MHP
Annual Report 2013

Plain-text annual report

M y r o n i 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 a n d A c c o u n t s 2 0 1 3 Myronivsky Hliboproduct One of Ukraine’s leading agro-industrial companies Annual Report and Accounts 2013 Who are MHP? MHP is a Ukrainian vertically integrated company, operating each stage of the poultry production process: from cultivation of land to production and distribution of chicken meat. Our Values Our Vision • We contribute to the development of Ukraine by combining the best professionals and advanced technologies We are: • dynamic in developing our business through our vertically integrated model • We enhance the knowledge and talents of our people to enhance their careers with us • the leading player in the Ukrainian poultry market • unique as a centre of knowledge to provide • We take responsibility for those who create and industry leadership secure the success of our company • We strive to achieve best results by managing environmental and financial resources wisely • We create trust and cooperation by providing full information to stakeholders on a regular basis • unique in our use of vertical integration, professional management and financial skill to drive our success • an excellent employer, a contributor to local communities and an organisation that operates with due regard to the environment Contents 01 Financial and operational highlights 02 Our Enterprises and Product portfolio 12 Chief Executive’s review 14 Market overview 16 A robust business model 04 Key Performance Indicators 18 Grain 06 Risk management 08 Board of Directors 10 Chairman’s statement 20 Poultry 22 Other agricultural activities 24 Sustainability 26 Financial review 32 Corporate governance 34 Directors’ report 35 Statement of the Board of Directors’ responsibilities Financial statements 36 Independent Auditor’s report 37 Consolidated statement of comprehensive income 38 Consolidated statement of financial position 39 Consolidated statement of changes in equity 40 Consolidated statement of cash flows 42 Notes to the consolidated financial statements Financial and operational highlights Company results and profitability Percentage increase 2012–2013 Percentage increase 2012–2013 Percentage increase 2012–2013 Result 2013 6% Revenue Poultry 17% Poultry production 23% Grain production 26% EBITDA margin • During 2013 the Vinnytsia project has been gradually launched into operations in line with operational and investment plans. By the end of 2013, nine of the 12 brigades were operational and worked at full capacity. • MHP’s production volume increased by 17% to 472,800 tonnes (2012: 404,000 tonnes) mostly due to the Vinnytsia poultry farm production growth. Sales volume increased by 19% to 447,000 tonnes (2012: 375,300 tonnes). • MHP’s market share was around 50% of industrially produced chicken in Ukraine, which is one third of poultry consumption in Ukraine. • The average price decreased by 7% year-on-year to UAH 15.99 per kg (net VAT) compared to UAH 17.19 (net VAT) in 2012 mainly due to relatively stable domestic poultry prices during 2013 and significant increase of share of export sales volumes from 15% in 2012 to 28% in 2013 as well as lower export price in H2 2013 as a result of new markets penetration. • Export sales of poultry increased significantly by over 110% year-on-year and constituted close to 123,000 tonnes (2012: 58,000 tonnes). • The Company opened around 20 new export markets both in Asia, the Middle East and Africa, simultaneously increasing its exports trades across all regions. • In July 2013, MHP was accredited (received “EU numbers”) by the EU authorities for exports of poultry products to the European countries. Since October 2013, MHP has exported its poultry products to the European market. • MHP sold 240,100 tonnes of sunflower oil (2012: 195,000 tonnes), which is 23% more year-on- year, due to the increased production of fodder mill at the Vinnytsia complex. All sunflower oil produced was sold to external customers at an average price of US$1,033 per tonne (2012: US$1,109) in line with international pricing trends. • Revenue from sunflower oil and chicken export sales denominated in US dollars in 2013 grew by 38% year-on-year. Grain Growing • By the end of 2013, MHP total land bank was • 360,000 ha. • In 2013 MHP acquired its first 40,000 ha agri asset beyond Ukraine in the Russian Federation (Voronezh region) and also increased its land bank in Ukraine by 35,000 ha. In 2013 MHP gathered around 2 million tonnes of crops (2012: 1,607,900 tonnes) from 287,000 ha (2012: 250,000 ha). • Due to MHP’s operational efficiency and employment of best practice, grain yields in 2013 are strong and significantly higher than Ukraine’s average. Other Agricultural • MHP sales volumes of meat processing • MHP is a sustainable market leader in meat products decreased by 6% to 33,210 tonnes (2012: 35,200 tonnes) due to the product portfolio optimisation during the year. • Average sausage and cooked meat prices increased by 6% to UAH 23.53 per kg (net VAT) compared to UAH 22.20 per kg (net VAT) in 2012. processing in Ukraine with up to 10% market share. 01 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Who are MHP? Our Enterprises and Product portfolio An introduction from the Chief Executive “Our robust and broadly based operation served us well during the year. It was a year when we produced more poultry and penetrated more international markets than ever before. We will continue this progress in 2014 and beyond.“ Yuriy Kosyuk Chief Executive Our Enterprises MHP’s enterprises are located in 13 regions of Ukraine and in the Russian Federation (Voronezh region). Vertical integration, economy of scale and efficiency are key elements in our business model. 02 Poultry Fodder Vinnytsia Poultry Farm Myronivska Poultry Farm Druzhba Narodiv Nova Poultry Farm Oril Leader Poultry Farm Peremoga Nova Poultry Farm Shahtarska Nova Poultry Farm Starynska Poultry Farm Grain Zernoproduct MHP Urozhay Agrofort Perspective Urozhaina Kraina Lypivka Ridny Kray Zernovy Kray AgroKryazh Voronezh Agro Holding (the Russian Federation) Fodder Complex “Ladyzhinsky” Myronivsky Plant for Manufacturing Groats & Feeds (MFC) Katerynopilsky Elevator Tavriysky Plant for Manufacturing Feeds Elevators Meat Meat processing Plant Druzhba Narodiv Myronivsky Meat Processing Plant “Lehko” Ukrainian Bacon Other Agricultural operations Druzhba Narodiv (cattle and pig farms) Crimean Fruit Company Snyatynska Nova Poultry Farm (goose) Myronivsky Hliboproduct Annual Report and Accounts 2013 Product portfolio Our brands are among the most recognised and trusted in Ukraine. We continually seek to improve our products, and regularly introduce new lines of products designed to appeal to the end buyer. Our aim is to build and maintain the respect and trust of our consumers. Poultry MHP is a leader of the Ukrainian market producing all range of chicken products from chilled to frozen, from whole and cuts to convenience food. Key products and brands Chilled chicken, whole or in portions Frozen chicken, whole or in portions Pre-cooked convenience food Sunflower oil US$, million 1,201 Sales in 2013 Domestic brands: Export brands: Grain Growing Key products MHP cultivates one of the biggest land banks in Ukraine with high efficiency and technology of best practice. Corn Sunflowers Wheat Rapeseeds Soyabeans and other crops US$, million 133 External sales in 2013 Total land bank 360,000 hectares by the end of 2013 Other Agricultural Meat processing is a logical step in vertical integration of MHP. Foie gras and goose meat are accredited for export to the EU. Key products and brands Sausages Cooked meats Premium fresh beef Foie gras Goose meat Fruit and Milk US$, million 162 Sales in 2013 03 Myronivsky Hliboproduct Annual Report and Accounts 2013 Strategic reportCorporate governanceFinancial statementsHow do we measure our success? Key Performance Indicators Revenue US$m 1600 1400 1200 1000 800 600 400 200 0 1,408 1,496 1,229 944 803 711 2008 2009 2010 2011 2012 2013 Revenue in 2013 The Company has shown a steady development, evidenced by a progressive increase in revenues. In 2013 they reached US$1,496 million (2012: US$1,408 million), 38% of which was received in hard currency derived from the export sales of, in particular, sunflower oil, chicken meat and grains. Future MHP will continue to grow its operations across all its business segments - in particular, Poultry and Grain - as well as boost its hard currency revenues in line with the Company’s operational expansion strategy. Gross profit US$m 450 400 350 300 250 200 150 100 50 0 422 361 324 238 247 293 2008 2009 2010 2011 2012 2013 Gross profit in 2013 Gross profit in 2013 decreased to US$324 million, driven mainly by lower earnings in the Grain segment. Gross margin decreased from 30% in 2012 to 22% in 2013. Future The Company expects higher gross profit as a result of greater production volumes, efficiencies, economies of scale and growth in prices. EBITDA US$m 468 401 391 312 271 325 2008 2009 2010 2011 2012 2013 500 450 400 350 300 250 200 150 100 50 0 04 EBITDA in 2013 EBITDA totalled US$391 million, 16% lower than in 2012 (US$468 million). This was mostly due to low grain prices for the 2013 harvest and high fodder costs for poultry during the first 9 months of the year. EBITDA margin decreased from 33% in 2012 to 26% in 2013. Future The Company expects EBITDA to increase, taking into account the low grain prices in 2013. These will filter through to lower production costs in 2014. There is also the potential for increased poultry and grain prices in Ukraine, at a time when MHP is looking forward to greater production volumes in both of these segments. Myronivsky Hliboproduct Annual Report and Accounts 2013 Key Performance Indicators by segment Poultry: production thousand tonnes and EBITDA margin % 500 400 300 200 100 0 473 384 404 285 360 225 2008 2009 2010 2011 2012 2013 Adjusted EBITDA margin % Poultry production development Since 2006 MHP has been investing heavily in the construction of greenfield poultry complexes. As a result, production volumes of chicken meat over the last six years have more than doubled: from 225,000 tonnes in 2008 to 472,800 tonnes in 2013. In 2014, due to the additional production increase at the Vinnytsia complex, MHP is targeting production of more than 550,000 tonnes of chicken meat. Adjusted EBITDA margin The adjusted EBITDA margin in 2013 decreased to 30% (2012: 35%), mostly due to increased fodder costs and lower poultry prices compared to 2012. 50% 40% 30% 20% 10% 0 Grain: production thousand tonnes and EBITDA margin % 2000 1800 1600 1400 1200 1000 800 600 400 200 0 1,712 1,607 1,984 960 913 735 2008 2009 2010 2011 2012 2013 Adjusted EBITDA margin % 50% 40% 30% 20% 10% 0 Grain production development MHP has been gradually increasing its land bank since 2005. Currently it operates 360,000 hectares (ha) of land. In 2013 the Company produced around 2 million tonnes of crops, which is 23% more than in 2012. By 2016, MHP plans to have increased its land bank to around 450,000 ha. Adjusted EBITDA margin* The adjusted EBITDA margin in 2013 was 10% (2012: 35%), due to significantly lower international grain prices compared to 2012. * Comprised the result of crops harvested in respective years only other expenses (net). EBITDA margin %: consolidated and by segment 60 50 40 30 20 10 0 2008 2009 2010 2011 2012 2013 Adjusted EBITDA margin (Poultry) % Adjusted EBITDA margin (Grain growing) % Consolidated adjusted EBITDA margin % Consolidated Adjusted EBITDA margin MHP enjoys strong and sustainable business profitability thanks to its vertically integrated model of Poultry and Grain operations. In 2013 the consolidated adjusted EBITDA margin was 26%, which is 7 percentage points lower than in 2012 and in line with EBITDA trends (see page 04). Future MHP expects its consolidated adjusted EBITDA margin to remain strong and, within the 25-33% range, well above those of its domestic and international peers. Again this is due to its robust vertically integrated model. 05 Myronivsky Hliboproduct Annual Report and Accounts 2013 Strategic reportCorporate governanceFinancial statementsHow do we conduct our business? Risk management Some of the risks the Group faces are common to all commercial operations, some are inherent in farming in general and chicken farming in particular. The principal risks the Group faces are macroeconomic, financial and operational. MHP has effective policies in place to manage and, where possible, to avoid these risks. Increased cost for, or disruptions in, gas and fuel supplies Potential Impact Gas and fuel, used for production and distribution, are imported. Uncertainty in supply and fluctuating prices could affect production and costs. Mitigation Gas and fuel represent only about 9% of our overall costs. We are increasing our use of co-generation and alternative energy technology. When we process sunflower seeds we are left with a huge amount of husks; we burn some to generate steam heat for our processing plant, and proportion is converted into briquettes for generating energy and these are exported. Weather Potential Impact Inclement weather could affect crop yield. Mitigation Ukraine’s weather is generally temperate, with plenty of sunshine in summer and adequate rainfall; this combines with extremely fertile earth to create excellent growing conditions. In addition, our management of our land and the use of modern technology enable us to achieve a yield which is significantly higher than the average for Ukraine. Operational risks Fluctuations in demand and market prices Potential Impact A drop in demand. Mitigation Falls in demand can generally be overcome with modest price reductions. Per capita consumption of meat is still low in comparison with other European countries and we believe demand for chicken will continue to increase. Beef and pork are mostly produced by householders and are far more expensive to produce and purchase than chicken, kg for kg. Avian flu and other livestock diseases Potential Impact In recent years, avian flu has affected wild birds and poultry flocks in a number of countries. It was first discovered in Ukraine in December 2005 and was still present in the Crimea and Sumy regions in 2008. Mitigation We operate strict biosecurity measures, including disinfectant washes and culling wild birds in the immediate vicinity of our farms. Fluctuations in grain prices Potential Impact World prices could affect our poultry production costs. Mitigation We grow 100% of the corn we need for feed and replace expensive protein from imported soya beans with that from sunflower seeds. We also grow around 20% of the sunflowers we need and buy the rest from domestic growers. Chicken always benefits from this when compared to other kinds of meat such as pork and beef because of the lower conversion rate (amount of grain required to produce 1kg of meat). 06 Myronivsky Hliboproduct Annual Report and Accounts 2013 Interest rate risk Potential Impact Changes in interest rates affecting the cost of borrowings, the value of our financial instruments, and our profit and loss and shareholders’ equity. Mitigation While MHP borrows on both fixed and variable rates, the majority of our debt is at fixed rates. For variable rate borrowings, interest is linked to LIBOR and EURIBOR and they are generally at lower interest rates than are available in Ukraine. Political and country risks Potential Impact Decrease in profitability and impairment of assets. Mitigation Our operations extend throughout all regions of Ukraine with wide regional diversification. Deep vertical integration and internally developed supply chains allow our operations located in potentially distressed regions of Ukraine to remain self-sufficient with both production needs and markets, even in the case of temporary regional isolation. Financial risks Credit risk Potential Impact Debtors fail to make scheduled payments. Mitigation No single customer represents more than 8% of total sales. The amount of credit allowed to one customer or group of customers is strictly controlled. Credit to major groups of customers, including supermarkets and franchisees, is restricted to between five and 21 days. Liquidity risk Potential Impact Lack of funds to make payments due. Mitigation MHP has a detailed budgeting and cash forecasting process to ensure that adequate funds are available. Our target is to maintain our current ratio, defined as the proportion of current assets to current liabilities, no less than 1.1–1.2. Currency exchange risk Potential Impact Exposure to depreciation of UAH against US dollars. Mitigation We earn around 40% of our total revenue in US dollars through the sale of sunflower oil, sunflower husk, chicken meat and grain. The amount of exports sales will continue to increase with further expansion of Vinnytsia poultry complex and strengthening of positions on export markets. This will allow us to service all our dollar-denominated loans and payments for operational purchases. 07 Myronivsky Hliboproduct Annual Report and Accounts 2013 Strategic reportCorporate governanceFinancial statementsHow do we conduct our business? Board of Directors 1 2 3 1. Yuriy Kosyuk 2. Viktoria Kapelyushnaya 3. Yuriy Melnyk Chief Executive Officer Mr Kosyuk founded MHP in 1998 and is also the CEO of PJSC MHP. In 1995 he founded the Business Centre for the Food Industry (BCFI) and was its 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. Chief Financial Officer Ms Kapelyushnaya, who is also Financial Director of PJSC MHP, joined MHP in 1998 and was elected to the Board in 2006. She was previously Deputy Chief Accountant, and then Chief Accountant, of BCFI. She holds diplomas in Meat Processing Engineering (1992) and Financial Auditing (1998) from the Kiev Food Industry Institute. First Deputy CEO Mr Melnyk is a scientist focusing on animal breeding and selection. He is a Doctor of Agricultural Sciences, Senior Researcher and Academician of the Ukrainian National Academy of Agricultural Sciences. In 1985 he graduated from the Animal Science faculty (breeding department) of the Ukrainian Agricultural Academy. Mr Melnyk holds a Ph.D. in Agricultural Sciences, specialising in animal breeding and genetics (2000). He has been a Member of the Ukrainian Academy of Agricultural Sciences since 2002, and a Doctor of Agricultural Science in his specialism from 2010. Since March 2010, Mr Melnyk has been the First Deputy CEO of MHP. 08 Myronivsky Hliboproduct Annual Report and Accounts 2013 4 5 6 7 4. Charles E. Adriaenssen 5. John Grant 6. Dr John C. Rich 7. Philippe Lamarche Non-Executive Chairman of the Board, and of the Nominations and Remunerations Committee Mr Adriaenssen joined the Board and became Chairman in 2006. He is Founder and Chairman of CA & Partners SA, a consulting company, Chairman of Outhere SA, an independent European classical music publisher, and Chairman of Bastille Investments, a private investment company. He was a director of INTERBREW between 2000 and 2004 and, since 2000, has been a director of Rayvax SA, a holding company of ABINBEV. 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. Non-Executive Director Chairman of the Audit Committee Mr Grant is a non-executive director of Melrose plc, Pace plc and Wolfson Microelectronics plc. He was previously Chairman of Gas Turbine Efficiency plc, Torotrak plc and a number of private companies, and a non-executive director of National Grid plc and Corac Group plc. In his executive career, he was Chief Executive of Ascot plc from 1997 to 2000, prior to which he was Finance Director of Lucas Industries plc and Director of Corporate Strategy for Ford Motor Company. Mr Grant holds a BSc in economics from Queen’s University, Belfast, and an MBA from Cranfield School of Management. Non-Executive Director Dr Rich joined the Board in 2006. He is the senior regional consulting agribusiness industry specialist for the International Finance Corporation (EMENA and West Africa), a non-executive director of Axzon Denmark and an executive director of Australian Agricultural Nutrition and Consulting Pty Ltd. In addition, he is a senior board consultant for a number of agribusiness companies worldwide. 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 member of the Royal College of Veterinary Scientists with post graduate experience in the food and finance industry. Non-Executive Director Mr Lamarche joined the Board in 2011. He is a private banker of Banque Puilaetco Dewaay, Luxembourg and has been involved in wealth management and structuring in that country since 1997. He previously worked as a solicitor in the shipping industry in Belgium and Luxembourg. He holds a degree in law and economics from The Catholic University of Louvain and a degree from the European Association of Financial Analysts. 09 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 How are we creating value? Chairman’s statement Deal of 2013 40,000ha MHP’s first deal outside of Ukraine (in the Russian Federation) It is always pleasing to report an excellent performance, but to record impressive results against a background of challenging market conditions is particularly gratifying. The year 2013 was notable for a collapse in commodity prices which, as a significant grower of grains, was inevitably reflected in the financial results of MHP. Yet it says much about the quality of the Company’s people, and the strength of its structure, resources and brand, that we were able to weather the storm and look forward to better conditions. Indeed, our vertically integrated model means that this could still have silver linings. In 2014, we can look forward to significantly lower costs for our poultry production, and higher margins, just as Phase 1 of our multi-million dollar new production facility becomes fully operational. This was a year when MHP showed professionalism, resilience and maturity; qualities that augur well as the Company seeks to realise its full potential both domestically and in new territories. We can take a great deal of pride from our performance in 2013: it showed our capability to produce sustainable results in the face of adverse conditions. Dividend payment in 2013 39% of net profit In 2013 MHP introduced its dividend policy and paid its first dividend for 2012, which constituted US$120 million 10 Myronivsky Hliboproduct Annual Report and Accounts 2013 The outlook After the challenges of 2013, which were largely outside of our control, we are looking forward to realising the upside of lower commodity prices. This will feed through to lower production costs and higher margins, and at an especially welcome time as Phase 1 of our Vinnytsia project becomes fully open and contributing to production. This net effect will be a considerable offset to the impact of market conditions last year. In addition, we fully intend to follow up our successful acquisition in the Russian Federation in 2013 with other exciting possibilities outside of our borders. By the EU and indeed global standards we are now a very large producer, and strategically we are focused not only on developing exports but also adding value through carefully chosen acquisitions in mature markets where we can benefit from our enhanced margins and profitability. In 2014 we are therefore being highly active in casting our net far and wide in Europe, and possibly further afield, in search of excellent consolidation opportunities. This is a testament to the quality of management and high calibre of people whose efforts drove the Company forward during the year. As a Board, we thank each and every one for their skill, enthusiasm and dedication. We were pleased to authorise a significant dividend payment for the first time in 2013. This marks a new policy, and we intend to become consistent in this regard in future years. The Board The Board enjoyed a year of continuity with no changes in its composition. I continue to be impressed not only with the mix of skills and experience we have around our table but the highly productive way the Board functions and engages with the management team. This is based on clear and continuous communication and the quality of information we receive. During 2013 measurable progress was made in ever-more demanding areas such as risk management, finance and legal issues, as well as honing and updating key policy areas such as anti-bribery, environmental and animal welfare standards. I believe the excellent functioning of the Board and its deep knowledge of the business serves its stakeholders well. Equally, evolving its composition is always an option as fresh thinking and skills become required. A solid financial performance Our financial performance in 2013 illustrated our ability to deliver creditable results in even highly unfavourable conditions. An integrated business model and careful management of costs, significant progress of the Vinnytsia complex launch during 2013 and, as a result, increased poultry sales, resulted in 6% revenue growth to US$1,496 million (2012: US$1,408 million). However, due to the inflated poultry production cost, softening average poultry prices and lower prices for crops harvested in 2013, MHP generated EBITDA of US$391 million, 16% lower than last year (2012: US$468 million). Achievement, internally and externally In my report last year I said that MHP had a clear strategy: to increase our production, extend our exports and build our brands. Our performance in this reporting year has been true to each of these goals. We have made excellent progress building out our Vinnytsia project, closing the year with nine of the 12 brigades coming into service and producing at full capacity. For the first time, we also ventured beyond Ukraine to make a strategic acquisition to increase our land bank. We extended our exports into new territories and received the green light of EU accreditation. At home, we increased our market share to over 50% and strengthened our position for a future growth. If a single word could categorise MHP, it is “efficient”. Our business model has efficiency at its heart, and the Company is tireless in its pursuit of optimising its activities. So during the year, from the well-above-average crop yields to the greatly improved finance terms of our renegotiated Eurobonds, 2013 brought many important successes. 11 Myronivsky Hliboproduct Annual Report and Accounts 2013 Strategic reportCorporate governanceFinancial statementsHow are we creating value? Chief Executive’s review 2013 26% EBITDA margin Another year of professionalism, productivity and important gains towards our goal. 12 When in years to come we look back on the development of MHP, 2013 will be a year we recall with considerable satisfaction. The word “up” is one we can use against all the key indicators. Turnover, sales, exports, markets, production, capacity – every major metric from 2013 makes pleasing reading. It is also the mark of a strong company when it can manage adverse market conditions. During the year, and in line with all Ukrainian grain growers, we were challenged by lower market prices for our output year on year. Our robust and broadly based operation served us well, and our vertically integrated model means that those low prices are now working in our favour in the form of lower production costs for the poultry segment. We have therefore entered 2014 with great optimism; a year when we will produce more poultry and penetrate more international markets than ever before; and more grains from new lands. Highlights of 2013 Projects: on schedule, on budget Our quest to strengthen our business never ceases and in 2013 we made important progress on a number of fronts. These included: • Efficient production capacity Having previously announced our intention to increase production, we delivered on our promise with positive action. During 2013 we gradually phased in extra capacity created at our new Vinnytsia complex. By the end of the year, nine of the 12 new brigades were operational and working at full capacity, contributing to an overall production increase of 17% year-on-year. This major project, which we started in mid-2012, will soon complete its Phase 1 development and add a further three brigades during 2014. The complex also enhances our ethos of self-sufficient vertical integration, bringing together different facets of agriculture and poultry production under the efficient control of a single facility. • An increased land bank Our agricultural capacity was boosted by our successful acquisition of 75,000 additional hectares of excellent arable land. For the first time, this included 40,000 hectares outside our borders, in the Russian Federation. In the south of the country, conditions, the soil, climate, skills and techniques – are very similar to our own, but an important difference is that the investment CAPEX required is attractively lower. Myronivsky Hliboproduct Annual Report and Accounts 2013 • Development of people We are determined to maximise the opportunities unfolding before us and in 2013 we took decisive steps to strengthen our senior management teams. deemed the time was right to be able to share the Company’s success with our loyal shareholders in a meaningful way. The funds allocated for this purpose amounted to US$120 million, or 39% of net profit. Our sales team was also fully reconfigured, producing immediate and tangible results: like-for-like sales increased by 6% during the reporting year in a stable market. We also achieved record yields from our land and, as is customary, far exceeded national averages for Ukraine. The differentiating factor is always our people: their skill, and our training and support, produces results far in excess of industry norms. Add to this an ideal hot and wet growing climate in 2013, and the result was an outstanding harvest. Excellent progress in exports During the year we consolidated our position as the leading industrial producer of chicken meat in Ukraine, which resulted in strong 50% market share of industrially produced chicken meat in 2013. Our revenues from poultry and related operations rose to US$1,201 million. While domestic consumption remained robust – chicken accounts for around 50% of all meat sold in Ukraine – an important contributor was a marked increase in our exports. During the year, we sold 123,000 tonnes of chicken to markets outside Ukraine, representing an increase of 112% over 2012. This growing international reach is an important strategic advance: we were successful in taking our poultry products to around 20 new countries during the year, with a wide geographical spread ranging across Africa, the Middle East, and Asia. This widens our customer base and provides a valuable hedge against any potential domestic issues and fluctuations. We were also delighted to receive full EU certification for our products during the year. This was the successful conclusion of five years’ concerted work to satisfy all compliance issues, and it will open up important possibilities. Our first dividend It is also a sign of our growing maturity that we were in a position to make our first dividend payment in 2013. With our previous phase of major capital expenditure being largely complete, we Our intention is to maintain dividend payments in the future and follow the best international practice. The outlook for 2014 There is much to look forward to as we build on our progress in 2013. During 2014 we expect the final completion of Phase 1 of the Vinnytsia project. This will add a further three production brigades, taking the total annual capacity to over 550,000 tonnes of chicken meat. Plans for Phase 2 are now being considered with the ultimate aim of elevating production to 800,000 tonnes a year. We believe this would create the most efficient chicken meat production facility in Ukraine (and indeed Europe) and deliver significant economies of scale. We will continue to focus on our export business, cementing our new territories and allocating around 25-30% of our total production to this increasing coverage of countries and continents. Europe will also be a key growth area as we build on our initial exports made there in 2013. The results of our biogas project to power our operations have been very encouraging. The efficiencies and good eco sense make a compelling case to roll out the concept to other MHP production facilities and we are investigating the possibilities now. We will maintain our investment in people and build on our reputation as being a high-quality and transparent employer. This helps us to attract and retain the high performers we need. Every employee will have a career development plan and in 2014 we will trial an Employee Satisfaction Survey with the aim of rolling it out to the whole Company in due course. MHP is also the biggest employer of talented graduates in our sector and we will strengthen our links with the major universities. By bringing together the brightest minds and the very best facilities and technologies, we bring our goal ever-closer: to become the leading poultry producer in Europe. Percentage increase 2012–2013 23% in grain production Total MHP harvest accounted for around 2 million tonnes of crops as a result of land bank increase, favourable weather conditions, and application of best agri technics. Percentage increase 2012–2013 17% in poultry production Due to the significant progress of the Vinnytsia complex, MHP increased its poultry production volumes to around 473,000 tonnes (2012: 404,000 tonnes). 13 Myronivsky Hliboproduct Annual Report and Accounts 2013 Strategic reportCorporate governanceFinancial statementsWhat are our objectives? Market overview According to the SSCU, in 2013 overall consumption of meat in Ukraine remained stable at 56 kg per capita. The domestic meat market Meat production In 2013, supplies of meat to the Ukrainian market, including imports, amounted to approximately 2.6 million tonnes, which remained almost at the same level as in 2012. Market share Industrial production % MHP Agromars Dniprovski Agrooven Volynska Others 50% 14% 5% 5% 4% 22% Source: SSCU, Poultry Producers Union of Ukraine The majority of meat consumed in Ukraine, across all kinds, is industrially produced. According to the SSCU (State Statistics Committee of Ukraine), industrial producers accounted for 60% of total meat produced domestically in 2013. Of this, the percentage of industrially produced poultry (82%) was significantly higher than that of beef (27%), pork (47%) or of meat generally (60%). The Company believes that this relatively high level of industrialisation continues to enable poultry producers (including MHP) to respond more efficiently than others to increased demand for meat products. Overall production of poultry in Ukraine increased by approximately 11% in volume year-on-year and constituted around 1.2 million tonnes of chicken meat. At the same time, production of pork and beef increased by 9% and 4% accordingly, mostly due to the slight decrease in household production and increase in industrial production. In total, 765,000 tonnes of pork and 403,000 tonnes of beef were produced during the year. Imports Even though agriculture plays a fundamental role in the Ukrainian economy, the amount of imported meat consumed has remained significant over the last 10-15 years. In 2013, it amounted to about 14% of meat consumed in Ukraine. In 2013, total imports of meat stood at 400,000 tonnes, of which over 43% was poultry (including unofficial imports of around 45,000 tonnes). Most imported chicken meat comprised carcasses and other low-value constituent parts, for use by meat processors. Exports Just as the production of poultry in Ukraine is growing annually, so are exports. In 2013 Ukraine exported around 176,000 tonnes of different meats (2012: 118,000 tonnes), 83% of which was poultry meat (see chart, p.15). Consumption During the year, consumption of meat, and the choice of meat types, remained rather similar to 2012. According to the SSCU and the Poultry Producers Union of Ukraine, annual intake amounted to 56 kg per capita with the amounts of poultry, pork and beef each remaining relatively static year-on-year. The level of meat consumption in Ukraine is still below the annual recommended dietary requirement, which is approximately 80 kg per capita per annum. Global meat consumption thousand tonnes Global meat trade thousand tonnes 10,000 8,000 6,000 4,000 2,000 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Pork Poultry Beef and veal Pork Poultry Beef and veal 120,000 100,000 80,000 60,000 40,000 20,000 0 14 Myronivsky Hliboproduct Annual Report and Accounts 2013 In line with international market trends, we believe that consumption of chicken meat will grow in the short and medium terms. This is based on the relative affordability of meat for the Ukrainian consumer, the difference in price between poultry and pork and beef, and dietary reasons. International market The meat industry worldwide has demonstrated substantial development over the last 20 years and more. Global meat consumption has increased significantly, driven mostly by the growth of poultry consumption in emerging market countries. During the same period, the growth rate of beef and veal production has been slowing. Poultry, amounting to 34% of the world’s meat production volume, is now the second largest meat market after pork. The growth of poultry consumption reflects changing consumer preferences for making healthier dietary choices. Poultry is also unaffected by religious restrictions. Behind the scenes, a shift from small-to large-scale production units; vertical integration of companies; shorter production cycles; and lower production costs compared to beef and pork have all contributed to the growth of the poultry industry. Future consumer behaviour will be mostly influenced by price, recognising poultry as a highly competitive source of protein. Global meat demand and trade continue to grow strongly, especially in many middle-and low-income countries, including Ukraine. Trade volumes of poultry have increased steadily during the last 40 years. Indeed, poultry meat is now the most traded meat. in 2013, the total volume of imports was around 9 million tonnes – well ahead of pork and beef. In 2013, the leading global importers were Japan, Saudi Arabia, Mexico, the EU, Iraq and the Russian Federation. The top global exporters were the United States, Brazil, the EU and Thailand. With Ukraine’s strong agricultural heritage, its potential to become a major exporter of chicken meat is considerable. MHP being a leading producer of chicken meat in Ukraine is ready to become one of the leading exporter’s of protein to the international markets and has great potential to develop this business direction. Imported and exported meat thousand tonnes Meat consumption in 2013 kg per capita 18% 14% 16% 17% 14% 700 600 500 400 300 200 100 0 115 102 51 48 120 100 80 60 40 20 0 78 Biological norm: 80kg 63 64 56* 22 32 25 26* 2010 2011 2012 2013 USA Brazil EU-27 Mexico Russia Ukraine 2009 Imported poultry Unofficial import of poultry* Imported other meats Exported poultry Exported other meats Total meat Poultry Source: SSCU, Poultry Producers Union of Ukraine * Company’s estimates * Includes unofficial poultry import Source: SSCU, Poultry Producers Union of Ukraine * Company’s estimates % imported as % of total poultry supply Top poultry importers 2013 thousand tonnes Top poultry exporters 2013 thousand tonnes 860 810 675 670 655 540 1000 800 600 400 200 0 355 340 300 270 260 238 233 200 185 175 Japan Saudi Arabia Mexico European Iraq Russia Union South Africa Angola Venezuela Hong Kong China Kazakhstan Cuba Ghana Ukraine United Arab Emirates 4000 3500 3000 2500 2000 1500 1000 500 0 3,580 3,354 1,095 540 415 365 323 150 145 100 Brazil United States European Union Thailand China Turkey Argentina Canada Ukraine Belarus Source: SSCU, Poultry Producers Union of Ukraine Source: SSCU, Poultry Producers Union of Ukraine 15 Myronivsky Hliboproduct Annual Report and Accounts 2013 Strategic reportCorporate governanceFinancial statements How does MHP work? A robust business model of vertical integration 18-19 Grain Operating one of the largest land banks in Ukraine Sunflower protein Fodder production 360,000 hectares 1,984,170 tonnes per annum 100% self-sufficiency in corn Our main crops are corn, sunflower, wheat, soyabeans and rapeseed. Corn and sunflower are used in our fodder mills for fodder production; wheat, soyabeans and rapeseed are sold to third parties through world grain trading companies. Export revenues from grain sales serve us as ‘a natural’ hedging. “MHP’s unique vertically integrated business model, intensive capital expenditure and professional personnel are key factors behind our stability and success.“ Yuriy Kosyuk Chief Executive Officer 16 Myronivsky Hliboproduct Annual Report and Accounts 2013 20-21 Poultry Around 50% of industrial production and one third of domestic consumption with one of the strongest food brands “Nasha Riaba” Hatching 22-23 Other agricultural activities Meat processing is a key contributor to the segment Processing Retail Distribution Bio gas production The poultry production sector includes five broiler farms, two breeder farms (with facilities for producing hatching eggs) and six hatcheries. 100% of poultry is processed at our own facilities. Our 11 distribution centres and around 500 refrigerated delivery vehicles enable us to deliver our products, chilled as well as frozen, to our customers. 5broiler farms 2breeder farms 2,600 franchised outlets As a logical step in our vertical integration model, MHP produces meat processing products, where chicken meat is a main ingredient. Approximately 1,500 hectares of land in Crimea are dedicated to orchards, of which 50% is under apple trees. 3processing facilities 33,210 tonnes of meat processing products in 2013 35,640 tonnes of fruits 17 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 A fertile year for our talents Divisional review Grain In 2013, we increased our total land bank by 26% and recorded one of our outstanding harvests Land bank increase 2012–2013 Grain production By volume % +75,000 fresh hectares Corn Wheat Sunflower Rapeseed Soya Other 57% 11% 7% 3% 2% 20% Percentage increase 2012–2013 23% harvest of crops 2013 harvest yields By tonnes per hectare 10 8 6 4 2 0 8.8 6.4 5.4 3.4 3.5 3.2 2.2 2.4 2.2 2.1 Corn Wheat Sunflower Rapeseed Soya MHP’s average* Ukraine’s average** * Tonnes per hectare ** Source: SSCU 18 Myronivsky Hliboproduct Annual Report and Accounts 2013 To quote the novelist Mark Twain: “Invest in land. They’ve stopped making it.” High quality, productive land has always been at the heart of our vertically integrated strategy. We were therefore pleased to make significant gains in our land bank resources during 2013. By cultivating more agricultural land and applying innovative techniques we achieved yields well in excess of the Ukrainian average, we made our business self-sufficient in the grain we need and, importantly protected the Company from volatility in the international grain markets. Despite challenges with weather during the autumn, through strong management and fully engaged operational teams, we succeeded in gathering the harvest even earlier than in 2012 – and, indeed, from more land. The majority of our total harvested production – around 65% – is used to meet our own feedstock needs. We also grow non-fodder crops to enable us to operate a crop rotation system. The rest of crop we sell on the market to generate export revenues in US dollars. This protects the Company from currency risks and serves as a natural hedge. As our business expands each year, so does our land bank. We entered 2013 with 285,000 hectares (ha) and were pleased to close it with an additional 75,000 ha. In 2013, grain export sales amounted to US$101 million from 353,000 tonnes. This compared to US$139 million from 480,000 tonnes in 2012. For the first time, we looked beyond our traditional borders to acquire 40,000 ha in the Voronezh region (the Russian Federation). More than just valuable land, this complex acquisition also included a silo which offers capacity of 200,000 m3 and a range of agricultural infrastructure and equipment. The deal was a natural fit for MHP, bringing many synergies in terms of techniques, climate, as well as lower capital costs. We are already making good progress in integrating MHP’s standards of efficiency and productivity into this new asset and we look forward to its first contribution to our harvest in 2014. This milestone move for MHP is in tune with other areas of our business where, increasingly, we are exploring for opportunities outside our home country. In addition, we added a further 35,000 ha in Ukraine, taking our land assets to 360,000 ha. The acquisitions further cemented our position as one of the largest operators of agricultural land in Ukraine. Indeed, Latifundist.com ranks MHP as having the fourth largest land portfolio in the country. 2013: an excellent harvest Not even the most effective integrated model can control the weather, but 2013 will be remembered as one of the strongest years when our achievements on the ground were complemented with ideal growing conditions. The summer was hot and wet, the basis for optimum quality and considerable quantity. In 2013 MHP gathered harvest from 287,000 ha and received almost 2 million tonnes of crops (2012: over 1.6 million) and oilseeds, with pleasing results for corn, winter wheat and sunflowers. Grain: a challenging market During the year crop prices in Ukraine experienced a considerable dip compared with those of 2012, and this was in line with international commodity market trends. In 2013, revenues from grain growing operations decreased to US$133 million (2012: $169 million), generating EBITDA of US$39 million. EBITDA per hectare was US$136 (2012: US$447). Despite enjoying a strong harvest in 2013, a decrease in market prices meant that increased yields unfortunately did not offset falling prices. However, with our vertically integrated business model, and the fact that the Company is its own largest customer for crops to feed our livestock, the upside is that lower grain prices in 2013 will lead to the lower production costs per kilo in 2014. Silo and other storages The Company’s crops are retained for our own fodder production in extensive facilities to store harvested grains in optimum conditions. We have therefore invested heavily in silo resources, as well as leading-edge ground- based solutions, and have increased our capacity from 1,230,600 m3 to 1,766,000 m3. The increase was mainly due to two new elevators totalling 185,000 m3 capacities in the Sumy and Khmelnytsky regions and a new type of storage (ground plastic bags for crops – “sleeves”). Driven by our rapidly growing poultry volumes, in 2013 MHP produced around 1.4 million tonnes of fodder at four fodder mill complexes, a rise of 16% over 2012. The power of people Our ability to out-perform national average yields is a direct result of the talents and skills of our people, coupled with our intensive investment in land. Sowing our crops is, quite literally, sowing the seeds of success of MHP in future years. The Company has earned a reputation as an employer of choice and all our businesses have access to the wide pool of excellent candidates that we attract. As a result we employ high-calibre people with demonstrable potential or proven success in this particular discipline. MHP’s specialists are supported by a major investments in R&D, laboratory facilities and testing programmes. As importantly, they have access to knowledge-sharing and practical experiences, with an active programme of domestic and international site visits to share techniques and concepts with farmers, scientists and commercial managers. Our professionals also need to be able to look far ahead: the profit per hectare in the medium-term is already being influenced by actions taken to prepare the ground now. Anticipating the needs of the soil and seeds, and gauging the optimum use of chemical and organic fertilisers, are specialist skills indeed. MHP’s success is rooted in our ability to excel in grains production and remain self-sufficient in meeting the requirements for poultry production. It therefore receives our maximum focus and, we believe, delivers results that reflect that commitment. Our objectives for grain in 2014 The reporting year was a significant one in terms of our land bank keeping pace with our ambitious production goals. With 75,000 additional hectares to manage and develop, 2014 will be a year of consolidating our assets and ensuring that our rigid quality standards continue to be uncompromised on this larger scale. Therefore, we are content at this stage with organic growth in the year ahead. However, by 2015-2016 we are targeting a land bank of approximately 450,000 ha, and if exceptional opportunities present themselves we stand ready to respond. 19 Myronivsky Hliboproduct Annual Report and Accounts 2013 Strategic reportCorporate governanceFinancial statements The Ukraine’s lowest-cost industrial producer of poultry Divisional review Poultry Delivering the efficiencies and reliability of vertical integration Poultry export By tonnes 150,000 120,000 90,000 60,000 123,000 58,000 30,000 32,800 0 2011 2012 2013 During 2013 MHP increased its export operations by over 100% year-to-year and simultaneously diversified its export channels. 20 Excellent production in a stable market The production of chicken, both fresh and frozen, is the core business of MHP and contributed around 92% of EBITDA in 2013. We rear our own livestock (both parents and broilers), and as a major crop producer we are self-sufficient in corn, the main ingredient in our poultry fodder. We were therefore pleased to strengthen our leadership of Ukraine’s industrially produced chicken market during 2013. Our market share resulted in around 50% of industrially produced poultry in Ukraine, which is one third of total poultry consumption in the country. In addition, the Company delivered a sizeable increase in production and a considerable uplift in exports. Domestically, production was the most significant development due to the increasing contribution from the new Vinnytsia poultry farm. Internationally, MHP’s exports recorded a significant increase to 123,000 tonnes (2012: 58,000 tonnes) with significant diversification. Exports accounted for 28% of all our poultry sales volumes. Overall in 2013 we produced 473,000 tonnes of poultry (2012: 404,000 tonnes), an increase of 17%. Revenue for the year grew by 11% to US$1,201 million (2012: US$1,083 million). Significant production from Vinnytsia Vinnytsia is MHP’s state-of-the-art production complex. Phase 1 of the two-phase project is currently in its final stages of completion. During 2013 the number of brigades rose from three to nine, working at 100% capacity. Since H2 2014, Phase 1 of the complex will account for around 220,000 tonnes per annum. When both phases are fully complete, the Vinnytsia complex will contribute over 400,000 tonnes of chicken meat per year. The complex includes a fodder plant, a sunflower crushing plant, a hatchery, rearing sites and a slaughterhouse, as well as infrastructure and social responsibility projects. MHP’s integrated model We believe that MHP is the lowest-cost producer in our field in Ukraine, and indeed one of the most cost-efficient in the world. Our business is built on a vertically integrated model, supported by three key elements: a major investment in greenfield projects; a corporate culture that never stops looking for even greater efficiencies; and, most important of all, a company of people who are motivated, fulfilled and respected. MHP owns four fodder mills, producing a wide variety of fodder to meet precise vitamin and protein contents for different age requirements. In 2013 we produced around 1.4 million tonnes of fodder, delivered by our own fleet of trucks to our chicken and breeder farms to guarantee its freshness and quality. In addition we sold 240,100 tonnes of sunflower oil (by-product), a 23% increase on 2012 due to the increased production of the fodder mill at Vinnytsia. This was especially welcome because this product is an important contributor (around 44%) to our overall export sales. We own six hatcheries, supplied by two breeding farms which in 2013 produced 377 million hatching eggs (2012: 311 million). This not only makes us self-sufficient in hatching eggs but also gives us full biosecurity. MHP also owns five broiler farms; Myronivska and, increasingly, Vinnytsia make the largest contributions of around 70% to total production volumes. At every stage, quality and efficiency are monitored and targeted. For example, in 2013 we improved survival rates from 96% in 2012 to 97%. We are also specialists in using our own resources. As an industrial user of energy we aim to extend our self-sufficiency to the gas and electricity we need. For instance, our biogas power plant, ‘fuelled’ by chicken manure, production wastewater and silage, produces safe and environmentally friendly green energy, while also decreasing production costs at one of our chicken facilities in the Dnepropetrovsk region (Oril Leader). MHP scrutinises every part of operations to see how it can be optimised. Indeed, even the husks from our own sunflower production are used to provide chicken bedding, and as a partial fuel for fodder production at several fodder plants. Marketing: domestic and exports MHP owns one of the most trusted and respected chicken brands in Ukraine: Nasha Riaba. In a highly competitive consumer market, we adopt a two-pronged strategy to marketing the brand: through supermarkets of all kinds, and via distribution to an extensive network of Myronivsky Hliboproduct Annual Report and Accounts 2013 Poultry 2012–2013 17% increase in production Nasha Riaba-branded franchises. These latter points of sale, which approached 2,600 outlets in 2013, give a balance to our strategy. During the year, the high quality positioning and price differential of the brand was supported by a creative and emotive advertising campaign based on family values. Our success in exports in 2013 was also particularly pleasing. In addition to achieving a volume increase to 123,000 tonnes of frozen chicken products, we were able to extend our Bio gas production Capacity increase schedule ’000 tonnes, adjusted weight Sunflower Oil, sales By tonnes 800 700 600 500 400 300 200 100 0 2005- 2006 Existing capacity 2007 2008 2009 2010- 2012 2013 2014E 2015E 2018E- 2020E Myronivka Vinnytsia Phase #1 Vinnytsia Phase #2 250 200 150 100 50 0 240.1 195.8 195.0 173.8 140.4 2009 2010 2011 2012 2013 reach from 20 countries to over 40. We added new territories to our portfolio which now stretches across the CIS countries, Asia, the Middle East and Africa. We also received a green light to begin exports to the EU and we have been fulfilling orders there since October 2013, paving the way for exciting opportunities in the future. Poultry: objectives for 2014 During 2014 a further three brigades will come into service at the Vinnytsia facility, bringing the total to 12. On this basis we expect total production to rise to in excess of 550,000 tonnes of chicken meat. Of this production, we expect around 30% to be sold to foreign markets as we increase our exports. We will strengthen our recently created international territories and cultivate the fresh opportunities that the recent EU clearance has presented to us. 21 Myronivsky Hliboproduct Annual Report and Accounts 2013 Strategic reportCorporate governanceFinancial statementsContinued market leadership of Ukraine’s meat sector Divisional review Other agricultural activities Continued vertical integration into market- leading meat products Fruit production % Apple Peach Sweet cherry 85% 10% 2% Apricot, pear, strawberry and other 3% MHP fruit company grows apples, strawberries, pears, grapes, peaches, apricots and other fruit. In 2013 we produced 35,640 tonnes of different fruit, which is 24% more than in 2012. 22 True to our philosophy of vertical integration, chicken meat we produce is also a main ingredient in a diverse range of other product lines. These include cooked and smoked meats, smoked and semi-smoked sausages, ham and convenience foods. MHP is also active in rearing cattle, pigs and geese, resulting in a range of top quality beef, pork and foie gras. In addition, we own orchards producing varieties of fruit. The financial performance of other agricultural operations segment significantly improved in 2013 mainly due to increased prices together with stable costs in meat processing, as well as due to positive trends in fruit and milk businesses. In total an increase in revenues resulted in 4% and reached US$162 million (2012: US$155 million). These additional agricultural activities represented 11% (2012: 11%) of our total gross revenues and 8% of EBITDA (2012: 2%). Meat processing products Meat processing is a key sub-segment in other agricultural activities of MHP. The volumes of meat processing products we produced in 2013 almost equalled those of previous years, but achieved better prices. MHP owns two meat processing facilities: Ukrainian Bacon in the Donetsk Region and Druzhba Narodiv in the Crimea. We are the leaders in the fragmented Ukrainian meat market, with our high-value meat products sold under three brand names – Baschinsky, Druzhba Narodiv and Europroduct. In 2013, production stood at 33,210 tonnes, a decrease on the previous year of 6%. The portfolio is strongly guided by consumer research, which also informs a constant programme of new product development. Cattle, pigs and milk Our Company’s integrated production facilities are equipped with the latest technologies for animal rearing. In 2013 we reared over 27,390 heads of cattle (2012: over 32,000) and 47,100 heads of pigs (2012: over 40,000). All facilities continued to create a direct, bio-secure and reliable source of top quality meat for our processed meat ranges. MHP is also a leading producer of milk, with volumes of around 40,000 tonnes in 2013. Fruit The southern Ukraine provides an excellent temperate climate for fruit growing. MHP’s Crimean Fruit Company grows apples, strawberries, pears, grapes, peaches, apricots and other fruit. The Company’s facility includes approximately 1,500 hectares given over to orchards, with most of the trees planted in 2007. Apples comprise around 50% of the planted area, and 2013’s harvest was particularly good, yielding over 30,460 tonnes. In 2013 our fruit business showed its first strong results and we believe it will be sustainable in the future. In total, we produced more than 35,640 tonnes of various fruits, an increase of 24% on 2012. The Company is also recognised for the quality of its produce and this is enhanced by storing the harvest in specially equipped modern chilling facilities with adjustable temperatures. The production also meets ISO 9001:2008 and ISO 22000:2005 standards. Gourmet delicacies: foie gras and Certified Angus Premium-priced delicacies naturally demand high standards and capabilities, and MHP is proud to be the only Ukrainian certified producer of foie gras. In July 2013 we also received certification from the EU and in December began exports of foie gras, in particular to Hungary. Myronivsky Hliboproduct Annual Report and Accounts 2013 Production, tonnes 2013 Production, tonnes 2013 33,210 meat processing products 35,640 fruits 10 SILVER 25 GOLD 3 BRONZE At the international exhibition IFFA – 2013: meat processing products of MHP received the highest grades We rear geese and produce foie gras and goose meat at our Snyatynska poultry farm in the Ivano-Frankivsk region. Strict quality controls (to international ISO 9001:2008 and ISO 22000:2005 standards) are followed. In 2013, the Company produced over 435 tonnes of foie gras and goose meat. MHP also offers a small niche production of exceptional Aberdeen Angus beef, sold under the “Certified Angus” trademark. This very fine beef, which also meets the same ISO standards above, is reared on our Druzhba Narodiv farm. 23 Myronivsky Hliboproduct Annual Report and Accounts 2013 Strategic reportCorporate governanceFinancial statementsGrowing sustainably, acting thoughtfully Sustainability Neighbourhood improvement Each year we contribute to the development of our local schools, kindergartens and playgrounds for children. We also assist in improving vital local infrastructure services including hospitals, building and repairing roads, providing lighting for public spaces and addressing other necessary aspects for municipal improvement where our facilities are located. In particular: in 2013 we carried out a project to help connect local people and state institutions with water and gas supplies. In the Kaniv district of the Cherkassy region, the home of our Myronivka poultry complex, we built a fire-fighting facility and equipped it with a fire engine. We also reconstructed the central park in the town of Myrne (where our Starynska Poultry farm is located) for local people to enjoy. Sport and cultural initiatives The Company is keen to help local children and young people enjoy a healthy start to life and we foster sporting initiatives where our facilities are located. At our Druzhba Narodiv meat processing plant in Crimea we have built a winter sports pavilion and young athletes are able to train there all year round. We also set up a new equestrian sport centre in the town of Ladyzhyn where our Vinnytsia complex is located. Football also has a passionate followers in our local communities and our Myronivska poultry farm took part in the organisation of the Kaniv district’s cup and championship competitions. Sponsorship and social programmes MHP is a proud supporter of a variety of local state institutions, cultural centres, NGOs. The Red Cross and other organisations. This support takes the form of our own produce (chicken meat, convenience food etc.), financial aid, equipment and resources. In 2013, we also gave a range of books to local public libraries, and supported the town of Ladyzhyn in their celebrations of Agricultural Workers’ Day. We provided a new town clock, together with fireworks and entertainment. Relations between the Company and employees With around 30,000 employees across nearly 30 different enterprises, MHP is not only a major business but one of the largest employers in Ukraine. We take this responsibility seriously, looking to safeguard our people’s well-being and providing a workplace that is fulfilling and fair. Various initiatives support these aims, ranging from monitoring employee satisfaction to controlling and enhancing quality of life. MHP also makes sure that lines of communication with the labour unions are always open. Employee benefits Every employee of MHP receives benefits that include transport, food, schooling and accommodation. In 2013 our enterprises successfully put in place a long-term programme to provide accommodation, ranging from residential homes for families to dormitories and rented apartments. Every month, every employee receives a food package of the Company’s own poultry. MHP also gives employees’ children access to kindergartens and arranges transport to take them there. Most of our enterprises also offer programmes for university education as well. We also care for our employees’ health, providing medical services in the event of illness or emergency, as well as family stays at health resorts. Investing in our people Like any company that is aiming to build on its success for the long-term, we value our human assets above all others. Each year, it is our aim to make MHP an even better company in which to thrive and develop. In 2013 we significantly increased our investment in training and launched a series of development programmes. These included development of both “hard and soft” skills, and piloting an extensive scheme that will see every employee in the Company receive his or her own career development plan. During the year we launched a new assessment system with a view to linking salary increases to individual performance. We also laid the plans for our first Employee Satisfaction Survey, as part of our determination to learn how we can become an even better employer, in a culture of good and open communication. We believe that the hallmark of a truly successful company does not simply lie in financial performance. The Company sees it as a corporate duty, and a privilege, to contribute to the quality of life in its communities. In 2013 we continued to build on our community programmes, with three main focus areas: neighbourhood improvements, sport and cultural initiatives, and sponsorship and social programmes. 24 Myronivsky Hliboproduct Annual Report and Accounts 2013 Responsibility for the product The Company takes seriously its responsibility to offer safe and healthy food and therefore controls the use of chemicals from the very earliest stages of production. In our grain operations we have made an official pledge not to use “Ia/Ib” class pesticides. This is consistent with IFC Performance Standards and the World Bank Group EHS guidelines. We also minimise the use of pesticides and agro-chemicals by using crop rotation, and any formulations we do use always comply with all current legislation. In addition, MHP products do not contain genetically modified materials or steroids. The majority of our enterprises have adopted a new international certification scheme FSSC 2200 which corresponds with ISO 9001 and ISO 22000 standards. This lays down defined standards in each link of the supply chain and is approved by the Global Initiative for Food Safety (GFSI). Waste disposal MHP leads by example in using low-waste processes and in finding innovative ways to re-use waste as secondary raw materials. For example, sunflower husks from oil production are used as fuel for boiler houses and as litter for birds. Atmospheric waste from elevators (silos) is sent out to specialised recycling enterprises, and the ash that results from sunflower husk combustion serves as fertiliser. Water management and wastewater reduction Water is a precious resource and MHP has made a significant investment in recycling technologies. We also apply scientific techniques to extracting potable water and are equipped with full water treatment technologies. Quality control is applied according to sanitary and environmental laboratory standards, and in accordance with Ukrainian legislation. Nurturing new talent is central to our future success and we work closely with universities; indeed, we are Ukraine’s largest employer of agricultural graduates. In 2013 we built on our active programme of internships and training, and around 700 students took part in our “Start Your Career with MHP” programme. Alongside this, we launched new programmes to advance the careers of existing employees and thus retain talented specialists. We also invested further in our specialist MHP “Agrocentre” agrarian school which teaches the latest skills and techniques in agriculture. Sport and activities The many benefits of sport – health, teamwork, strategy, camaraderie – receive our full support at MHP. We offer fully equipped sports halls at our enterprises and support popular football programmes. Most enterprises have their own competitive teams including “Nasha Riaba” at the Myronivska poultry farm which is a regional leader. We also promote annual sports festivals and contests. Just one example is the annual “Tractor-Fast” competition, where entrants showcase their professional tractor skills. A safe working environment The most important priority of all at MHP is that our employees go home safe every day. All MHP facilities therefore have well- developed health and safety policies. These require regular safety inspections of equipment, as well as tailor-made programmes with the emphasis on preventing accidents and minimising potential health, safety and environmental risks. Our Labour Protection Department is responsible for our ongoing compliance with health and safety requirements. This is not only monitored by our regular internal audits but also by those of the European Bank of Reconstruction and Development (EBRD) and the International Finance Corporation (IFC). Animal welfare MHP believes that the welfare of poultry is paramount and as the Company we fully share the views of our consumers and customers on this issue. We are committed to the most humane methods of poultry rearing at our enterprises. MHP adheres to the scientific standards directives of the European Union for the protection of animals, and to the guidelines of the International Organization for Animal Health, of which Ukraine is a permanent member. The principles behind these standards and guidelines are focused on the health and humane treatment of birds throughout the entire production cycle, from the incubation and hatching of chicks through to their rearing, transport and slaughter. The Company’s policy also respects five animal freedoms: freedom from hunger and thirst; freedom from discomfort; freedom from pain, injuries and disease; freedom to express their normal behaviour; and freedom from fear and stress. In July 2013, MHP received official clearance to export products to EU countries from its Myronivka poultry farm (chicken meat), its meat processing plant Legko (convenience food) and the Snyatynska farm (goose meat and foie gras). Exports duly began in October, with full compliance of stringent welfare standards. Environment In the course of our daily operations, we are constantly looking for ways to reduce the impact we make on the environment and our use of natural resources. Energy efficiency The Company made a major step towards becoming more eco-efficient in 2013 when our new biogas plant at the Oril-Leader poultry farm came online. It serves some of our industrial needs and produces energy under an official green tariff. The plant runs on chicken manure and waste, reducing both our carbon footprint and production costs. We have also invested in automated systems, solid state lighting and energy-saving plant designed to achieve maximum efficiency from energy resources. As importantly, our staff are trained in the best use of energy and how to reduce our consumption. Air protection All MHP sites use a combination of energy reduction technologies and highly efficient dust filters in order to minimise pollutants reaching the air. The Company pays an annual State environmental tariff to compensate for any pollution we cause. We comply with all relevant laws in this area and have never incurred environmental penalties. 25 Myronivsky Hliboproduct Annual Report and Accounts 2013 Strategic reportCorporate governanceFinancial statements How have we performed Financial review MHP is one of Ukraine’s leading agro-industrial companies, focused on producing chicken and chicken products, processed meat products and the cultivation of grain. As the leading poultry producer in Ukraine*, MHP accounted for approximately 50% of all industrially produced chicken in Ukraine and about one third of all poultry consumed there in 2013. We also operate one of the country’s largest banks of agricultural land. At the end of 2013 MHP had around 360,000 hectares of land under its control, including 40,000 hectares in Russia. In addition, we produce and sell sunflower oil as a by-product of producing chicken feed, as well as sausages, fruits, cooked meat, convenience foods, beef, goose, milk 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. This segment produces and sells chicken and chicken products, sunflower oil, convenience food, mixed fodder and other products related to the poultry production process. In 2013 it accounted for 80% of total sales (2012: 77%) and 92% of total EBITDA (2012: 80%). Grain Growing operations. This segment produces grain used as fodder for our own operations. A proportion is also sold to third parties and in 2013 this constituted 9% of MHP’s total revenue (2012: 12%) and 10% of total EBITDA (2012: 24%). Other Agricultural operations. This segment produces and sells sausages and cooked meat, as well as goose, foie gras, milk and other agricultural products. The segment was responsible for 11% of 2013’s total sales (2012: 11%) and 8% of total EBITDA (2012: 2%). Results Revenue Net change in fair value of bio-assets and agricultural produce Cost of sales Gross profit Gross margin, % Selling, general and administrative expenses Government grants recognised as income Other operating expenses and income, net Operating profit Depreciation EBITDA EBITDA margin, % Operating profit Finance costs, net Finance income Foreign exchange gains/(losses) Gain from acquisition of subsidiaries Other expenses and income, net Profit before tax Income tax expense Net income Net margin, % *pps –percentage points 2013 US$000 2012 US$000 1,496,079 13,634 (1,185,987) 323,726 1,407,522 16,734 (1,001,909) 422,347 Change % 6% (19%) 18% (23%) 22% 30% (8pps)* (130,615) 100,885 (22,160) 271,836 119,014 390,850 26% 271,836 (109,775) 3,766 (11,052) 6,776 (1,316) 160,235 2,005 162,240 11% (120,485) 102,369 (23,648) 380,583 87,135 467,718 33% 380,583 (59,311) 3,350 (3,285) – (2,633) 318,704 (7,788) 310,916 22% 8% (1%) (6%) (29%) 37% (16%) (7pps)* (29%) 85% 12% 236% – (50%) (50%) 126% (48%) (11pps)* In 2013, MHP’s consolidated revenue increased by 6% to US$1,496 million (2012: US$1,408 million) as a result of increased sales volumes of chicken meat and sunflower oil. Gross profit decreased in 2013 by 23% to US$ 324 million against US$ 422 million in 2012. This was driven mainly by lower earnings in the grain segment. Gross margin decreased from 30% in 2012 to 22% in 2013. In 2013, EBITDA totalled US$391 million, 16% lower than the previous year (2012: US$468 million). This was due to low grain prices for the 2013 harvest and high fodder costs during the first nine months of the year. EBITDA margin decreased from 33% in 2012 to 26% in 2013. *source: the State Statistics Committee of Ukraine (SSCU) 26 Myronivsky Hliboproduct Annual Report and Accounts 2013 Net income for the year decreased by 48%, from US$311 million in 2012 to US$162 million in 2013. This was in line with the EBITDA trend combined with increased depreciation (US$119 million in 2013 against US$87 million in 2012) and finance costs (US$110 million in 2013 against US$59 million in 2012). As a result, net income margin decreased from 22% to 11%. Income Statement by Segments in 2013 Revenue Total revenue Inter-segment eliminations Sales to external customers Net change in fair value of biological assets and agricultural produce Gross Profit* Segment result/operating profit EBITDA Finance cost Finance income Foreign exchange losses Other expenses, net Profit before tax Income tax expense Net profit from continuing operations Poultry US$000 Grain US$000 1,250,953 (49,853) 1,201,100 25,636 311,650 275,026 358,468 328,028 (194,764) 133,264 (27,368) (12,534) 13,555 39,076 Other agricultural US$000 167,358 (5,643) 161,715 15,366 24,610 25,844 32,753 Unallocated US$000 Total US$000 – – – – – 1,746,339 (250,260) 1,496,079 13,634 323,726 (42,589) 271,836 (39,447) 390,850 (109,775) 3,766 (11,052) 5,460 160,235 2,005 162,240 * Gross profit to external customers as adjusted for inter-segment sales results General tax system – tax legislation changes The current Tax Code of Ukraine, which was enacted in December 2010, introduced gradual decreases in income tax rates for the coming years as well as certain changes to the rules of income tax assessment. The tax rate was set at 19% effective 1 January 2013, 18% effective 1 January 2014, 17% effective 1 January 2015 and 16% effective 1 January 2016. The proposed decrease of the VAT rate to 17%, which was scheduled to begin in 2014 by the Tax Code of Ukraine, has been postponed. The rate in force for 2014 remained at 20%. 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 2013 state support was provided in the form of special tax regimes (VAT and Corporate Income Tax). The majority of MHP Group companies that are involved in agricultural production pay the Fixed Agricultural Tax (the “FAT”) in accordance with the Tax Code and are exempt from Corporate Income Tax and other taxes such as Land Tax, Special Water Consumption Duty and Trade Patent. This tax regime is valid until further notice. According to the Tax Code, the special VAT regime for the agricultural industry will be effective until 1 January 2018. Foreign currency exchange rates and functional currency MHP’s operating assets are located in Ukraine and its revenues and costs are denominated principally in Hryvnias. Almost all financial costs and currency denominated proceeds amounting to 39% of revenue are denominated in foreign currencies (primarily US dollars). Management believes that MHP’s exposure to currency exchange rate fluctuations as a result of foreign currency costs is completely hedged by its US dollar revenue earned from the export of sunflower oil, sunflower husks, poultry and grain. In 2013 the Company generated US$585 million of currency denominated proceeds, up by 22% compared with the US$480 million generated in 2012. This is mostly due to increases in poultry export sales volumes. Export revenues, 2011-2013, US$000 Sunflower oil and related products Chicken meat Grains* Other agricultural segment products Total currency denominated proceeds 2013 2012 2011 253,194 216,683 114,923 405 585,205 227,835 112,931 138,639 431 479,836 222,418 67,874 63,101 486 353,879 *grain export sales during the year ended 31 December 2013 includes USD 14,249 thousand of gain received from operations, when goods are exchanged or swapped for goods which are of similar nature. 27 Myronivsky Hliboproduct Annual Report and Accounts 2013 Strategic reportCorporate governanceFinancial statements How have we performed Financial review continued The functional currency for the Group’s companies is the Ukrainian Hryvnia (UAH); the functional currency of the Russian Federation companies of the Group is Russian Rouble (RUB). However, for the convenience of analysts MHP presents its financial statements in US dollars (USD), using the quarterly average and historical exchange rates. Currency UAH/USD UAH/EUR UAH/RUB Poultry and related operations Revenue – Chicken meat and other – Sunflower oil IAS 41 standard gains Gross profit Gross margin EBITDA EBITDA margin EBITDA per 1kg of chicken meat *pps –percentage points Closing rate as of 31 December 2013 7.9930 11.0415 0.2450 Closing rate as of 31 December 2012 7.9930 10.5372 N/A Average for 2013 7.9930 10.6116 0.2512 Closing rate as of 31 December 2011 7.9898 10.2981 N/A Average for 2012 7.9910 10.2692 N/A Average for 2011 7.9677 11.0926 N/A 2013 US$000 2012 US$000 1,201,100 952,937 248,163 25,636 311,650 26% 358,468 30% 0.80 1,082,978 866,544 216,434 11,955 342,836 32% 376,459 35% 1.00 Growth rate % 11% 10% 15% 114% (9%) (6pps)* (5%) (5pps)* (20%) MHP’s revenue from its Poultry and related operations segment is principally generated from sales of chicken and, to a lesser extent, of sunflower oil (a by-product of its sunflower protein production), mixed fodder and convenience food. Revenue from sales of chicken meat and other poultry is primarily from sales of chilled chicken, whole or in portions, ancillary products (such as hearts and livers), frozen chicken and convenience food under the Lehko! brand, as well as other products related to the poultry production process. Consumer demand for poultry remained high in 2013, and all MHP’s poultry production units continued to operate at full capacity. In 2013 poultry production volumes increased by 17% to 472,800 tonnes of poultry (2012: 404,000 tonnes). This volume growth was mostly due to increased operations at the new Vinnytsia poultry complex. In 2013 MHP’s poultry sales volumes to third parties increased by 19% to 447,000 tonnes compared with 375,300 tonnes in 2012. Export sales of poultry increased significantly by over 100% year-on-year and amounted to nearly 123,000 tonnes (2012: 58,000 tonnes). Share of export sales increased from 15% of total sales volume in 2012 to 28% in 2013. In H2 2013 the Company substantially diversified its exports by decreasing the proportion to Custom Union countries and increasing volumes to Arabian countries, Asia and, for the first time, the EU. In total, MHP opened up around 20 new export markets in Asia, the Middle East and Africa, simultaneously increasing its exports trades across all regions. High volumes of exported chicken meat were the key driver of increased revenue in foreign currencies in 2013. Poultry export sales generated US$217 million, up by 92% compared with US$113 million in 2012, providing an additional hedge against currency risk and devaluation of the Hryvnia. The average sales price of poultry decreased by 7% to UAH 15.99 per kg in 2013 (2012: UAH 17.19 per kg) as a result of stable domestic prices. This was combined with increased export volumes and lower export prices from new markets. MHP produces sunflower oil as a by-product of the sunflower seeds we use in the manufacture of chicken feed. Almost 100% of the sunflower oil we produce is exported. In 2013, 240,100 tonnes of sunflower oil were produced and sold for export, which is 23% more than in 2012, due to the high sunflower harvest yield in 2013. Average prices of sunflower oil decreased by 7% to US$1,033 per tonne. This compared to US$1,109 per tonne in 2012 and was in line with world market trends. The segment’s revenue amounted to US$1,201 million, up 11% on the previous year (2012: US$1,083 million), driven mostly by volume growth in poultry and sunflower oil sales. Average poultry production costs in 2013 increased slightly, by approximately 3%, compared to 2012. As a result of the substantial rise in the grain price at the end of 2012, costs in the first 9 months of 2013 increased by 13% year on year. However, following a sharp reduction in prices for grains harvested in 2013, costs in Q4 2013 decreased by 16%. 28 Myronivsky Hliboproduct Annual Report and Accounts 2013 The Poultry segment`s cost of raw materials and other inventory mainly comprises feed grain and other items associated with producing fodder, as well as items for producing hatching eggs. Most of the feed grain used in poultry production such as corn, and in part sunflower seeds, is produced by the Company’s Grain Growing division. Management believes that the prices at which products are sold between divisions are generally consistent with average market prices during the harvest season. The gross profit of the Poultry segment was US$312 million in 2013, 9% lower than the previous year (2012: US$343 million). Despite higher volumes sold, gross profit margin declined from 32% in 2012 to 26% in 2013, due to a softening in chicken meat prices and higher production costs. EBITDA for the Poultry segment decreased by 5% to US$358 million in 2013 (2012: US$376 million), mostly in line with gross profit decline. EBITDA margin decreased to 30% in 2013 compared to 35% in 2012. Grain growing Revenue IAS 41 standard gains Gross profit EBITDA EBITDA per 1 hectare 2013 US$000 133,264 (27,368) (12,534) 39,075 136 2012 US$000 169,142 4,329 72,618 111,708 447 Growth rate % (21%) (732%) (117%) (65%) (70%) In 2013 the Company operated 287,000 hectares of land in Ukraine and 40,000 hectares in the Russian Federation for growing grain. Due to favourable weather conditions the harvest from our Ukrainian land showed a marked increase to 2 million tonnes of grains and oilseeds in 2013 (2012: 1.6 million tonnes). However, high yields around the world led to a sharp decline in prices, and therefore lower revenues than in 2012. The Company’s new 40,000 hectares in the Russian Federation were also harvested by MHP in 2013 but were sowed by the previous owner; the contribution of this land to the Grain segment’s results was therefore zero in the reporting year. MHP’s grain yields in 2013 were significantly higher than the Ukrainian average. This was due both to the Company’s operational efficiency and the best-practice techniques we employ. Our corn yield increased to 8.8 tonnes per hectare in 2013 compared to 7.6 tonnes per hectare in 2012. Similar gains were also achieved in other grains and oilseeds. MHP uses the majority of the grain it produces (corn and sunflower seeds) in its own operations, while wheat, rape, soybean and barley are sold to third parties. These external sales constitute the revenue of the Grain growing segment. In spite of the high volume of grain harvested, the decline in grain prices saw revenue decrease by 21% to US$133 million in 2013 compared to US$169 in 2012. Consequently, EBITDA per hectare (ha) decreased by 70% from US$447 per ha in 2012 to US$136 per ha in 2013. The Grain growing segment’s costs relate primarily to raw materials (including seed, fertiliser and pesticides), payroll and related expenses, and the depreciation of agricultural machinery, equipment and buildings. Other Agricultural Operations Revenue – Meat processing – Other IAS 41 standard gains Gross profit Gross margin EBITDA EBITDA margin *pps –percentage points 2013 US$000 2012 US$000 161,715 101,070 60,645 15,366 24,610 15% 32,754 20% 155,402 102,959 52,443 450 6,892 4% 10,016 6% Growth rate % 4% (2%) 16% n/a 257% 11pps* 227% 14pps* MHP’s revenue in its Other Agricultural operations division is generated from the sale of sausages and cooked meat, produced by Druzhba and Ukrainian Bacon, and sales of fruit, milk, beef, goose and foie gras. The financial performance of this division showed a significant improvement in 2013, mainly due to better results from its fruit business and positive trends in the meat processing and milk businesses. MHP’s sausage and cooked meat volumes decreased by 6% to 33,210 tonnes in 2013 compared with 35,200 tonnes in 2012. Stable demand for meat processing products had a positive impact on sales prices during 2013. Average sausage and cooked meat prices rose by 6% to UAH 23.53 per kg in 2013. MHP is a market leader in meat processing in Ukraine and its market share remained at around 10%. 29 Myronivsky Hliboproduct Annual Report and Accounts 2013 Strategic reportCorporate governanceFinancial statements How have we performed Financial review continued The cost of raw materials and other inventory 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. More than 50% of the meat raw materials required for the Company’s meat processing operations is met by internally produced poultry. Revenue of the segment increased by 4% to US$162 million in 2013 over 2012. Gross profit increased to US$25 million in 2013 (2012: US$7 million) as a result of higher profitability of the meat processing, fruit and milk businesses. Positive IAS 41 effect of US$15 million in 2013 mostly related to the fruit business where the majority of orchards reached the level of full technological productivity. EBITDA of Other Agricultural operations rose to US$33 million in 2013 in line with the increase in gross profit. EBITDA margin increased from 6% in 2012 to 20% in 2013. Liquidity and capital resources MHP’s cash flow from operating activities was driven mainly by operating profit adjusted for non-cash items such as depreciation, and for changes in working capital. Cash flow from operations before working capital changes decreased by 21% to US$305 million for the year 2013 (2012: US$384 million) in line with the EBITDA decline. In 2013 the decrease of working capital amounted to US$ 27 million. In Q4 we usually purchase large volumes of sunflower seeds to meet the considerable stock we will need for the following year. However, in 2013 the investment required for sunflower seeds was lower than usual due to lower prices and forward financing transactions with international grain trader Toepfer. At the same time, lower CAPEX also had a positive effect on working capital dynamics through zero growth of VAT receivables. Total CAPEX was US$267 million in 2013, mostly related to the Vinnytsia project. Since the start of construction in May 2010, more than US$700 million has been invested in the project by the end of 2013. Cash flows Operating activities Operating profit before movements in working capital changes Change in working capital Net Cash generated from operating activities Investing activities CAPEX Including non-cash investments Assets sale and other Deposits Net cash used in investing activities Financing activities Net cash generated from financing activities Including Treasury shares acquisition Dividends Net increase in cash and cash equivalents Effects of exchange rates Total change in cash Debt Total Debt US$, m Long Term Debt Short Term Debt Cash and bank deposits Net Debt LTM EBITDA Debt/LTM EBITDA Net Debt/LTM EBITDA 30 2013 US$00 2012 US$000 305,034 26,592 331,626 383,731 (185,597) 198,134 (267,202) 39,172 3,335 629 (224,066) (387,721) 123,703 1,824 1,788 (260,406) (28,138) – (99,026) 79,422 (1,737) 77,685 62,279 (41,465) – 7 20 27 31 December 2013 31 December 2012 31 December 2011 1,302 1,183 119 (172) 1,130 391 3.33 2.89 1,140 817 323 (95) 1,045 468 2.44 2.23 898 709 190 (97) 802 401 2.24 2.00 Myronivsky Hliboproduct Annual Report and Accounts 2013 As of 31 December 2013, MHP’s total debt was US$1,302 million, most of which was denominated in US dollars. The average weighted interest rate of debt was below 8%. Almost 60% of MHP`s total debt is the new 7-year Eurobond issued in April 2013, which matures in April 2020. After the Eurobond issue, MHP’s debt structure improved significantly with the share of long-term debt increased to 90% at the end of 2013 compared to 72% at the end of 2012. US$192 million of our long-term debt is principally represented by loans, covered by the ECA, which matures at various dates up to 2018. US$80 million of our debt is accounted for by IFC and EBRD loans for financing the Company’s working capital needs. US$ 60 million represents financing for the lease of agricultural machinery and equipment used in our grain growing activities and for vehicles for distribution, and matures at various dates up to 2018. As of the end of 2013, MHP had US$172 million in cash. Net Debt increased to US$1,130 million as of 31 December 2013 compared to US$1,045 million as of 31 December 2012. The Net Debt/LTM EBITDA ratio at the end of the period was 2.89 (Eurobond covenant: 3.0). As a hedge for currency risks, revenues from the export of sunflower oil, sunflower husks and poultry are denominated in US dollars, fully covering debt service expenses. About 39% of the Company’s revenue is denominated in foreign currencies - primarily US dollars. Management believes that MHP’s exposure to currency exchange rate fluctuations as a result of foreign currency costs is completely hedged by its US dollar revenue earned from the export of sunflower oil, sunflower husks, poultry and grain. In 2013 the Company generated US$585 million of currency denominated proceeds, up by 22% compared with the US$480 million generated in 2012. This was mostly due to increases in poultry export sales volumes. A positive outlook Since November 2013, Ukraine has been subject to political instability. On 22 February 2014 the Parliament of Ukraine voted for a reinstatement of the 2004 Constitution and the dismissal of the incumbent President. New presidential elections are scheduled for May 2014 and a transitional government has been formed. Despite the political turmoil, domestic demand for chicken meat remains high; during the first months of 2014 it increased by around 20% compared to the same period last year. At the beginning of February 2014, MHP was banned from exporting its poultry meat to the Russian Federation as well as to other Custom Union countries (Kazakhstan and Belarus). However, taking into account our diversified export channels (with around 40 countries in our portfolio), MHP’s export sales across the regions are currently over 20% higher than during the same period last year, and in general are in line with our objectives. During 2014, and exactly as planned, Phase 1 of the Vinnytsia complex will be fully complete. The final three production brigades are scheduled to be launched in operation in 2014, and by the close of the year the complex will reach its full production capacity of around 220,000 tonnes of chicken meat per annum. During the first months of 2014 the Ukrainian Hryvnia devalued against major world currencies. However, taking into account the Company’s business model of vertical integration, we foresee a positive effect arising from the currency’s devaluation because: • most of our production costs are in local currency; • we will achieve higher profitability in grains as domestic grain prices correlate with international prices set in hard currency (US dollars). On 27 February 2014, pro-Russian forces took control of the parliament of Crimea, an autonomous region of Ukraine. The region then voted to hold a referendum on the status of Crimea in March 2014. MHP owns several production facilities in the region and we are mindful of the uncertain situation there. However, the Group’s reports show that, as of 31 December 2013, our Crimean assets generated 10% of operating profit. Therefore, the Company does not consider this disruption to pose a significant risk to its total profitability in the future. Moreover, it is currently “business as usual” at each of those production facilities. So despite the challenging situation that exists in Ukraine, we feel confident in delivering a strong year for MHP in 2014 both operationally and financially. This will be driven mainly by the increase in overall production of chicken meat at the Vinnytsia complex, and by the additional grains we will produce from our 40,000-hectare land bank expansion in the Russian Federation. 31 Myronivsky Hliboproduct Annual Report and Accounts 2013 Strategic reportCorporate governanceFinancial statements How do we conduct our business? Corporate governance MHP is registered in Luxembourg. Its shares are listed on the London Stock Exchange. The Company complies with the Ten Principles of Corporate Governance approved by the Luxembourg Stock Exchange and voluntary corporate governance regime stated in the UK Corporate Governance Code. The Company upholds and practices the highest standards of ethics and integrity in its relationships with its shareholders, directors, personnel, business community and other third parties including government and regulatory agencies. The main aspects of the Company’s corporate governance policy are described in the Corporate Governance Charter approved by the Board of Directors in May 2012 and published on the Company’s corporate website at http://www.mhp.com.ua. Board of Directors The Board is responsible for the overall conduct of the Company’s business and has the powers, authorities and duties vested in it by and pursuant to the relevant Luxembourg laws and regulations and the articles of association of the Company. 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, four are independent. The Board is assisted by two Board committees: the Audit Committee and the Nominations and Remuneration Committee. These committees handle business within their respective areas and present recommendations and reports on which the Board may base its decisions and actions. The Board has a Senior Independent Director. The Senior Independent Director is available to shareholders if they have any concerns that they cannot resolve through the normal channels of contact. The Senior Independent Director also provides a sounding board for the Chairman, and is responsible for the evaluation of the Chairman and serves as a trusted intermediary for non-executive directors as and when necessary. Starting from 2011, the Board conducts regular effectiveness reviews in order to evaluate its performance as well as that of its committees and individual directors. The evaluation process is normally initiated by a questionnaire and then supplemented by individual interviews by the Chairman with each of the directors. The conclusions are analysed by the Board to further strengthen its composition and performance. During the year, the Board comprised: Charles E Adriaenssen, Independent Non-executive Director, Chairman Dr John C Rich, Independent Non- executive Director John Grant, Non-executive Director, Senior Independent Director Philippe Lamarche, Independent Non-executive Director Yuriy Kosyuk, Chief Executive Officer Yuriy Melnyk, Deputy CEO, Executive Director Viktoria Kapelyushnaya, Chief Financial Officer, Executive Director During 2013 the attendance by directors at the Board’s meetings was at the level of 100%. The term of office of each member of the Board of Directors will expire at the annual general shareholders meeting to be held in 2016. 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, Mr Grant and Mr Lamarche, provide for payment of compensation and the reimbursement of certain expenses. Ms Kapelyushnaya and Mr Melnyk do not receive compensation for their service as Directors of MHP S.A. in addition to their remuneration as executive management of PJSC 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 CEO 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 main tasks are: • To recommend to the Board the appointment or renewal of Directors, to review remuneration and monitor performance of the Board, and to make recommendations to the Board in respect of the necessary skills and experience required to improve the functioning of the Board. • To monitor the performance of key officers of the Company and evaluate results versus stated objectives, to monitor training needs and programmes to improve employee effectiveness, to ensure the Company develops successors for all key positions. • To oversee the development and approval by the Board of the Company’s overall compensation policy including its long-term incentive plans, to ensure that top managers are incentivised to achieve and are compensated for exceptional performance, to oversee the maintenance and continuous improvement of the Company’s compensation policy with a view to aligning the interests of employees with the interests of shareholders. • To submit for approval to the Board the compensation packages of the CEO and of the executive management. • To approve all external hiring of key officers. During 2013, the Committee held two meetings, and all of the Committee members attended. Audit Committee John Grant, Chairman Dr John C Rich, Philippe Lamarche The Committee’s main tasks are: • To review and monitor the integrity of the Company’s financial statements, announcements of results and any other formal announcement relating to its financial performance, significant financial reporting issues and judgements and to make recommendations to the Board with respect to the financial statements. • To keep under review and report to the Board on the effectiveness of the Company’s financial reporting and internal control policies and procedures for the identification, management and reporting of risks. 32 Myronivsky Hliboproduct Annual Report and Accounts 2013 • To review the Company’s policies and procedures for the identification, management and reporting of non- financial risks, to review reports on the risk management process and to report to the Board on the effectiveness of the risk assurance process. • To monitor and review the effectiveness of the Company’s internal audit function in the context of the Company’s overall risk management system. • To approve appointment, reappointment, compensation and oversight of the Company’s external auditors. • To assist the Board in overseeing compliance with all legal and regulatory requirements. During 2013, the Committee held four meetings, and the average attendance of the Committee members was at the level of 100%. Remuneration of auditors Remuneration of auditors amounted to US$1.0 million, US$0.7 million, US$0.8 million in 2013, 2012 and 2011 respectively. Auditor’s remuneration is mainly attributable to the audit services and services provided in respect to bonds issued but also includes tax consulting fees of around US$0.1 million per year. The Company has rules and processes in place to ensure independence of the auditors, including non-audit fees limitation set by the Board and annual investigations by the Audit Committee of whether any services provided are incompatible with independence of the auditors. Internal control/risk management The Board of Directors is ultimately responsible for the Company’s governance, risk management, internal control environment and processes and formally reviews their effectiveness at least annually. There is a continuous process for identifying, evaluating and managing the significant risks the Company faces and the Board regularly monitors exposure to key business risks. The Company has an independent internal audit function whose activities are overseen by the Audit Committee. The Board of Directors approved in principle the MHP Anti-Bribery Policy, the document which is aimed at establishing the key principles and requirements in order to prevent corruption and bribery and ensure compliance with the applicable anti- corruption laws (to the extent applicable to MHP Group companies) enacted in the jurisdictions in which MHP Group companies operate. Also, the Board of Directors approved in principle the MHP Code of Ethics and Conflict of Interest Policy. The aim of the Code of Ethics is to ensure consistency in managers’ and employees’ behaviour within MHP and their interactions with third parties. To this end, certain procedures have been devised to avoid potential violations of the Code. The Conflict of Interest Policy This policy covers any transactions involving conflicts of interest (whether actual or potential) of: (1) MHP’s management team members, including directors of subsidiaries and branches (“key management”); (2) MHP’s line managers who have authority to authorise transactions on behalf of MHP (“line managers”); (3) other MHP employees who are authorised to internally approve any decisions as to significant provisions of transactions based on the internal policies and instructions (“responsible employees”) or have power to influence such decisions. Financial reporting process MHP has in place a comprehensive financial review cycle, which includes a detailed annual budgeting process. The annual budget and the business plan, upon which the budget is based, is reviewed and approved by the Board of Directors. Major commercial and financial risks are assessed as part of the business planning process. There is a comprehensive system of financial reporting, with monthly performance reports presented to the Board of Directors. At the Group level, MHP has in place common accounting policies and procedures on financial reporting and closing. Management monitors the publication of the new reporting standards and works closely with the external auditors in evaluating in advance the potential impact of these standards. Compensation of key management personnel Total compensation of the Group’s executive management, which consists of contractual salary and performance bonuses, amounted to US$12,969 thousand, US$11,686 thousand and US$8,741 thousand (including performance bonuses of US$4,745 thousand, US$3,493 thousand and US$2,601 thousand) in 2013, 2011 and 2010, respectively. Total compensation of the Group’s non-executive directors, which consists of contractual salary, amounted to US$550 thousand, US$407 thousand and US$380 thousand in 2013, 2012 and 2011, respectively. 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: • any convictions relating to fraudulent offences; • 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 • 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 PJSC MHP has a share option plan and no share options have been granted to members of the Board of Directors, members of MHP’s senior management or employees. Additional disclosures At the date of this annual report, there were no takeover bids made over the Company’s shares. According to the terms of the Senior Notes, the Company may be required to offer to repurchase the Senior Notes from the holders if a change in control as a result of a takeover bid occurs. There are no agreements between the Company and its Directors or employees providing for compensation on loss of office or employment (whether through resignation, purported redundancy or otherwise) that would occur because of a takeover bid. Dividend policy In March 2013 the Board of Directors approved the adoption of a dividend policy which maintains a balance between the need to invest in further development and the right of shareholders to share the net profit of the Company. The new dividend policy confirms the Company’s intention to pay annual dividends to the shareholders on a regular basis. 33 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 How do we conduct our business? Directors’ report The directors present their annual report and audited financial statements for the year ended 31 December 2013. Future developments The Group’s strategy is: • to expand its capacity to produce chicken Viktoria Kapelyushnaya Chief Financial Officer 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 five chicken and two breeder farms, feed mills, and convenience foods facilities. Grain segment This division grows crops for fodder, and for sale to third parties, on 360,000 hectares of land. It incorporates a number of arable farms and grain storage facilities. Other agricultural operations segment This division produces and sells sausages and cooked meat, beef, goose and foie gras, and fruit. It incorporates one mixed farm, a goose farm and two facilities for producing prepared meat products. More information about the operations of the business is set out in the Chairman’s Statement on pages 10-11, the Chief Executive Officer’s review on pages 12-13, and the Business review on pages 16-23. Yuriy Melnyk First Deputy CEO Dr John C Rich Independent Non-executive Director John Grant Non-executive Director, Senior Independent Director Philippe Lamarche Independent Non-executive Director The Directors’ biographies are on pages 08-09 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 32-33 of this report. Annual general meeting “AGM” The AGM will be held at the Company’s registered office in Luxembourg at 12 noon on 28 April 2014. Disclosure of information to auditors So far as each director is aware, all information which is relevant to the audit of the Group’s financial statements has been supplied to the Group’s auditors. Each director has taken 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. and chicken products in a domestic market which has a 45.5 million population and one of the world’s lowest rates of meat consumption per capita; • to expand its grain production to around 450,000 hectares by 2015-2016 and 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; and • to continue to develop its distribution network and customer base. The management believes there are ample opportunities for growth as customers choose to buy domestically produced chicken, which is cheaper and fresher than imported meat. Going concern After reviewing the 2014 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. Directors during the year The following served as directors of the Company during the year ended 31 December 2013: Charles E Adriaenssen Independent Non-executive Director, Chairman of the Board Yuriy Kosyuk Chief Executive Officer 34 Myronivsky Hliboproduct Annual Report and Accounts 2013 Statement of the Board of Directors’ responsibilities for the preparation and approval of the financial statements for the year ended 31 December 2013 The Board of Directors is responsible for the preparation of the consolidated financial statements that present fairly the consolidated financial position of MHP S.A. and its subsidiaries (the “Group”) as of 31 December 2013 and the consolidated results of its operations, cash flows and changes in equity for the year then ended, in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS”). In preparing the consolidated financial statements, the Board of Directors is responsible for: • properly selecting and applying accounting policies; • presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; The Board of Directors, within its competencies, is also responsible for: • designing, implementing and maintaining an effective and sound system of internal controls throughout the Group; • maintaining adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the consolidated financial position of the Group, and which enable them to ensure that the consolidated financial statements of the Group comply with IFRS; • maintaining statutory accounting records in compliance with local legislation and accounting standards in the respective jurisdictions; • taking such steps as are reasonably available to them to safeguard the assets of the Group; and • providing additional disclosures when • preventing and detecting fraud and other compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s consolidated financial position and financial performance; • making an assessment of the Group’s ability to continue as a going concern. irregularities. The consolidated financial statements of the Group for the year ended 31 December 2013 were authorised for issue by the Board of Directors on 1 April 2014. Board of Directors’ responsibility statement We confirm that to the best of our knowledge the directors’ report, which is incorporated into the annual report, includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. On behalf of the Board: Chief Executive Officer Yuriy Kosyuk Chief Financial Officer Viktoria Kapelyushnaya 35 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Report on other legal and regulatory requirements The directors’ report, which is the responsibility of the Board of Directors, is consistent with the consolidated financial statements and includes the information required by the law of 19 December 2002 on the commercial and companies register and on the accounting records and annual accounts of undertakings, as amended with respect to the corporate governance statement. For Deloitte Audit société à responsabilité limitée Cabinet de révision agréé Sophie Mitchell, Réviseur d’enterprises agréé Partner 1 April 2014 560, rue de Neudorf L-2220 Luxembourg Independent Auditor’s report to the Shareholders of MHP S.A. 5, rue Guillaume Kroll L-1882 Luxembourg Report on the consolidated financial statements Following our appointment by the General Meeting of the Shareholders dated 29 April 2013, we have audited the accompanying consolidated financial statements of MHP S.A., which comprise the consolidated statement of financial position as at 31 December 2013, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Responsibility of the Board of Directors 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, and for such internal control the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Responsibility of the réviseur d’entreprises agréé 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 for Luxembourg by the Commission de Surveillance du Secteur Financier. 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 réviseur d’entreprises agréé’s judgement 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 réviseur d’entreprises agréé 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 consolidated financial position of MHP S.A. as of 31 December 2013, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union. Emphasis of matter We draw your attention to Note 28 “Contingencies and contractual commitments” to the consolidated financial statements, which describes the current political crisis in Ukraine. The impact of the continuing economic crisis and political turmoil in Ukraine and their final resolution are unpredictable and may adversely affect the Ukrainian economy and the operations of the Group. Our opinion is not qualified in respect of this matter. 36 36 Myronivsky Hliboproduct Annual Report and Accounts 2013 Myronivsky Hliboproduct Annual Report and Accounts 2013 Consolidated statement of comprehensive income for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) Notes 2013 2012 2011 Revenue Net change in fair value of biological assets and agricultural produce Cost of sales Gross profit Selling, general and administrative expenses VAT refunds and other government grants income Other operating expenses, net Operating profit Finance income Finance costs: Interests and other finance costs Transaction costs related to corporate bonds Finance costs Gain from acquisition of subsidiaries Foreign exchange (loss)/gain, net Other expenses, net Other expenses, net Profit before tax Income tax benefit/(expense) Profit for the year Other comprehensive income/(loss) Items that will not be reclassified to profit or loss: Effect of revaluation of property, plant and equipment Deferred tax charged directly to revaluation reserve Cumulative translation difference Other comprehensive (loss)/income for the year Total comprehensive income for the year Profit attributable to: Equity holders of the Parent Non-controlling interests Total comprehensive income attributable to: Equity holders of the Parent Non-controlling interests Earnings per share Basic and diluted earnings per share (USD per share) On behalf of the Board: Chief Executive Officer Yuriy Kosyuk Chief Financial Officer Viktoria Kapelyushnaya 6 1,496,079 1,407,522 1,229,090 21,288 (889,127) 16,734 7 (1,185,987) (1,001,909) 13,634 8 9 10 2 323,726 (130,615) 100,885 (22,160) 422,347 (120,485) 102,369 (23,648) 361,251 (106,447) 87,985 (22,045) 271,836 3,766 380,583 3,350 320,744 6,356 (93,121) (16,654) (59,311) – (65,918) – (109,775) (59,311) (65,918) 6,776 (11,052) (1,316) – (3,285) (2,633) – 2,318 (1,385) (111,601) (61,879) (58,629) 160,235 318,704 262,115 11 2,005 (7,788) (2,760) 162,240 310,916 259,355 12 – – (22) (22) 5,166 (826) (436) 3,904 – – (3,040) (3,040) 162,218 314,820 256,315 155,907 6,333 297,104 13,812 243,376 15,979 162,240 310,916 259,355 155,885 6,333 300,756 14,064 240,336 15,979 162,218 314,820 256,315 33 1.48 2.80 2.26 The accompanying notes on pages 42 to 77 form an integral part of these consolidated financial statements. 37 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Consolidated statement of financial position as of 31 December 2013 (in thousands of US dollars, unless otherwise indicated) 31 December 2013 31 December 2012 31 December 2011 Notes ASSETS Non-current assets Property, plant and equipment Land lease rights Deferred tax assets Long-term VAT recoverable, net Non-current biological assets Long-term bank deposits Other non-current assets Current assets Inventories Biological assets Agricultural produce Other current assets, net Taxes recoverable and prepaid, net Trade accounts receivable, net Short-term bank deposits Cash and cash equivalents TOTAL ASSETS EQUITY AND LIABILITIES Equity Share capital Treasury shares Additional paid-in capital Revaluation reserve Retained earnings Translation reserve Equity attributable to equity holders of the Parent Non-controlling interests Total equity Non-current liabilities Bank borrowings Bonds issued Finance lease obligations Deferred tax liabilities Current liabilities Trade accounts payable Other current liabilities Bank borrowings Accrued interest Finance lease obligations TOTAL LIABILITIES TOTAL EQUITY AND LIABILITIES On behalf of the Board: Chief Executive Officer Yuriy Kosyuk Chief Financial Officer Viktoria Kapelyushnaya 12 1,493,739 1,339,687 1,008,923 27,227 13 7,795 11 24,850 14 46,327 15 6,017 14,476 26,694 8,231 35,784 53,695 6,154 16,615 48,837 20,022 2,414 70,442 5,802 17,656 16 15 17 18 19 20 21 21 1,658,912 1,486,860 1,135,615 245,861 199,680 172,721 38,373 209,149 70,912 – 172,470 274,255 159,276 166,128 33,880 200,308 72,616 – 94,785 182,240 135,990 169,022 21,989 137,175 65,794 1,777 94,758 1,109,166 1,001,248 808,745 2,768,078 2,488,108 1,944,360 284,505 (65,393) 181,982 22,869 1,012,826 (241,249) 284,505 (65,393) 181,982 22,869 976,919 (241,227) 284,505 (40,555) 179,565 18,781 679,815 (240,791) 1,195,540 1,159,655 39,008 53,665 881,320 44,489 1,249,205 1,198,663 925,809 22 23 24 11 192,297 951,728 39,370 7,043 199,483 571,515 45,955 3,345 109,108 567,000 32,558 2,207 1,190,438 820,298 710,873 25 26 22 22, 23 24 101,990 86,823 98,367 20,771 20,484 68,970 62,902 301,658 14,125 21,492 52,689 53,269 170,380 12,073 19,267 328,435 469,147 307,678 1,518,873 1,289,445 1,018,551 2,768,078 2,488,108 1,944,360 The accompanying notes on pages 42 to 77 form an integral part of these consolidated financial statements. 38 Myronivsky Hliboproduct Annual Report and Accounts 2013 Consolidated statement of changes in equity for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) Balance at 1 January 2011 Profit for the year Other comprehensive income Total comprehensive income for the year Dividends declared by subsidiaries Acquisition and changes in non-controlling interests in subsidiaries Attributable to equity holders of the Parent Share capital 284,505 – – Treasury shares Additional paid-in capital Revaluation reserve Retained earnings Translation reserve (40,555) – – 179,565 – – 18,781 – – 436,439 243,376 – (237,751) – (3,040) Non- controlling interests 29,384 15,979 – Total equity 670,368 259,355 (3,040) Total 640,984 243,376 (3,040) – – – – – – – – – – – – 243,376 (3,040) 240,336 15,979 256,315 – – – – – – (601) (601) (273) (273) Balance at 31 December 2011 284,505 (40,555) 179,565 18,781 679,815 (240,791) 881,320 44,489 925,809 Profit for the year Other comprehensive loss Total comprehensive income for the year Acquisition of treasury shares (Note 21) Acquisition and changes in non-controlling interests in subsidiaries (Note 2 and 21) Dividends declared by subsidiaries – – – – – – – – – (41,465) – – – – 16,627 2,417 – – – 4,088 297,104 – – (436) 297,104 3,652 13,812 252 310,916 3,904 4,088 297,104 (436) 300,756 14,064 314,820 – – – – – – – – – (41,465) – (41,465) 19,044 (19,044) – – (501) (501) Balance at 31 December 2012 284,505 (65,393) 181,982 22,869 976,919 (241,227) 1,159,655 39,008 1,198,663 Profit for the year Other comprehensive income Total comprehensive income for the year Dividends declared by the Parent (Note 29) Dividends declared by subsidiaries Non-controlling interests acquired (Note 2) – – – – – – – – – – – – – – – – – – – – – – – – 155,907 – – (22) 155,907 (22) 6,333 – 162,240 (22) 155,907 (22) 155,885 6,333 162,218 (120,000) – – – – – (120,000) – (120,000) – – (804) (804) 9,128 9,128 Balance at 31 December 2013 284,505 (65,393) 181,982 22,869 1,012,826 (241,249) 1,195,540 53,665 1,249,205 On behalf of the Board: Chief Executive Officer Yuriy Kosyuk Chief Financial Officer Viktoria Kapelyushnaya The accompanying notes on pages 42 to 77 form an integral part of these consolidated financial statements. 39 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Consolidated statement of cash flows for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) Operating activities Profit before tax Non-cash adjustments to reconcile profit before tax to net cash flows Depreciation and amortisation expense Net change in fair value of biological assets and agricultural produce Gain from acquisition of subsidiaries Change in allowance for irrecoverable amounts and direct write-offs Loss on disposal of property, plant and equipment and other non-current assets Finance income Finance costs Non-operating foreign exchange loss/(gain), net Operating cash flows before movements in working capital Working capital adjustments Change in inventories Change in biological assets Change in agricultural produce Change in other current assets Change in taxes recoverable and prepaid Change in trade accounts receivable Change in other liabilities Change in trade accounts payable Cash generated by operations Interest received Interest paid Income taxes paid Net cash flows from operating activities Investing activities Purchases of property, plant and equipment Acquisition of land lease rights Purchases of other non-current assets Proceeds from disposals of property, plant and equipment Purchases of non-current biological assets Acquisition of subsidiaries, net of cash acquired Investments in long-term deposits Investments in short-term deposits Withdrawals of short-term and long-term deposits Loans repaid by/(provided to) employees, net Loans repaid by related parties, net Net cash flows used in investing activities Notes 2013 2012 2011 5 5 2 10 160,235 318,704 262,115 119,014 (13,634) (6,776) 27,888 358 (3,766) 109,775 11,052 87,135 (16,734) – 25,605 199 (3,350) 59,311 3,257 80,341 (21,288) – 18,888 551 (6,356) 65,918 (2,519) 404,146 474,127 397,650 9,833 (6,565) (32,843) (8,313) 925 3,123 32,513 27,919 430,738 3,766 (93,581) (9,297) (75,508) (12,059) 2,276 (13,245) (92,911) (7,638) 13,615 (127) 288,530 3,350 (81,508) (12,238) (29,033) (13,011) (43,290) (886) (47,103) (12,666) 7,491 13,350 272,502 6,645 (77,239) (4,247) 331,626 198,134 197,661 2 (157,216) (5,231) (3,020) 2,815 (1,507) (61,056) – – 629 495 25 (257,667) (1,314) (3,629) 1,746 (1,408) – – (4) 1,792 78 – (234,895) (5,424) (4,093) 369 (2,139) – (6,017) (52,259) 184,419 (1,098) – (224,066) (260,406) (121,137) The accompanying notes on pages 42 to 77 form an integral part of these consolidated financial statements. 40 Myronivsky Hliboproduct Annual Report and Accounts 2013 Consolidated statement of cash flows (continued) for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) Financing activities Proceeds from bank borrowings Repayment of bank borrowings Proceeds from bonds issued Repayment of bonds Repayment of finance lease obligations Transaction costs related to bank loans received Transaction costs related to corporate bonds issued Dividends paid to shareholders Dividends paid by subsidiaries to non-controlling shareholders Acquisition of treasury shares Net cash flows (used in)/from financing activities Net increase in cash and cash equivalents Net foreign exchange difference Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December Non-cash transactions Additions of property, plant and equipment under finance leases Additions of property, plant and equipment financed through direct bank-lender payments to the vendor Revaluation of grain storage facilities Notes 2013 2012 2011 23 27,29 27,29 21 65,333 (323,079) 400,000 – (23,912) (1,172) (45,507) (99,026) (775) – 223,179 (96,666) – – (22,268) – – – (501) (41,465) 158,071 (142,867) – (9,976) (25,740) – – – (602) – (28,138) 62,279 (21,114) 79,422 (1,737) 94,785 7 20 94,758 55,410 27 39,321 172,470 94,785 94,758 12,510 30,370 13,895 26,662 – 93,333 5,166 72,007 – 12 On behalf of the Board: Chief Executive Officer Yuriy Kosyuk Chief Financial Officer Viktoria Kapelyushnaya The accompanying notes on pages 42 to 77 form an integral part of these consolidated financial statements. 41 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes to the consolidated financial statements for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) 1. Corporate information MHP S.A. (the “Parent” or “MHP S.A.”), a limited liability company (société anonyme) registered under the laws of Luxembourg, was formed on 30 May 2006. MHP S.A. was formed to serve as the ultimate holding company of PJSC “Myronivsky Hliboproduct” (“MHP”) and its subsidiaries. Hereinafter, MHP S.A. and its subsidiaries are referred to as the “MHP S.A. Group” or the “Group”. The registered address of MHP S.A. is 5, rue Guillaume Kroll, L-1882 Luxembourg. The controlling shareholder of MHP S.A. is the Chief Executive Officer of MHP S.A. Mr Yuriy Kosyuk (the “Principal Shareholder”), who owns 100% of the shares of WTI Trading Limited (“WTI”), which is the immediate majority shareholder of MHP S.A. The principal business activities of the Group are poultry and related operations, grain growing, as well as other agricultural operations (meat processing, cultivation and selling fruit and producing beef and meat products ready for consumption). 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. Grain growing comprises the production and sale of grains. Other agricultural operations comprise the production and sale of cooked meat, sausages, beef, milk, goose meat, foie gras, fruit and feed grains. During the year ended 31 December 2013 the Group employed about 30,000 people (2012: 27,800 people, 2011: 24,800 people). The Group has been undertaking a large-scale investment programme to expand its poultry and related operations. In May 2010 the Group commenced construction of the greenfield Vinnytsia poultry complex and in the second half of 2012 started the commissioning of production facilities which were already completed. During 2013 the Group continued commissioning and launching into operations completed production facilities (Note 12). The facilities of Vinnytsia complex which remain under construction as of 31 December 2013 will be commissioned during 2014, as scheduled. During the year ended 31 December 2013 the Group continued to increase its agricultural land bank as part of its vertical integration and diversification strategy through a number of business acquisitions (Note 13). The primary subsidiaries, the principal activities of the companies forming the Group and the Parent’s effective ownership interest as of 31 December 2013, 2012 and 2011 were as follows: Name Country of registration acquired Principal activities 2013 2012 2011 Raftan Holding Limited MHP Myronivsky Zavod po Vygotovlennyu Cyprus Ukraine Ukraine 2006 Sub-holding company 1998 Management, marketing and sales 1998 Fodder and sunflower oil 100.0% 100.0% 99.9% 88.5% 99.9% 88.5% 100.0% 99.9% 88.5% Year established/ Krup i Kombikormiv Vinnytska Ptahofabryka Peremoga Nova Druzhba Narodiv Nova Oril-Leader Tavriysky Kombikormovy Zavod Ptahofabryka Shahtarska Nova Myronivska Ptahofabryka Starynska Ptahofabryka Ptahofabryka Snyatynska Nova Zernoproduct Katerynopilsky Elevator Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Druzhba Narodiv Crimean Fruit Company NPF Urozhay Agrofort Urozhayna Krayina Ukrainian Bacon AgroKryazh Baryshevka Voronezh Agro Holding Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine Russian Federation production 2011 Chicken farm 1999 Chicken farm 2002 Chicken farm 2003 Chicken farm 2004 Fodder production 2003 Breeder farm 2004 Chicken farm 2003 Breeder farm 2005 Geese breeder farm 2005 Grain cultivation 2005 Fodder production and grain storage, sunflower oil production 2006 Cattle breeding, plant cultivation 2006 Fruits and grain cultivation 2006 Grain cultivation 2006 Grain cultivation 2010 Grain cultivation 2008 Meat processing 2013 Grain cultivation 2013 Grain cultivation 2013 Grain cultivation 99.9% 99.9% 99.9% 99.9% 99.9% 99.9% 99.9% 94.9% 99.9% 89.9% 99.9% 99.9% 81.9% 99.9% 86.1% 99.9% 79.9% 99.9% 51.0% 100.0% 99.9% 99.9% 99.9% 99.9% 99.9% 99.9% 99.9% 94.9% 99.9% 89.9% 99.9% 99.9% 81.9% 99.9% 86.1% 99.9% 79.9% – – – 99.9% 99.9% 99.9% 99.9% 99.9% 99.9% 99.9% 94.9% 99.9% 89.9% 99.9% 99.9% 81.9% 89.9% 86.1% 99.9% 79.9% – – – The Group’s operational facilities are located in different regions of Ukraine, including Kyiv, Cherkasy, Dnipropetrovsk, Donetsk, Ivano-Frankivsk, Vinnytsia, Kherson, Sumy, Khmelnitsk regions and Autonomous Republic of Crimea as well as in Voronezh region of the Russian Federation. 42 Myronivsky Hliboproduct Annual Report and Accounts 2013 2. Changes in the Group structure Detailed below is the information on incorporations and acquisitions of subsidiaries, as well as changes in non-controlling interests in subsidiaries of the Group during the years ended 31 December 2013, 2012 and 2011. Incorporations During the year ended 31 December 2011 the Group established a new subsidiary Vinnytska Ptahofabryka engaged in poultry production at Vinnytsia Complex. Acquisitions AgroKryazh In May 2013 the Group acquired from third parties a 99.9% interest in a group of companies “AgroKryazh”, a grain growing business, cultivating a land bank of 12,380 hectares in the Vinnytsia region of Ukraine. The transaction was accounted for under the acquisition method. Baryshevka In April 2013 the Group acquired from third parties a 51.0% interest in a group of companies “Baryshevka”, a grain growing business cultivating a land bank of 18,810 hectares in the Kyiv region of Ukraine. The transaction was accounted for under the acquisition method. Voronezh Agro Holding In July 2013 the Group acquired from third parties a 100% interest in a group of companies “Voronezh Agro Holding”, a grain growing business cultivating a land bank of about 40,000 hectares, in the Voronezh region of the Russian Federation, of which 24,000 hectares is owned by “Voronezh Agro Holding” and was included in property plant and equipment (Note 12). This acquisition also added 200,000 m3 of storage facilities as well as agricultural machinery to the Group’s asset. The following table presents the fair value of identifiable assets and liabilities acquired during the year ended 31 December 2013: Provisional fair value of identifiable assets and liabilities: Property, plant and equipment (Note 12) Land lease rights (Note 13) Inventories and biological assets Loans and borrowings Trade and other payables Deferred tax liabilities Non-controlling interests Total identifiable net assets at fair value Gain from acquisition of subsidiaries Total cash consideration due and payable Cash paid Cash acquired AgroKryazh Baryshevka Voronezh Agro Holding Total 3,779 6,187 3,308 – (1,056) – – 3,195 12,283 2,363 – (814) – (8,343) 53,896 3,787 9,740 (12,996) (2,414) (3,069) (785) 60,870 22,257 15,411 (12,996) (4,284) (3,069) (9,128) 12,218 8,684 48,159 69,061 (1,708) (1,229) (3,839) (6,776) 10,510 7,455 44,320 62,285 (10,565) 55 (6,226) – (44,542) 222 (61,333) 277 The gain from acquisitions of subsidiaries was recognised within the consolidated statement of comprehensive income for the period ended 31 December 2013. The gain arose as a result of a lack of resources by the previous owners, which did not allow them to manage the assets in the most efficient manner. From the date of acquisition the acquired group of companies contributed US$19,970 thousand of revenue and US$689 thousand of loss to the consolidated results of the Group. Had the transactions related to acquisitions as discussed above, occurred on 1 January 2013, “Pro forma” revenue and loss for the year ended 31 December 2013 would have been US$6,021 thousand and US$3,816 thousand, respectively. These “pro forma” revenue and profit measures for the year do not reflect any adjustments related to other transactions. “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. The non-controlling interest recognised at the acquisition date was measured by reference to the proportionate share of the recognised amounts of the subsidiary’s identifiable net assets and amounted to US$9,128 thousands. 43 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes to the consolidated financial statements (continued) for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) 2. Changes in the group structure continued Changes in non-controlling interests in subsidiaries In December 2012 the Group increased its effective ownership interest in NPF Urozhay to 99.9% through the acquisition of a non-controlling interest previously held by one of its key management personnel in exchange for 1,257,032 treasury shares held by the Group. The transaction was recognised within equity (Note 21). The Group made certain 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, either individually or in aggregate. 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). 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 basis of historical cost, except for revalued amounts of grain storage facilities, biological assets, agricultural produce, and certain financial instruments, which are carried at fair value. Adoption of new and revised International Financial Reporting Standards The following Standards have been adopted by the Group for the first time for the financial year beginning on or after 1 January 2013 and have an impact on the Group: • Presentation of items of Other Comprehensive Income” (Amendments to IAS 1). Effective for accounting periods beginning on or after 1 July 2012; IFRS 13 “Fair value measurement”. Fair value measurement and disclosure. Effective 1 January 2013; IAS 19 “Employee Benefits” (2011). The revised version of IAS 19 was effective 1 January 2013; and • • • “Disclosures – Offsetting Financial Assets and Financial Liabilities” (Amendments to IFRS 7). The amendments to IFRS 7 were effective 1 January 2013. “Presentation of items of Other Comprehensive Income” (Amendments to IAS 1) The main change resulting from amendments to IAS 1 is a requirement to group items presented in “Other comprehensive income” (OCI) on the basis of whether they are potentially able to be reclassified to profit or loss subsequently (reclassification adjustments). The amendments affect presentation only and have no impact on the Group’s financial position or performance. IFRS 13 “Fair value measurement” IFRS 13 aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRSs. The requirements do not extend the use of fair value accounting but provide guidance on how it should be applied where its use is already required or permitted by other standards within IFRSs. The additional disclosures required following the adoption of this standard are provided in the individual notes relating to the assets and liabilities whose fair values were determined using the requirements of IFRS 13. Fair value hierarchy is provided in Notes 15, 17 and 30. In accordance with the transitional provisions of IFRS 13, the Group has applied the new fair value measurement guidance prospectively and has not provided any comparative information for new disclosures. Notwithstanding the above, the change had no impact on the measurement of the Group’s assets and liabilities. IAS 19 “Employee Benefits” (2011) and “Disclosures – Offsetting Financial Assets and Financial Liabilities” (IFRS 7 amendments). The Group has also applied IAS 19 Employee Benefits (as revised in 2011), and “Disclosures – Offsetting Financial Assets and Financial Liabilities” (IFRS 7 amendments)”. The adoption of these standards and amendments did not have a material impact on the financial position or performance of the Group. 44 Myronivsky Hliboproduct Annual Report and Accounts 2013 3. Summary of significant accounting policies continued Standards and Interpretations in issue but not effective 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: Standards and Interpretations Amendment to IAS 27 “Separate Financial Statements” (revised 2011) – Investment entities IFRS 10 “Consolidated Financial Statements” IFRS 11 “Joint Arrangements” IFRS 12 “Disclosure of Interests in Other Entities” IAS 28 “Investments in Associates and Joint Ventures” Amendments to IAS 32 “Financial instruments: Presentation” – Application guidance on the offsetting of financial assets and financial liabilities Amendments to IFRS 10, IFRS 11 and IFRS 12 – “Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance” Amendments to IAS 36 “Recoverable amounts disclosures for non-financial assets” Amendments to IAS 39 “Novation of derivatives and continuation of hedge accounting” IFRIC 21 “Levies” Amendments to IFRS 7 “Financial instruments: Disclosures” – Disclosures about the initial application of IFRS 91 Amendments to IFRS 9 and 7 – “Mandatory Effective Date of IFRS 9 and Transition Disclosures” IFRS 9 “Financial Instruments: Classification and Measurement and Accounting for financial liabilities and derecognition”1 Amendments to IAS 19 “Employee Benefits” – Defined Benefit Plans: Employee contribution1 IFRS 14 “Regulatory Deferral Accounts”1 Amendments to IFRSs – “Annual Improvements to IFRSs 2010-2012 Cycle”1 Amendments to IFRSs – “Annual Improvements to IFRSs 2011-2013 Cycle”1 1 This standard and amendment have not yet been endorsed for use in European Union. Effective for annual period beginning on or after 1 January 2014 1 January 2014 1 January 2014 1 January 2014 1 January 2014 1 January 2014 1 January 2014 1 January 2014 1 January 2014 1 January 2014 1 January 2015 1 January 2015 1 January 2015 Not yet adopted in the EU Not yet adopted in the EU Not yet adopted in the EU Not yet adopted in the EU Management is currently evaluating the impact of the adoption of IFRS 9 “Financial Instruments”, and amendment to IFRS 7 “Financial instruments: Disclosures”. For other Standards and Interpretations management anticipates that their adoption in future periods will not have a material effect on the financial statements of the Group in future periods. Functional and presentation currency The functional currency of Ukrainian, Cyprus and Luxemburg companies of the Group is the Ukrainian Hryvnia (UAH); the functional currency of the Russian Federation companies of the Group is Russian Rouble (RUB). Transactions in currencies other than the functional currency of the entities concerned 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 reporting date. All realised and unrealised gains and losses arising on exchange differences are recognised in the consolidated statement of comprehensive income for the period. These consolidated financial statements are presented in US dollars (USD), which is the Group’s presentation currency. The results and financial position of the Group are translated into the presentation currency using the following procedures: • assets and liabilities for each consolidated statement of financial position presented are translated at the closing rate as of the • reporting date of that statement of financial position; income and expenses for each consolidated statement of comprehensive income 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 translates items of income and expenses for each period presented in the financial statements using the quarterly average rates of exchange, if such translations reasonably approximate the results translated at exchange rates prevailing at the dates of the transactions. 45 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes to the consolidated financial statements (continued) for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) 3. Summary of significant accounting policies continued The relevant exchange rates were: Currency UAH/USD UAH/EUR UAH/RUB Closing rate as of 31 December 2013 Average for 2013 7.9930 11.0415 0.2450 7.9930 10.6116 0.2512 Closing rate as of 31 December 2012 7.9930 10.5372 N/A Closing rate as of 31 December 2011 7.9898 10.2981 N/A Average for 2012 7.9910 10.2692 N/A Average for 2011 7.9677 11.0926 N/A 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 entity, 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. Income and expenses of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition and up to the effective date of disposal, as appropriate. Total comprehensive income or loss of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. All significant intercompany transactions, balances and unrealised gainsor losseson transactions are eliminated on consolidation, except 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. Accounting for acquisitions The acquisitions of subsidiaries from third parties are accounted for using the acquisition method. On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values. The consideration transferred by the Group is measured at fair value, which is the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquired subsidiary and the equity interests issued by the Group in exchange for control of the subsidiary. Acquisition-related costs are generally recognised in the statement of comprehensive income as incurred. When the consideration transferred by the Group in a business combination includes assets and liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and is included as part of the consideration transferred. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the measurement period (which may not exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the subsidiary’s net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the recognised amounts of the subsidiary’s identifiable net assets. The choice of measurement basis is made on a transaction-by- transaction basis. Other types of non-controlling interests, if any, are measured at fair value or, when applicable, on the basis specified in other IFRS standards. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquired subsidiary, and the fair value of the Group’s previously held equity interest in the acquired subsidiary (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed exceeds the sum of the consideration transferred, the amount of non-controlling interests in the subsidiary and the fair value of the Group’s previously-held interest in the subsidiary (if any), the excess is recognised in the consolidated statement of comprehensive income, as a bargain purchase gain. Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to owners of the Parent. When an acquisition of a legal entity does not constitute a business, the cost of the group of assets is allocated between the individual identifiable assets in the group based on their relative fair values. 46 Myronivsky Hliboproduct Annual Report and Accounts 2013 3. Summary of significant accounting policies continued 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 is recognised directly in equity and attributed to owners of the Parent. Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible to the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: • Level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabilities. • Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable. • Level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. Borrowing costs Borrowing costs include interest expense, finance charges on finance leases and other interest-bearing long-term payables and debt service costs. Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in the statement of comprehensive income in the period in which they are incurred. Contingent liabilities and assets Contingent liabilities are not recognised in the consolidated financial statements. Rather, 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. Segment information Segment reporting is presented on the basis of management’s perspective and relates to the parts of the Group that are defined as operating segments. Operating segments are identified on the basis of internal reports provided to the Group’s chief operating decision maker (CODM). The Group has identified its top management team as its CODM and the internal reports used by the top management team to oversee operations and make decisions on allocating resources serve as the basis of information presented. These internal reports are prepared on the same basis as these consolidated financial statements. 47 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes to the consolidated financial statements (continued) for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) 3. Summary of significant accounting policies continued Based on the current management structure, the Group has identified the following reportable segments: • Poultry and related operations; • Grain growing operations; and • Other agricultural operations. The Group does not present information on segment assets and liabilities as the CODM does not review such information for decision- making purposes. Revenue recognition The Group generates revenue primarily from the sale of agricultural products to the 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. When goods are exchanged or swapped for goods which are of a similar nature and value, the exchange is not regarded as a transaction which generates revenue. When goods are sold in exchange for dissimilar goods, the exchange is regarded as a transaction which generates revenue, and revenue is measured at the fair value of the goods received, adjusted by the amount of any cash or cash equivalents transferred. VAT refunds and other government grants The Group’s companies are subject to special tax treatment for VAT. The Group’s enterprises, which qualify as agricultural producers, are entitled to retain the net VAT payable. VAT amounts payable are not transferred to the State, but credited to the entity’s separate special account to support the agriculture activities of the Group. Net result on VAT operations, calculated as excess of VAT liability over VAT credit is charged to profit or loss. VAT receivable exceeding VAT liability is used as a reduction in tax liabilities of the next period. Government grants are recognised as income over the periods necessary to match them with the related costs, or as an offset against finance costs when received as compensation for the finance costs for agricultural producers. To the extent the conditions attached to the grants are not met at the reporting date, the received funds are recorded in the Group’s consolidated financial statements as deferred income. Other government grants are recognised at the moment when the decision to disburse the amounts to the Group is made. Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received. Property, plant and equipment Property, plant and equipment are carried at historical cost 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 depreciation and 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; (d) 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; and (e) for qualifying assets, borrowing costs capitalised in accordance with the Group’s accounting policy. 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 statement of comprehensive income as incurred. For grain storage facilities 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 reporting 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 statement of comprehensive income to the extent that it reverses a revaluation decrease of the same asset previously recognised in the statement of comprehensive income. If the asset’s carrying amount is decreased as a result of a revaluation, the decrease is recognised in the statement of comprehensive income. 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 statement of comprehensive income. 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. 48 Myronivsky Hliboproduct Annual Report and Accounts 2013 3. Summary of significant accounting policies continued 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 prospectively 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 the statement of comprehensive income. Construction in progress comprises costs directly related to the 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 construction in progress 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. Intangible assets Intangible assets, which are acquired by the Group and which have finite useful lives, consist primarily of land lease rights. Land lease rights acquired separately are carried at cost less accumulated amortisation and accumulated impairment losses. Land lease rights acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, land lease rights acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as land lease rights acquired separately. Amortisation of intangible assets is recognised on a straight line basis over their estimated useful lives. For land lease rights, the amortisation period varies from 3 to 15 years. The amortisation period and the amortisation method for intangible assets with finite useful life are reviewed at least at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in profit or loss when the asset is derecognised. Impairment of tangible and intangible assets other than goodwill At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets 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 statement of comprehensive income unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. 49 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes to the consolidated financial statements (continued) for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) 3. Summary of significant accounting policies continued 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 statement of comprehensive income, 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. Impairment of goodwill For the purposes of impairment testing, goodwill is allocated to each of the Group’s cash generating units (or groups of cash- generating units) that is expected to benefit from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in statement of comprehensive income in the consolidated statement of comprehensive income. An impairment loss recognised for goodwill is not reversed in subsequent periods. Income taxes Income taxes have been computed in accordance with the laws currently enacted or substantially 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 reporting 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. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax liabilities and assets are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax is charged or credited to the statement of comprehensive income, except when it relates to items credited or charged directly to equity or other comprehensive income, in which case the deferred tax is also dealt with in equity or other comprehensive income. Deferred 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. The majority of the Group companies that are involved in agricultural production (poultry farms and other entities engaged in agricultural production) benefit substantially from the status of an agricultural producer. These companies are exempt from income taxes and pay the Fixed Agricultural Tax instead (Note 11). Inventories Inventories are stated at the lower of cost and net realisable value. Costs comprise 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. 50 Myronivsky Hliboproduct Annual Report and Accounts 2013 3. Summary of significant accounting policies continued 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 costs to sell at both initial recognition and as of the reporting date, with any resulting gain or loss recognised in the consolidated statement of comprehensive income. Costs to sell include all costs that would be necessary to sell the assets, including costs necessary to get the assets to market. The difference between fair value less costs to sell and total production costs is allocated to biological assets held in stock as of each reporting date as a fair value adjustment. The change in this adjustment from one period to another is recognised as “Net change in fair value of biological assets and agricultural produce” in the statement of comprehensive income. Agricultural produce harvested from biological assets is measured at its fair value less costs to sell at the point of harvest. A gain or loss arising on initial recognition of agricultural produce at fair value less costs to sell is included in the statement of comprehensive income. 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. The fair value of broilers is determined by reference to the cash flows that will be obtained from the 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 and pigs comprise cattle held for regeneration of livestock population and animals raised 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 the production of fruit. Fruit trees achieve their normal productive age in the second to the 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) Grain and fruits The fair value of fodder grain and fruits is determined by reference to market prices at the point of harvest. (iii) Hatchery eggs The fair value of hatchery eggs is determined by reference to market prices at the point of harvest. The Group’s biological assets are classified into bearer and consumable biological assets depending upon the function of a particular group of biological assets in the Group’s production process. Consumable biological assets are those that are to be harvested as agricultural produce, and include hatchery eggs and live broiler poultry intended for the production of meat, as well as pork and meat cows. Bearer biological assets include poultry held for hatchery eggs production, orchards, milk cows and breeding bulls. 51 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes to the consolidated financial statements (continued) for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) 3. Summary of significant accounting policies continued Financial instruments Financial assets and financial liabilities are recognised on the Group’s consolidated statement of financial position when the Group becomes a party to the contractual provisions of the instrument. Regular way purchases and sales of 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. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss. Accounts receivable Accounts receivable are measured at initial recognition at fair value, and are subsequently measured at amortized cost using the effective interest rate method. Accounts receivable, which are non-interest bearing, are stated at their nominal value. Appropriate allowances for estimated irrecoverable amounts are recognised in the statement of comprehensive income 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 an 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 amortized 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 The Group enters into derivative financial instruments to purchase sunflower seeds. Derivatives are initially recognised at fair value at the date the derivative contracts are entered into and subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. Embedded derivatives Derivatives embedded in non-derivative host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not remeasured at fair value through statement of comprehensive income. As of 31 December 2013, 2012 and 2011 there were no material derivative financial instruments that were recognised in these consolidated financial statements. Trade and other accounts payable Accounts payable are measured at initial recognition at fair value, and are subsequently measured at amortized 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 Group. All other leases are classified as operating leases. Assets held 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 statement of financial position 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 expenses are recognised directly to the statement of comprehensive income and are classified as finance costs. Rental income or expenses under operating leases are recognised in the consolidated statement of comprehensive income on a straight line basis over the term of the lease. 52 Myronivsky Hliboproduct Annual Report and Accounts 2013 3. Summary of significant accounting policies continued 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. Reclassifications and revisions Certain comparative information presented in the consolidated financial statements for the years ended 31 December 2012 and 2011 has been revised in order to achieve comparability with the presentation used in the consolidated financial statements for the year ended 31 December 2013. Such reclassifications and revisions were not significant to the Group financial statements. 4. Critical accounting judgements and key sources of estimation uncertainty In the application of the Group’s accounting policies, which are described in Note 3, management are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects both current and future periods. Critical judgements in applying accounting policies The following are the critical judgements, apart from those involving estimations (see below), that 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. Acquisitions of land lease rights During the year ended 31 December 2013, the Group acquired control over entities owning legal rights for operating leases of agricultural land plots. For each individual acquisition, the Group evaluated whether the acquisition constituted an asset acquisition or a business combination. In making this judgement, management considered whether the acquired entities are capable of being conducted and managed as a business for the purpose of providing returns, including whether the acquired entities possess other assets and workforce as inputs compared to normal industry requirements. As a result, the Group’s management concluded that land lease rights of USD 3,607 thousand and USD 22,257 thousand were acquired in assets acquisition and business combination transactions, respectively (Note 13). Revenue recognition In the normal course of business, the Group engages in sale and purchase transactions with the purpose of exchanging crops in various locations to fulfill the Group’s production requirements. In accordance with the Group’s accounting policy, revenue is not recognised with respect to the exchange transactions involving goods of similar nature and value. The Group management applies judgement to determine whether each particular transaction represents an exchange or a transaction that generates revenue. In making this judgement, management considers whether the underlying crops are of similar type and quality, as well as whether the time passed between the transfer and receipt of the underlying crops indicates that the substance of the transaction is an exchange of similar goods. The amount of exchange transaction involving goods of similar nature amounted to USD 81,808 thousand, 33,819 thousand, 4,256 thousand for the years ended 31 December 2013, 2012 and 2011. Recognition of inventories During the year ended 31 December 2013, 2012 and 2011, the Group acquired components for mixed fodder production from a local supplier under grain purchase financing arrangements. According to the contractual terms, legal ownership to the goods passed to the Group on physical delivery to the Group’s grain storage facilities, which is generally the date when inventories are recognised in the Group’s financial statements. However, based on the analysis of the nature of this arrangement, management applied judgement to determine the date on which control over these goods passed to the Group. In making this judgment, management considered the relevant significance of risk and rewards associated with ownership of grain, in particular date of transfer of physical damage risk, as well as commercial risks and benefits associated with ownership. Based on this assessment, management concluded that the Group assumed risk of physical damage and obtained commercial benefits prior to obtaining legal ownership over these inventories and as such, that these inventories should be recognised in the Group’s financial statements from the date when they were acquired by the supplier. Revaluation of property, plant and equipment As described in Notes 3 and 12, the Group applies the revaluation model to the measurement of grain storage facilities. At each reporting date, the Group carries out a review of the carrying amount of these assets to determine whether the carrying amount differs materially from fair value. The Group carries out such review by preparing a discounted cash flow analysis involving assumptions on projected revenues and costs, and a discount rate. Additionally, the Group considers economic stability and availability of transactions with similar assets in the market when determining whether to perform a fair value assessment in a given period. Based on the results of this review, the Group concluded that grain storage facilities should be revalued during the year ended 31 December 2012, only. 53 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes to the consolidated financial statements (continued) for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) 4. Critical accounting judgements and key sources of estimation uncertainty continued The Group appointed an independent valuer for revaluation of its grain storage facilities during the year ended 31 December 2012. Key assumptions used by the independent valuer in assessing the fair value of grain storage facilities using the replacement cost method were as follows: • present condition of particular assets was ranked from excellent to good; • changes in prices of assets and construction materials from the date of their acquisition/construction to the date of valuation were assessed as 1.15; and • other external and internal factors that might have effect on fair value of grain-storage facilities. Results of revaluation based on the replacement cost approach were compared with a revaluation performed using the income approach to check for impairment indicators of revalued assets, if any. Key sources of estimation uncertainty The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Fair value less costs to sell of biological assets and agricultural produce Biological assets are recorded at fair values less costs to sell. The Group estimates the fair values of biological assets based on the following key assumptions: • average meat output for broilers and livestock for meat production; • average productive life of breeders and cattle held for regeneration and milk production; • expected crops output; • projected orchards output; • estimated changes in future sales prices; • projected production costs and costs to sell; and • discount rate. During the year ended 31 December 2013 fair value of biological assets and agricultural produce was estimated using discount factors of 14.01% and 12.37% for non-current and current assets respectively. Although some of these assumptions are obtained from published market data, the majority of these assumptions are estimated based on the Group’s historical and projected results (Note 15). Useful lives of property, plant and equipment The estimation of the useful life of an item of property, plant and equipment is a matter of management estimate based upon experience with similar assets. In determining the useful life of an asset, management considers the expected usage, estimated technical obsolescence, physical wear and tear and the physical environment in which the asset is operated. Changes in any of these conditions or estimates may result in adjustments for future depreciation rates. VAT recoverable Note 14 describes long-term VAT recoverable accumulated by the Group on its capital expenditures and investments in working capital. The balance of VAT recoverable may be realised by the Group either through a cash refund from the State budget or by set off against VAT liabilities in future periods. Management classified the VAT recoverable balance as current or non-current based on expectations as to whether it will be realised within 12 months from the reporting date. In addition, management assessed whether an allowance for irrecoverable VAT needed to be created. In making this assessment, management considered past history of receiving VAT refunds from the State budget. For VAT recoverable expected to be set off against VAT liabilities in future periods, management based its estimates on detailed projections of expected excess of VAT output over VAT input in the normal course of the business. Vinnytsia complex commissioning As discussed in Notes 1 and 12, during 2013 the Group continued commissioning production facilities at Vinnytsia complex. During the period of production trials, when the facilities were not ready to be used in the manner intended by management, no depreciation was charged. After completion of the trial period, the Group commenced depreciation of production facilities when they were launched into operation. In making the assessment of the trial period length, management considered actual utilisation of production facilities as well as output achieved, for as long as these were significantly lower than the designed capacity of the equipment. 54 Myronivsky Hliboproduct Annual Report and Accounts 2013 5. Segment information The majority of the Group’s operations are located within Ukraine. Segment information is analysed on the basis of the types of goods supplied by the Group’s operating divisions. The Group’s reportable segments under IFRS 8 are therefore as follows: Poultry and related operations segment: • Sales of chicken meat. • Sales of sunflower oil. • Other poultry related sales. Grain growing operations segment: • Sales of Grain. Other agricultural operations segment: • Sales of meat processing products and other meat. • Other agricultural operations (sales of fruit, milk, feed grains and other). The accounting policies of the reportable segments are the same as the Group’s accounting policies described in Note 3. Sales between segments are carried out at market prices. The segment result represents operating profit under IFRS before unallocated corporate expenses. Unallocated corporate expenses include management remuneration, representative expenses, and expenses incurred in respect of the maintenance of office premises. This is the measure reported to the chief operating decision maker for the purposes of resource allocation and assessment of segment performance. As of 31 December and for the year then ended the Group’s segmental information was as follows: Year ended 31 December 2013 External sales Sales between business segments Total revenue Segment results Unallocated corporate expenses Other expenses, net1 Profit before tax Poultry and related operations Grain growing Other agricultural operations Eliminations Consolidated 1,201,100 49,853 133,264 194,764 161,715 5,643 – 1,496,079 – (250,260) 1,250,953 328,028 167,358 (250,260) 1,496,079 275,026 13,555 25,844 – 314,425 (42,589) (111,601) 160,235 Other information: Additions to property, plant and equipment2 Depreciation and amortisation expense3 Net change in fair value of biological assets and agricultural produce 171,102 83,442 25,636 27,930 25,521 (27,368) 7,956 6,909 15,366 – – – 206,988 115,872 13,634 Includes finance income, finance costs, foreign exchange loss (net) and other expenses (net). 1 2 Additions to property, plant and equipment in 2013 (Note 12) include unallocated additions in the amount of USD 4,115 thousand. 3 Depreciation and amortisation for the year ended 31 December 2013 does not include unallocated depreciation and amortisation in the amount of USD 3,142 thousand. Year ended 31 December 2012 External sales Sales between business segments Total revenue Segment results Unallocated corporate expenses Other expenses, net1 Profit before tax Poultry and related operations Grain growing Other agricultural operations Eliminations Consolidated 1,082,978 42,919 169,142 147,719 155,402 5,074 – 1,407,522 – (195,712) 1,125,897 316,861 160,476 (195,712) 1,407,522 318,537 92,139 3,494 – 414,170 (33,587) (61,879) 318,704 Other information: Additions to property, plant and equipment2 Depreciation and amortisation expense3 Net change in fair value of biological assets and agricultural produce 375,604 57,922 11,955 21,375 19,569 4,329 11,679 6,522 450 – – – 408,658 84,013 16,734 Includes finance income, finance costs, foreign exchange gain (net) and other expenses (net). 1 2 Additions to property, plant and equipment in 2012 (Note 12) include unallocated additions in the amount of USD 4,092 thousand. 3 Depreciation and amortisation for the year ended 31 December 2012 does not include unallocated depreciation and amortisation in the amount of USD 3,122 thousand. 55 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes to the consolidated financial statements (continued) for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) 5. Segment information continued Year ended 31 December 2011 External sales Sales between business segments Total revenue Segment results Unallocated corporate expenses Other expenses, net1 Profit before tax Poultry and related operations 978,871 36,381 Grain growing Other agricultural operations Eliminations Consolidated 103,739 117,831 146,480 5,203 – 1,229,090 – (159,415) 1,015,252 221,570 151,683 (159,415) 1,229,090 236,602 104,286 9,651 – 350,539 (29,795) (58,629) 262,115 Other information: Additions to property, plant and equipment2 Depreciation and amortisation expense3 Net change in fair value of biological assets and agricultural produce 309,072 53,879 2,665 23,079 16,422 17,322 7,598 6,742 1,301 – – – 339,749 77,043 21,288 Includes finance income, finance costs, foreign exchange gain (net) and other expenses (net). 1 2 Additions to property, plant and equipment in 2011 (Note 12) include unallocated additions in the amount of USD 2,527 thousand. 3 Depreciation and amortisation for the year ended 31 December 2011 does not include unallocated depreciation and amortisation in the amount of USD 3,298 thousand. The Group’s export sales to external customers by major product types were as follows during the years ended 31 December 2013, 2012 and 2011: Sunflower oil and related products Chicken meat and related products Grain Other agricultural segment products 2013 2012 2011 253,194 216,683 100,674 405 227,835 112,931 138,639 431 222,418 67,874 63,101 486 570,956 479,836 353,879 Export sales of sunflower oil and related products and export sales of grains are primarily made to global trading companies at CPT port terms. The major markets for the Group’s export sales of chicken meat are Kazakhstan and the Russian Federation as well as, to the lesser extent, other CIS countries, the Middle East and Central Asia, Africa and the EU. 6. Revenue Revenue for the years ended 31 December 2013, 2012 and 2011 was as follows: 2013 2012 2011 881,249 258,168 61,683 804,381 227,835 50,762 693,207 222,418 63,246 1,201,100 1,082,978 978,871 133,264 169,142 103,739 133,264 169,142 103,739 101,070 60,645 102,959 52,443 99,740 46,740 161,715 155,402 146,480 1,496,079 1,407,522 1,229,090 Poultry and related operations segment Chicken meat Sunflower oil and related products Other poultry related sales Grain growing operations segment Grain Other agricultural operations segment Other meat Other agricultural sales 56 Myronivsky Hliboproduct Annual Report and Accounts 2013 7. Cost of sales Cost of sales for the years ended 31 December 2013, 2012 and 2011 was as follows: Poultry and related operations Grain growing operations Other agricultural operations For the years ended 31 December 2013, 2012 and 2011 cost of sales comprised the following: Costs of raw materials and other inventory used Payroll and related expenses Depreciation and amortisation expense Other costs 2013 2012 2011 877,540 155,976 152,471 705,128 147,821 148,960 684,001 71,883 133,243 1,185,987 1,001,909 889,127 2013 2012 2011 797,239 187,493 104,619 96,636 700,410 151,538 74,870 75,091 620,385 131,840 66,675 70,227 1,185,987 1,001,909 889,127 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. 8. Selling, general and administrative expenses Selling, general and administrative expenses for the years ended 31 December 2013, 2012 and 2011 were as follows: Payroll and related expenses Services Fuel and other materials used Depreciation expense Advertising expense Representative costs and business trips Insurance expense Bank services and conversion fees Other 2013 2012 2011 52,137 25,561 14,991 14,395 12,276 4,096 1,937 480 4,742 46,414 20,738 13,646 12,265 12,691 8,641 1,594 474 4,022 40,391 24,381 12,433 13,666 2,415 8,330 1,919 486 2,426 130,615 120,485 106,447 Remuneration to the auditors, included in Services above, approximates to USD 1,025 thousand, USD 744 thousand and USD 832 thousand for the years ended 31 December 2013, 2012 and 2011, respectively. Such remuneration includes both audit and non-audit services, with the audit fees component approximating USD 550 thousand for each of the years ended 31 December 2013, 2012 and 2011. 9. VAT refunds and other 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. VAT refunds and other government grants recognised by the Group as income during the years ended 31 December 2013, 2012 and 2011 were as follows: VAT refunds Other government grants 2013 2012 2011 99,220 1,665 101,581 788 87,476 509 100,885 102,369 87,985 VAT refunds for agricultural industry According to the Tax Code of Ukraine issued in December 2010 and effective as of 1 January 2011 (“Tax Code”), companies that generated not less than 75% of gross revenues for the previous tax year from sales of own agricultural products are entitled to retain VAT on sales of agricultural products, net of VAT paid on purchases, for use in agricultural production. In accordance with the Tax Code, the VAT rate will be decreased from the currently effective 20% to 17% starting from 1 January 2015. The special VAT regime for the agricultural industry will be effective until 1 January 2018. 57 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes to the consolidated financial statements (continued) for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) 9. VAT refunds and other government grants income continued Included in VAT refunds for the years ended 31 December 2013, 2012 and 2011 were specific VAT subsidies for the production and sale of milk and live animals for further processing in the amount of USD 1,299 thousand, USD 1,426 thousand and USD 422 thousand, respectively. Other government grants Other government grants recognised as income during the years ended 31 December 2013, 2012 and 2011 mainly comprised subsidies related to crop growing. In accordance with the Law “On State Budget of Ukraine”, two companies of the Group received grants for the years ended 31 December 2013, 2012 and 2011 for the creation and cultivating of orchards, vines and berry fields. In addition to the government grants income recognised by the Group, the Group receives a grant to compensate agricultural producers for costs used to finance operations. Agricultural producers are entitled to the compensation of finance costs incurred on bank borrowings in accordance with the Law “On State Budget of Ukraine” during the years ended 31 December 2013, 2012 and 2011. The eligibility, application and tender procedures related to such grants are 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 2013, 2012 and 2011 comprised USD nil, USD nil, and USD 1,828 thousand, respectively (Note 10). 10. Finance costs Finance costs for the years ended 31 December 2013, 2012 and 2011 were as follows: Interest on corporate bonds Transaction costs related to corporate bonds Interest on bank borrowings Interest on obligations under finance leases Bank commissions and other charges Interest on financing arrangements for grain purchases Government grants as compensation for the finance costs of agricultural producers (Note 9) Total finance costs Less: Finance costs included in the cost of qualifying assets 2013 2012 2011 88,245 16,654 13,911 4,964 3,172 1,847 – 64,449 – 15,839 4,795 3,786 643 – 64,996 – 9,720 5,157 3,782 294 (1,828) 128,793 89,512 82,121 (19,018) (30,201) (16,203) 109,775 59,311 65,918 For qualifying assets, the weighted average capitalisation rate on funds borrowed generally during the year ended 31 December 2013 was 10.14% (2012: 8.10%, 2011: 9.55%). Interest on corporate bonds for the years ended 31 December 2013, 2012 and 2011 includes amortisation of premium and debt issue costs on bonds issued in the amounts of USD 9,003 thousand, USD 4,509 thousand and USD 4,124 thousand, respectively. 11. Income tax The majority of the Group’s operating entities are located in Ukraine, therefore the effective tax rate reconciliation is completed based on Ukrainian statutory rates and statutory rates of the Russian Federation for results generated by Voronezh Agro Holding. The net results of the Group companies incorporated in jurisdictions other than Ukraine were insignificant during the years ended 31 December 2013, 2012 and 2011. The majority of the Group companies that are involved in agricultural production pay the Fixed Agricultural Tax (the “FAT”) in accordance with the Tax Code. The FAT replaces the following taxes for agricultural producers: Corporate Income Tax, Land Tax, Special Water Consumption Duty, and Trade Patent. The FAT is calculated by local authorities and depends on the area and valuation of land occupied. This tax regime is valid indefinitely. FAT does not constitute an income tax, and as such, is recognised in the statement of comprehensive income in other operating expenses. During the year ended 31 December 2013, the Group’s companies that have the status of Corporate Income Tax (the “CIT”) payers in Ukraine were subject to income tax at a rate of 19% (for the year ended 31 December 2012: 21%; 1 January 2011: 1 April 2011: 25%, 1 April 2011: 31 December 2011: 23%). The Tax Code of Ukraine (Note 28) is introducing gradual decreases in income tax rates from 23% effective 1 April 2011, 21% effective 1 January 2012, 19% effective 1 January 2013, 18% effective 1 January 2014, 17% effective 1 January 2015, 16% effective 1 January 2016 as well as certain changes to the rules of income tax assessment starting from 1 April 2011. The deferred income tax assets and liabilities as of 31 December 2013, 2012 and 2011 were measured based on the tax rates expected to be applied to the period when the temporary differences are expected to reverse. 58 Myronivsky Hliboproduct Annual Report and Accounts 2013 11. Income tax continued The components of income tax (benefit)/expense were as follows for the years ended 31 December 2013, 2012 and 2011: Current income tax charge Deferred tax benefit Income tax (benefit)/expense 2013 2012 2011 9,157 (11,162) (2,005) 7,915 (127) 7,788 5,664 (2,904) 2,760 The reconciliation between profit before tax multiplied by the statutory tax rate and the tax expense for the years ended 31 December 2013, 2012 and 2011 was as follows: Profit before income tax Income tax expense calculated at rates effective during the year ended at respective jurisdictions Tax effect of: Income generated by FAT payers (exempt from income tax) Changes in tax rate and law Recognised deferred tax assets on property, plant and equipment Non-deductible expenses (by law) Expenses not deducted for tax purposes (policy choice) Income tax expense 2013 2012 2011 160,235 30,470 318,704 66,928 262,115 61,010 (44,068) 3 – 7,263 4,327 (82,443) – – 19,402 3,901 (77,043) – (6,792) 10,332 15,253 (2,005) 7,788 2,760 As of 31 December 2013, 2012 and 2011 the Group did not recognise deferred tax assets arising from temporary differences of USD 22,724 thousand, USD 18,576 thousand and USD 64,907 thousand, respectively, as the Group did not intend to deduct the relevant expenses for tax purposes in subsequent 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, based on current legislation. As of 31 December 2013, 2012 and 2011 deferred tax assets and liabilities comprised the following: Deferred tax assets arising from: Property, plant and equipment Other current liabilities Inventories Advances received and other payables Expenses deferred in tax books Total deferred tax assets Deferred tax liabilities arising from: Property, plant and equipment Inventories Prepayments to suppliers Total deferred tax liabilities Net deferred tax assets 2013 2012 2011 3,325 1,780 2,490 371 13,871 4,732 1,301 1,081 849 3,484 21,837 11,447 (7,792) (943) (123) (8,858) 12,979 (4,165) (2,138) (258) (6,561) 4,886 5,996 1,518 1,011 1,155 288 9,968 (2,987) (996) (397) (4,380) 5,588 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 statement of financial position as of 31 December 2013, 2012 and 2011: Deferred tax assets Deferred tax liabilities 2013 2012 2011 20,022 (7,043) 12,979 8,231 (3,345) 4,886 7,795 (2,207) 5,588 59 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes to the consolidated financial statements (continued) for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) 11. Income tax continued The movements in net deferred tax assets for the years ended 31 December 2013, 2012 and 2011 were as follows: Net deferred tax assets as of beginning of the year Deferred tax benefit Deferred tax liabilities arising on acquisition of subsidiaries (Note 2) Deferred tax on property, plant and equipment charged directly to other comprehensive income Translation difference Net deferred tax assets as of end of the year 2013 2011 2010 4,886 11,162 (3,069) – – 12,979 5,588 127 – (826) (3) 4,886 2,688 2,904 – – (4) 5,588 12. Property, plant and equipment The following table represents movements in property, plant and equipment for the year ended 31 December 2013: Cost or fair value: At 1 January 2013 Additions Disposals Transfers Acquired through business combination (Note 2) Translation difference Buildings and structures Grain storage facilities Land Machinery and equipment Utilities and infrastructure Vehicles and agricultural machinery Office furniture and equipment Construction in progress Total – 312 – – 453,870 50,767 (1,085) 95,604 20,074 152 9,727 66 49,756 9,536 – 3,602 15,080 118 434,105 41,160 (2,643) 155,851 76,151 20,907 (30) 35,224 265,287 39,450 (5,523) 254 18,534 525 (208) 559 399,690 1,697,393 211,103 (9,644) – 48,446 (155) (291,094) 2,088 9 754 4 11,672 (126) 46 – 1,429 – 60,870 223 At 31 December 2013 20,538 608,949 78,092 630,570 133,010 311,014 19,456 158,316 1,959,945 Accumulated depreciation and impairment: At 1 January 2013 Depreciation charge for the year Elimination upon disposal Translation difference At 31 December 2013 Net book value At 1 January 2013 – – – – – 66,750 24,944 (261) (4) 91,429 75 1,916 – (5) 139,043 43,675 (1,983) (5) 20,081 4,625 (20) (1) 119,542 37,009 (4,039) (31) 12,215 2,848 (168) – 1,986 180,730 24,685 152,481 14,895 – – – – – 357,706 115,017 (6,471) (46) 466,206 – 387,120 49,681 295,062 56,070 145,745 6,319 399,690 1,339,687 At 31 December 2013 20,538 517,520 76,106 449,840 108,325 158,533 4,561 158,316 1,493,739 The following table represents movements in property, plant and equipment for the year ended 31 December 2012: Cost or fair value: At 1 January 2012 Additions Disposals Transfers Revaluations Translation difference Buildings and structures Grain storage facilities Machinery and equipment Utilities and infrastructure Vehicles and agricultural machinery Office furniture and equipment Construction in progress Total 293,998 61,598 (1,293) 99,744 – (177) 43,912 – – 4,721 1,151 (28) 348,916 25,487 (2,222) 62,339 – (415) 58,726 7,204 (147) 10,495 – (127) 215,188 53,341 (4,352) 1,445 – (335) 17,876 1,383 (947) 343 – (121) 315,380 1,293,996 412,750 263,737 (8,979) (18) – (179,087) 1,151 – (1,525) (322) At 31 December 2012 453,870 49,756 434,105 76,151 265,287 18,534 399,690 1,697,393 Accumulated depreciation and impairment: At 1 January 2012 Depreciation charge for the year Elimination upon disposal Eliminated upon revaluations Translation difference At 31 December 2012 Net book value At 1 January 2012 51,435 16,365 (938) – (112) 66,750 2,373 1,584 – (4,015) 133 109,983 31,039 (1,731) – (248) 16,473 3,750 (75) – (67) 94,868 28,239 (3,380) – (185) 9,941 3,195 (865) – (56) 75 139,043 20,081 119,542 12,215 – – – – – – 285,073 84,172 (6,989) (4,015) (535) 357,706 242,563 41,539 238,933 42,253 120,320 7,935 315,380 1,008,923 At 31 December 2012 387,120 49,681 295,062 56,070 145,745 6,319 399,690 1,339,687 60 Myronivsky Hliboproduct Annual Report and Accounts 2013 12. Property, plant and equipment continued The following table represents movements in property, plant and equipment for the year ended 31 December 2011: Cost or fair value: At 1 January 2011 Additions Disposals Transfers Translation difference Buildings and structures Grain storage facilities Machinery and equipment Utilities and infrastructure Vehicles and agricultural machinery Office furniture and equipment Construction in progress Total 259,799 27,030 (247) 8,361 (945) 32,589 7,728 – 3,720 (125) 274,024 45,656 (743) 31,011 (1,032) 52,440 5,530 (4) 950 (190) 190,943 29,285 (2,083) (2,263) (694) 16,046 1,786 (121) 223 (58) 131,551 225,261 – (42,002) 570 957,392 342,276 (3,198) – (2,474) At 31 December 2011 293,998 43,912 348,916 58,726 215,188 17,876 315,380 1,293,996 Accumulated depreciation and impairment: At 1 January 2011 Depreciation charge for the year Elimination upon disposal Translation difference At 31 December 2011 Net book value At 1 January 2011 37,189 14,517 (128) (143) 51,435 1,046 1,331 – (4) 83,171 27,602 (473) (317) 13,198 3,325 (1) (49) 71,068 25,323 (1,253) (270) 2,373 109,983 16,473 94,868 6,755 3,322 (109) (27) 9,941 – – – – – 212,427 75,420 (1,964) (810) 285,073 222,610 31,543 190,853 39,242 119,875 9,291 131,551 744,965 At 31 December 2011 242,563 41,539 238,933 42,253 120,320 7,935 315,380 1,008,923 During 2013 the Group continued commissioning production facilities at the Vinnytsia complex. The facilities of Vinnytsia complex remaining under construction as of 31 December 2013 will be commissioned during 2014, as scheduled. As of 31 December 2013, included within construction in progress were prepayments for property, plant and equipment in the amount of US$9,407 thousand (2012: US$24,796 thousand, 2011: US$46,086 thousand). As of 31 December 2013, included within property, plant and equipment were fully depreciated assets with the original cost of US$56,817 thousand (2012: US$34,722 thousand, 2011: US$19,647 thousand). As of 31 December 2013, certain of the Group’s machinery and equipment with the carrying amount of USD nil (2012: USD nil, 2011: US$4,648 thousand) were pledged as collateral to secure its bank borrowings (Note 22). As of 31 December 2013, 2012 and 2011 the net carrying amount of property, plant and equipment, represented by vehicles and agricultural machinery, held under finance lease agreements was US$76,053 thousand, US$69,059 thousand and US$73,798 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, there were no indicators of impairment as of 31 December 2013, 2012 and 2011. Revaluation of grain storage facilities During the year ended 31 December 2012, the Group engaged independent appraisers to revalue its grain storage facilities. The effective date of revaluation was 31 October 2012. The valuation, which conformed to the International Valuation Standards, was determined using replacement cost method by reference to observable prices in an active market adjusted based on age and condition of the facilities. No revaluation of grain storage facilities was performed during the years ended 31 December 2013 and 2011 as, based on management’s assessment, the fair value of grain storage facilities as of 31 December 2013 and 2011 did not materially differ from their carrying amount. If the grain storage facilities were carried at cost and depreciated on a straight line basis based on their original depreciation rate, their net book value as of 31 December 2013 would be US$50,662 thousand (2012: US$24,102 thousand, 2011: US$20,514 thousand). 61 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes to the consolidated financial statements (continued) for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) 13. Land lease rights Land lease rights represent rights for operating leases of agricultural land plots. The following table represents the movements in land lease rights for the years ended 31 December: Cost: As of 1 January Additions Acquired through business combinations (Note 2) Translation difference As of 31 December Accumulated amortisation: As of 1 January Amortisation charge for the year Translation difference As of 31 December Net book value: As of 1 January As of 31 December 2013 2012 2011 31,634 3,607 22,257 – 30,332 1,314 – (12) 24,439 5,995 – (102) 57,498 31,634 30,332 4,940 3,721 – 8,661 3,105 1,837 (2) 4,940 1,223 1,891 (9) 3,105 26,694 27,227 23,216 48,837 26,694 27,227 14. Long-term VAT recoverable, net As of 31 December 2013, 2012 and 2011 the balance of long-term VAT recoverable was accumulated on continuing capital expenditures. Management expects that these balances will not be recovered within 12 months from the reporting date. As of 31 December 2013, an allowance for estimated irrecoverable long-term VAT of USD 338 thousand was recorded by the Group (2012: USD 7,754 thousand, 2011: USD 4,938 thousand). 15. Biological assets The balances of non-current biological assets were as follows as of 31 December 2013, 2012 and 2011: Orchards, hectare Milk cows, boars, sows, units 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 Thousand units Carrying amount Thousand units Carrying amount Thousand units Carrying amount 2013 2012 2011 1.64 22.3 5.3 38,893 26,642 1,230 66,765 3,677 3,677 70,442 1.64 21.6 7.1 30,018 18,547 994 49,559 4,136 4,136 53,695 1.64 14.1 5.1 27,978 14,803 906 43,687 2,640 2,640 46,327 The balances of current biological assets were as follows as of 31 December 2013, 2012 and 2011: Thousand units Carrying amount Thousand units Carrying amount Thousand units Carrying amount 2013 2012 2011 Breeders held for hatchery eggs production, units 3,121 65,907 2,634 54,273 2,384 39,345 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 34,438 26,570 76 49 65,907 73,267 8,841 45,745 5,637 283 133,773 199,680 26,223 20,587 75 45 54,273 51,051 6,628 39,590 7,204 530 105,003 159,276 25,273 20,472 71 56 39,345 55,411 5,915 23,876 10,654 789 96,645 135,990 Other current consumable biological assets include geese and other livestock. 62 Myronivsky Hliboproduct Annual Report and Accounts 2013 15. Biological assets continued The following table represents movements in biological assets for the years ended 31 December 2013, 2012 and 2011: Breeders held for hatchery eggs Crops in fields Orchards production Broiler poultry Milk cows, boars, sows Non-current cattle and pigs As of 1 January 2011 Costs incurred Gains/(losses) arising from change in fair value of biological assets less costs to sell Transfer to consumable biological assets Transfer to bearing non-current biological assets Decrease due to sale Decrease due to harvest Translation difference 17,840 210,683 25,768 20,976 39,530 67,498 43,287 423,599 13,997 9,794 69,913 – – – (274,383) (177) (5,669) – – – (12,994) (103) 26,390 (76,889) – – (17,045) (139) 192,844 76,889 – – (681,022) (186) 3,000 (1,325) 4,071 (198) (14,484) (52) As of 31 December 2011 23,876 27,978 39,345 55,411 14,803 Costs incurred Gains/(losses) arising from change in fair value of biological assets less costs to sell Transfer to consumable biological assets Transfer to bearing non-current biological assets Decrease due to sale Decrease due to harvest Translation difference 236,222 20,270 79,783 475,752 10,784 61,030 – – – (281,529) (9) (4,410) – – – (13,805) (15) 35,496 (87,496) – – (12,836) (19) 249,694 87,496 – – (817,281) (21) 2,288 – 9,559 (599) (18,279) (9) As of 31 December 2012 39,590 30,018 54,273 51,051 18,547 Costs incurred Acquired through business combination (Note 2) Gains/(losses) arising from change in fair value of biological assets less costs to sell Transfer to consumable biological assets Transfer to bearing non-current biological assets Decrease due to sale Decrease due to harvest Translation difference 304,553 9,187 23,944 – 95,123 – 602,985 – 18,218 – 11,625 – – – (319,437) 227 11,815 – – – (26,884) – 46,988 (110,442) – – (20,035) – 219,076 110,442 – – (910,287) – 3,505 (48) 19,019 (1,900) (30,699) – As of 31 December 2013 45,745 38,893 65,907 73,267 26,642 2,809 913 (941) (285) 1,269 (12) (1,104) (9) 2,640 1,320 (1,655) (176) 2,498 (13) (477) (1) 4,136 1,602 – (2,369) (446) 2,502 (195) (1,553) – 3,677 Cattle, pigs 9,119 22,122 12,072 1,610 (5,340) (11,291) (17,601) (37) 10,654 31,270 1,854 176 (12,057) (12,303) (12,388) (2) 7,204 40,181 – 2,877 493 (21,520) (11,904) (11,694) – 5,637 Biological assets of the Group are measured at fair value within level 3 of the fair value hierarchy, except for cattle and pigs that can be measured based on market prices of livestock of similar age, breed and genetic merit, which is measured at fair value within level 1 of the fair value hierarchy. There were no transfers between any levels during the year. 63 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes to the consolidated financial statements (continued) for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) 15. Biological assets continued The following unobservable inputs were used to measure the biological assets: Description Fair value as at 31 December 2013 Valuation technique(s) Crops in fields 45,745 Discounted cash flows Unobservable inputs Range of unobservable inputs (average) Relationship of unobservable inputs to fair value Crops yield – tonnes 3.0–5.3 (4.7) per hectare Crops price Discount rate per tonne 12.37% USD 200 – 430 (263) The higher the market price, The higher the crops yield, the higher the fair value the higher the fair value The higher the discount rate, the lower the fair value The higher the fruit yield, the higher the fair value Orchards 38,893 Discounted cash flows Fruit yield – tonnes per  hectare 5.7–39.2 (24.5) per year Fruit price USD 623 – 2,206 (840) The higher the market price, Discount rate per tonne 14.01% 65,907 Discounted cash flows Number of hatchery eggs produced by one breeder 165–175 the higher the fair value The higher the discount rate, the lower the fair value The higher the number, the higher the fair value Breeders held for hatchery eggs production Hatchery egg price USD 0.32 – 0.36 (0.33) The higher the market price, Discount rate Average weight of one broiler – kg per egg 12.37% 2.26 the higher the fair value The higher the discount rate, the lower the fair value The higher the weight, the higher the fair value Poultry meat price USD 1.47 – 1.60 (1.54) The higher the market price, Broiler poultry 73,267 Cash flows Milk cows 24,111 Discounted cash flows Milk yield – litre per cow 10.96 – 18.79 (15.05) per day per kg the higher the fair value The higher the milk yield, the higher the fair value Weight of the cow – kg 475 – 532 (492) The higher the weight, the per cow Milk price higher the fair value USD 0.40 – 0.50 (0.49) The higher the market price, per litre the higher the fair value Meat price USD 1.2 – 1.32 (1.25) The higher the market price, Discount rate per kg 14.01% the higher the fair value The higher the discount rate, the lower the fair value If the above unobservable inputs to the valuation model were 10% higher/lower while all the other variables were held constant, the carrying amount of the current and non-current biological assets would decrease/increase by USD 39,935 thousand and USD 24,452 thousand respectively. 64 Myronivsky Hliboproduct Annual Report and Accounts 2013 16. Inventories The balances of inventories were as follows as of 31 December 2013, 2012 and 2011: Components for mixed fodder production Work in progress Other raw materials Spare parts Sunflower oil Packaging materials Mixed fodder Other inventories 2013 2012 2011 121,291 54,365 32,078 16,593 10,785 4,189 3,726 2,834 175,013 44,043 25,023 10,999 9,662 4,533 3,802 1,180 111,220 35,705 19,037 5,373 3,077 4,057 2,822 949 245,861 274,255 182,240 As of 31 December 2013, 2012 and 2011, work in progress in the amount of USD 54,365 thousand, USD 44,043 thousand and USD 35,705 thousand comprised expenses incurred in cultivating fields to be planted in the years 2014, 2013 and 2012, respectively. As of 31 December 2013, components for mixed fodder production with a carrying amount of USD nil (2012: USD 62,500 thousand, 2011: USD 45,491 thousand) were pledged as collateral to secure bank borrowings (Note 22). 17. Agricultural produce The balances of agricultural produce were as follows as of 31 December 2013, 2012 and 2011: Chicken meat Other meat Grain Fruits, vegetables and other crops Thousand tonnes Carrying amount Thousand tonnes Carrying amount Thousand tonnes Carrying amount 2013 2012 2011 20,440 N/A1 776 N/A1 40,035 3,724 110,233 18,729 172,721 14,715 N/A1 631 N/A1 26,206 4,059 121,507 14,356 166,128 5,561 N/A1 841 N/A1 11,716 6,380 131,764 19,162 169,022 1 Due to the diverse composition of noted produce unit of measurement is not applicable. The fair value of agricultural produce was estimated based on market price as at date of harvest and is within level 1 of the fair value hierarchy. 18. Taxes recoverable and prepaid, net Taxes recoverable and prepaid were as follows as of 31 December 2013, 2012 and 2011: VAT recoverable Miscellaneous taxes prepaid Less: allowance for irrecoverable VAT 19. Trade accounts receivable, net The balances of trade accounts receivable were as follows as of 31 December 2013, 2012 and 2011: Agricultural operations Due from related parties (Note 27) Sunflower oil sales Less: allowance for irrecoverable amounts 2013 2012 2011 223,037 6,096 (19,984) 213,944 5,228 (18,864) 149,853 1,350 (14,028) 209,149 200,308 137,175 2013 2012 2011 69,207 1,018 2,061 (1,374) 59,177 10,359 4,237 (1,157) 53,750 10,895 1,934 (785) 70,912 72,616 65,794 The allowance for irrecoverable amounts is estimated at the level of 25% of trade accounts receivable on sales of poultry meat which are over 30 days past due (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. 65 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes to the consolidated financial statements (continued) for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) 19. Trade accounts receivable, net continued The Group also performs specific analysis of trade accounts receivable due from individual customers to determine whether any further adjustments are required to the allowance for irrecoverable amounts assessed on the percentages disclosed above. Based on the results of such a review, as of 31 December 2013 the Group determined that trade accounts receivable on sales of poultry meat of USD 445 thousand (2012: USD 456 thousand, 2011: USD 750 thousand) were overdue but do not require allowance for irrecoverable amounts. For the years ended 31 December 2013, 2012 and 2011 the Group has not recorded any impairment of receivables relating to amounts owed by related parties as management is certain about their recoverability. The ageing of trade accounts receivable that were impaired as of 31 December 2013, 2012 and 2011 was as follows: Trade accounts receivable on sales of poultry meat: Over 30 but less than 270 days Over 270 days Trade accounts receivable on other sales: Over 60 but less than 360 days Over 360 days Trade accounts receivable Allowance for irrecoverable amounts 2013 2012 2011 2013 2012 2011 – 647 647 308 649 957 915 125 1,040 359 434 793 372 344 716 199 298 497 – (647) (647) (78) (649) (727) (457) (125) (582) (141) (434) (575) 1,604 1,833 1,213 (1,374) (1,157) (93) (344) (437) (50) (298) (348) (785) 20. Cash and cash equivalents The balances of cash and cash equivalents were as follows as of 31 December 2013, 2012 and 2011: Cash in hand and with banks USD short-term deposits with banks UAH short-term deposits with banks RUB short-term deposits with banks 2013 2012 2011 98,880 60,170 11,885 1,535 41,027 45,000 8,758 – 47,119 37,000 10,639 – 172,470 94,785 94,758 During the year ended 31 December 2013, UAH, RUB and USD denominated short-term deposits earned an effective interest rate of 13.32%, 5.73% and 5.10%, respectively (2012: 18.00% and 6.42%, respectively, 2011: 5.29% and 5.60%). All cash and cash equivalents are held within reputable foreign and Ukrainian banks. 21. Shareholders’ equity Share capital As of 31 December the authorised, issued and fully paid share capital of MHP S.A. comprised the following number of shares: Number of shares authorised for issue Number of shares issued and fully paid Number of shares outstanding 2013 2012 2011 159,250,000 110,770,000 105,666,888 159,250,000 110,770,000 105,666,888 159,250,000 110,770,000 107,854,856 The authorised share capital as of 31 December 2013, 2012 and 2011 was EUR 318,500 thousand represented by 159,250,000 shares with par value of EUR 2 each. All shares have equal voting rights and rights to receive dividends, which are payable at the discretion of the Group. Treasury shares During the year ended 31 December 2012 the Group acquired, under the share buy-back programme, 3,445,000 shares for cash consideration of USD 41,465 thousand. In December 2012 the Group transferred 1,257,032 shares in exchange for a 10% share in NPF Urozhay, the Group’s subsidiary. The excess of the fair value of shares transferred (that approximated the carrying value of the non- controlling interest at the transaction date) over the carrying value of the shares bought back, in the amount of USD 2,417 thousand was recognised as an adjustment to additional paid-in capital (Note 2). 66 Myronivsky Hliboproduct Annual Report and Accounts 2013 22. Bank borrowings The following table summarises bank borrowings and credit lines outstanding as of 31 December 2013, 2012 and 2011: Bank Foreign banks Foreign banks Ukrainian banks Total bank borrowings Less: Short-term bank borrowings and current portion of long-term bank borrowings Total long-term bank borrowings 1 WAIR represents the weighted average interest rate on outstanding borrowings. USD 4.80% Currency WAIR1 USD’ 000 WAIR1 USD’ 000 WAIR1 USD’ 000 2013 2012 2011 USD EUR 6.05% 88,414 1.81% 164,250 5.14% 190,976 2.15% 162,675 4.39% 3.13% 252,664 38,000 38,000 290,664 (98,367) 192,297 353,651 5.43% 147,490 5.39% 147,490 501,141 (301,658) 199,483 95,979 97,009 192,988 86,500 86,500 279,488 (170,380) 109,108 The Group’s borrowings are drawn from various banks as term loans, credit line facilities and overdrafts. Repayment terms of principal amounts of bank borrowings vary from monthly repayment to repayment on maturity depending on the agreement reached with each bank. Interest on the borrowings drawn with the 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 2013, 2012 and 2011: Credit lines Term loans 2013 2012 2011 38,000 252,664 232,490 268,651 146,500 132,988 290,664 501,141 279,488 The following table summarises fixed and floating interest rate bank loans and credit lines held by the Group as of 31 December 2013, 2012 and 2011: Floating interest rate Fixed interest rate 2013 2012 2011 290,664 – 501,141 – 276,712 2,776 290,664 501,141 279,488 Bank borrowings and credit lines outstanding as of 31 December 2013, 2012 and 2011 were repayable as follows: Within one year In the second year In the third to fifth year inclusive After five years 2013 2012 2011 98,367 58,479 125,390 8,428 301,658 66,840 115,316 17,327 170,380 30,951 60,871 17,286 290,664 501,141 279,488 As of 31 December 2013, the Group had available undrawn facilities of USD 287,844 thousand (2012: USD 133,981 thousand, 2011: USD 251,315 thousand). These undrawn facilities expire during the period from January 2014 until June 2020. The Group, as well as particular subsidiaries of the Group, has to comply with certain covenants imposed by the banks providing the loans. The main covenants which are to be complied with by the Group are as follows: total equity to total assets ratio, net debt to EBITDA ratio, EBITDA to interest expenses ratio and current ratio. The Group subsidiaries are also required to obtain approval from lenders regarding the property to be used as collateral. During the years ended 31 December 2013, 2012 and 2011 the Group has complied with all covenants imposed by banks providing the loans. As of 31 December 2013, the Group had borrowings of USD nil (2012: USD 50,000 thousand, 2011: USD 52,191 thousand) that were secured. These borrowings were secured by property, plant and equipment with a carrying amount of USD nil (2012: USD nil, 2011: USD 4,648 thousand) (Note 12) and inventories with a carrying amount of USD nil (2012: USD 62,500 thousand, 2011: USD 45,491 thousand) (Note 16). 67 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes to the consolidated financial statements (continued) for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) 22. Bank borrowings continued As of 31 December 2013, 2012 and 2011 accrued interest on bank borrowings were USD 1,668 thousand, USD 3,969 thousand and USD 1,916 thousand, respectively. 23. Bonds issued Bonds issued and outstanding as of 31 December 2013, 2012 and 2011 were as follows: 8.25% Senior Notes due in 2020 10.25% Senior Notes due in 2015 Unamortised premium on bonds issued Unamortised debt issuance cost 2013 2012 2011 750,000 234,767 1,426 (34,465) – 584,767 2,801 (16,053) – 584,767 3,755 (21,522) 951,728 571,515 567,000 As of 31 December 2013, 2012 and 2011 accrued interest on bonds issued were USD 19,103 thousand, USD 10,156 thousand and USD 10,157 thousand, respectively. 8.25% Senior Notes On 2 April 2013, MHP S.A. issued USD 750,000 thousand 8.25% Senior Notes due in 2020 at an issue price of 100% of the principal amount. USD 350,000 thousand out of the issued USD 750,000 thousand 8.25% Senior Notes were used to facilitate the early redemption and exchange of its existed 10.25% Senior Notes due in 2015. The early redemption of 10.25% Senior Notes due in 2015 from the issue of 8.25% Senior Notes due in 2020, which were placed with the same holders resulted in a change in the net present value of the future cash flows of less than 10%, and thus was accounted for as modification and all the related expenses, including consent fees, were capitalised and will be amortised over the maturity period of the 8.25% Senior Notes due in 2020 in the amount of USD 28,293 thousand. Other related expenses, including consent fees, in the amount of USD 16,654 thousand were expensed as incurred. The Senior Notes are jointly and severally guaranteed on a senior basis by MHP, Druzhba Narodiv, Druzhba Narodiv Nova, Myronivsky Zavod po Vygotovlennyu Krup i Kombikormiv, Oril-Leader, Katerynopilsky Elevator, Ptahofabryka Peremoga Nova, Zernoproduct, Myronivska Ptahofabryka, Starynska Ptahofabryka, Ptahofabryka Shahtarska Nova, Agrofort, NPF Urozhay, Vinnytska Ptahofabryka. 10.25% Senior Notes In November 2006, MHP S.A. issued USD 250,000 thousand 10.25% Senior Notes, due in November 2011, at par. On 29 April 2010, MHP S.A. issued USD 330,000 thousand 10.25% Senior Notes due in 2015 at an issue price of 101.452% of principal amount. As of 13 May 2010 MHP S.A. exchanged 96.01% (USD 240,033 thousand) of USD 250,000 thousand of the existing 10.25% Senior Notes due in 2011 for the new Notes due in 2015. As a result of the exchange, new Senior Notes were issued for the total par value of USD 254,767 thousand. The Senior Notes are jointly and severally guaranteed on a senior basis by MHP, Druzhba Narodiv, Druzhba Narodiv Nova, Myronivsky Zavod po Vygotovlennyu Krup i Kombikormiv, Oril-Leader, Katerynopilsky Elevator, Ptahofabryka Peremoga Nova, Zernoproduct, Myronivska Ptahofabryka, Starynska Ptahofabryka, Ptahofabryka Shahtarska Nova, Agrofort, NPF Urozhay and Vinnytska Ptahofabryka. Interest on the Senior Notes is payable semi-annually in arrears. These Senior Notes are subject to certain restrictive covenants including, but not limited to, limitations on the incurrence of additional indebtedness in excess of Net Debt to EBITDA ratio as defined by indebtedness agreement, restrictions on mergers or consolidations, limitations on liens and dispositions of assets and limitations on transactions with affiliates. 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 a 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. During the years ended 31 December 2013, 2012 and 2011 the Group has complied with all covenants defined by indebtedness agreement. The weighted average effective interest rate on the Senior Notes is 9.9% per annum for the year ended 31 December 2013 and 11.7% per annum for the years ended 31 December 2012 and 2011. The Notes are listed on London Stock Exchange. 68 Myronivsky Hliboproduct Annual Report and Accounts 2013 24. Finance lease obligations Long-term finance lease obligations represent amounts due under agreements for the leasing of trucks, agricultural machinery and equipment with Ukrainian and foreign companies. As of 31 December 2013, the weighted average interest rates on finance lease obligations were 6.85% and 7.90% for finance lease obligations denominated in EUR and USD, respectively (2012: 7.28% and 7.69%, 2011: 8.88% and 7.68%). The following are the minimum lease payments and present value of minimum lease payments under the finance lease agreements as of 31 December 2013, 2012 and 2011: Payable within one year Payable in the second year Payable in the third to fifth year inclusive Less: Future finance charges Minimum lease payments Present value of minimum lease payments 2013 2012 2011 2013 2012 2011 23,748 19,323 23,440 25,704 20,130 30,488 22,736 16,391 19,145 20,484 17,202 22,168 21,491 17,814 28,142 19,267 14,706 17,852 66,511 76,322 58,272 59,854 67,447 51,825 (6,657) (8,875) (6,447) – – – Present value of finance lease obligations 59,854 67,447 51,825 59,854 67,447 51,825 Less: Current portion Finance lease obligations, long-term portion 25. Trade accounts payable Trade accounts payable were as follows as of 31 December 2013, 2012 and 2011: Trade accounts payable to third parties Payables due to related parties (Note 27) (20,484) (21,492) (19,267) 39,370 45,955 32,558 2013 2012 2011 101,979 11 68,918 52 52,655 34 101,990 68,970 52,689 As of 31 December 2013 trade accounts payable included liabilities that bear a floating rate of interest under grain purchase financing arrangements in the amount of USD 60,486 thousand and accrued interest of USD 593 thousand (2012: USD 29,362 thousand and accrued interest of USD 294 thousand, 2011: USD 11,184 thousand and accrued interest of USD 126 thousand). 26. Other current liabilities Other current liabilities were as follows as of 31 December 2013, 2012 and 2011: Accrued payroll and related taxes Advances from and other payables due to related parties (Note 27) Advances from and other payables due to third parties Amounts payable for property, plant and equipment Other payables 2013 2012 2011 36,097 20,974 9,685 7,112 12,955 34,285 200 7,820 11,415 9,182 32,886 200 1,921 10,236 8,026 86,823 62,902 53,269 69 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes to the consolidated financial statements (continued) for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) 27. Related party balances and transactions For the purposes of these financial statements, parties are considered to be related if one party controls, is controlled by, or is under common control with the other party, or exercises 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. Transactions with related parties under common control The Group enters into transactions with related parties that are the companies under common control of the Principal Shareholder of the Group (Note 1) in the ordinary course of business for the purchase and sale of goods and services and in relation to the provision of financing arrangements. Terms and conditions of sales to related parties are determined based on arrangements specific to each contract or transaction. Management believes that amounts receivable due from related parties do not require an 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 transactions with the related parties during the years ended 31 December 2013, 2012 and 2011 were as follows: Sales of goods to related parties Sales of services to related parties Purchases from related parties 2013 8,103 67 228 2012 9,058 107 544 2011 10,649 89 127 The balances owed to and due from related parties were as follows as of 31 December 2013, 2012 and 2011: Trade accounts receivable (Note 19) Payables due to related parties (Note 25) Payables for dividends declared, included in Other current liabilities (Note 26) Advances received (Note 26) Advances and finance aid receivable 2013 2012 2011 1,018 11 20,974 – 115 10,359 52 – 200 4,935 10,895 34 – 200 2,000 The amount of payables includes payables for dividends related to the liability to the Company’s major shareholder for the declared dividends (Note 29). The Board of Directors of MHP S.A. also acknowledged the consent of WTI Trading Limited (the Company’s major shareholder) to be paid later than on the declared dividend payment date (but not later than 1 March 2014), with no interest accrued on the amount of dividend paid later. Compensation of key management personnel Total compensation of the Group’s key management personnel included primarily in selling, general and administrative expenses in the accompanying consolidated statements of comprehensive income amounted to USD 12,969 thousand, USD 11,686 thousand and USD 8,741 thousand for the years ended 31 December 2013, 2012 and 2011, respectively. Compensation of key management personnel consists of contractual salary and performance bonuses. Total compensation of the Group’s non-executive directors, which consists of contractual salary, amounted to USD 550 thousand, USD 407 thousand and USD 380 thousand in 2013, 2012 and 2011, respectively. Key management personnel totalled 42, 40 and 38 individuals as of 31 December 2013, 2012 and 2011, respectively, including four independent directors as of 31 December 2013, 2012 and 2011. Other transactions with related parties In December 2012 the Group increased its effective ownership interest in NPF Urozhay to 99.9% through the acquisition of a non- controlling interest previously held by one of its key management personnel in exchange for 1,257,032 treasury shares held by the Group (Note 2 and 21). 70 Myronivsky Hliboproduct Annual Report and Accounts 2013 28. Contingencies and contractual commitments Political crisis Since November 2013, Ukraine has been in a political and economic turmoil. The Ukrainian Hryvnia devalued against major world currencies and significant external financing is required to maintain stability of the economy. The National Bank of Ukraine, among other measures, has imposed temporary restrictions on processing of client payments by banks and on the purchase of foreign currency on the inter-bank market. In February 2014, Ukraine’s sovereign rating has been downgraded to CCC with a negative outlook. In February 2014, the Parliament of Ukraine voted for reinstatement of the 2004 Constitution and dismissal of the incumbent President. New presidential elections are scheduled for May 2014 and a transitional government has been formed. In March 2014, Crimea, an autonomous region of Ukraine, was effectively annexed by the Russian Federation. The further political developments are currently unpredictable and may adversely affect the Ukrainian economy. As of 31 December 2013 and for the year then ended, the Group’s assets located in the Crimea region amounted to 5% of the Group’s total assets generating in average 9% of operating profit per annum. As of the date of this report, operation of the Group’s facilities throughout Ukraine, including those in Crimea, continued to operate normally through the first quarter of 2014. 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 Ukrainian laws and regulations can lead to the imposition of severe penalties and fines. Future tax examinations could raise issues or assessments which are contrary to the Group companies’ tax filings. Such assessments could include taxes, penalties and fines, 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. In December 2010 the Tax Code of Ukraine was officially published. In its entirety, the Tax Code of Ukraine became effective on 1 January 2011, while some of its provisions took effect later (such as, Section III dealing with corporate income tax, which came into force from 1 April 2011). Apart from changes in CIT rates from 1 April 2011 and planned abandonment of VAT refunds for the agricultural industry from 1 January 2018, as discussed in Notes 11 and 9 respectively, the Tax Code also changed various other taxation rules. Starting from 1 September 2013, new detailed transfer pricing rules were introduced into the Ukrainian legislation. These rules introduce additional reporting and documentation requirements to certain types of transactions (including, but not limited to, transactions with related parties). The new legislation allows the tax authorities to impose additional tax liabilities in respect of these transactions if they consider the transactions to be priced not at arm’s length. As the practice of implementation of the new transfer pricing rules has not yet developed and wording of some clauses of the rules is unclear, the impact of challenge of the Group’s transfer pricing positions by the tax authorities cannot be reliably estimated. Legal issues In the ordinary course of business, the Group is subject to legal actions and complaints. As of 31 December 2013, the Group companies had ongoing litigations with the tax authorities related to disallowance of certain amounts of VAT refunds and deductible expenses claimed by the Group. According to the assessment performed by the management of the Group on a case by case basis the maximum exposure of the Group to such risks as of 31 December 2013 amounted to USD 32,182 thousand. Out of this amount, USD 31,613 thousand relates to cases where court hearings have taken place and where the court in either the first or second instance has already ruled in favour of the Group. Based on past history of court resolutions of similar lawsuits Management believes that possible exposure relating to these court cases amounts to approximately USD 569 thousand as of 31 December 2013 (2012: USD 1,196 thousand, 2011: USD 2,000 thousand). Contractual commitments on the purchase of property, plant and equipment During the years ended 31 December 2013, 2012 and 2011, 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 2013, purchase commitments on such contracts were primarily related to construction of the Vinnytsia poultry complex and amounted to USD 6,993 thousand (2012: USD 14,689 thousand, 2011: USD 80,168 thousand). 71 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes to the consolidated financial statements (continued) for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) 28. Contingencies and contractual commitments continued Commitments on land operating leases The Group has the following contractual obligations in respect of land operating leases as of 31 December 2013, 2012 and 2011: Within one year In the second to the fifth year inclusive Thereafter 2013 2012 2011 25,913 81,871 80,787 22,011 74,288 79,551 12,480 41,457 64,713 188,571 175,850 118,650 The increase in contractual obligations under land operating leases was attributable to higher rates, introduced by the Ukrainian Government effective from January 2012, used to determine the amount of such obligations. Ukrainian legislation provides for a ban on sales of agricultural land plots until 1 January 2016. There are significant uncertainties as to the subsequent extension of the ban. The current legislation has resulted in the Group holding land lease rights, rather than the land itself. 29. Dividends On 4 March 2013 the Company announced that the Board of Directors approved a payment of dividend of US$1.13 per share, equivalent to US$120 million. On 16 May 2013 the Board of Directors approved a payment date of dividends on 28 May 2013 to shareholders of record on 22 May 2013. The Board of Directors approved that no dividend will be paid on the Company’s treasury shares. 30. Fair value of financial instruments Fair value disclosures in respect of financial instruments are made in accordance with the requirements of International Financial Reporting Standards 7 “Financial Instruments: Disclosure” and 13 “Fair value measurement”. 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, judgement 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. The fair value is estimated to be the same as the carrying value for cash and cash equivalents, short-term bank deposits, trade accounts receivables, and trade accounts payable due to the short-term nature of the financial instruments. Set out below is the comparison by category of carrying amounts and fair values of all the Group’s financial instruments, excluding those discussed above, that are carried in the consolidated statement of financial position: Financial liabilities Bank borrowings (Note 22) Senior Notes due in 2015 (Note 23) Senior Notes due in 2020 (Note 23) Finance lease obligations (Note 24) Carrying amount Fair value 2013 2012 2011 2013 2012 2011 290,664 234,859 735,972 59,854 501,141 581,671 – 67,447 279,488 577,157 – 51,825 297,276 242,690 669,375 60,368 508,702 601,385 – 66,342 283,677 513,697 – 51,418 The carrying amount of Senior Notes issued includes interest accrued at each of the respective dates. The fair value of bank borrowings and finance lease obligations was estimated by discounting the expected future cash outflows by a market rate of interest for bank borrowings of 3.3% (2012: 3.0%, 2011: 4.5%) and for finance lease obligations of 7.5% (2012: 8.0%, 2011: 8.0%), and is within level 2 of the fair value hierarchy. The fair value of Senior Notes was estimated based on market quotations and is within level 1 of the fair value hierarchy. 72 Myronivsky Hliboproduct Annual Report and Accounts 2013 31. Risk management policies During the years ended 31 December 2013, 2012 and 2011 there were no material changes to the objectives, policies and process for credit risk, capital risk, liquidity risk, currency risk, interest rate risk, livestock diseases risk and commodity price and procurement risk managing. 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 through the issue of new debt or the redemption of existing debt. The Group’s target is to achieve a leverage ratio (net debt to adjusted operating profit) of not higher than 3.0. The Group defines its leverage ratio as the proportion of net debt to adjusted operating profit. As of 31 December 2013, 2012 and 2011 the leverage ratio was as follows: Bank borrowings (Note 22) Bonds issued (Note 23) Finance lease obligations (Note 24) Debt Less: Cash and cash equivalents and short-term bank deposits Net debt Operating profit Adjustments for: Depreciation and amortisation expense (Notes 7 and 8) Adjusted operating profit Net debt to adjusted operating profit 2013 2012 2011 290,664 951,728 59,854 501,141 571,515 67,447 279,488 567,000 51,825 1,302,246 1,140,103 898,313 (172,470) (94,785) (96,535) 1,129,776 1,045,318 801,778 271,836 380,583 320,744 119,014 87,135 80,341 390,850 467,718 401,085 2.89 2.23 2.00 Debt is defined as bank borrowings, bonds issued and finance lease obligations. Net debt is defined as debt less cash and cash equivalents and short-term bank deposits. For the purposes of the leverage ratio, debt does not include interest-bearing liabilities, which are included in trade accounts payable (Note 25). Adjusted operating profit is defined as operating profit adjusted for the depreciation and amortisation 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: Long-term bank deposits Loans to employees and related parties Other receivables Trade accounts receivable, net (Note 19) Short-term bank deposits Cash and cash equivalents (Note 20) Financial liabilities: Bank borrowings (Note 22) Bonds issued (Note 23) Finance lease obligations (Note 24) Amounts payable for property, plant and equipment (Note 26) Accrued interest (Note 22 and 23) Trade accounts payable (Note 25) Other current liabilities (Note 26) 2013 2012 2011 5,802 1,645 19,789 70,912 – 172,470 6,154 1,966 5,750 72,616 – 94,785 6,017 2,437 1,828 65,794 1,777 94,758 270,618 181,271 172,611 290,664 951,728 59,854 7,112 20,771 101,990 12,943 501,141 571,515 67,447 11,415 14,125 68,970 9,182 279,488 567,000 51,825 10,236 12,073 52,689 8,026 1,445,062 1,243,795 981,337 The main risks inherent to the Group’s operations are those related to credit risk, liquidity risk, currency risk, interest rate risk, livestock diseases risk, and commodity price and procurement risk. 73 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes to the consolidated financial statements (continued) for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) 31. Risk management policies continued 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. 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 the credit period is expired. About 38% (2012: 31%, 2011: 28%) of trade accounts receivable comprise amounts due from 12 large supermarket chains, which have the longest contractual receivable settlement period among customers. 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 using the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows as of 31 December 2013, 2012 and 2011. The amounts in the table may not be equal to the statement of financial position carrying amounts since the table includes all cash outflows on an undiscounted basis. Year ended 31 December 2013 Bank borrowings Bonds issued Finance lease obligations Total Year ended 31 December 2012 Bank borrowings Bonds issued Finance lease obligations Total Year ended 31 December 2011 Bank borrowings Bonds issued Finance lease obligations Total Carrying amount Contractual amounts Less than 1 year From 2nd to 5th year After 5th year 318,603 290,664 951,728 1,423,050 66,080 59,854 106,083 85,939 23,664 203,978 494,298 42,416 8,542 842,813 – 1,302,246 1,807,733 215,686 740,692 851,355 501,141 571,515 67,447 526,824 734,613 76,735 313,702 59,939 25,705 195,146 674,674 51,030 17,976 – – 1,140,103 1,338,172 399,346 920,850 17,976 279,488 567,000 51,825 299,418 794,552 58,272 177,506 59,939 22,736 103,210 734,613 35,536 18,702 – – 898,313 1,152,242 260,181 873,359 18,702 All other financial liabilities (excluding those disclosed above) are repayable within one year. The Group’s target is to maintain its current ratio, defined as the proportion of current assets to current liabilities, at the level of not less than 1.2. As of 31 December 2013, 2012 and 2011, the current ratio was as follows: 2013 2012 2011 1,109,166 1,001,248 469,147 328,435 808,745 307,678 3.38 2.13 2.63 Current assets Current liabilities 74 Myronivsky Hliboproduct Annual Report and Accounts 2013 31. Risk management policies continued 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, but the management of the Group sets limits on the level of exposure to foreign currency fluctuations in order to manage currency risk. The carrying amounts of the Group’s foreign currency denominated monetary assets and liabilities as of 31 December were as follows: ASSETS Long-term bank deposits Trade accounts receivable Other current assets, net Cash and cash equivalents LIABILITIES Current liabilities Trade accounts payable Other current liabilities Accrued interest Short-term bank borrowings Short-term finance lease obligations Non-current liabilities Long-term bank borrowings Bonds issued Long-term finance lease obligations 2013 2012 2011 USD EUR USD EUR USD EUR – 12,429 928 118,211 131,568 5,802 – 39 540 6,381 – 8,607 732 73,270 82,609 6,154 – 35 1,017 7,206 – 3,794 688 71,766 76,248 6,017 – – 1,165 7,182 66,088 21,145 19,892 59,401 14,088 5,637 3,373 878 38,966 6,312 30,592 593 13,312 270,362 12,794 4,897 5,508 813 31,296 8,698 12,146 266 11,416 151,918 9,605 3,522 7,389 657 17,264 9,662 180,614 55,166 327,653 51,212 185,351 38,494 65,729 984,782 23,317 126,568 – 15,705 68,104 584,767 25,013 131,379 – 20,536 30,561 584,767 25,581 79,745 – 6,977 1,073,828 142,273 677,884 151,915 640,909 86,722 1,254,442 197,439 1,005,537 203,127 826,260 125,216 The table below illustrates the Group’s sensitivity to a change in the exchange rate of the Ukrainian Hryvnia against the US dollar and EUR. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a possible change in foreign currency rates. 2013 Increase in USD exchange rate Increase in EUR exchange rate Decrease in USD exchange rate Decrease in EUR exchange rate 2012 Increase in USD exchange rate Increase in EUR exchange rate Decrease in USD exchange rate Decrease in EUR exchange rate 2011 Increase in USD exchange rate Increase in EUR exchange rate Decrease in USD exchange rate Decrease in EUR exchange rate Change in foreign currency exchange rates Effect on profit before tax 10% 10% 5% 5% 10% 10% 5% 5% 10% 10% 5% 5% (112,287) (19,106) 56,144 9,553 (92,293) (19,592) 46,146 9,796 (75,001) (11,803) 37,501 5,902 The effect of foreign currency sensitivity on shareholders’ equity is included in the statement of comprehensive income. There are no hedging activities in the other comprehensive income, so the statement of comprehensive income and the statement of changes in equity impacts are the same. 75 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes to the consolidated financial statements (continued) for the year ended 31 December 2013 (in thousands of US dollars, unless otherwise indicated) 31. Risk management policies continued During the years ended 31 December 2013, 2012 and 2011, the Ukrainian Hryvnia was relatively stable against the US dollar. During the year ended 31 December 2013 the Ukrainian Hryvnia depreciated against the EUR by 4.79% (2012: depreciated against the EUR by 2.32%, 2011: appreciated against the EUR by 2.60%). As a result, during the year ended 31 December 2013 the Group recognised net foreign exchange losses in the amount of USD 11,052 thousand (2012: foreign exchange losses in the amount of USD 3,285 thousand, 2011: foreign exchange gains in the amount of USD 2,318 thousand) in the consolidated statement of comprehensive income. In November 2012 the National Bank of Ukraine (“NBU”) introduced a requirement whereby a company is required to sell 50% of their foreign currency proceeds from any export sales at Ukrainian interbank currency market. During the year ended 31 December 2013 a USD 6,841 thousand (2012: USD 3,578 thousand) net foreign exchange gain resulting from the difference in NBU and Ukrainian interbank currency market exchange rates, was included in Other operating expenses. The Group management believes that the currency risk is mitigated by the existence of USD-denominated proceeds from sales of sunflower oil, grain and chicken meat, which are sufficient for servicing the Group’s foreign currency denominated liabilities and were as follows during the years ended 31 December 2013, 2012 and 2011: Sunflower oil and related products Chicken meat and related products Grain1 Other agricultural segment products 2013 2012 2011 253,194 216,683 114,923 405 227,835 112,931 138,639 431 222,418 67,874 63,101 486 585,205 479,836 353,879 1 Grain export sales during the year ended 31 December 2013 includes USD 14,249 thousand of gain received from operations, when goods are exchanged or swapped for goods which are of similar nature. Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect the value of the financial instruments. For variable rate borrowings, interest is linked to LIBOR or EURIBOR. The below table illustrates the Group’s sensitivity to increases or decreases of interest rates by 5% (2012: 5%, 2011: 5%). The analysis was applied to interest bearing liabilities (bank borrowings, finance lease obligations and accounts payable under grain purchase financing arrangements) based on the assumption that the amount of liability outstanding as of the reporting date was outstanding for the whole year. 2013 LIBOR LIBOR EURIBOR EURIBOR 2012 LIBOR LIBOR EURIBOR EURIBOR 2011 LIBOR LIBOR EURIBOR EURIBOR Increase/(decrease) of floating rate Effect on profit before tax US$’000 5% –5% 5% –5% 5% –5% 5% –5% 5% –5% 5% –5% (6,381) 6,381 (8,320) 8,320 (17,146) 17,146 (8,189) 8,189 (9,263) 9,263 (4,781) 4,781 The effect of interest rate sensitivity on shareholders’ equity is equal to that on the statement of comprehensive income. 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 diseases, 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. 76 Myronivsky Hliboproduct Annual Report and Accounts 2013 31. Risk management policies continued 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 continues expansion of its grain growing segment, as part of the vertical integration strategy, and also accumulates sufficient commodity stock to meet its production needs. 32. 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 for the year ended 31 December 2013 was USD 68,297 thousand and is recorded in the consolidated statement of comprehensive income on an accrual basis (2012: USD 58,450 thousand, 2011: USD 48,563 thousand). In January 2011 in accordance with the Law of Ukraine “On charge and accounting of unified social contribution” certain changes in the administration of social charges were made and social charges are to become payable in the form of Unified Social Contribution, including contributions to the State Pension Fund in range of 36.76% – 49.7% of gross salary cost. The Group companies are not liable for any other supplementary pensions, post-retirement health care, insurance benefits or retirement indemnities to its current or former employees, other than pay-as-you-go expenses. 33. Earnings per share The earnings and weighted average number of ordinary shares used in the calculation of earnings per share are as follows: Profit for the year attributable to equity holders of the Parent Earnings used in calculation of earnings per share Weighted average number of shares outstanding Basic and diluted earnings per share (USD per share) 2013 2012 2011 155,907 155,907 297,104 297,104 243,376 243,376 105,666,888 106,242,419 107,854,856 1.48 2.80 2.26 The Group has no potentially dilutive ordinary shares nor other dilutive instruments; therefore, the diluted earnings per share equal basic earnings per share. 34. Subsequent events There are no subsequent events to mention. 35. Authorisation of the consolidated financial statements These consolidated financial statements were authorised for issue by the Board of Directors of MHP S.A. on 1 April 2014. 77 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes 78 Myronivsky Hliboproduct Annual Report and Accounts 2013 79 Strategic reportCorporate governanceFinancial statementsMyronivsky Hliboproduct Annual Report and Accounts 2013 Notes 80 Myronivsky Hliboproduct Annual Report and Accounts 2013 Myronivsky Hliboproduct PJSC Myronivsky Hliboproduct 158 Akademica Zabolotnogo Str, Kiev, 03143, Ukraine For further enquiries: a.sobotyuk@mhp.com.ua +38 044 207 00 70 Registered office: 5 rue Guillaume Kroll L-1882 Luxembourg Registered number: B116838 M y r o n i 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 a n d A c c o u n t s 2 0 1 3 www.mhp.com.ua 

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