recognised when gas is dispatched to customers and title has transferred. Segment reporting − The Group applies IAS 14 “Segment Reporting” for disclosure of information on business segments in the consolidated ﬁnancial statements. The Group identiﬁes a business segment as a separate reportable segment if a majority of its revenue is earned from sales to external customers and (a) its revenue from sales to external customers and from transactions with other segments is 10% or more of the total revenue, external and internal, of all segments; or (b) its segment result, whether proﬁt or loss, is 10% or more of the combined result of all segments in proﬁt or the combined result of all segments in loss, whichever is the greater in absolute amount; or (c) its assets are 10% or more of the total assets of all segments. The Group combines business segments into a separately reportable segment with one or more other similar internally reported segments if an internally reported segment is below all of the thresholds of signiﬁcance above. If a segment is identiﬁed as a business segment in the current period because it satisﬁes the relevant 10% thresholds, prior period comparative segment data is restated to reﬂect the newly reportable segment as a separate segment, even if that segment did not satisfy the 10% thresholds in the prior period. Finance costs − Interest expenses, ﬁnance charges on ﬁnance leases and other interest-bearing long-term payables and debt service costs are recognised in the consolidated income statement as ﬁnance costs in the period in which they are incurred. Finance costs are added to the carrying amount of the respective liability to the extent they are not settled in the period in which they arise. 58 Myronivsky Hliboproduct Annual Report 2008 3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONTINUED Government grants − Government grants received or receivable for processing of live animals and value added tax (“VAT”) grants for agricultural industry (conditional upon reinvestment of the granted funds for agricultural production purposes) and compensation of the ﬁnance costs are recognised as income over the periods necessary to match them with the related costs. To the extent the conditions attached to the grants are not met at the balance sheet date, the received funds are recorded in the Group’s consolidated ﬁnancial statements as deferred income. Government grants related to selection and genetics programmes in breeding as well as subsidies related to crop growing are recognised at the moment when the decision to disburse the amounts to the Group is made. Contingent liabilities and assets − Contingent liabilities are not recognised in the consolidated ﬁnancial statements. They are disclosed in the notes to the consolidated ﬁnancial statements unless the possibility of an outﬂow of resources embodying economic beneﬁts is remote. Contingent assets are recognised only when the contingency is resolved. 4 BUSINESS SEGMENTS All of the Group’s operations are located within Ukraine. During 2006, the Group’s operations were divided into three primary business segments – poultry, other agricultural operations and natural gas operations. As a result of the expansion of the Group’s grain growing operations in 2007, the Group has identiﬁed this as a separate business segment as of 31 December 2007. In addition, during the ﬁrst quarter of 2007 the Group ceased its natural gas operations and has treated this as a discontinued operation (Note 5). The Group does not disclose any secondary segments based on geography as all of its operations are conducted within one geography. Other agricultural operations were largely acquired by the Group in March 2006 acquisitions (Note 2). The following table presents revenue, results of operations and certain assets and liabilities information regarding business segments for the year ended 31 December 2008. In this table segment results represent operating proﬁt of each business segment. Unallocated corporate assets comprise assets that are not directly attributable to particular segment. Unallocated corporate liabilities comprise interest-bearing liabilities, equity and liabilities that are not directly attributable to a particular segment. REVENUES Total revenue Inter-segment eliminations Sales to external customers SEGMENT RESULTS Segment results before loss on impairment of property, plant and equipment Loss on impairment of property, plant and equipment (Note 7) Segment results Unallocated corporate expenses Operating proﬁt OTHER INFORMATION Segment assets Unallocated corporate assets Consolidated total assets Segment liabilities Unallocated corporate liabilities Consolidated total liabilities Additions to property, plant and equipment Depreciation Effect of fair value adjustments Poultry and related operations US$000 Other agricultural US$000 Grain growing US$000 Consolidated US$000 680,393 (20,362) 94,370 (1,268) 67,430 (17,653) 842,193 (39,283) 660,031 93,102 49,777 802,910 255,165 – 184 (2,653) 10,739 – 266,088 (2,653) 255,165 (2,469) 10,739 263,435 562,485 122,430 120,287 (32,565) (9,696) (5,202) 159,658 41,230 17,854 23,764 7,383 (1,137) 48,468 8,325 (10,390) (19,929) 243,506 805,202 119,359 924,561 (47,463) (530,881) (578,344) 231,891 56,938 6,327 Myronivsky Hliboproduct Annual Report 2008 59 FINANCIAL STATEMENTS AND NOTES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 4 BUSINESS SEGMENTS CONTINUED The following table presents revenue, results of operations and certain assets and liabilities information regarding business segments for the years ended 31 December 2007 and 2006: REVENUES Total revenue Inter-segment eliminations Poultry and related operations US$000 2007 Other agricultural US$000 Grain growing Consolidated US$000 US$000 2006 Poultry and related operations US$000 Other agricultural US$000 Grain growing Consolidated US$000 US$000 395,621 (10,756) 51,655 (573) 68,672 (30,182) 515,948 (41,511) 269,505 (3,882) 28,826 (766) 25,175 (7,861) 323,506 (12,509) Sales to external customers 384,865 51,082 38,490 474,437 265,623 28,060 17,314 310,997 SEGMENT RESULTS Segment results before loss on impairment of property, plant and equipment Loss on impairment of property, plant and equipment (Note 7) 98,159 3,995 28,725 130,879 116,129 5,770 3,104 125,003 (5,683) (4,555) – (10,238) – – – – Segment results 92,476 (560) 28,725 120,641 116,129 5,770 3,104 125,003 Unallocated corporate expenses Operating proﬁt OTHER INFORMATION Segment assets Unallocated corporate assets* Consolidated total assets Segment liabilities Unallocated corporate liabilities Consolidated total liabilities 684,951 158,434 80,207 (27,882) (8,965) (9,715) (8,498) 112,143 923,593 28,939 952,532 (46,562) (486,564) (533,126) 595,815 160,955 29,986 (23,588) (6,598) (1,614) (8,568) 116,435 786,756 43,356 830,112 (31,800) (431,444) (463,244) Additions to property, plant and equipment** Property, plant and equipment acquired through business combinations Non-current biological assets acquired through business combination Depreciation Effect of fair value adjustments 165,564 13,633 14,707 193,904 194,674 27,938 23,872 246,484 – – – – – 31,866 893 32,759 – 33,201 7,754 – 5,721 4,153 – 5,285 2,334 – 44,207 14,241 – 17,788 11,287 11,868 2,894 (2,953) – 2,613 995 11,868 23,295 9,329 * As of 31 December 2006, unallocated corporate assets and liabilities include assets and liabilities related to natural gas trading operation in the amount of US$5,304 thousand and US$170 thousand, respectively. ** Additions to property, plant and equipment in 2006 (Note 7) include unallocated additions to property, plant and equipment in the amount of US$7,188 thousand. 5 DISCONTINUED OPERATIONS Natural gas During the year ended 31 December 2007, the Group ceased its natural gas operations (Note 4). The comparative information for the consolidated income statement has been represented to show the discontinued operations separately from continuing operations. The results of the natural gas operations segment for the years ended 31 December 2007 and 2006 were as follows: Revenue Net change in fair value of natural gas in stock less estimated point-of-sale costs Cost of sales Gross (loss)/proﬁt Other operating income Operating (loss)/proﬁt Income tax beneﬁt/(expense) (Note 8) (Loss)/proﬁt for the year from discontinued operations 60 Myronivsky Hliboproduct Annual Report 2008 2007 US$000 8,872 (1,166) (7,842) (136) – (136) 34 (102) 2006 US$000 29,721 1,166 (25,981) 4,906 1,979 6,885 (1,721) 5,164 5 DISCONTINUED OPERATIONS CONTINUED The net cash inﬂows from operating activities obtained by the Group in relation to the natural gas operations for the year ended 31 December 2007 comprised US$6,164 thousand (2006: net cash inﬂows of US$2,840 thousand). No cash ﬂows related to ﬁnancing or investing activities from natural gas operations were incurred by the Group during the years ended 31 December 2007 and 2006. The assets and liabilities comprising the discontinued operations were as follows: Total assets Total liabilities 2007 US$000 – – 2006 US$000 5,304 170 Kyivska During the year ended 31 December 2008, the Group disposed of its shareholding in Kyivska (Note 2). The comparative information for the consolidated income statement has been represented to show the discontinued operations separately from continuing operations. The results of the Kyivska for the years ended 31 December 2008, 2007 and 2006 were as follows: Revenue Net change in fair value of biological assets and agricultural produce Cost of sales Gross (loss)/proﬁt Other operating (expenses)/income Operating (loss)/proﬁt Other expenses, net Income tax beneﬁt/(expense) (Note 8) (Loss) on disposal of operation (Loss)/proﬁt for the year from discontinued operations 2008 US$000 2007 US$000 2006 US$000 3,922 (1,382) (5,796) (3,256) (114) (3,370) (159) – (3,529) (6,193) (9,722) 3,213 (1,980) (5,229) (3,996) 564 (3,432) (67) – (3,499) – (3,499) 3,644 1,295 (4,683) 256 301 557 (312) – 245 – 245 During the years ended 31 December 2008, 2007 and 2006 the results from discontinued operations were attributable to equity holders of the Parent. The assets and liabilities comprising the discontinued operations were as follows: Total assets Total liabilities The net cash ﬂows incurred by the Group in relation to Kyivska for the years ended 31 December were as follows: Operating activities Investing activities Financing activities Net increase/(decrease) in cash and cash equivalents 2008 US$000 16,603 10,056 2007 US$000 30,126 48,342 2006 US$000 30,724 47,579 2008 US$000 (3,019) (867) 3,893 2007 US$000 2006 US$000 (1,535) (1,265) 2,453 (396) (2,388) 4,304 7 (347) 1,520 6 RELATED PARTY BALANCES AND TRANSACTIONS For the purposes of these ﬁnancial statements, parties are considered to be related if one party has the ability to control the other party or exercise signiﬁcant inﬂuence over the other party in making ﬁnancial or operational decisions. 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 and conditions as transactions between unrelated parties. Myronivsky Hliboproduct Annual Report 2008 61 FINANCIAL STATEMENTS AND NOTES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 6 RELATED PARTY BALANCES AND TRANSACTIONS CONTINUED The following companies and individuals are considered to be related parties to the Group as of 31 December 2008: Name of the related party Mr Yuriy Kosyuk WTI Mrs Olena Kosyuk Allied Tech LLP (United Kingdom) Allied Tech LLC (USA) Allied Tech Commerce LLP (United Kingdom) Agroﬁrma Berezanska Ptahofabryka ULL Beteiligungs und Management GmbH Merkaba LLC Spector Nature of relations with the Group Chief Executive Ofﬁcer of MHP SA and the Principal Shareholder of the Group Immediate parent, company owned by Mr Yuriy Kosyuk Wife of Mr Yuriy Kosyuk Companies owned or controlled by Mr Yuriy Kosyuk Company owned by Merkaba LLC LLC Zolotoniske Zvirogospodarstvo Company owned by Agroﬁrma Berezanska Ptahofabryka In March 2006, Mrs Olena Kosyuk sold her shareholding in Kyivska, Druzhba and Crimean Fruit to the Group (Note 2). Starting from the date of their acquisition Kyivska, Druzhba and Crimean Fruit were consolidated into the Group. Accordingly, balances of the transactions with the acquired subsidiaries have been eliminated in the Group’s consolidated balance sheet as of 31 December 2006. In April 2007, Mr Yuriy Kosyuk sold his shareholding in Roda. Accordingly, starting from June 2007 Roda and Realizatsiyna Baza ceased to be related parties to the Group. In November 2006, the Group made a prepayment for production equipment amounting to US$1,500 thousand to ULL Beteiligungs und Management GmbH (“ULL”). In January 2007, the initial agreement was canceled and ULL returned the full amount of the prepayment. In October 2008 Allied Tech LLC (USA) was liquidated. The balances of trade accounts receivable due from related parties (Note 16) were as follows as of 31 December 2008, 2007 and 2006: Agroﬁrma Berezanska Ptahofabryka Other related parties Total 2008 US$000 2007 US$000 2006 US$000 2,316 475 2,791 1,235 80 1,315 6,549 235 6,784 The balances of short-term advances, ﬁnance aid to and promissory notes from related parties (Note 14) as of 31 December 2008, 2007 and 2006 were as follows: Agroﬁrma Berezanska Ptahofabryka Spector Allied Tech LLP Allied Tech Commerce LLP Other related parties Total The revenues from sales to related parties for the years ended 31 December 2008, 2007 and 2006 were as follows: Agroﬁrma Berezanska Ptahofabryka Druzhba Kyivska Other related parties Total * Before acquisition on 31 March 2006 62 Myronivsky Hliboproduct Annual Report 2008 2008 US$000 2007 US$000 2006 US$000 670 16 − − 290 976 408 656 − − 359 891 444 395 350 120 1,423 2,200 2008 US$000 9,630 n/a n/a 573 10,203 2007 US$000 2006 US$000 8,430 n/a n/a 122 8,552 5,744 376* 73* 6 6,199 6 RELATED PARTY BALANCES AND TRANSACTIONS CONTINUED During the years ended 31 December 2008, 2007 and 2006, the Group’s sales to Agroﬁrma Berezanska Ptahofabryka mainly consisted of sales of mixed fodder and its components. During the year ended 31 December 2007, the Group sold property, plant and equipment for US$3,465 thousand to Agroﬁrma Berezanska Ptahofabryka. In June 2007, the Group sold to Mr Yuriy Kosyuk a building with net book value of US$3,460 thousand, which was used by the Principal Shareholder as a beneﬁt in kind, for a cash consideration of US$4,005 thousand. The difference between the sale price and net book value of the building at the date of transaction of US$405 thousand (net of current income tax effect of US$140 thousand) was recognised in the Group’s consolidated ﬁnancial statements as an adjustment to shareholders’ equity. In April 2007, the Group sold its participatory shareholding in ZZG to Mr Yuriy Kosyuk for the cash consideration of US$4,798 thousand (Note 2). Terms and conditions of sales to related parties are determined based on arrangements, speciﬁc to each contract or transaction. Management believes that the accounts receivable due from related parties do not require allowance for irrecoverable amounts and that the amounts payable to related parties will be settled at cost. The terms of the payables and receivables related to trading activities of the Group do not vary signiﬁcantly from the terms of similar transactions with third parties. The balances of advances received from related parties were as follows (Note 24) as of 31 December 2008, 2007 and 2006: Allied Tech LLC Allied Tech LLP Other related parties Total The purchases from related parties for the years ended 31 December 2008, 2007 and 2006 were as follows: Spector Agroﬁrma Berezanska Ptahofabryka Druzhba Kyivska Crimean Fruit Other related parties Total * Before acquisition on 31 March 2006 2008 US$000 2007 US$000 2006 US$000 120 218 – 338 116 213 − 329 18 − 8 26 2008 US$000 2007 US$000 2006 US$000 1,474 418 n/a n/a n/a – 1,892 11 358 n/a n/a n/a − 369 631 35 1,426* 95* 30* 87 2,304 As of 31 December 2008, 2007 and 2006, the Group leased property, plant and equipment with the carrying value of US$150 thousand, US$285 thousand and US$2,679 thousand, respectively, to its related parties under operating lease arrangements (Note 7). For the years ended 31 December 2008, 2007 and 2006, lease payments received from the related parties under the operating lease agreements amounted to US$53 thousand, US$116 thousand and US$403 thousand, respectively (Note 7). Compensation to key management personnel – Total compensation of the Group’s key management personnel (excluding compensation to Mr Yuriy Kosyuk) included in selling, general and administrative expenses in the accompanying consolidated income statements amounted to US$9,281 thousand, US$2,245 thousand and US$1,959 thousand for the years ended 31 December 2008, 2007 and 2006, respectively. Compensation to key management personnel consists of contractual salary and performance bonuses. Key management personnel totalled 32 individuals as of 31 December 2008 and 29 individuals as of 31 December 2007 and 2006. The aggregate amount of remuneration paid by the Group to the Chief Executive Ofﬁcer Mr Yuriy Kosyuk during the years ended 31 December 2008, 2007 and 2006 was US$1,804 thousand, US$1,620 thousand and US$1,463 thousand, respectively, in the form of salary and bonuses. As of 31 December, Mr and Mrs Kosyuk received beneﬁts in kind by use of the following assets: Vehicles at net book value (Note 7) Short-term and long-term interest free loans Buildings at net book value (Note 7) Total 2008 US$000 2007 US$000 2006 US$000 – 223 − 223 2,807 207 − 3,014 2,523 881 3,402 6,806 Myronivsky Hliboproduct Annual Report 2008 63 FINANCIAL STATEMENTS AND NOTES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 7 PROPERTY, PLANT AND EQUIPMENT, NET The following table represents movements in property, plant and equipment for the year ended 31 December 2008: Cost or valuation As of 1 January 2008 Additions Disposals Transfers Disposal of Kyivska (Note 2) Acquired through business combination (Note 2) Impairment loss Translation difference As of 31 December 2008 Accumulated depreciation As of 1 January 2008 Depreciation charge for the year Eliminated on disposal Disposal of Kyivska (Note 2) Translation difference As of 31 December 2008 Net book value 31 December 2008 1 January 2008 Buildings and structures US$000 Grain Machinery and equipment US$000 storage facilities US$000 Utilities Vehicles and and infra- agricultural structure machinery US$000 US$000 Ofﬁce furniture equipment US$000 and Construction in progress US$000 Total US$000 184,169 13,643 (3,218) 7,353 (1,317) 6,143 (2,653) (66,423) 31,497 626 (2) 7 (38) – – (11,030) 244,200 18,643 (10,392) 4,879 (1,429) 8,587 – (90,178) 32,115 6,063 (471) 892 (81) 992 – (13,467) 135,930 54,164 (3,297) 3,326 (1,488) 408 – (63,962) 5,016 1,335 (92) 273 (31) 165 – (2,228) 94,375 137,417 – (16,730) (1,287) 12,442 (9,114) (85,955) 727,302 231,891 (17,472) – (5,671) 28,737 (11,767) (333,243) 137,697 21,060 174,310 26,043 125,081 4,438 131,148 619,777 19,922 10,011 (375) (410) (9,898) 19,250 – 686 – (25) (216) 41,976 22,798 (1,603) (659) (21,135) 6,779 3,052 (32) (25) (3,286) 31,974 19,937 (1,559) (820) (16,804) 1,895 1,108 (78) (23) (977) 445 41,377 6,488 32,728 1,925 – – – – – – 102,546 57,592 (3,647) (1,962) (52,316) 102,213 118,447 20,615 132,933 19,555 92,353 2,513 131,148 517,564 164,247 31,497 202,224 25,336 103,956 3,121 94,375 624,756 The following table represents movements in property, plant and equipment for the year ended 31 December 2007: Buildings and structures US$000 Grain storage facilities US$000 Machinery and equipment US$000 Utilities and infra- structure US$000 Vehicles and agricultural machinery US$000 Ofﬁce furniture and Construction in progress US$000 equipment US$000 Total US$000 98,447 20,454 (4,564) 77,852 (742) (2,912) – (4,366) 14,129 1,651 – 1,465 – 4,610 9,642 – 133,011 50,863 (6,901) 74,320 (422) (1,698) – (4,973) 16,507 3,435 (119) 12,681 (46) – – (343) 95,029 41,586 (959) 882 (114) – – (494) 2,568 1,756 (77) 834 (3) – – (62) 189,543 74,159 (210) (168,034) (1,083) – – – 549,234 193,904 (12,830) – (2,410) – 9,642 (10,238) 184,169 31,497 244,200 32,115 135,930 5,016 94,375 727,302 12,353 8,375 (695) (10) (101) – 19,922 806 558 – – 118 (1,482) 26,195 17,563 (1,763) (2) (17) – 3,953 2,885 (58) (1) – – 17,124 15,776 (921) (5) – – 1,032 925 (62) – – – – 41,976 6,779 31,974 1,895 – – – – – – – 61,463 46,082 (3,499) (18) – (1,482) 102,546 164,247 31,497 202,224 25,336 103,956 3,121 94,375 624,756 86,094 13,323 106,816 12,554 77,905 1,536 189,543 487,771 Cost or valuation As of 1 January 2007 Additions Disposals Transfers Disposal of ZZG (Note 2) Reclassiﬁcations Increase due to revaluation Impairment loss As of 31 December 2007 Accumulated depreciation As of 1 January 2007 Depreciation charge for the year Eliminated on disposal Disposal of ZZG (Note 2) Reclassiﬁcations Eliminated from revaluation As of 31 December 2007 Net book value 31 December 2007 1 January 2007 64 Myronivsky Hliboproduct Annual Report 2008 7 PROPERTY, PLANT AND EQUIPMENT, NET CONTINUED The following table represents movements in property, plant and equipment for the year ended 31 December 2006: Buildings and structures US$000 Grain storage facilities US$000 Machinery and equipment US$000 Utilities and infra- structure US$000 Vehicles and agricultural machinery US$000 Ofﬁce furniture and Construction in progress US$000 equipment US$000 Total US$000 Cost or valuation As of 1 January 2006 Additions Disposals Transfers Acquired through business combination (Note 2)* 65,616 15,964 (374) 4,977 12,264 4,155 9,401 (26) 548 51 94,723 18,448 (904) 9,491 11,253 13,220 2,138 (258) 768 639 43,679 44,284 (1,858) 329 8,595 1,450 876 (72) 59 255 40,229 162,561 (92) (16,172) 3,017 263,072 253,672 (3,584) – 36,074 As of 31 December 2006 98,447 14,129 133,011 16,507 95,029 2,568 189,543 549,234 Accumulated depreciation As of 1 January 2006 Depreciation charge for the year Eliminated on disposal Acquired through business combination (Note 2)* As of 31 December 2006 Net book value 31 December 2006 1 January 2006 7,611 4,361 (39) 420 12,353 399 393 – 14 806 15,323 9,834 (281) 1,319 2,707 1,285 (59) 20 8,385 7,774 (517) 1,482 559 441 (28) 60 26,195 3,953 17,124 1,032 – – – – – 34,984 24,088 (924) 3,315 61,463 86,094 13,323 106,816 12,554 77,905 1,536 189,543 487,771 58,005 3,756 79,400 10,513 35,294 891 40,229 228,088 * Include assets received in the course of Kyivska, Druzhba, Crimean Fruit, ZZG and Urozhay acquisitions. As of 31 December 2008, included within property, plant and equipment were fully depreciated assets with the cost of US$5,276 thousand (2007: US$5,123 thousand; 2006: US$4,045 thousand). As of 31 December 2008, the Group’s machinery and equipment with the carrying amount of US$6,674 thousand were pledged as collateral to secure its bank borrowings (Note 20). Vehicles and agricultural machinery with the carrying amount of US$786 thousand were pledged to secure vendor-ﬁnancing arrangements with foreign companies (Note 22). As of 31 December 2008, 2007 and 2006 the net carrying amount of ﬁxed assets held under ﬁnance lease agreements were US$57,476 thousand, US$57,389 thousand and US$37,111 thousand respectively. Impairment assessment – The Group reviews its property, plant and equipment each period to determine if any indication of impairment exists. Based on these reviews, indicators of impairment were identiﬁed in 2008 and 2007 associated with the assets used in the production of goose meat and foie gras, assets used in production of convenience foods under the “Legko!” brand, and construction in progress represented by administrative ofﬁce premises. As a result, the Group estimated the recoverable amount of these assets and determined that the carrying value exceeded the recoverable amount . Accordingly, during the year ended 31 December 2008 the Group has recognised impairment losses of US$11,767 thousand (2007: US$10,238 thousand, 2006: nil) for the difference in these amounts. The additional impairment losses recognised in respect to assets used in the production of goose meat and foie gras and convenience foods under the “Legko!” brand during the year ended 31 December 2008 are attributable to increased business risks and lower expected returns to the production lines, as well as decreased market prices for commercial properties as compared to the analysis performed during the year ended 31 December 2007. The amount of impairment losses recognised during the period, together with information on the discount rates used in the estimation of the recoverable amount of impaired assets and the business segments to which the assets belong, is as follows: Production line Convenience foods Goose meat and foie gras Administrative ofﬁce premises Total Business segment Poultry and related operations Other agricultural Unallocated 2008 Discount rate used, % 2007 Loss on Discount rate used, % impairment US$000 25.5 33.5 15.25 – 2,653 9,114 11,767 19.6 22.0 n/a Loss on impairment US$000 5,683 4,555 – 10,238 The discount rates used in assessment of the recoverable amounts of impaired assets vary depending on the currency denomination of future cash ﬂows and different levels of business risks assessed for each group of assets. Myronivsky Hliboproduct Annual Report 2008 65 FINANCIAL STATEMENTS AND NOTES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 7 PROPERTY, PLANT AND EQUIPMENT, NET CONTINUED Revaluation of grain storage facilities – During the year ended 31 December 2007, the Group engaged independent appraisers to revalue its grain storage facilities. The effective date of revaluation was 1 December 2007. The valuation, which conformed to the International Valuation Standards, was determined by reference to observable prices in an active market and recent market transactions on arm’s length terms. During revaluation, the Group identiﬁed certain assets which related to the grain storage facilities, but were included in different groups. The related cost and accumulated depreciation of such assets in the amount of US$4,610 thousand and US$118 thousand, respectively, was transferred to the grain storage facilities group during the year ended 31 December 2007. During the year ended 31 December 2008, the Group carried out a review of the carrying amount of grain storage facilities to determine whether the carrying amount differed materially from that which would be determined using fair value. Based on the results of this review, the Group determined that no further revaluation is required as of 31 December 2008. If the grain storage facilities were carried at cost, their net book value as of 31 December 2008 would be US$13,321 thousand (2007: US$19,809 thousand). Leased assets – As of 31 December 2008, 2007 and 2006, the Group leased or provided in use property, plant and equipment to related parties (including Mr and Mrs Kosyuk) under operating lease agreements (at net book value): Buildings and structures Machinery and equipment Vehicles and agricultural machinery Ofﬁce furniture and equipment Total 2008 US$000 2007 US$000 2006 US$000 − − 150 − 150 − − 3,089 3 3,092 3,402 2,278 2,913 11 8,604 For the years ended 31 December 2008, 2007 and 2006, lease payments received from the related parties under the operating lease agreements amounted to US$53 thousand, US$116 thousand and US$403 thousand, respectively (Note 6). 8 TAXATION Sixteen of the Group companies pay the Fixed Agricultural Tax (the “FAT”) in accordance with the Law “On Fixed Agricultural Tax”. The FAT substitutes the following taxes for agricultural producers: Corporate Income Tax, Land Tax, Vehicle Tax (excluded in December 2006), Municipal Tax, Natural Resources Usage Duty, and Trade Patent. The FAT is calculated by local authorities and depends on the area and valuation of land occupied. This tax regime was effective until 1 January 2011, and subsequent to 31 December 2008 was extended for an inﬁnite period (Note 37). During the years ended 31 December 2008, 2007 and 2006, the Group companies which have the status of the Corporate Income Tax (the “CIT”) payers in Ukraine were subject to income tax at 25% rate. The net results of the Group companies incorporated in jurisdictions other than Ukraine were insigniﬁcant during the years ended 31 December 2007 and 2006. The components of income tax expense were as follows for the years ended 31 December 2008, 2007 and 2006: 2008 US$000 2007 US$000 2006 US$000 1,739 (460) 1,279 1,279 – 1,279 1,132 (738) 394 428 (34) 394 710 1,584 2,294 573 1,721 2,294 Current income tax expense Deferred tax (beneﬁt)/expense Income tax expense Attributable to: Continuing operations Discontinued operations (Note 5) 66 Myronivsky Hliboproduct Annual Report 2008 8 TAXATION CONTINUED Reconciliation between proﬁt before tax multiplied by the statutory tax rate and the tax expense for the years ended 31 December 2008, 2007 and 2006 is as follows: Proﬁt before tax from continuing operations (Loss)/proﬁt before tax from discontinued operations (Note 5) Proﬁt before income tax Income tax expense at statutory tax rate of 25% Tax effect of: Income generated by FAT payers (exempt from income tax) Non-deductible expenses Expenses not deducted for tax purposes Income tax expense 2008 US$000 16,194 (9,722) 6,472 1,618 (44,987) 12,286 32,362 1,279 2007 US$000 50,822 (3,635) 2006 US$000 100,869 7,130 47,187 107,999 11,797 27,000 (24,475) 5,952 7,120 (34,669) 1,418 8,545 394 2,294 As of 31 December 2008, 2007 and 2006, the Group did not recognise deferred tax assets arising from temporary differences of US$129,448 thousand, US$28,480 thousand and US$34,180 thousand, respectively, as the Group does not intend to deduct respective expenses for tax purposes in future periods. Deferred tax liabilities have not been recognised in respect of unremitted earnings of Ukrainian subsidiaries as the earnings can be remitted free from taxation currently and in future years. As of 31 December 2008, 2007 and 2006, deferred tax assets and liabilities comprised the following: Deferred tax assets arising from: Advances received and other payables Other current liabilities Inventories Expenses deferred in tax books Other Total deferred tax assets Deferred tax liabilities arising from: Property, plant and equipment Advances received and other payables Inventories Total deferred tax liabilities Net deferred tax liability 2008 US$000 2007 US$000 2006 US$000 2,099 1,030 473 4,994 – 8,596 2,209 310 − 3,647 64 6,230 (12,312) (241) (156) (9,339) − (692) (12,709) (10,031) (4,113) (3,801) − 1,328 613 814 636 3,391 (2,790) (1,296) (1,594) (5,680) (2,289) Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred income taxes relate to the same ﬁscal authority. The following amounts, determined after appropriate offsetting, are presented in the consolidated balance sheet as of 31 December: Deferred tax assets Deferred tax liabilities The movements in net deferred tax liability for the years ended 31 December 2008, 2007 and 2006 were as follows: Net deferred tax liabilities as of beginning of the year Deferred tax (beneﬁt)/expense Deferred tax on property, plant and equipment charged directly to revaluation reserve Deferred tax liabilities arising on acquisition of subsidiaries (Note 2) Translation difference Net deferred tax liabilities as of end of the year 2008 US$000 2,047 (6,160) (4,113) 2007 US$000 2006 US$000 2,705 (6,506) (3,801) − (2,289) (2,289) 2008 US$000 2007 US$000 2006 US$000 3,801 (460) − 2,630 (1,858) 4,113 2,289 (738) 2,250 − − 3,801 705 1,584 − − − 2,289 Myronivsky Hliboproduct Annual Report 2008 67 FINANCIAL STATEMENTS AND NOTES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 9 LONG-TERM VAT RECOVERABLE, NET As of 31 December 2007 and 2006, the balances of long-term VAT recoverable were accumulated in start-up businesses in which signiﬁcant capital expenditures during the year ended 31 December 2006 were incurred. As of 31 December 2008, the balance of long-term VAT recoverable was accumulated on increased trading activities and continuing investment programmes. The management expects that these balances will not be recovered within the 12 months after the balance sheet date. As of 31 December 2008, an allowance for estimated irrecoverable amounts of US$1,437 thousand was recorded by the Group for the balance of long-term VAT recoverable. 10 BIOLOGICAL ASSETS The balances of non-current biological assets were as follows as of 31 December 2008, 2007 and 2006: Milk cows, boars, sows, units Orchards, hectare Other non-current bearer biological assets Total bearer non-current biological assets Non-current cattle and pigs, units Total consumable non-current biological assets Total non-current biological assets 2008 Thousand units 10.2 2.11 − 8.6 Carrying amount US$000 6,033 19,934 526 26,493 2,987 2,987 29,480 The balances of current biological assets were as follows as of 31 December 2008, 2007 and 2006: Breeders held for hatchery eggs production, units Total bearer current biological assets Broiler poultry, units Hatchery eggs, units Crops in ﬁelds, hectare Cattle and pigs, units Other current consumable biological assets Total consumable current biological assets Total current biological assets 2008 Thousand units 1,420 14,297 12,690 70 43 − Carrying amount US$000 19,323 19,323 23,126 3,866 26,840 10,386 554 64,772 84,095 Other current consumable biological assets include geese, minks and other livestock. Thousand units 12.7 2.11 − 10.7 Thousand units 1,481 12,830 12,841 59 48 − 2007 2006 Thousand units 9.3 1.13 − 13.0 Carrying amount US$000 8,305 27,100 200 35,605 6,491 6,491 42,096 2007 2006 Thousand units 1,108 9,351 6,621 38 43 − Carrying amount US$000 23,710 23,710 22,798 5,786 26,229 10,538 1,724 67,075 90,785 Carrying amount US$000 4,753 11,840 224 16,817 9,872 9,872 26,689 Carrying amount US$000 12,501 12,501 18,270 1,702 10,980 4,245 3,896 39,093 51,594 68 Myronivsky Hliboproduct Annual Report 2008 10 BIOLOGICAL ASSETS CONTINUED The following table represents the changes in the carrying amounts of major biological assets during the years ended 31 December 2008, 2007 and 2006: As of 1 January 2006 Increase due to purchases Gains arising from change in fair value of biological assets less estimated point-of-sale costs Transfer to consumable biological assets Decrease due to harvest As of 31 December 2006 Increase due to purchases Gains arising from change in fair value of biological assets less estimated point-of-sale costs Transfer to consumable biological assets Decrease due to harvest As of 31 December 2007 Increase due to purchases Gains arising from change in fair value of biological assets less estimated point-of-sale costs Transfer to consumable biological assets Decrease due to harvest Translation difference As of 31 December 2008 11 OTHER NON-CURRENT ASSETS Crops in ﬁelds US$000 881 3,948 25,823 – (19,672) Breeders held for hatchery eggs production US$000 6,657 3,388 Orchards US$000 – 2,149 Broiler poultry US$000 10,672 1,940 Total US$000 18,210 11,425 11,936 – (2,245) 26,891 (22,373) (2,062) 180,132 22,373 (196,847) 244,782 – (220,826) 10,980 11,840 12,501 18,270 5,392 6,274 4,801 432 53,591 16,899 77,538 – (67,681) 15,615 – (6,629) 64,818 (54,422) (3,988) 196,943 54,422 (247,269) 354,914 – (325,567) 26,229 27,100 23,710 22,798 7,431 185 5,238 26 99,837 12,880 92,705 – (93,553) (5,972) 15,239 – (13,335) (9,255) 80,106 (72,914) (6,917) (9,900) 353,078 72,914 (414,073) (11,617) 541,128 – (527,878) (36,744) 26,840 19,934 19,323 23,126 89,223 The balances of other non-current assets were as follows as of 31 December 2008, 2007 and 2006: Packaging and containers Lease rights for land Other investments Long-term loans to employees and related parties Other non-current assets Total 2008 US$000 2007 US$000 2006 US$000 3,458 572 283 95 2,050 6,458 4,227 872 578 265 2,071 8,013 2,349 941 406 322 583 4,601 Long-term loans to employees and related parties are interest free and measured at amortised cost using the effective interest rate method. As of 31 December 2007, the balance of other non-current assets included project documentation related to construction in the amount of US$1,594 thousand (2006: US$570 thousand). Myronivsky Hliboproduct Annual Report 2008 69 FINANCIAL STATEMENTS AND NOTES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 12 INVENTORIES The balances of inventories were as follows as of 31 December 2008, 2007 and 2006: Components for mixed fodder production Other raw materials Spare parts Packaging materials Mixed fodder Sunﬂower oil Other inventories Total 2008 US$000 21,748 6,998 2,780 3,437 1,590 510 1,055 38,118 2007 US$000 20,793 7,557 4,500 3,185 2,785 793 3,032 42,645 13 AGRICULTURAL PRODUCE The balances of agricultural produce were as follows as of 31 December 2008, 2007 and 2006: Chicken meat Other meat Grain Fruits, vegetables and other crops Total agricultural produce 2008 Thousand tonnes 4,887 n/a 306 n/a Carrying amount US$000 7,881 3,394 24,695 6,795 42,765 2007 2006 Thousand tonnes 5,807 n/a 67 n/a Carrying amount US$000 9,333 1,460 12,394 8,493 31,680 Thousand tonnes 7,094 n/a 26 n/a 2006 US$000 37,319 8,269 3,623 1,964 3,175 382 2,359 57,091 Carrying amount US$000 9,129 1,899 6,238 3,978 21,244 14 OTHER CURRENT ASSETS, NET The balances of other current assets were as follows as of 31 December 2008, 2007 and 2006: Prepayments to suppliers and prepaid expenses Government grants receivable (Note 25) Short-term advances, ﬁnance aid to and promissory notes from related parties (Note 6) Loans to employees Other receivables Less: allowance for irrecoverable amounts Total 2008 US$000 2007 US$000 2006 US$000 7,867 3,397 976 1,391 2,346 (607) 8,707 4,192 1,423 1,467 2,235 (1,703) 7,854 5,331 2,200 1,030 709 (660) 15,370 16,321 16,464 As of 31 December 2008, 2007 and 2006, government grants receivable were mainly represented by amounts due from the state for poultry and cattle processed during the last months of 2008, 2007 and 2006, respectively. 15 TAXES RECOVERABLE AND PREPAID, NET Taxes recoverable and prepaid were as follows as of 31 December 2008, 2007 and 2006: VAT recoverable Miscellaneous taxes prepaid Less: allowance for irrecoverable VAT Total 70 Myronivsky Hliboproduct Annual Report 2008 2008 US$000 49,736 777 (4,175) 46,338 2007 US$000 47,726 540 (2,866) 2006 US$000 42,799 5 (1,230) 45,400 41,574 16 TRADE ACCOUNTS RECEIVABLE, NET The balances of trade accounts receivable were as follows as of 31 December 2008, 2007 and 2006: Agricultural operations Due from related parties (Note 6) Sunﬂower oil sales Natural gas trading Less: allowance for irrecoverable amounts Total 2008 US$000 26,663 2,791 2,957 – (880) 31,531 2007 US$000 19,941 1,315 180 – (1,073) 2006 US$000 9,939 6,784 1,078 463 (537) 20,363 17,727 Allowance for irrecoverable amounts is estimated at the level of 25% for trade accounts receivable on sales of poultry meat which are aged over 30 days (for trade accounts receivable on other sales – over 60 days). Trade accounts receivable on sales of poultry meat which are aged over 270 days and trade accounts receivable on other sales which are aged over 360 days are provided in full. The aging of trade accounts receivable that were impaired as of 31 December 2008 was as follows: Trade accounts receivable on sales of poultry meat: Over 30 but less than 270 days Over 270 days Total trade accounts receivable on sales of poultry meat Trade accounts receivable on other sales: Over 60 but less than 360 days Over 360 days Total trade accounts receivable on other sales Total 17 SHORT-TERM BANK DEPOSITS Short-term bank deposits were as follows as of 31 December 2008, 2007 and 2006: Term deposits with Ukreximbank Term deposits with UniCredit Bank Term deposits with UniCredit Bank Term deposits with Raiffeisen Bank Aval Term deposits with Vneshtorgbank Term deposits with Vneshtorgbank Term deposits with Ukrgasbank Bank Total Annual interest rate % 11.00 18.00 10.00 6.00 12.00 10.00 – Currency US$ UAH UAH US$ UAH UAH US$ Annual interest rate % – 10.00 9.00 – – – – 2007 – 7,792 2,263 – – – – 10,055 2008 24,000 1,040 182 94 13 13 – 25,342 Trade Allowance for accounts irrecoverable amounts US$000 receivable US$000 280 561 841 268 182 450 1,291 Annual interest rate % – – – – – 7.50 70 561 631 67 182 249 880 2006 – – – – – – 2,000 2,000 Myronivsky Hliboproduct Annual Report 2008 71 FINANCIAL STATEMENTS AND NOTES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 18 CASH AND CASH EQUIVALENTS The balances of cash and cash equivalents were as follows as of 31 December 2008, 2007 and 2006: Cash in hand and with banks Short-term deposits with banks Total 2008 US$000 18,975 35,097 54,072 2007 US$000 10,088 − 10,088 2006 US$000 6,625 37,790 44,415 At the end of 2008 the National Bank of Ukraine imposed restrictions as to early withdrawal of bank deposits (Note 26). The balances of term deposits were as follows as of 31 December 2008, 2007 and 2006: Annual interest rate* % 12.00 11.25 18.00 11.00 – Currency US$ US$ UAH US$ US$ Annual interest rate % – – – – – 2008 20,500 10,000 2,597 2,000 – 35,097 Annual interest rate* % – 6.5 – 9.5 6.5 2006 – 13,000 – 6,940 17,850 37,790 2007 – – – – – – Term deposits with UniCreditBank Term deposits with OTP Bank Term deposits with UniCreditBank Term deposits with Ukrgazbank Term deposits with HVB Ukraine Total * Actual annual interest rate as of 31 December 2008 and 2006 19 SHARE CAPITAL Share capital of MHP SA Share capital of MHP SA As of 30 May 2006 MHP SA issued 20,000 shares with par value of EUR 2, which resulted in the share capital of EUR 40 thousand (US$50 thousand). All these shares have been entirely paid by a contribution in cash. The authorised capital, including the issued share capital, was ﬁxed at EUR 340,000 thousand represented by 170,000,000 shares with par value of EUR 2 each. On 13 June 2006 MHP SA issued an additional 100,000,000 shares with par value of EUR 2, which resulted in increase of the share capital by EUR 200,000 thousand (US$251,261 thousand), in exchange for a 100% shareholding in RHL. The fair value of the shares was determined by an independent appraiser as of the date of the contribution. On 15 May 2008 MHP SA issued 10,750,000 new ordinary shares. After the issue MHP SA’s share capital consists of 110,770,000 ordinary shares at par value EUR 2 each. The offering has been completed at US$15 per share. The increase in MHP SA share capital amounted to US$33,194 thousand at the transaction date. Share premium on issue constituted US$128,056 thousand at the transaction date. The net expenses related to the issue amounted to US$9,300 thousand. Net proceeds, after deducting expenses, of the offering amounted to US$151,950 thousand. MHP SA share capital has a par value of EUR 2 and all issued shares have been paid in full. The shareholders have the right to vote and the right to receive dividends. Dividends are payable at the discretion of the Group. Shareholders – As of 31 December 2008, 2007 and 2006, the shareholders of the parent company of the Group were: Shareholders/parent WTI Trading Limited International Finance Corporation, USA (“IFC”) Others Total 2008 MHP SA % 77.67 − 22.33 100.00 2007 MHP SA % 100.00 − − 100.00 2006 MHP % 93.70 6.30 − 100.00 The controlling shareholder of the Group is the Chief Executive Ofﬁcer of MHP SA Mr Yuriy Kosyuk. Mr Yuriy Kosyuk who owns 100% of the shares of WTI Trading Limited (“WTI”), which is the immediate shareholder of MHP SA, which, in its turn, was 77.67% in MHP SA. The rest of the shares are listed on the London Stock Exchange in the form of Global Depository Receipts (GDRs). On 1 February 2007, WTI acquired 6.3% of the Parent’s shares from IFC. As a result of the transaction IFC ceased to be a shareholder of the Group. The purchase price for such shares was determined based on the terms of an agreement entered into between IFC, Mr Yuriy Kosyuk and WTI dated 15 June 2006. 72 Myronivsky Hliboproduct Annual Report 2008 20 BANK BORROWINGS The following table summarises bank loans and credit lines outstanding as of 31 December 2008, 2007 and 2006: Bank Foreign banks Ukrainian banks Ukrainian banks Total bank borrowings Less: Short-term bank borrowings and current portion of long-term bank borrowings Total long-term bank borrowings Weighted average interest rate % 5.43 6.78 – Currency EEUR US$ UAH Weighted average interest rate % Weighted average interest rate % 2007 2006 4.77 86,597 4.82 63,426 8.71 12.51 10,799 42,337 53,136 139,733 (73,855) 65,878 10.10 13.34 4,257 44,359 48,616 112,042 (55,988) 56,054 2008 78,697 109,000 – 109,000 187,697 (130,241) 57,456 Repayment terms of principal amounts of bank borrowings vary from monthly repayment to repayment on maturity depending on the agreement reached with each bank. The interest on the borrowings drawn with Ukrainian banks is payable on a monthly or quarterly basis. Interest on borrowings drawn with foreign banks is payable semi-annually. Term loans and credit line facilities were as follows as of 31 December 2008, 2007 and 2006: Credit lines Term loans Total bank borrowings 2008 US$000 132,560 55,137 187,697 2007 US$000 84,973 54,760 2006 US$000 39,750 72,292 139,733 112,042 The following table summarises ﬁxed and ﬂoating interest rates bank loans and credit lines held by the Group as of 31 December 2008, 2007 and 2006: Floating interest rate Fixed interest rate Total Bank loans and credit lines outstanding as of 31 December 2008 were repayable as follows: Within one year In the second year In the third to ﬁfth year inclusive Total 2008 US$000 147,941 39,756 187,697 2007 US$000 102,348 37,385 2006 US$000 70,357 41,685 139,733 112,042 Foreign 21,241 22,703 34,753 2008 Ukrainian 109,000 – – Total 130,241 22,703 34,753 78,697 109,000 187,697 Myronivsky Hliboproduct Annual Report 2008 73 FINANCIAL STATEMENTS AND NOTES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 20 BANK BORROWINGS CONTINUED Included in bank borrowings as of 31 December 2008 is a revolving committed credit line facility drawn with ING Bank (Ukraine) in an amount of US$35,000 thousand. The facility is available until 2010, and may be drawn in six-month tranches. On 25 December 2008 the Group entered into a credit facility agreement with OTP Bank (Ukraine) for US$20,000 thousand until 5 January 2010. As of 31 December 2008, the Group had available borrowings on undrawn facilities of US$26,963 thousand, including US$1,844 thousand of available overdraft facilities. These undrawn facilities expire during the period from January 2009 until December 2016. The Group as well as particular subsidiaries has to comply with certain covenants imposed by the banks providing the loans. The main covenants which are to be complied by the Group are as follows: total debt to equity ratio, total debt to EBITDA ratio and total equity to total assets ratio. The Group subsidiaries should also obtain approval with lenders regarding the property to be used as collateral. As of 31 December 2008, the Group had borrowings of US$13,521 thousand that were secured. These borrowings were secured by property, plant and equipment with the carrying amount of US$6,674 thousand (Note 7). 21 BONDS ISSUED Bonds issued and outstanding as of 31 December 2008, 2007 and 2006 were as follows: 10.25% Senior Notes due in 2011 14% Druzhba Nova Bonds due in 2008 Unamortised premium on bonds issued Unamortised debt issue cost Total Less: Current portion of long-term bonds Total long-term portion of bonds issued 2008 US$000 250,000 – – (3,097) 2007 US$000 2006 US$000 250,000 39,604 116 (6,512) 250,000 39,604 295 (8,396) 246,903 283,208 281,503 – (39,604) – 246,903 243,604 281,503 10.25% Senior Notes In November 2006, MHP SA issued US$250 million 10.25% Senior Notes (“Senior Notes”), due in November 2011, at par. The notes are listed on London Stock Exchange. The Senior Notes are jointly and severally guaranteed on a senior basis by MHP, Peremoga, Druzhba Nova, Oril, MZVKK, Zernoproduct and Druzhba. Interest on the Senior Notes is payable semi-annually in arrears. On or prior to 30 November 2009, the Group may redeem up to 35% of the aggregate principal amount of the Senior Notes with the net proceeds of any offering of MHP SA common equity at a redemption price of 110.25% of the principal amount, plus accrued and unpaid interest up to the redemption date. These Senior Notes are subject to certain restrictive covenants including, but not limited to, limitations on the incurrence of additional indebtedness, restrictions on mergers or consolidations, limitations on liens and dispositions of assets and limitations on transactions with afﬁliates. The effective interest rate on the Senior Notes is 11.43% per annum. If the Group fails to comply with the covenants imposed, all outstanding Senior Notes will become due and payable without further action or notice. If change of control occurs, the Group shall make an offer to each holder of the Senior Notes to purchase such Senior Notes at a purchase price in cash in an amount equal to 101% of the principal amount thereof, plus accrued and unpaid interest and additional amounts, if any. As of 31 December 2008, the fair value of the Senior Notes issued by the Group was equal to US$120,875 thousand (2007: US$252,500 thousand; 2006: US$255,312 thousand). 14% Druzhba Nova Bonds In September 2006, Druzhba Nova issued 200,000 of 14.0% coupon bonds with nominal value of US$39,604 thousand at a premium of US$360 thousand, due in August 2008. Interest on the bonds was payable quarterly in arrears. The bonds were not subject to any restrictive covenants. The effective interest rate on the bonds was 14.31% per annum. As of 31 December 2007, the fair value of Druzhba Nova bonds was equal to US$40,966 thousand (2006: US$39,994 thousand). The bonds were fully repaid during the year ended 31 December 2008. The fair value of the notes and bonds was determined based on market quotations. 74 Myronivsky Hliboproduct Annual Report 2008 22 LONG-TERM FINANCE LEASE AND VENDOR FINANCING OBLIGATIONS Long-term ﬁnance lease and vendor ﬁnancing obligations as of 31 December 2008, 2007 and 2006 were as follows: Finance lease obligations, long-term portion Long-term payables for property, plant and equipment under vendor ﬁnancing arrangements Total 2008 US$000 47,972 – 47,972 2007 US$000 30,018 520 30,538 2006 US$000 17,433 395 17,828 The long-term payables for property, plant and equipment mainly represent vendor ﬁnancing arrangements with foreign and Ukrainian companies. As of 31 December 2007, the weighted average interest rates on such payables were 11% and 9.9% for payables denominated in EUR and UAH, respectively (2006: 7.58% and 10.0%). As of 31 December 2008, 2007 and 2006, the current portion of long-term payables for property, plant and equipment was included in current accounts payable for property, plant and equipment as follows: Long-term payables for property, plant and equipment Short-term payables for property, plant and equipment Less: Long-term portion of payables for property, plant and equipment Total 2008 US$000 – 8,116 – 8,116 2007 US$000 1,534 8,612 2006 US$000 969 11,273 (520) (395) 9,626 11,847 As of 31 December 2008, the Group’s property, plant and equipment with net book value of US$786 thousand were pledged as a collateral under vendor ﬁnancing arrangements with foreign and Ukrainian companies (Note 7). The long-term ﬁnance lease obligations represent amounts due under agreements for lease of trucks, agricultural machinery and equipment with Ukrainian and foreign companies. As of 31 December 2008, the weighted average interest rates on ﬁnance lease obligations were 8.28% and 10.0% for ﬁnance lease obligations denominated in EUR and US$, respectively. The following are the minimum lease payments and present value of minimum lease payments under the ﬁnance lease agreements as of 31 December 2008: Payable within one year Payable in the second year Payable in the third to the ﬁfth year inclusive Payable after ﬁfth year Less: Future ﬁnance charges Present value of lease obligations Less: Current portion Finance lease obligations, long-term portion Minimum lease payments US$000 28,928 24,697 32,408 684 86,717 Present value of minimum lease payments US$000 21,625 19,632 27,776 564 69,597 (17,120) – 69,597 69,597 (21,625) 47,972 Myronivsky Hliboproduct Annual Report 2008 75 FINANCIAL STATEMENTS AND NOTES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 23 TRADE ACCOUNTS PAYABLE Trade accounts payable were as follows as of 31 December 2008, 2007 and 2006: Trade accounts payable to third parties Payables related to natural gas trading and related transactions Payables due to related parties Total 2008 US$000 22,145 – 25 22,170 2007 US$000 25,077 − 39 25,116 2006 US$000 13,555 170 − 13,725 During the year ended 31 December 2008 the Group changed the terms of some of its arrangements related to grain purchase ﬁnancing. As a result, as of 31 December 2008 trade accounts payable included liabilities that bear a ﬂoating rate of interest under grain purchase ﬁnancing arrangements in the amount of US$6,205 thousand and accrued interest of US$136 thousand. 24 OTHER CURRENT LIABILITIES Other current liabilities were as follows as of 31 December 2008, 2007 and 2006: Accrued payroll and payroll related taxes Advances from and other payables due to third parties Advances from related parties (Note 6) Payables on other ﬁnancing arrangements Other payables Total 2008 US$000 15,151 2,470 338 12,484 2,549 32,992 2007 US$000 11,940 4,362 329 – 1,454 18,085 2006 US$000 6,595 709 26 – 1,424 8,754 Payables on other ﬁnancing arrangements represented credit facility received from the government organisation at 8.75% with a maturity on 30 June 2009. 25 GOVERNMENT GRANTS INCOME The Ukrainian legislation provides for a number of different grants and tax beneﬁts for companies involved in agricultural operations. The below- mentioned grants and similar privileges are established by Verkhovna Rada (the Parliament) of Ukraine, as well as by the Ministry of Agrarian Policy of Ukraine, the Ministry of Finance of Ukraine, the State Committee of Water Industry, the customs authorities and local district administrations. The government grants recognised by the Group as income during the years ended 31 December 2008, 2007 and 2006 were as follows: VAT refunds Processing of live animals Fruits and vine cultivation Breeding Other government grants Total 2008 US$000 59,338 46,146 468 293 1,418 107,663 2007 US$000 21,365 29,641 2,417 1,198 1,668 56,289 2006 US$000 26,121 18,006 1,397 347 807 46,678 VAT refunds for agricultural industry – According to the Law of Ukraine “On the Value Added Tax”, companies that generated not less than 50% of gross revenues for the previous tax year from sales of own agricultural products are entitled to refunds of VAT on sales of agricultural products. The VAT on sales, net of VAT paid on purchases, is transferred to a special account, restricted to payments for goods and services related to agricultural activities. The corresponding VAT liability to be refunded at each balance sheet date is recorded in the Group’s consolidated ﬁnancial statements as deferred income, as the income recognition criteria is considered to be met only when payments are made. As of 31 December 2008, the balance of deferred income related to VAT refunds was US$789 thousand (2007: US$304 thousand, 2006: US$648 thousand). The mentioned VAT refunds were effective during 2008, 2007 and 2006. In October 2008, the Law of Ukraine “On Immediate Actions on Prevention of Financial Crisis Impact” extended the exemption until January 2011. This Law introduced certain changes which come into effect from 1 January 2009 and may affect the amount of VAT refunds for the future periods. The management estimates that these changes will not have a signiﬁcant impact on the Group’s future VAT refunds. Subsequent to 31 December 2008, the exemption was extended for an indeﬁnite period (Note 37). 76 Myronivsky Hliboproduct Annual Report 2008 25 GOVERNMENT GRANTS INCOME CONTINUED Government grants on processing of live animals – During the years ended 31 December 2008, 2007 and 2006, the Law “On State Budget of Ukraine” established subsidies for companies engaged in processing of live animals (chicken and other poultry, cows and pigs). This subsidy is provided to the Group’s chicken farms in the form of payment for each item of poultry slaughtered at the farms. This subsidy is also available to the Group’s beef and pork processing facilities. As of the date these consolidated ﬁnancial statements were authorized for issue, the regulations as to the amounts of grants on processing of live animals were not issued. Accordingly, there is uncertainty as to the amounts of these grants expected to be received by the Group in 2009. Government grants on fruits and vine cultivation – In accordance with the Law “On State Budget of Ukraine” two companies of the Group were entitled to receive grants for the years ended 31 December 2008, 2007 and 2006 for creation and cultivating of orchards, vines and berry-ﬁelds (these companies were acquired in the second quarter of 2006). Government grants related to selection and genetics programmes in breeding – Two of the Group companies received grants from the state budget for the purpose of ﬁnancing selection and genetics programmes in poultry breeding. This subsidy is provided to the Group’s breeding farms in the form of compensation of expenses in connection with selection and genetics poultry breeding. The eligibility, application and tender procedures related to the grants are carried out by the Ministry of Agrarian Policy of Ukraine and Ukrainian Agricultural Academy of Sciences. Other government grants – Other government grants recognised as income during the years ended 31 December 2008, 2007 and 2006 mainly comprise subsidies related to crop growing. In 2006, Starynska and Zernoproduct began receiving subsidies in connection with their crop-growing activities. This subsidy is calculated based on the number of hectares sowed with a particular crop. In addition to the government grant income recognised by the Group, the Group receives a grant to compensate agricultural producers for costs used to ﬁnance the operations. Agricultural producers are entitled to compensation of ﬁnance costs incurred on bank borrowings in accordance with the Law “On State Budget of Ukraine” during the years ended 31 December 2008, 2007 and 2006. The eligibility, application and tender procedures related to the grants were deﬁned and controlled by the Ministry of Agrarian Policy of Ukraine. These grants were recognised as a reduction in the associated ﬁnance costs and during the years ended 31 December 2008, 2007 and 2006 were US$2,406 thousand, US$2,141 thousand and US$449 thousand, respectively (Note 32). 26 CONTINGENCIES AND CONTRACTUAL COMMITMENTS Recent volatility in global and Ukrainian ﬁnancial markets – In recent months a number of major economies around the world have experienced volatile capital and credit markets. A number of major global ﬁnancial institutions have been placed into bankruptcy, taken over by other ﬁnancial institutions and/or supported by government funding. As a consequence of the recent market turmoil in capital and credit markets both globally and in Ukraine, notwithstanding any potential economic stabilisation measures that may be put into place by the Ukrainian government and the National Bank of Ukraine, there exists as of the date these ﬁnancial statements are authorised for issue economic uncertainties surrounding the continual availability, and cost, of credit both for the entity and its counterparties, and the potential for economic uncertainties to continue in the foreseeable future. As a consequence, the potential exists that assets may not be recovered at their carrying amounts in the ordinary course of business, which would have a corresponding impact on the entity’s proﬁtability. During the year ended 31 December 2008, the National Bank of Ukraine imposed restrictions as to the early withdrawal of bank deposits placed by the entities and individuals with Ukrainian banks and Ukrainian subsidiaries of foreign banks. The estimated maximum exposure to the Group, as measured by reference to the carrying value of short-term bank deposits included in cash and cash equivalents (Note 18) and short-term bank deposits (Note 17) as of 31 December 2008 comprised US$60,439 thousand. The Group’s management believes that the Group will be able to substantially recover the carrying amount of the deposits. Operating environment − The principal business activities of the Group are within Ukraine. Laws and regulations affecting businesses operating in Ukraine are subject to rapid changes and the Group’s assets and operations could be at risk if there are any adverse changes in the political and business environment. Taxation − Ukrainian tax authorities are increasingly directing their attention to the business community as a result of the overall Ukrainian economic environment. In respect of this, the local and national tax environment in Ukraine is constantly changing and subject to inconsistent application, interpretation and enforcement. Non-compliance with Ukraine laws and regulations can lead to the imposition of severe penalties and interest. Future tax examinations could raise issues or assessments which are contrary to the Group companies’ tax ﬁlings. Such assessments could include taxes, penalties and interest, and these amounts could be material. While the Group believes it has complied with local tax legislation, there have been many new tax and foreign currency laws and related regulations introduced in recent years which are not always clearly written. Legal issues − The Group is involved in litigations and other claims that are in the ordinary course of its business activities. Management believes that the resolution of such matters will not have a material impact on its ﬁnancial position or operating results. Myronivsky Hliboproduct Annual Report 2008 77 FINANCIAL STATEMENTS AND NOTES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 26 CONTINGENCIES AND CONTRACTUAL COMMITMENTS CONTINUED Contractual commitments on purchase of raw materials and biological asset − During the year ended 31 December 2008, the Group became a party to several forward contracts for the purchase of sunﬂower seeds and biological assets with speciﬁed period, quantity, and price. As of 31 December 2008, purchase commitments on forward contracts amounted to US$1,833 thousand (2007: US$108,094 thousand; 2006: US$9,451 thousand). As of 31 December 2008, purchase commitments on acquisition of biological assets from a foreign supplier amounted to US$1,416 thousand (2007: US$8,734 thousand; 2006: US$83 thousand). Contractual commitments on purchase of property, plant and equipment − During the years ended 31 December 2008, 2007 and 2006, the companies of the Group entered into a number of contracts with foreign suppliers for the purchase of property, plant and equipment for development of agricultural operations. As of 31 December 2008, purchase commitments on such contracts amounted to US$20,927 thousand (2007: US$3,851 thousand; 2006: US$28,263 thousand). Contractual commitments on sales of sunﬂower oil − As of 31 December 2008, commitments of the Group on sunﬂower oil sales to a foreign customer comprised US$6,854 thousand (2007: US$12,869 thousand; 2006: US$8,307 thousand). Contractual commitments on purchase of additional shares − In April 2007, the Group entered into an agreement to acquire minority shareholders’ interest in Zernoproduct-Lypivka. As of 31 December 2008 the transaction was subject to registration with Ukrainian state authorities. The Group committed to purchase additional shares in Zernoproduct-Lypivka valued at US$283 thousand. Completion of the transaction is expected to result in an increase of the Group’s effective interest in Zernoproduct-Lypivka to 92.8%. Commitments on operating lease of land − The Group has the following non-cancelable contractual obligations as to the operating lease of land as of 31 December 2008, 2007 and 2006: Within one year In the second to the ﬁfth year inclusive Thereafter Total 27 RISK MANAGEMENT POLICIES 2008 US$000 5,264 19,218 38,193 62,675 2007 US$000 5,868 21,749 46,359 73,976 2006 US$000 4,697 18,006 42,726 65,429 Capital risk management − The Group manages its capital to ensure that entities of the Group will be able to continue as a going concern while maximising the return to the equity holders through maintaining a balance between the higher returns that might be possible with higher levels of borrowings and the security afforded by a sound capital position. The management of the Group reviews the capital structure on a regular basis. Based on the results of this review, the Group takes steps to balance its overall capital structure through new share issues and as the issue of new debt or the redemption of existing debt. The Group’s target is to achieve the leverage ratio of not higher than 3.25 up to 31 December 2007, 3.0 up to 31 December 2008, and 2.5 thereafter. It is determined as the proportion of debt to adjusted operating proﬁt. As of 31 December 2008, 2007 and 2006 the leverage ratio was a follows: Bank borrowings (Note 20) Bonds issued (Note 21) Finance lease obligations (Note 22) Payables on other ﬁnancing arrangements (Note 24) Operating proﬁt Adjustments for: Depreciation expense Loss on impairment of property, plant and equipment (Note 7) Gain from change in accounting estimates in respect of valuation of biological assets Adjusted operating proﬁt Debt to adjusted operating proﬁt 78 Myronivsky Hliboproduct Annual Report 2008 2008 US$000 187,697 246,903 69,597 12,484 516,681 243,506 56,938 11,767 – 2007 US$000 139,733 283,208 44,441 – 2006 US$000 112,042 281,503 27,111 – 467,382 420,656 112,143 116,435 44,207 10,238 (150) 23,295 – (6,738) 312,211 166,438 132,992 1.65 2.81 3.16 27 RISK MANAGEMENT POLICIES CONTINUED Debt is deﬁned as bank borrowings, bonds issued, long-term ﬁnance lease and vendor ﬁnancing obligations, and payables on other ﬁnancing arrangements. For the purposes of the leverage ratio, debt does not include interest-bearing liabilities, which are included in trade accounts payable (Note 23). Adjusted operating proﬁt is deﬁned as operating proﬁt as adjusted for the depreciation expense and losses and gains believed by the management to be non-recurring in nature, as this measure produces results substantially comparable to those reviewed for the purposes of ﬁnancial covenants under the Group’s borrowings. Major categories of ﬁnancial instruments Financial assets: Cash and cash equivalents Trade accounts receivable, net Government grants receivable (Note 14) Short-term bank deposits (Note 17) Loans to employees and related parties (Notes 11 and 14) Other receivables (Note 14) Total ﬁnancial assets Financial liabilities: Bank borrowings Bonds issued Finance lease and vendor ﬁnancing obligations Accounts payable for property, plant and equipment Interest accrued Trade accounts payable Other long-term payables Other current liabilities (Note 24) Total ﬁnancial liabilities 2008 US$000 2007 US$000 2006 US$000 54,072 31,531 3,397 25,342 1,486 2,346 118,174 10,088 20,363 4,192 10,055 1,732 2,235 48,665 44,415 17,727 5,331 2,000 1,352 709 71,534 2008 US$000 2007 US$000 2006 US$000 187,697 246,903 69,597 8,116 3,520 22,170 400 15,033 553,436 139,733 283,208 44,441 9,626 4,102 25,116 2,004 1,454 112,042 281,503 27,111 11,847 3,851 13,725 1,474 1,424 509,684 452,977 The main risks inherent to the Group’s operations are those related to credit risk exposures, market movements in interest rates and foreign exchange rates, potential negative impact of livestock diseases, and commodity price and procurement risk. Credit risk − The Group is exposed to credit risk which is the risk that one party to a ﬁnancial instrument will fail to discharge an obligation and cause the other party to incur a ﬁnancial loss. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one customer or group of customers. The approved credit period for major groups of customers, which include franchisees, distributors and supermarkets, is set at 5–21 days; sales to other customers are performed on prepayment terms. Limits on the level of credit risk by customer are approved and monitored on a regular basis by the management of the Group. The Group’s management assesses amounts receivable from the customers for recoverability starting from 30 and 60 days for receivables on sales of poultry meat and receivables on other sales, respectively. No assessment is performed immediately from the date credit period is expired. About 50% of trade receivables comprise amounts due from the large supermarkets, which have the longest contractual receivable settlement period among the customers Of the trade accounts receivable balance as of 31 December 2008, the Group’s ﬁve largest customers represent 38% of the outstanding balance. The Group manages its exposure to the risk of recoverability of bank deposits (Note 26) by placing deposits with the banks in which it has drawn bank borrowings. Myronivsky Hliboproduct Annual Report 2008 79 FINANCIAL STATEMENTS AND NOTES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 27 RISK MANAGEMENT POLICIES CONTINUED Liquidity risk − Liquidity risk is the risk that the Group will not be able to settle all liabilities as they are due. The Group’s liquidity position is carefully monitored and managed. The Group has in place a detailed budgeting and cash forecasting process to help ensure that it has adequate cash available to meet its payment obligations. The following table details the Group’s remaining contractual maturity for its non-derivative ﬁnancial liabilities. The table has been drawn up based on the undiscounted cash ﬂows of ﬁnancial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash ﬂows. The amounts in the table may not be equal to the balance sheet carrying amounts since the table includes all cash outﬂows on an undiscounted basis. 2008 Borrowings Bonds issued Finance lease obligations Total Carrying amount US$000 Contractual amounts US$000 Less than 1 year US$000 From 2nd to 5th year US$000 187,697 250,000 69,597 205,584 324,740 86,716 141,175 25,625 28,928 62,075 299,115 57,104 507,294 617,040 195,728 418,294 After 5th year US$000 2,336 – 684 3,020 The Group’s target is to maintain its current ratio, deﬁned as a proportion of current assets to current liabilities, at the level of 1.1–1.2. As of 31 December 2008, 2007 and 2006, the current ratio was as follows: Current assets Current liabilities Current ratio 2008 US$000 337,631 219,453 1.5 2007 US$000 267,337 184,595 2006 US$000 256,950 104,096 1.4 2.5 Currency risk − Currency risk is the risk that the value of a ﬁnancial instrument will ﬂuctuate due to changes in foreign exchange rates. The Group undertakes certain transactions denominated in foreign currencies. The Group does not use any derivatives to manage foreign currency risk exposure, at the same time the management of the Group sets limits on the level of exposure by currencies. The carrying amounts of the Group’s foreign currency denominated monetary assets and liabilities as of 31 December 2008 are as follows: US$ denominated EUR denominated 3,987 24,094 40,357 68,438 1,694 6 109,000 250,000 8,536 2 – 12 14 4,591 5,790 78,697 – 61,061 369,236 150,139 Assets Trade accounts receivable Short-term bank deposits Cash and cash equivalents Total assets Liabilities Trade accounts payable Accounts payable for property, plant and equipment Bank borrowings Bonds issued Finance lease and vendor ﬁnancing obligations Total liabilities 80 Myronivsky Hliboproduct Annual Report 2008 27 RISK MANAGEMENT POLICIES CONTINUED The below details the Group’s sensitivity to strengthening of the Ukrainian hryvna against US$ and EUR by 5% and weakening of the Ukrainian hryvna against US$ and EUR by 15%. This sensitivity rate represents management’s assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 5% and 15% change in foreign currency rates. Proﬁt/(loss) The effect of foreign currency sensitivity on shareholders’ equity is equal to that on proﬁt or loss. US$ denominated EUR denominated 15,040/(45,120) 7,506/(22,519) During the year ended 31 December 2008, the Ukrainian Hryvnia depreciated against the EUR by 46.3% and against the US$ by 52.5%. As a result, the Group recognised foreign exchange losses in the amount of US$187,127 thousand in the consolidated income statement. The Group’s management believes that the currency risk is mitigated by existence of US$-denominated proceeds from sunﬂower oil sales, which are substantially sufﬁcient for servicing the Group’s US$-denominated liabilities. Interest rate risk − Interest rate risk arises from the possibility that changes in interest rates will affect the value of the ﬁnancial instruments. The Group borrows on both a ﬁxed and variable rate basis. The primary sources of the Group’s funds are loans tied to LIBOR and EURIBOR. The below details the Group’s sensitivity to increase or decrease of ﬂoating rate by 10%. The analysis was applied to interest-bearing liabilities (bank borrowings, ﬁnance lease obligations and accounts payable under grain purchase ﬁnancing arrangements) based on the assumptions that the amount of liability outstanding as of the balance sheet date was outstanding for the whole year. Proﬁt/(loss) 12,209/(12,209) 6,496/(6,496) 18,705/(18,705) LIBOR EURIBOR Total The effect of foreign currency sensitivity on shareholders’ equity is equal to that on proﬁt or loss. Livestock diseases risk − The Group’s agro-industrial business is subject to risks of outbreaks of various diseases. The Group faces the risk of outbreaks of disease which are highly contagious and destructive to susceptible livestock, such as avian inﬂuenza or bird ﬂu for its poultry operations. These and other diseases could result in mortality losses. Disease control measures were adopted by the Group to minimise and manage this risk. The Group’s management is satisﬁed that its current existing risk management and quality control processes are effective and sufﬁcient to prevent any outbreak of livestock diseases and related losses. Commodity price and procurement risk − Commodity price risk arises from the risk of an adverse effect on current or future earnings from ﬂuctuations in the prices of commodities. To mitigate this risk the Group accumulates sufﬁcient commodity stock at each balance sheet date to support at least one quarter of operations, and uses commodity forward purchase contracts. 28 REVENUE Revenue for the years ended 31 December 2008, 2007 and 2006 was as follows: Poultry and related operations segment Revenue from sales of chicken meat Revenue from sunﬂower oil sales Revenue from other poultry related sales Other agricultural operations segment Revenue from sales of other meat Other agricultural sales Grain growing segment Revenue from sales of grains and sugar beets Total revenue from continuing operations 2008 US$000 2007 US$000 2006 US$000 501,013 109,974 49,044 660,031 66,122 26,980 93,102 283,835 67,028 34,002 210,555 38,312 16,756 384,865 265,623 34,523 16,559 51,082 21,174 6,886 28,060 49,777 38,490 17,314 802,910 474,437 310,997 Myronivsky Hliboproduct Annual Report 2008 81 FINANCIAL STATEMENTS AND NOTES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 29 COST OF SALES Cost of sales for the years ended 31 December 2008, 2007 and 2006 was as follows: Poultry and related operations Other agricultural operations Grain growing operations Total For the years ended 31 December 2008, 2007 and 2006, cost of sales comprised the following: Costs of raw materials and other inventory used Payroll and related expenses Depreciation expense Other costs Total 2008 US$000 437,865 91,492 42,353 571,710 2008 US$000 390,421 86,440 51,541 43,308 571,710 2007 US$000 285,008 55,665 24,345 2006 US$000 167,689 26,032 16,275 365,018 209,996 2007 US$000 239,004 58,310 40,397 27,307 2006 US$000 142,908 30,942 20,913 15,233 365,018 209,996 By-products arising from the agricultural production process are measured at net realisable value, and this value is deducted from the cost of the main product. 30 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the years ended 31 December 2008, 2007 and 2006 were as follows: Payroll and related expenses Services Advertising expenses Representative costs and business trips Fuel and other materials used Depreciation expense Insurance expenses Bank services and conversion fees Other Total 31 OTHER OPERATING EXPENSES Other operating expenses for the years ended 31 December 2008, 2007 and 2006 were as follows: Change in allowance for irrecoverable amounts and direct write-offs Change in allowance for irrecoverable VAT and direct write-offs Non-production materials write-off Loss/(gain) on disposal of property, plant and equipment Non-recurring legal and accounting fees Other Total 2008 US$000 37,820 11,069 8,361 8,319 8,045 5,397 580 477 427 80,495 2007 US$000 16,306 6,905 9,626 7,912 4,470 3,810 1,130 824 616 51,599 2006 US$000 10,178 4,547 7,288 6,244 3,214 2,382 444 370 407 35,074 2008 US$000 2007 US$000 2006 US$000 1,052 4,821 995 1,145 – 2,009 10,022 2,777 2,438 817 (660) – 1,903 7,275 824 1,826 1,283 426 1,140 906 6,405 82 Myronivsky Hliboproduct Annual Report 2008 32 FINANCE COSTS, NET Finance costs for the years ended 31 December 2008, 2007 and 2006 were as follows: Interest on corporate bonds Interest on bank borrowings Interest on obligations under ﬁnance leases Interest on grain purchases ﬁnancing arrangements Bank commissions and other charges Early repayment ﬁne on IFC loans Government grants as compensation of the ﬁnance costs for agricultural producers (Note 25) Total 2008 US$000 31,300 11,332 5,584 3,456 2,397 – (2,406) 51,663 2007 US$000 32,781 10,405 4,256 2,533 1,648 – (2,141) 2006 US$000 4,432 16,752 2,097 741 2,596 10,347 (449) 49,482 36,516 In December 2006, MHP repaid all amounts outstanding under its loan agreements with IFC ahead of schedule with a portion of the proceeds from the offering of the Senior Notes in November 2006 (Note 21). During the year ended 31 December 2006, the Group paid early repayment ﬁne to IFC in the amount of US$10,347 thousand. Interest on corporate bonds for the years ended 31 December 2008, 2007 and 2006 includes amortisation of premium and debt issue costs on bonds issued in the amounts of US$1,611 thousand, US$1,705 thousand and US$152 thousand, respectively. 33 PENSIONS AND RETIREMENT PLANS The employees of the Group receive pension beneﬁts from the government in accordance with the laws and regulations of Ukraine. The Group’s contributions to the State Pension Fund are recorded in the income statement on the accrual basis. The Group companies are not liable for any supplementary pensions, post-retirement health care, insurance beneﬁts or retirement indemnities to its current or former employees, other than pay-as-you-go expenses. During the years ended 31 December 2008, 2007 and 2006 the Group companies remitted 33.2% and 19.9% for CIT and FAT payers, respectively, of the aggregate employees’ salaries to the State Pension Fund subject to the following limits: Period 1 January 2006 – 31 March 2006 1 April 2006 – 30 September 2006 1 October 2006 – 31 December 2006 1 January 2007 – 31 March 2007 1 April 2007 – 30 September 2007 1 October 2007 – 31 December 2007 1 January 2008 – 31 March 2008 1 April 2008 – 30 June 2008 1 July 2008 – 30 September 2008 1 October 2008 – 31 December 2008 Limit per employee per month US$ 304 312 318 518 553 560 624 649 667 536 The Group’s contributions to the State Pension Fund during the year ended 31 December 2008 amounted to US$22,820 thousand (2007: US$10,152 thousand; 2006: US$6,793 thousand). 34 FAIR VALUE OF FINANCIAL INSTRUMENTS Estimated fair value disclosure of ﬁnancial instruments is made in accordance with the requirements of International Financial Reporting Standard 7 “Financial Instruments: Disclosure”. Fair value is deﬁned as the amount at which the instrument could be exchanged in a current transaction between knowledgeable willing parties in an arm’s length transaction, other than in forced or liquidation sale. As no readily available market exists for a large part of the Group’s ﬁnancial instruments, judgment is necessary in arriving at fair value, based on current economic conditions and speciﬁc risks attributable to the instrument. The estimates presented herein are not necessarily indicative of the amounts the Group could realise in a market exchange from the sale of its full holdings of a particular instrument. As of 31 December 2008, 2007 and 2006, the following methods and assumptions were used by the Group to estimate the fair value of each class of ﬁnancial instruments for which it is practicable to estimate such value: The fair value is estimated to be the same as the carrying value for cash and cash equivalents, trade and other accounts receivable (including promissory notes receivable), and trade and other accounts payable, short-term ﬁnance lease obligations and short-term borrowings due to the short-term nature of the ﬁnancial instruments. Myronivsky Hliboproduct Annual Report 2008 83 FINANCIAL STATEMENTS AND NOTES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED FOR THE YEARS ENDED 31 DECEMBER 2008, 2007 AND 2006 34 FAIR VALUE OF FINANCIAL INSTRUMENTS CONTINUED The fair value of bank borrowings as of 31 December 2008 is estimated at US$164,335 thousand compared to carrying amount of US$187,697 thousand. The fair value of ﬁnance lease obligations as of 31 December 2008 is estimated at US$62,470 thousand compared to carrying amount of US$69,597 thousand. Fair value of these liabilities was estimated by discounting the expected future cash outﬂows by a market rate of interest. The fair value of bonds is estimated at US$120,875 thousand compared to the carrying value of US$250,000 thousand. The fair value was estimated based on market quotations. 35 EARNINGS PER SHARE The earnings and weighted average number of ordinary shares used in calculation of earnings per share are as follows: Proﬁt for the year attributable to equity holders of the Parent Loss/(proﬁt) for the year from discontinued operations used in calculation of earnings per share from discontinued operations Earnings used in calculation of earnings per share from continuing operations Weighted average number of shares outstanding 2008 US$000 1,518 9,722 11,240 2007 US$000 2006 US$000 40,870 100,549 3,601 44,471 (5,409) 95,140 2008 2007 2006 106,738,750 100,020,000 100,020,000 During the years ended 31 December 2008, 2007 and 2006 the results from discontinued operations were attributable to equity holders of the Parent. Due to the change in the capital structure resulting from the Corporate Reorganisation, the earnings per share for the year ended 31 December 2006 has been based on the weighted average number of shares after the Corporate Reorganisation. The Group has no dilutive potential ordinary shares; therefore, the diluted earnings per share equal basic earnings per share. 36 SUPPLEMENTAL CASH FLOW INFORMATION Operating, investing and ﬁnancing transactions that did not require the use of cash or cash equivalents were as follows in the years ended 31 December: Additions of property, plant and equipment under ﬁnance leases and vendor ﬁnancing arrangements Additions of property, plant and equipment ﬁnanced through direct bank-lender payments to the vendor Contributions of ﬁxed assets to share capital Property, plant and equipment purchased for credit Transaction costs accrued but not paid 37 SUBSEQUENT EVENTS 2008 US$000 2007 US$000 2006 US$000 47,616 28,417 20,231 16,313 – 8,116 – 27,849 − 9,626 − 51,314 478 11,847 2,106 Extension of beneﬁts for agricultural producers In March 2009 the newly enacted laws extended the effective period for the FAT regime and VAT refunds for the agricultural producers for an indeﬁnite period. Increase in ownership share in Starynska On 2 April 2009 the Group increased the share capital of Starynska by US$2,594 thousand. As a result, the Group’s effective ownership interest increased to 94.9%. The amount of contribution, payable in cash, was outstanding as of the date these consolidated ﬁnancial statements were authorised for issue. Reﬁnancing of existing bank borrowings In January 2009 the Group reﬁnanced bank borrowings with OTP Bank for the total amount of US$20,000 thousand with maturity in January 2010. 38 AUTHORISATION OF THE CONSOLIDATED FINANCIAL STATEMENTS These consolidated ﬁnancial statements were authorised for issue by the Board of Directors of MHP SA on 9 April 2009. 84 Myronivsky Hliboproduct Annual Report 2008 CORPORATE INFORMATION JSC Myronivsky Hliboproduct 158, Akademica Zabolotnogo Str, Kyiv, 03143, Ukraine www.mhp.com.ua For further inquires: ir@mhp.com.ua +38 044 207 00 00 Registered ofﬁce 8-10, rue Mathias Hardt L-1717 Luxembourg Registered number: B116838 Designed and produced by 85FOUR. Printed in England by Cousin ISO 14001 environmentally accredited printers. Myronivsky Hliboproduct Annual Report 2008 85 WWW.MHP.COM.UA I M Y R O N V S K Y H L I B O P R O D U C T > A N N U A L R E P O R T 2 0 0 8

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