ANNUAL REPORT AND ACCOUNTS
A LEADING INTERNATIONAL
AGRO-INDUSTRIAL
COMPANY
CONTENTS
3
16
46
66
151
STRATEGIC
REPORT
3 Performance Highlights
4 Company Overview
7 Our Business Model
BUSINESS
REVIEW
16 Key Performance
Indicators
19 Financial and Operational
Review
10 Chairman’s Statement
25 Financial Policies
13 CEO’s Statement
27 Risk Management
39 Stakeholder Engagement
41 Corporate Responsibility
GOVERNANCE
FINANCIAL
STATEMENTS
SHAREHOLDER
INFORMATION
46 Corporate Governance
Report
67 Statement of the Board of
Directors
151 Financial Calendar
152 Glossary of Terms
53 Board of Directors
56 Audit Committee Report
60 Nominations and
Remuneration Committee
Report
62 Management Report
68 Independent Auditor’s
Report
77 Consolidated Financial
Statements
82 Notes
3
STRATEGIC
REPORT
PERFORMANCE HIGHLIGHTS
FINANCIAL HIGHLIGHTS
GROWTH IN DYNAMIC MARKETS
US$
million
2,056
Revenue
(+32% y/y; 2018:
US$ 1,552 million)
US$
million
1,186
Export revenue
(+28% y/y; 2018:
US$ 924 million)
of total revenue
58%
Export
revenue
(2018: 60%)
US$
million
376
Adjusted EBITDA
(net of IFRS 16)
(-16% y/y; 2018:
US$ 450 million)
US$
2.04
Earnings per
share
(+74% y/y; 2018:
US$ 1.17)
US$
million
350
10-year
Eurobond
issuance with
a coupon of
6.25%
US$
million
1,139
Net debt
(net of IFRS 16)
(2018: US$ 1,131)
with US$ 341 million
in cash
OPERATIONAL AND STRATEGIC HIGHLIGHTS
ACQUISITION OF
PERUTNINA PTUJ
a leading poultry producer and
meat-processor based in the
Balkans
FULL LAUNCH OF PHASE 2 OF
THE VINNYTSIA COMPLEX
six rearing sites (brigades) and a
slaughterhouse, commissioned and
operating at full capacity
PHASE 1 OF #2 BIOGAS
COMPLEX
at the Vinnytsia complex
launched with 12 MW capacity
STRATEGIC REPORTPerformance HighlightsAnnual Report 2019 4
COMPANY OVERVIEW
AN INTERNATIONAL COMPANY HEADQUARTERED IN UKRAINE, MHP IS A VERTICALLY-INTEGRATED,
LEADING AGRO-INDUSTRIAL GROUP. IT IS THE LEADING DOMESTIC PRODUCER OF POULTRY PRODUCTS
WITH THE HIGHEST MARKET SHARE AND STRONGEST DOMESTIC BRAND RECOGNITION1.
SUSTAINABLE GROWTH DRIVEN
INTERNATIONAL AND DOMESTIC STRATEGY
MHP continues to deliver upon its targeted international
growth strategy supported by a strong position in its domestic
markets.
BY DIVERSIFIED
in domestic markets
The Company’s strategy
remains
focussed on the shift towards higher value-added products such
as the “ready-to-cook” and “ready-to-eat” ranges; and on the
‘industrialisation’ of its clients, with the Company anticipating
their evolving requirements and providing solutions to meet
them, at the same time as reducing both unit cost and risk for
those clients.
The Company continues to invest in Ukraine and during
2019 it launched six rearing sites and an additional slaugh-
terhouse line as part of Phase 2 of the Vinnytsia poultry
complex; Phase 2 (240,000-260,000 tonnes of poultry meat) is
expected to be operating at 100% capacity by the end of 2023.
implementation of
MHP now exports
to over 80 countries and export
revenue constituted 58% of total revenue in 2019, driven by the
continued
the Company’s geographic
diversification strategy as well as product mix optimisation -
the “right product to the right market” - to countries within
the EU, MENA, CIS and Africa. As part of this strategy, and in
particlar
in relation to the opening of prospective new
markets, the Company will continue to focus on more customised
products.
In February 2019, the Company completed its acquisition of
Perutnina Ptuj (“PP”) in Slovenia. PP is an international food-
processing company and the largest producer of poultry meat
and poultry meat products in Southeast Europe. Its products are
sold under two strong brand names, “PP” and “Poli”.
More information about PP can be found on pages 6 and 9.
Its results are reported separately in the European Operating
Segment (“EOS”).
to provide
is to be a world-leading protein
The Company’s vision
its
is
agri-business. The Company’s mission
customers with high-quality and safe poultry products, anticip
ating and meeting their evolving priorities and requirements.
Our vertically-integrated business model,
experienced
the
management
deployment of modern innovative technologies are combined
to underpin and drive MHP’s success. The Company is also
one of the largest grain producers in Ukraine and the leading
processed-meat producer in Ukraine2.
team, diversified growth strategy and
1 InMind
2 SSSU
Сompany OverviewAnnual Report 2019 STRATEGIC REPORTMHP & PP
5
MHP’S VERTICALLY-INTEGRATED BUSINESS MODEL MARKS IT OUT
FROM ITS PEERS
MHP owns and operates modern facilities at each of the
key stages of the production process: grain and fodder
production; egg incubation and grow-out; processing; sales,
marketing and distribution. This vertically-integrated model
delivers a considerably lower cost-base1 versus industry peers,
as well as enhanced quality control and higher biosecurity of
the poultry flock. These factors are critical in an increasingly
regulated industry and also for consumer choice and confidence,
both of which are imperative to modern-day consumers.
This business model significantly reduces the Company’s
dependence on suppliers and farmers and also its exposure to
raw material price volatility.
MHP’S FACILITIES ARE AMONGST THE MOST TECHNOLOGICALLY
ADVANCED INTERNATIONALLY
MHP’s continued investment has enabled it to employ modern
production assets and the Company believes that its chicken
farms are amongst the most efficient in the world. This investment
is driven by
to continuous
the Company’s commitment
improvement in operational efficiency, product development
and innovation through investment in research & development.
OUR BUSINESS SEGMENTS
The Company is organised into four business segments: Poultry
& Related Operations; Grain Growing; Meat-Processing & Other
Agricultural Operations; and the European Operating Segment.
More information on the operational and financial results of each
of the business segments can be found in the Operational and
Financial Review section on pages 19 to 24.
POULTRY & RELATED OPERATIONS SEGMENT
(MHP, excluding Perutnina Ptuj (“EOS”))
MHP is the leading poultry producer in Ukraine, accounting
for approximately 30%2 of chicken meat consumed in the
country in 2019. MHP supplies chilled and frozen chicken and
other meat products to a number of nationwide supermarket
chains, including Fozzy, ATB-Market, Metro Cash & Carry,
ECO, Novus and Auchan. MHP’s brand names in Ukraine
include Nasha Riaba and Ukrainian Chicken; export brand
names include Qualiko, Ukrainian Chicken, Аssilah, Sultanah,
Al Hassanat and Bibilo. MHP also produces and sells vegetable
oils (sunflower and soybean oils) as a by-product of its fodder
production, mainly to international traders.
GRAIN GROWING SEGMENT
MHP has a leading grain cultivation business growing corn,
sunflower and soybean to support the vertical integration of
its chicken production. The Company is self-sufficient in corn
with any excess production sold for export, providing one of
the Company’s sources of hard currency revenue. Increasingly,
other grains such as wheat and rape are grown for sale to both
domestic and international customers.
In 2019, MHP’s landbank constituted approximately 380,000
hectares, one of the
in Ukraine.
land portfolios
Crop yields are well above the Ukrainian average3.
largest
The Company aims to increase the segment’s profitability
through sustainable optimisation of the landbank. This will be
achieved via innovation and technology including Artificial
Intelligence (“AI”) and machine-learning algorithms for real-time
analysis, forecasting and facilitation of decision making.
2019 REVENUE BY BUSINESS SEGMENT
2019 REVENUE BY DESTINATION
2019 EXPORT REVENUE BY PRODUCT
13%
EOS
7%
Meat-processing & other
Agricultural
Operations
13%
Grain Growing
1 MHP
2 SSSU
3 According to Latifundist.com rating
42%
Domestic
3%
Meat-processing and
other agricultural
products
21%
Grain
Poultry and Related
Operations
Export
26%
Vegetable oil and
related products
Chicken meat and
related products
Сompany OverviewAnnual Report 2019 STRATEGIC REPORT58%50%67% 6
MEAT-PROCESSING & OTHER AGRICULTURAL OPERATIONS
SEGMENT
MHP’s meat-processing business is an important driver of the
segment’s profitability as it produces value-added products for
which customers are willing to pay a premium.
Processing includes the production of a wide variety of fresh
meat products, prepared food and ready-to-eat food; these
include sausages, cooked meats and convenience
food
products, predominantly from chicken meat.
The Company’s convenience food and processed food brand
names for the Ukrainian market include Bashchinsky, Lehko!,
Sytni and Qualiko; MHP also exports some non-branded products.
MHP is one of the leaders in the highly fragmented meat-
processing market in Ukraine, accounting for approximately 15%
of all sausage and cooked meats produced in Ukraine in 20191.
quickly-prepared, warm and healthy meals) and Poli (sausages,
cold meats, pâté and snacks) brands. Perutnina Ptuj is the first
company in Slovenia to introduce a new standard aligned to
latest research into the well-being of animals. This standard
exceeds EU legislative requirements. A large and growing part
of PP production is governed by a rigid breading standard of
Animal Welfare thus allowing to sell under the PP NATUR
Premium Brand.
Following the strategic acquisition of PP, MHP has diversified
its production asset portfolio and now has significant assets
in both Ukraine and the Balkans; this diversification is part of
the Company’s strategy to best position itself to manage any
outbreaks of livestock diseases or geopolitical shocks.
EUROPEAN OPERATING SEGMENT (Operations of Perutnina Ptuj)
The European Operating Segment comprises 100% of
Perutnina Ptuj (‘‘PP‘‘), a leading poultry and processed meat
producer in the Balkans with production assets in Slovenia,
Croatia, Serbia, Bosnia and Herzegovina2.
PP owns distribution companies in Austria, North Macedonia
and Romania and supplies products to 15 European countries.
Products are sold under the PP (meat, sausages and snacks for
PP OWNS DISTRIBUTION COMPANIES
IN AUSTRIA, NORTH MACEDONIA
AND ROMANIA AND SUPPLIES
PRODUCTS TO 15 EUROPEAN
COUNTRIES. PRODUCTS ARE SOLD
UNDER THE PP AND POLI BRANDS.
PP operates a vertically-integrated business model with animal
rearing processes following the strictest European Animal
Welfare standards, which guarantees exports at premium
prices to selected processors and markets of Western Europe.
Management has been able to realise operational synergies
based upon the similarity of the MHP and PP business models
and these, combined with efficiency improvements, resulted in
above-forecast profitability at PP during the 10 months in 2019
during which its results were consolidated.
INVESTMENT AND COOPERATION
The Company’s medium- to long-term strategy is to be an
efficient and successful player in the consolidation of poultry
assets and it continues to monitor potential M&A opportunities,
both in poultry production and / or in meat-processing operations,
internationally.
In the near term, MHP will also continue to invest in international
greenfield projects. In February 2020 MHP announced that
it was planning a project in Saudi Arabia; there is significant
government support for the project and a feasibility study is
ongoing. Investment projects in several Eastern European
countries will also continue and there are plans to invest in
Serbia and Croatia.
1MHP
2 SURS (Statistical Office of the Republic of Slovenia)
Сompany OverviewAnnual Report 2019 STRATEGIC REPORT 7
Our Business Model
OUR BUSINESS MODEL
HOW WE GENERATE REVENUE
POULTRY & RELATED OPERATIONS
SEGMENT
GRAIN GROWING
SEGMENT
MEAT-PROCESSING & OTHER
AGRICULTURAL SEGMENT
EUROPEAN OPERATING
SEGMENT
We produce and sell chicken meat
(fresh and frozen); vegetable oils
(sunflower and soybean); and mixed
fodder
We grow crops for fodder production
and for sale to third parties
We produce and sell sausages;
processed and cooked meat;
convenience foods; and produce from
cattle and milk operations
We produce and sell chicken meat
and processed poultry meat products
US$
1,368
million revenue
728,917
tonnes of poultry
produced
US$
268
million revenue
2,4
million tonnes of
crops produced
US$
149
million revenue
54,525
tonnes of meat
products produced
US$
271
million revenue
79,358
tonnes of poultry
produced
HOW WE CREATE VALUE
OUR ASSETS
SUSTAINED INVESTMENT IN CAPEX AND R&D
Sustained CAPEX and R&D programmes have
enabled consistent production expansion,
rigorous
control, developed and
maintained product quality, and ensured high
standards of product safety.
cost
INNOVATION
The Company looks for dynamic and innovative
ways of developing our production and
agricultural processes to improve efficiency,
drive down costs and reduce our environmental
impacts.
OUR PEOPLE
We have a highly skilled and knowledgeable
workforce, an experienced management team
and we are committed to continuously investing
in training and development.
MODERN AND EFFICIENT PRODUCTION ASSETS
Our investment has enabled us to employ
modern production assets. The Company
believes that its chicken complexes are amongst
the most efficient in the world.
MARKETPLACE
MHP is always looking to expand into new
markets for our products and now sells its
products to over 80 countries.
LONG-TERM CASH AND REVENUE GENERATION
Our businesses have a consistent track record
of revenue and cash generation providing a
solid platform for value creation.
VERTICALLY-INTEGRATED STRUCTURE
Our structure differentiates us from our peers,
and enables us to reduce our dependence on
third-party suppliers and our exposure to raw
material price volatility. It also ensures the
maintenance of strict biosecurity and quality
standards throughout the production process.
STRONG BRANDS
Our brands have a high degree of domestic
recognition with a reputation
for quality,
enabling products to be sold at premium prices.
Annual Report 2019 STRATEGIC REPORT 8
Annual Report 2019
Our Business Model
OUR BUSINESS MODEL AT MHP
UKRAINE
LAND
on long-term lease in Ukraine with
a harvest of 2.4 million tonnes of
grain per annum
380,000
hectares
17MW
project
RETAIL
DISTRIBUTION
9 distribution centres
in Ukraine
1,839
dedicated outlets
380
vehicles
SUNFLOWER AND
SOYBEAN PROTEIN
PRODUCTION
of cakes, oils and granulated
husk provide a natural hedge
million
exports
US$303
FODDER
PRODUCTION
3 production facilities
1.9
million tonnes
BIOGAS
2+1 projects2. All the manure and
husks generated from MHP’s
operations are used to generate
biogas
PRODUCTION OF
MEAT-PROCESSING
PRODUCTS
2 production facilities
54,525
tonnes1
POULTRY
PRODUCTION
3 vertically-integrated
poultry complexes, from
hatching to rearing and
processing
7.8
million heads
per week
HATCHING EGGS
2 breeding farms with
528 million hatching eggs
produced in 2019
100%
in-house
production
1 Including 35,458 tonnes of meat-processing products and 19,236 tonnes of convenience food
2 Biogas complexes at Oril-Leader (5 MW) and at Vinnytsia (12 MW) are complete, an additional 12MW biogas complex is not yet constructed
STRATEGIC REPORT 9
Our Business Model
OUR BUSINESS MODEL AT
PERUTNINA PTUJ
LAND
4,000
hectares
FODDER
PRODUCTION
3 production facilities
84%
in-house
production
PARENT STOCK/HATCHING
EGGS PRODUCTION
3 locations (Serbia, Bosnia &
Herzegovina, Slovenia)
92%
in-house
production
BIOGAS
1 plant
1MW
RETAIL
DISTRIBUTION &
LOGISTICS
MEAT-PROCESSING
AND CONVENIENCE
FOOD
5 production facilities
SLAUGHTERHOUSES
4 facilities
10%
of sales through
own retail outlets
HATCHERIES
4 facilities
85%
in-house
production
POULTRY
PRODUCTION
4 locations (Serbia, Bosnia
& Herzegovina, , Slovenia,
Croatia)
8%
in-house
production
Annual Report 2019 STRATEGIC REPORT 10
“AGAINST A TURBULENT AND DYNAMIC GLOBAL BACKDROP,
I REMAIN CONFIDENT THAT MHP, WITH
ITS VERTICALLY-
INTEGRATED BUSINESS MODEL, DIVERSIFIED EXPORT STRATEGY,
STRONG FINANCIAL POSITION AND EXPERIENCED MANAGEMENT
TEAM, IS WELL-POSITIONED TO OVERCOME THE SHORT-TERM
CHALLENGES AND TO CAPITALISE UPON OUR SIGNIFICANT LONG-
TERM OPPORTUNITIES.
SUBSEQUENT
THE ACQUISITION AND
INTEGRATION OF
PERUTNINA PTUJ IN FEBRUARY 2019 DIVERSIFIED THE COMPANY’S
PRODUCTION ASSETS, DELIVERED UPON OUR STRATEGY OF
INTERNATIONAL
EXPANSION AND DIVERSIFICATION AND
DEMONSTRATED MHP’S ABILITY TO BE AN EFFICIENT AND
SUCCESSFUL PLAYER IN THE LONG-TERM CONSOLIDATION OF
GLOBAL PROTEIN ASSETS.”
Dear Shareholder,
During 2019, MHP continued to deliver upon its long-term growth
strategy in both export and domestic markets. Group revenue
growth of 32% year-on-year was achieved against a backdrop
of challenging global protein markets and trade flows and is a
testament to our business model, strategy and management
team.
(“COVID-19”) Pandemic and,
Global turbulence and uncertainty driven by the human
Coronavirus
lesser
extent, by recent avian flu outbreaks in Eastern Europe have
increased as we have moved through the first quarter of 2020
and that uncertainty is set to continue. I will return to our 2020
outlook in more detail later in the Statement.
to a
GROUP REVENUE
GROWTH OF
YEAR-ON-YEAR WAS ACHIEVED IN
CHALLENGING GLOBAL MARKETS
STRATEGIC REPORTAnnual Report 2019 Chairman’s StatementCHAIRMAN’SSTATEMENT32% 11
2019 PERFORMANCE AND ACHIEVEMENTS
The launch of further sites as part of Phase 2 of the
Vinnytsia poultry complex contributed to an 18% year-on-year
increase in Group poultry production volumes. In addition,
our strategy of geographic diversification and product
mix optimisation led to an increase in volumes sold across a
number of regions including MENA, the EU, Africa and Asia, at
the same time as mitigating regional risks.
The Company’s acquisition
in February 2019 of
Perutnina Ptuj (“PP”), a leading poultry and processed-meat
producer based in the Balkans, increased 2019 Group revenue
by US$ 271 million and delivered a higher-than-expected 16%
adjusted EBITDA margin. This demonstrates the ability of our
experienced management team to integrate new acquisitions
and to deliver operational synergies.
Group adjusted 2019 EBITDA (net of IFRS 16) of US$ 376
million was lower than expected and down 16% (2018:
US$ 450 million),
impacted by weaker export prices,
(par-
especially poultry exports to the EU and crops
ticularly corn); a ban on exports to KSA in Q4 2019;
and the strengthening of the Ukrainian Hryvna
(UAH).
The adjusted EBITDA margin (net of IFRS 16) decreased
to 18% (2018: 29%).
Our financial position was strengthened during the year with
the raising of US$ 350 million in a highly successful Eurobond
issue at 6.25%, below Ukrainian sovereign yields. Proceeds
from this new issue enabled full repayment of MHP’s short-term
borrowings extending MHP’s maturity profile, making
virtually all of its debt long term and providing us with a robust
balance sheet going forward.
CORPORATE GOVERNANCE
The Company recognises the importance of strong corporate
governance in line with international best practice and has
continued its rigorous approach and adherence to the UK
1 Revenue from PP is from 21 February 2019 when the acquisition was completed
Corporate Governance Code 2018 to the extent practicable.
It commissioned a third-party gap analysis to assist in the
process and to advise on the implementation of corrective
and / or evolutionary actions where necessary. As part of the
continuing development plan for Board members, education
programmes were completed by the NEDs as planned.
BOARD DEVELOPMENTS
At the request of the Board, in March 2019 I agreed to
support the CEO with the conduct of certain specific strategic
projects and certain executive management functions where
my knowledge and expertise are particularly helpful and as a
consequence I moved to an executive position within the Com-
pany.
As a corollary to this, another independent NED, Mr Philip J
Wilkinson OBE, was appointed in March 2020. Mr Wilkinson
has significant experience in international poultry markets.
The Company complies with the UK Corporate Governance
Code to the extent practical and in relation to this there were
some changes to Board committees following my move to
Executive Chairman. In March 2019, I stepped down from the
Audit Committee (“AC”) and Mr Wills was appointed as
a member of the AC. In April 2020, I stepped down as
Chairman of the Nominations and Remuneration Committee
(“NRC”) and an independent NED, Mr Wills, was appointed as
Chairman of the NRC.
OUR PEOPLE
Following our acquisition of PP, MHP now employs
31,427 people across seven countries. I am proud of their
enduring commitment, professionalism and dedication to our
customers. On behalf of our Board I offer them our sincere
thanks.
The health and safety of our employees is paramount. MHP’s
dedicated and experienced HR team is working closely with
our employees and their representatives to ensure that
everyone has
the necessary support and assistance
following the outbreak of the COVID-19 Pandemic.
STAKEHOLDER ENGAGEMENT
Regular engagement, dialogue with and feedback from MHP’s
material internal and external stakeholders are important
elements of the success of the Group and is the core of our
business model.
Understanding our stakeholders’ views informs and assists
MHP’s decision-making processes and helps drive prog-
ress towards the achievement of MHP’s aims, objectives and
strategy. In keeping with the requirements of Section 172 (1)
of the UK Companies Act 2006, we have set out on pages
38 to 39 MHP’s key stakeholder groups, their material issues
and how MHP engages with them. Each stakeholder group
requires a tailored engagement approach to foster effective
communication and mutually beneficial relationships.
CORPORATE RESPONSIBILITY
Responsible business is a critical element of the Company’s
long-term strategy. The Board is pleased with the progress
achieved during 2019. A highlight was the launch of the first
phase of MHP’s second biogas plant. This project is being
implemented
in two phases with an eventual planned
installed energy capacity of 29 MW. This will make the
facility the largest biogas complex in the world for processing
organic waste from broiler chickens.
I am excited by the work that the Company is under-
taking in a number of key research and development
areas including food quality and security, animal well-being
and nutrition. I’m especially proud of our progress in the field of
antibiotic-free poultry production.
I’d like to draw your
attention to the CEO’s Statement in which Yuriy Kosyuk sets
out in more detail our exciting advances in these fields.
Annual Report 2019 Chairman’s StatementSTRATEGIC REPORT DIVIDEND
Although the Company has over US$ 300 million of free cash,
and we feel well-placed to weather the uncertainties of the
months ahead, the Board felt it was prudent to take further
actions to conserve cash. As part of these actions, on 13 April
2020, it agreed that the dividend should be reduced from
approximately US$ 80 million (US$ 0.7474 per share) in 2019
to approximately US$ 30 million (US$ 0.2803 per share),
to be paid to shareholders by the end of April 2020. The
announcement will be published in due course.
OUTLOOK FOR 2020
2020 is set to be challenging. At the time of writing, the world
is coping with the COVID-19 Pandemic, a global emergency
and crisis. In addition, an outbreak of H5N1 avian influenza in
Ukraine (the Vinnytsia region) was announced in Q1 2020 and
caused a temporary cessation of exports from Ukraine to the EU
(reopened at the beginning of March 2020), Saudi Arabia and
other MENA markets (reopened in February and March 2020),
and CIS countries (expected to reopen from May 2020).
Furthermore, the disruption in global protein flows seen
during 2019 is ongoing. African Swine Fever is still active
in China and Southeast Asia, EU poultry over-production
is set to continue, and global animal and feed commodity
protein flows are still in the process of rebalancing as a result of
disease and global political events.
These combined events are likely to have a significant
effect on HORECA demand and economic activity and
will impact MHP’s financial results in 2020. Against this
to expect our main driv-
backdrop we
ers of growth
in poultry production
increases
volumes of c25,000 tonnes from PP and c10,000 tonnes
from the Vinnytsia complex, respectively, combined with an
increase in the efficiency of our grain growing operations
driven by optimisation of production costs and land utilisation.
continue
to be
12
In spite of these short-term challenges, I remain confident
that MHP, as a food producer and distributor with a highly
experienced Board and senior management team, is well-
positioned. I should like to take a moment to set out the factors
underpinning my confidence in the business:
• Strong financial position. The strengthening of our
financial position in September 2019 through the issue
of the US$ 350 million Eurobond has provided us with a
robust balance sheet with no requirements to refinance
in the near term.
• Vertical
integration. The Company’s business model
reduces its dependence on suppliers and exposure to raw
material price volatility. It also provides higher biosecurity of
the flock and quality control at the point of sale.
• Sales to over 80 countries. Continued execution of our
diversified export strategy has led to MHP now exporting to
over 80 countries globally, thus de-risking the Company in
relation to geopolitical events as evidenced by our ability to
mitigate the loss of volumes to Saudi Arabia in Q4 2019 by
significantly increasing volumes to other markets.
CORONAVIRUS (COVID-19) PANDEMIC
At this stage it is difficult to estimate the duration and severity
of the impact from the Pandemic.
The Company has put in place a wide range of measures
to protect and support our employees. It has a strong
balance sheet and cash position, but is actively pursuing
additional opportunities to preserve cash and optimise its near
term. Overall, MHP is well-placed to manage its way through
the expected virus-related disruption over the coming months
in 2020.
is
• 30% domestic market share. MHP
in Ukraine. Domestic demand
leading
poultry producer
for
chicken is expected to remain strong and to have further
growth potential as beef and pork are mostly produced
by households and small
far more
farms and are
expensive to produce and purchase than chicken.
the
Dr John Rich, Chairman
13 April 2020
Annual Report 2019 Chairman’s StatementSTRATEGIC REPORT 13
CEO’S
STATEMENT
“AT THE TIME OF WRITING, WE FIND OURSELVES IN HIGHLY
UNCERTAIN TIMES DUE TO THE COVID-19 PANDEMIC. I WANT
TO REASSURE OUR PEOPLE THAT THEIR HEALTH AND SAFETY
IS PARAMOUNT AND THAT WE WILL CONTINUE TO PROVIDE
NECESSARY SUPPORT AND ASSISTANCE.
I REMAIN CONFIDENT THAT MHP IS UNIQUELY POSITIONED
AND WILL NOT ONLY ADAPT TO SUCCESSFULLY MANAGE THE
SHORT-TERM CHALLENGES, BUT WILL EVOLVE TO OPTIMALLY
POSITION ITSELF TO CAPITALISE ON THE MEDIUM AND LONG-
TERM OPPORTUNITIES IN OUR INDUSTRIES.
2019 WAS A CHALLENGING YEAR FOR MHP, BUT IT WAS
ALSO A PIVOTAL YEAR IN OUR HISTORY. WE INTEGRATED
PERUTNINA PTUJ (PP) INTO OUR OPERATIONS AND PERHAPS
MORE IMPORTANTLY WE INSTIGATED CHANGE WE ARE IN THE
PROCESS OF TRANSFORMING THE COMPANY’S BUSINESS MODEL
SO THAT WE AS A GROUP ARE MORE EFFICIENT AND MORE
CUSTOMER ORIENTED. THIS TRANSFORMATION WILL EMBRACE
NEW TECHNOLOGY AND INNOVATION AND WILL RELY ON EACH
AND EVERY ONE OF OUR TALENTED AND COMMITTED EMPLOYEES.
I AM CONFIDENT THAT THEY CAN RISE TO THE CHALLENGE
AND DELIVER FOR OUR STAKEHOLDERS.”
TURBULENT AND DYNAMIC GLOBAL MARKETS IN 2019
In 2019, global markets were disrupted following on from
in China and
the events of 2018. African Swine Fever
Southeast Asia caused significant imbalances in all protein
flows but had more impact in poultry production and regional
pricing. The changing global poultry flows caused a significant
disparity between export producers in terms of market access;
Saudi Arabia, MHP’s key market in the Middle East, was closed
to Ukrainian exports in Q4 2019. Poland emerged as a key
producer of poultry
in 2019 which caused over-production
within the EU, resulting in historically low prices for poultry breast
meat.
PERFORMANCE HIGHLIGHTS
Group revenue in 2019 amounted to US$ 2,056 million (2018: US$
1,552 million), representing 32% growth year-on-year driven by an
increase in the sale of poultry meat, vegetable oils and convenience
food, as well as by the acquisition of Perutnina Ptuj (PP). Domestic
revenues reflect growth of 39% whilst export growth was up 28%,
driven by an increase in grains, vegetable oils and meat-process-
ing products. Export revenue represented 58% of Group revenue in
2019 (2018: 60%). Adjusted EBITDA (net of IFRS 16) was US$ 376
million and lower than expected and down 16% (2018: US$ 450
million) resulting in an adjusted EBITDA margin (net of IFRS 16)
of 18% (2018: 29%). The lower profitability was driven by lower
commodity prices (both for crops and poultry) and the effects of
adverse weather conditions, combined with the significant strength-
ening of the Ukrainian Hryvnia (13% in Q4 2019 alone) leading to
higher US dollar denominated production costs.
Annual Report 2019 STRATEGIC REPORTCEO’s Statement 14
transform
will be rolled-out more extensively over the next
several years and will
the Company’s
sales from a commodity production base to a branded
value-added base delivering higher margin products.
This development also further mitigates risks in the
movement of raw products for export when disease
outbreaks occur in Eastern Europe.
• Export volume growth. Export revenue grew by
28% year-on-year and now constitutes 58% of total
revenue, driven by the continued implementation
of the Company’s diversification strategy as well as
product mix optimisation - the “right product for
the right market” - to countries within the EU, MENA,
CIS and Africa.
BUSINESS REVIEW
Despite the challenges, MHP made significant progress towards
a number of strategic goals during the year and continued to
execute upon its growth strategy in both export and domestic
markets.
• Integration of Perutnina Ptuj. I am delighted with the way in
which the newly-acquired Balkans operations have been so
efficiently integrated into the Group and with the operational
synergies that have been realised to date. There is more to
achieve and there are also lessons to be learned from the PP
operations that will be applied across the wider Group going
forward.
• Transformation from a raw materials company into a
‘culinary’ company. A gradual strategic shift towards more
customer-centric products is underway. The most important
evolution in this tenet of our strategy during 2019 was the move
towards more value-added primary and further-processed
products for the Ukraine domestic market and, similarly,
is
export markets. This
customer-led and involves us working closely with our
customers as partners to anticipate their evolving needs,
strategic evolution, which
• Mid-term growth opportunities. In February 2020 we an-
nounced that MHP is planning a greenfield project in Saudi Ara-
bia; there is significant government support for the project and a
feasibility study is ongoing.
2020 STRATEGIC PRIORITIES
MHP has responded and adapted to the challenges of 2019
and continues to take positive steps to further enhance and
optimise its business model.
• Business transformation. To increase MHP’s financial strength,
we have tasked a newly-created business transformation
group with ambitious goals to improve the efficiency of all
business processes. This includes transforming customer
service, the digitalisation of processes and the creation of
a new franchising business model. This team is in the early
stages of investigating potential new products and processes
which, over time, will create thoughtful, balanced solutions for
increased efficiency.
• Looking after our people as MHP transforms. Our peo-
ple are our greatest asset and MHP will ensure that they
are looked after, including through a fair, transparent and
merit-based
they are
remuneration system whereby
rewarded for their contribution. Andriy Bulakh, appointed
Deputy CEO, People in January 2020, will oversee our work
values and
corporate
on developing
competency model; increasing the efficiency and productivity
of employees and organisations; new training formats; and
switching to more flat, flexible and adaptive staff management
models featuring increased engagement.
culture,
the
• Perutnina Ptuj. Continued investment in PP remains a
priority
in order to capitalise on the opportunities for
expansion into regional and Western European markets.
We will focus on high-quality, branded ready-to-eat and
ready-to-cook products. I am confident that PP will continue to
deliver and will be a leader in poultry production in Europe in
the medium-term.
• Investment
in
‘Commercial Kitchens’. A
‘Commercial
Kitchen’ concept is being developed and is planned to be
implemented in Ukraine during 2020, whereby the Company
will directly supply end customers rather than HORECA
processors.
GROUP REVENUE IN 2019
AMOUNTED TO US$ MILLION
Annual Report 2019 CEO’s StatementSTRATEGIC REPORT • Production volume growth. During
its annual strategy
meeting in May 2019, the Company reiterated its previous
production target of 850-880,000 tonnes of poultry meat
by 2024. We continue to expect PP and the expanded
Vinnytsia complex to be our main drivers of production growth
in 2020 towards this goal.
• Increasing the profitability of our agricultural oper-
ations. Spring crops are a key driver of the Company’s
results. The Grain Growing segment is therefore refocussing.
It is increasing the number of hectares in which spring crops
(corn, soy and sunflower) are sown and reducing the number of
hectares
(wheat, barley and
rapeseed) are sown. This, combined with the optimisation of
production costs and the use of technology including Artificial
Intelligence, will increase the efficiency of the Grain Growing
segment.
in which winter crops
• Export growth. We will continue to execute our geographical
diversification strategy and to focus upon more customised
products as part of a strategy to access new prospective
markets.
• Long-term goal to be an efficient and successful player in
the global protein industry consolidation. We continue to
monitor developments and potential M&A opportunities, both
in poultry production and in the meat-processing industry,
internationally.
long-term goal of being carbon neutral
• To promote the sustainable development of the business.
MHP is committed to reducing greenhouse gas emissions
with a
for
every kilogram of poultry meat produced. The Company’s
largest biogas facility is in production with one more unit
(12 MW) planned. In addition, a research programme
focussed oncarbon
carbon
dioxide and other forms of carbon are stored in the soil for the
long-term, is ongoing.
sequestration, whereby
15
INNOVATION AND RESEARCH & DEVELOPMENT
The Company’s Centre of Innovation has continued its active
programme in 2019, both in Ukraine and in the Balkans. Key
advances made in relation to the production of poultry meat
included the following:
• Antibiotic-free. Significantly more production (in excess of
30% of total volumes) is now designated as “antibiotic-free” and
the Company remains on target to produce in excess of 85% of
poultry meat on an antibiotic-free basis by 2023. In early
2020, an antibiotic-free line of poultry products was launched
in Ukraine for domestic consumers (see also case study on
page 43). An important planned development of the Nasha
Riaba brand in 2020 underlines MHP’s industry-leading
commitment to eliminate the use of antibiotics in the chicken
meat production process. Nasha Riaba product labelling
will highlight the brand’s long term commitment to the
eradication of antibiotic use; this step will further reinforce
MHP’s commitment to improvinghuman health and healthy
eating. MHP plans to achieve this aim by setting step-by-step
targets and rigorous and robust testing.
• Health and nutrition. A two-year MHP research programme
has enabled the Company to confirm and to state on its
products that its poultry products have lower levels of
saturated fats and higher levels of polyunsaturated fats; this is
a significant mitigation factor
in human coronary artery
disease and a key driver of sales growth for increasingly health
conscious consumers.
Yuriy Kosyuk, CEO and Founder of MHP
13 April 2020
Annual Report 2019 CEO’s StatementSTRATEGIC REPORT 16
KEY PERFORMANCE INDICATORS
WE MONITOR PROGRESS AGAINST THE DELIVERY OF OUR STRATEGIC GOALS USING
SEVERAL FINANCIAL KEY PERFORMANCE INDICATORS (“KPIs”).
Each KPI provides a way of measuring elements of our strategy. Our strategy focusses upon the medium to long term period and
therefore we consider how we have performed over a number of years, showing the KPIs for the last five years.
REVENUE, US$m
EXPORT REVENUE, US$m
ADJUSTED EBITDA (NET OF IFRS 16), US$m
2,056
1,552
1,288
1,062
1,135
2200
2000
1800
1600
1400
1200
1000
800
600
400
200
0
1,186
58%
924
60%
56%
635
57%
732
49%
524
1200
1000
800
600
400
200
0
100%
50%
0%
600
500
400
300
200
100
0
436
415
459
450
3761
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
US$m (LHS)
% of total revenue (RHS)
1 Adjusted EBITDA (after implementation of IFRS 16) comprised
US$ 427 million
BUSINESSREVIEW BUSINESS REVIEWBusiness Review Annual Report 2019 17
Key Performance Indicators
KEY PERFORMANCE INDICATORS
REVENUE, US$m
EXPORT REVENUE, US$m
How we calculate it
ADJUSTED EBITDA, US$m
As reported.
Revenue to destinations outside of country of production, received in
hard currency.
Adjusted EBITDA is defined as profit before tax, net finance costs,
depreciation and amortisation, net after-tax exceptional and
non-recurring items, net foreign exchange loss, and net other expenses.
Why we measure it
To ensure we are successful in growing the business.
To ensure we are delivering on our strategy of international expansion
in turn leading to additional hard currency revenue. Export revenue
provides MHP with a natural hedge against local currency volatility.
To track the underlying performance of the business.
2019 Progress
Revenue was up 32% y/y driven by an increase in the sale of poultry
meat, vegetable oils and convenience food, as well as by the acquisition
of Perutnina Ptuj.
Export revenue was up 28% y/y driven by an increase in exports of
grains, vegetable oils and meat-processing products.
Adjusted EBITDA (net of IFRS 16) was down by 16% y/y (adjusted EBITDA
after implementation of IFRS 16 was down by 5% y/y) mainly due to a
decrease in prices of both poultry and grains, as well as higher US$
production costs due to the strengthening of the UAH.
Execution of our diversified sales strategy – both for exports and
domestic sales.
Export growth through sales diversification and market targeting.
Production efficiency and focus on consumer innovation.
KPI unchanged y/y.
Change to KPI
KPI unchanged y/y.
KPI unchanged y/y.
Link to strategy
Annual Report 2019 BUSINESS REVIEW 18
Key Performance Indicator by Segment
KEY PERFORMANCE INDICATORS
BY SEGMENT
THE COMPANY IS UNDERPINNED BY ITS VERTICALLY-INTEGRATED
BUSINESS MODEL, ITS EXPERIENCED MANAGEMENT TEAM AND
ITS DIVERSIFICATION STRATEGY IN BOTH DOMESTIC AND
INTERNATIONAL MARKETS.
POULTRY & RELATED OPERATIONS SEGMENT
GRAIN GROWING SEGMENT
700
600
500
400
300
200
100
0
729
1
618
573
566
520
0.66
0.66
0.50
0.53
0.5
0.64
0.41
0
423
2,351
416
2,654
2,408
1,999
267
276
1,892
167
3000
2500
2000
1500
1000
500
0
450
400
350
300
250
200
150
100
50
0
CONSOLIDATED 2019 GROUP
ADJUSTED EBITDA
MARGIN (NET OF IFRS 16)1
2015*
2016*
2017*
2018
2019
2015
2016
2017
2018
2019
Production of poultry, thousand tonnes (LHS)
EBITDA per kg, US$ (net of IAS 41) (RHS)
Production of grains, thousand tonnes (LHS)
EBITDA (net of IFRS 16) per ha,US$ (RHS)
1 Adjusted EBITDA margin (after implementation of
IFRS 16) comprised 21%
Annual Report 2019 BUSINESS REVIEW18% 19
Financial and Operational Review
FINANCIAL AND OPERATIONAL REVIEW
the Company of Perutnina Ptuj,
EVENTS DURING AND POST REPORTING PERIOD
Further to the announcement in February 2019 of the
acquisition by
the
largest producer of poultry meat and poultry meat products
in the Balkans region of Southeast Europe, MHP completed
the acquisition of minority shareholders at the end of
September 2019 and is now the 100% owner of PP.
that
On 13 September 2019, MHP announced
it had
completed the issue of a US$ 350 million Eurobond of
6.25% notes due 19 September 2029 - making it the
longest-dated Eurobond issue by a Ukrainian corporate
the private
with
issue
sector
enabled
liabilities
full repayment of MHP’s short-term
(US$ 335 million at the end of H1 2019), extending MHP’s
maturity profile and making virtually all of its debt long term.
lowest coupon ever
in Ukraine. Proceeds
issued
from
this new
the
in
OPERATIONAL HIGHLIGHTS
In 2019, MHP continued to launch additional production
sites as part of Phase 2 of the Vinnytsia poultry complex
bringing the total number of rearing sites to six. The Com-
pany’s other poultry production
to
operate at full capacity during the period.
• Poultry production volumes
the European
Operating Segment) reached 728,9171 tonnes, up 18%
year-on-year (2018: 617,943 tonnes). Poultry production
volumes
the European Operating Segment
from
amounted to 79,358 tonnes;
facilities continued
(excluding
• The average chicken meat price decreased by
5% year-on-year to UAH 38.06 per kg (2018: UAH 39.86
per kg) (excluding VAT). The average price of chicken meat
produced by the European Operating Segment during 2019
was EUR 2.64 per kg;
• Chicken meat exports
increased by 25% to 357,433
tonnes
(excluding the European Operating Segment’s
13,881 tonnes), compared with 286,846 tonnes in 2018, as
a result of increased exports mainly to countries in the MENA
region and the EU.
FINANCIAL HIGHLIGHTS
• Revenue of US$ 2,056 million,
year-on-year (2018: US$ 1,552 million);
increased by 32%
• Export revenue of US$ 1,186 million, comprised 58% of total
revenue (2018: US$ 924 million, 60% of total revenue);
• Operating profit of US$ 216 million was down 31%
year-on-year (2018: US$ 312 million) and operating margin
declined to 11% (2018: 20%);
• Adjusted EBITDA margin (net of IFRS 16) decreased to 18%
(2018: 29%); adjusted EBITDA (net of IFRS 16) decreased to
US$ 376 million versus US$ 450 million in 2018;
• Net profit for the period was US$ 215 million (2018:
US$ 128 million).
FINANCIAL OVERVIEW
in mln. US$, unless indicated
otherwise
2019
20182
% change
Revenue
2,056
1,552
32%
IAS 41 standard gains/(losses)
Gross profit
Gross profit margin
Operating profit
Operating profit margin
Adjusted EBITDA4
Adjusted EBITDA margin4
(40)
398
19%
216
11%
427
21%
Adjusted EBITDA (net of IFRS 16) 376
32
422
27%
312
20%
450
29%
450
-225%
-6%
-8 pps3
-31%
-9 pps
-5%
-8 pps
-16%
Adjusted EBITDA margin
(net of IFRS 16)
Net profit before foreign
exchange differences
Net profit margin before foreign
exhange gain/(loss)
Foreign exchange gain5
Net profit/(loss)
Net profit margin
18%
29%
-11 pps
30
1%
185
215
10%
116
-74%
7%
-6 pps
12
128
8%
n/a
68%
2 pps
1 Production volume of chicken meat only without by-products
2 Information for the Q4 2019 and for the year ended 31 December 2019 is presented excluding results of
discontinued operation, which is presented as a single amount as loss after tax from discontinued operations
3 pps – percentage points
4 After implementation of IFRS 16
5 Average official FX rate for 12 months: UAH/US$ 25.8373 in 2019 and UAH/US$ 27.2016 in 2018
Annual Report 2019 BUSINESS REVIEW 20
Fnancial and Operational Review
MAJOR PRODUCT TYPES IN 2019 AND 2018
US$ thousand
2019
2018
Chicken meat and related products
588,903
471,177
Vegetable oil and related products
302,600
274,313
Grain
Other agricultural products
251,836
42,362
156,511
21,703
1,185,701
923,704
Currency risk
During the year ended 31 December 2019, the Ukrainian
Hryvnia appreciated against the EUR and the US$ by 20.03%
and 16.90% respectively (2018: appreciated against the EUR by
5.62% and 1.37% against the US$). As a result, during the year
ended 31 December 2019, the Group recognised a net foreign
exchange gain of US$ 185,291
foreign
exchange gain of US$ 11,638 thousand) in the consolidated
statement of profit or loss and other comprehensive income.
thousand
(2018:
Currency risk is mitigated by the generation of foreign currency
revenue from the sale of products including sunflower oil, grain
and chicken meat. This is sufficient for servicing the Group’s
foreign currency denominated liabilities. Sales for the years
ended 31 December 2019 and 31 December 2018 are shown in
the table to the right.
The functional currency for the Ukrainian companies of the
Group is the UAH. However, for the convenience of stakeholders,
MHP presents its financial statements in US dollars (US$) using
quarterly average and historical exchange rates.
RELEVANT EXCHANGE RATES
Currency
UAH/US$
UAH/EUR
Closing rate as at
31 December 2019
Average
for 2019
Closing rate as at
31 December 2018
Average
for 2018
23.6862
26.4220
25.8373
28.9406
27.6883
31.7141
27.2016
32.1341
Annual Report 2019 BUSINESS REVIEW 21
Segment Performance
SEGMENT PERFORMANCE
POULTRY & RELATED OPERATIONS
KEY OPERATIONAL DATA
SEGMENT –
2019
2018
% change
Poultry
Sales volume, third party,
tonnes
-Sales in Ukraine, third parties,
tonnes
669,964
593,527
13%
312,531
306,680
2%
-Export sales volume, third party,
tonnes
357,433
286,846
25%
Average price per 1 kg net of
VAT, UAH
Average price per 1 kg net of
VAT, USD
Price per 1 kg net of VAT, UAH
(Ukraine)
Price per 1 kg net of VAT, USD
(export)
Sunflower oil
38.06
39.86
-5%
1.47
1.47
37.49
36.62
0%
2%
1.49
1.59
-6%
of chicken meat sold across MENA, the EU, Africa and Asia.
Alongside this strong international growth, domestic sales
in Ukraine increased by 2% year-on-year to 312,531 tonnes
(2018: 306,680 tonnes).
During 2019, the aggregate average chicken meat price was
UAH 38.06, 5% lower than 2018 mainly due to the substantial
drops in poultry prices in EU countries as well as the revalua-
tion of the UAH.
Vegetable oil (sunflower and soybean)
During 2019, MHP’s sales of sunflower oil increased by 22% y/y
to 384,150 tonnes. Sales of soybean oil increased by 3% y/y
during 2019 to 51,771 tonnes.
POULTRY & RELATED OPERATIONS
FINANCIAL RESULTS AND TRENDS
SEGMENT –
in mln. US$, unless indicated
otherwise
2019
2018
%
change
Revenue
1,368
1,241
10%
segment
During 2019,
increased by
10%
in sales volume of
y/y driven mostly by an
chicken meat and vegetable oil, but partly offset by the
decreased prices of chicken meat.
revenue
increase
IAS 41 standard gains/(losses) reflect the net change in fair
value of biological assets and agricultural produce. IAS 41
standard gain during 2019 amounted to US$ 9 million, mainly
as a result of an increase of poultry meat stocks, but partly
offset by the decrease in prices.
Segment gross profit
for 2019 decreased by 9%
y/y driven by lower prices of chicken meat and higher
US$ production costs due to the strengthening of the UAH as
well as the higher cost of mixed fodder protein components and
payroll costs.
During 2019, adjusted EBITDA decreased by 10%, in line with
the decrease in gross profit.
Sales volume, third party tonnes
384,150 315,079
22%
Poultry and other
1,073
973
Soybean oil
Sales volume, third party tonnes
51,771
50,044
3%
Vegetable oil
295
268
IAS 41 standard gains/(losses)
9
(1)
Chicken meat
The aggregate volume of chicken meat sold to third parties
increased by 13% during 2019 mainly as a result of the
increased production of heavier chicken and a decreased
share of thinning as well as the launch of new rearing sites as
part of Phase 2 of the Vinnytsia poultry complex.
MHP continued to follow its strategy of both geographic diver-
sification and product mix optimisation, building up volumes
Gross profit
Gross margin
Adjusted EBITDA
Adjusted EBITDA margin
Adjusted EBITDA per 1 kg
(net of IAS 41)
1 pps – percentage points
10%
10%
n/m
-9%
273
301
20%
24%
-4 pps1
281
21%
311
-10%
25%
-4 pps
0.41
0.53
-23%
Annual Report 2019 BUSINESS REVIEW
22
Segment Performance
GRAIN GROWING SEGMENT – KEY OPERATIONAL DATA
In 2019 MHP harvested around 360,000 hectares of land in
Ukraine and gathered around 2,4 million tonnes of crops,
9% lower y/y mainly due to MHP’s historically record high
harvest of corn
in 2018. MHP average yields are
significantly higher than Ukraine’s average for almost all
crops due to operational efficiency and the employment of best
technology.
GRAIN GROWING SEGMENT – FINANCIAL RESULTS AND
TRENDS
Segment revenue for 2019 amounted to US$ 268 million,
up 48% year-on-year (2018: US$ 181 million). The increase
was mainly attributable to the higher level of crops in stock
designated for sale as of 31 December 2018, in turn due to the
record yields in 2018.
IAS 41 standard losses for 2019 amounted to US$ 50 million. The
loss was primarily driven by a substantial decrease in the prices
of crops (especially corn).
The 2019 adjusted EBITDA of the segment decreased by 28%,
y/y mainly due to the decrease in prices as well as higher
US$ production costs from the strengthening of the UAH and
accentuated by the seasonality of operations with major
expenses incurred in H1 2019.
HARVEST CAMPAIGN RESULTS
20191
20181
Production volume
(in tonnes)
Cropped land
(in hectares)
Production volume
(in tonnes)
Cropped land
(in hectares)
Corn
Wheat
Sunflower
Rapeseed
Soya
Other2
Total
1,312,416
300,396
237,755
122,597
102,418
332,007
2,407,589
MHP HARVEST YIELDS
140,221
46,797
65,447
41,233
38,197
27,581
359,476
1,344,547
295,640
235,245
125,346
114,322
539,322
2,654,422
123,398
48,379
72,981
38,541
37,558
41,963
362,820
2019
2018
MHP’s average3
Ukraine’s average3
MHP’s average3
Ukraine’s average3
(tonnes per hectare)
(tonnes per hectare)
Corn
Wheat
Sunflower
Rapeseed
Soya
9.4
6.4
3.6
3.0
2.7
7.1
4.3
2.6
2.6
2.3
10.9
6.1
3.2
3.3
3.0
GRAIN GROWING SEGMENT – FINANCIAL RESULTS AND TRENDS
7.8
3.7
2.3
2.7
2.6
1 Only land of Grain Growing segment
2 Including barley, rye, sugar beet, sorghum and other and excluding land left fallow as
part of crop rotation
in mln. US$, unless indicated otherwise
Revenue
IAS 41 standard gains/(losses)
Gross profit
Adjusted EBITDA4
3 MHP yields are net weight, Ukraine yields are bunker weight
Adjusted EBITDA (net of IFRS 16)
4 After implementation of IFRS 16
5 in US$
Adjusted EBITDA per 1 hectar (net of IFRS 16)5
2019
268
(50)
29
109
60
167
2018
% change
181
33
108
151
151
416
48%
-252%
-73%
-28%
-60%
-60%
Annual Report 2019 BUSINESS REVIEW 23
MEAT-PROCESSING & OTHER AGRICULTURAL OPERATIONS
SEGMENT – KEY OPERATIONAL DATA
Meat-processing products
2019
2018
Sales volume, third party tonnes
35,458
33,975
Price per 1 kg net of VAT, UAH
67.34
62.22
%
change
4%
8%
During 2019 sales of processed-meat products increased by
4% y/y and reached 35,458 tonnes. The average processed
meat price increased by 8% y/y to UAH 67.34 per kg in 2019,
mostly driven by the implementation of the improved sales and
marketing strategy.
Convenience food
2019
2018
Sales volume, third pary tonnes
19,236
17,997
Price per 1 kg net of VAT, UAH
40.97
42.53
%
change
7%
-4%
Sales volumes of convenience food increased by 7% y/y in
2019 to 19,236 tonnes, driven mainly by a high base effect,
whereby salted fillet (a semi-final product) was included
previously. The average price in 2019 decreased by 4% y/y to
UAH 40.97 per kg (excluding VAT).
MEAT-PROCESSING & OTHER AGRICULTURAL OPERATIONS
SEGMENT – FINANCIAL RESULTS AND TRENDS
Segment revenue for 2019 increased by 15% y/y, in line with
an increase in price and volume for meat processing, and
amounted to US$ 149 million.
The segment’s adjusted EBITDA increased to US$ 20 million in
2019 compared to US$ 16 million in 2018, an increase of 25% y/y
driven mostly by higher returns earned from meat-processing
products.
in mln. US$, unless
indicated otherwise
2019
2018
%
change
Revenue
Meat processing
Other1
IAS 41 standard gains
Gross profit
Gross margin
Adjusted EBITDA
Adjusted EBITDA margin
149
118
31
2
19
13%
20
13%
130
103
27
-
12
9%
16
12%
15%
15%
15%
100%
58%
4 pps
25%
1 pps
PERUTNINA PTUJ’S ADJUSTED EBITDA
MARGIN IN 2019
1 Includes convenience food products, milk, cattle, goose meat, foie gras and feed grains
2 Results of PP from 21 February 2019 when the acquisition was completed
3 Includes sausages and convenience foods
4 After implementation of IFRS 16
Segment Performance
EUROPEAN OPERATING SEGMENT (PP) – KEY OPERATIONAL
DATA
Poultry
Sales volume, third party tonnes
Price per 1 kg net of VAT, EUR
Meat-processing products3
Sales volume, third party tonnes
Price per 1 kg net of VAT, EUR
2019
(10 months)2
51,101
2.64
2019
(10 months)
30,282
2.71
EUROPEAN OPERATING SEGMENT (PP) – FINANCIAL
RESULTS AND TRENDS
in mln. US$, unless indicated
otherwise
2019
(10 months)2
Revenue
IAS 41 standard gains
Gross profit
Gross margin
Adjusted EBITDA4
Adjusted EBITDA margin4
Adjusted EBITDA (net of IFRS 16)
Adjusted EBITDA margin
(net of IFRS 16)
271
-
77
28%
44
16%
42
15%
The European Operating Segment’s revenue amounted to
US$ 271 million for the 10 months in 2019. Adjusted EBITDA4 was
US$ 44 million and the adjusted EBITDA margin4 was 16%.
Annual Report 2019 BUSINESS REVIEW16% 24
CURRENT GROUP FINANCIAL POSITION AND CASH FLOW
DEBT STRUCTURE AND LIQUIDITY
(in mln. US$)
Cash from operations
Change in working capital
Net cash from operating activities
2019
310
192
502
2018
306
(45)
261
Cash used in investing activities
(333)
(224)
Including:
Net cash outflow on acquisition of
subsidiaries
Net cash inflow from disposal of
subsidiaries
CAPEX1
Cash used in financing activities
Dividends
Total financial activities
Total change in cash2
(206)
-
(113)
37
(85)
(48)
121
-
7
(252)
137
(89)
48
85
in mln. US$
Total Debt3
Long-term Debt3
Short-term Debt3
Cash and cash equivalents
Net Debt3
LTM adjusted EBITDA3;4
Net Debt / LTM adjusted EBITDA3;4
31
December
2019
31
December
2018
1,480
1,343
1,448
32
(341)
1,139
379
3.01
1,206
137
(212)
1,131
450
2.51
As of 31 December 2019, long-term debt represented 98% of
total outstanding debt. The weighted average interest rate was
around 7%.
As of 31 December 2019, MHP’s cash and cash equivalents
amounted to US$ 341 million.
Cash flow from operations before changes in working capital for
2019 amounted to US $310 million (2018: US$ 306 million).
Positive cash flow effects from changes in working capital during
12M 2019 mostly reflect reduction in inventory as unusually high
stocks of sunflower and soya crops as of 31 December 2018
(following record high yields in 2018) were utilized or sold during
the period. Additional effect arises due to increase in amounts
payable for seeds and plant protection products to be paid in
2020, as well as reimbursement of VAT receivable for previous
periods.
Net debt
US$ 1,131 million as of 31 December 2018.
increased
to US$ 1,139 million, compared
to
The Net Debt3 / LTM adjusted EBITDA (net of IFRS 16) ratio was
3.01 as of 31 December 2019, which is higher than the limit of 3.0
imposed by the Eurobond agreement. Although exceeding the
ratio of 3.0 does not constitute the breach of any covenant
under the loan agreement, it does lead to the introduction of
additional control measures by MHP. In particular, MHP has to
supervise and assess any
issuance of additional debt,
restricted payments (e.g. dividend distribution, investment in
third parties), mergers with third parties outside of the Group
and the granting of financing of any kind to third parties.
During 2019, total CAPEX amounted to US$ 113 million
mainly related to the launch of production sites of Phase
2 of the Vinnytsia poultry complex.
1 Calculated as cash used for Purchases of property, plant and equipment plus cash used for purchases of other non-current assets
Segment Performance
Such restrictions become effective on the date of publication of
the audited financial statements as of and for the year ended
31 December 2019.
As a hedge for currency risks, revenue from the export of grain,
sunflower and soybean oil, sunflower husks, and chicken
meat are denominated in foreign currency, covering debt service
expenses in full.
Export revenue for 2019 amounted to US$ 1,186 million or 58% of
total revenue (2018: US$ 924 million or 60% of total sales).
OUTLOOK FOR 2020
A number of challenges have combined to create an unusual
degree of uncertainty in early 2020. In particular, the combina-
tion of the COVID-19 Pandemic and an outbreak of H5N1 avian
influenza in the Vinnytsia region of Ukraine in Q1 2020, which
caused a temporary cessation of exports from Ukraine to the
EU, Saudi Arabia and other MENA markets and CIS countries, is
expected to adversely affect MHP’s financial results for the year.
Against this backdrop, the Company’s main drivers of growth
are expected to be increases in poultry production volumes
of c25,000 tonnes from Perutnina and c10,000 tonnes from
Vinnytsia respectively, combined with an increase in the
efficiency of grain growing operations driven by optimisation of
production costs and land utilisation.
With its vertically-integrated business model and efficient cost
base, the Board believes that MHP is well-placed to manage its
way through the expected disruption over the next few months
and remains confident that the Group will deliver a strong
financial result in 2020.
2 Calculated as Net cash from operating activities plus Cash used in investing activities plus Total financial activities
3 Net of IFRS 16 adjustments: as if any lease that would have been treated as an operating lease under IAS 17 as was in effect before the 1 January 2019, is treated as an operating lease for purposes of this calculation. In accordance with covenants in MHP’s bond and loan
agreements, these data exclude the effects of IFRS 16 on accounting for operating leases.
4 Calculated as if acquisitions of subsidiaries had occurred on the first day of the year. LTM adjusted EBITDA of Perutnina Ptuj d.d amounted to US$ 45 million
Annual Report 2019 BUSINESS REVIEW 25
Financial Policies
FINANCIAL POLICIES
MHP HAS INCLUDED CERTAIN MEASURES IN THIS REPORT THAT ARE NOT MEASURES OF PERFORMANCE UNDER IFRS,
INCLUDING EARNINGS BEFORE INTEREST, TAXATION, DEPRECIATION AND AMORTISATION (“EBITDA”) AND LAST TWELVE
MONTHS’ EBITDA (“LTM EBITDA”) BOTH AT A CONSOLIDATED AND AT A SEGMENT LEVEL.
Adjusted EBITDA, LTM Adjusted EBITDA and Segment
Adjusted EBITDA are presented
this Report because
the Directors consider them to be important supplemental
measures of the Group’s financial performance.
in
the Directors believe
these measures are
Additionally,
investors, analysts and stakeholders
frequently used by
to evaluate the efficiency of the Group’s operations and
its ability to employ its earnings for the repayment of debt,
capital expenditure and working capital requirements.
MHP defines Adjusted EBITDA as profit for the year before
income
income,
tax expense, finance costs, finance
depreciation and amortisation expense, impairment of prop-
erty, plant and equipment, net foreign exchange gain/loss,
and net other expenses. Depreciation and amortisation
expenses are components of both cost of sales and
selling, general and administrative expenses
the
consolidated financial statements.
in
The introduction of IFRS 16 on Leases from January 2019 has
caused adjustments to the financial statements and as a
result, the comparability of results between 2018 and 2019 is
impacted by these adjustments. To ensure comparability of
Adjusted EBITDA year to year, MHP has chosen to present
Adjusted EBITDA for 2019 both before and after adjustment for
IFRS 16.
LTM Adjusted EBIDTA
is defined as
Adjusted EBITDA (net of IFRS 16) for the prior 12 consecutive
(net of
IFRS
16)
if
as
EBITDA
сalculated
acquisitions
months ending on such date of measurement; LTM
Adjusted
of
subsidiaries had occurred on the first day of the prior 12
consecutive months ending on such date of measurement.
LTM Adjusted EBITDA excludes the effects of IFRS 16 on
accounting for operating leases. Adjusted EBITDA is derived
by adjusting EBITDA (as defined above) for losses/gains on
impairment/ reversal of impairment of property, plant and equip-
ment, net losses on disposals of subsidiaries, other expenses, net
and foreign exchange (loss)/gain. The Group believes that this
measure is more useful in evaluating the financial performance of
the Company and its subsidiaries than traditional EBITDA due to
the exclusion of items that management considers not to be
representative of the underlying operations of the Group.
The Group’s Segment measure in the consolidated finan-
cial statements is defined as “Segment result” and represents
operating profit by Segment before unallocated corpo-
rate expense, being the Segment measure reported to the
chief operating decision maker for the purposes of resource
allocation and assessment of Segment performance.
the
the Management Report,
reported Segment
Within
result is adjusted for the amount of depreciation and amor-
tisation per Segment in order to present “Segment Adjusted
EBITDA” to external users, which MHP feels
is a more
commonly-used external metric familiar to investors. Net debt
is defined as bank borrowings, bonds issued and lease obliga-
tions less cash and cash equivalents. Net debt ( net of IFRS 16) is
defined as Net debt less the effects of lease liabilities
recognised under IFRS 16.
The Group believes that net debt is commonly used by securities
analysts, investors and other interested parties in the evaluation
of a company’s leverage.
loan agreement covenants
the
In MHP’s bond and
definitions Adjusted EBITDA, LTM Adjusted EBITDA and
Net debt exclude the effects of IFRS 16 on accounting for
operating leases. They are calculated as if any lease that would
have been treated as an operating lease under IAS 17 (as was in
effect before 1 January 2019), is treated as an operating lease.
is
a measure
of MHP’s
Adjusted
not
EBITDA
IFRS and should not be
operating performance under
considered as an alternative
the year,
for
operating profit, Segment result or any other performance
measures derived in accordance with IFRS or as an alternative
to cash flow from operating activities or as a measure of MHP’s
liquidity.
to profit
to similarly
Such measures presented in this Annual Report may not be
comparable
titled measures of performance
presented by other companies, and should not be considered
as substitutes for the information contained in the consolidated
financial statements.
Annual Report 2019 BUSINESS REVIEW RECONCILIATION OF ADJUSTED EBITDA
RECONCILIATION OF NET DEBT
26
Financial Policies
Сalculation of net debt was aligned with definitions used for the purpose of assessment of compliance with debt covenants provided in
the respective loan agreements. Thus, the accrued interest which has been included previously as part of the carrying amount of bank
borrowings, bonds issued and finance lease obligations has been excluded from the amount of total debt. As of 31 December 2019 and 2018
the leverage ratio was as follows:
US$ thousand
Profit for the year
from continuing
operations
Income taxes
Finance costs
Finance income
Depreciation
and amortisation
expense
Adjustments:
Loss on
impairment/
reversal of
impairment of
property, plant
and equipment,
net
Other expenses,
net
Foreign
exchange
loss/(gain),
net
Adjusted
EBITDA
Effect of IFRS
16
Adjusted
EBITDA (net of
IFRS 16)
Year ended
31 December
2019
Year
ended 31
December
2018
221,105
129,378
32,107
147,552
(8,034)
50,527
138,019
(4,457)
205,691
134,066
Cash and cash equivalents
EBITDA
598,421
447,553
US$ thousand
Bank borrowings
Bonds issued
Finance lease obligations
Total debt
Net debt
Effect of IFRS 16
Net debt (net of IFRS 16)
6,244
3,803
SEGMENT PERFORMANCE
8,064
10,561
(185,291)
(11,638)
US$ million
External sales
427,4381
450,259
Sales between business segments
(50,975)
-
376,463
450,259
Total revenue
Segment results
Depreciation and amortisation
Segment Adjusted EBITDA before
unallocated expenses
Unallocated expenses
Unallocated depreciation and
amortisation
Adjusted EBITDA1
1 Adjusted EBITDA (net of IFRS 16) amounted to US$ 376 million
Year ended
31 December 2019
Year ended
31 December 2018
100,825
1,365,669
215,863
1,682,357
(340,735)
1,341,622
(202,802)
1,138,820
238,498
1,090,935
13,442
1,342,875
(211,768)
1,131,107
-
1,131,107
Grain
Growing
Segment
Meat-Processing &
Other Agricultural
Operations Segment
European
Operating
Segment
Eliminations Consolidated
Year ended 31 December 2019
Poultry &
Related
Operations
Segment
1,367,554
49,633
1,417,187
182,778
98,526
268,419
246,477
514,896
28,972
80,115
148,673
949
149,622
12,820
7,544
281,304
109,087
20,364
271,297
-
2,055,943
-
(297,059)
-
271,297
(297,059)
2,055,943
-
25,196
18,523
43,719
249,766
204,708
454,474
(28,019)
983
427,438
Segment results represent operating profit, as adjusted for unallocated corporate expenses, which is reconciled to Segment Adjusted
EBITDA before unallocated expenses by adding back Segment depreciation as illustrated in the following tables:
Annual Report 2019 BUSINESS REVIEW 27
RISK
MANAGEMENT
The environment and markets in which we operate are dynamic and subject to constant change. We must be able to respond to these changes, taking appropriate levels of risk to
protect our market position and to capitalise onopportunities. A failure to manage these changes and risks could have an adverse impact on our business and on the achievement of our
strategic goals and financial performance. We have integrated our risk management processes into our strategy and embedded them throughout the Company, thereby aligning risk management,
strategy and performance across all entities, departments and functions. This enables us to make better business decisions.
RISK MANAGEMENT FRAMEWORK
To understand our risk profile and align it with our objectives and decision-making processes, we operate a global risk framework based upon the recommendations in the COSO (the Committee of
Sponsoring Organisations of the Treadway Commission) Enterprise Risk Management Framework. The COSO Framework defines how to identify, classify, assess and manage the risks that
MHP faces in order to provide reasonable assurance regarding the achievement of the Company`s strategy and objectives. The implementation and functioning of our Risk Management Policy
is supported by Management team and employee training programmes.
STEP
Identify Risk
• Our Management team identifies
the
the Group's
risks
achievement of
strategy and business objectives.
that may
affect
STEP
Measure Potential
Impact
• Identified risks are assessed and risk
tolerance is set.
in order of
impact on
• Risks are prioritised
severity of potential
strategy and business objectives.
• A risk scoring system is used to help
quantify both the probability and
potential impact of each major risk
after the effect of mitigating actions,
to assess residual risks against
the Company's risk appetite and
prioritise further risk management
actions.
• A portfolio view of risk appetite is
assumed.
STEP
Manage Risk
STEP
Monitor
STEP
Report
• Responses
are
to
implemented in the context of the
Group's risk appetite.
risks
• New
risks and
in
existing risks are monitored on a
continuous basis.
changes
• Key risks are discussed regularly
by the Management team and
reported at least annually to the
Board through the Audit Committee.
• Risk management information is
used to make informed decisions.
CONTINUOUS ASSESSMENT AND IMPROVEMENT OF RISK MANAGEMENT FRAMEWORK
BUSINESS REVIEWRisk ManagementAnnual Report 2019 1»2»3»4»5 28
the effectiveness of
RISK OVERSIGHT
The Audit Committee monitors
the
Company’s risk management and control systems through
regular updates from Management, reviews of the key findings
of the external and internal auditors, and an annual review
of the risk management process and risk matrix. Results are
reported regularly to the Board, which has overall responsibility
for risk management.
The Internal Audit function provides objective assurance to
the Management team and to the Audit Committee on the
effectiveness of risk management and helps Management
to continuously improve its risk management framework and
processes.
The Company’s approach to the identification and assessment
of risks, and the response to risks, is based on best business
practices and international COSO Enterprise Risk Management
standards.
ENHANCEMENTS TO RISK MANAGEMENT OVER THE PAST
12 MONTHS
risk management
We constantly strive
processes.
to enhance our risk
management culture throughout the Group, including within
the newly-acquired PP:
to
In 2019, we continued
improve our
I.
Encouraging the identification of risks:
Managers encourage open communication and promote
and support disclosure and risk management discussions.
II. Embedding risk management within every
role and function:
Every employee shares the responsibility for
managing risk.
Risk Management
III. Continuous
identification and assessment of risks:
Process owners regularly look for new operational risks,
reassess the status of known risks, and re-evaluate or
update plans to prevent or respond to problems associated
with these risks.
COSOOUR RISK FRAMEWORK
IS BASED
UPON THE RECOMMENDATIONS IN THE
COSO ENTERPRISE RISK MANAGEMENT
FRAMEWORK
BUSINESS REVIEWAnnual Report 2019 29
Risk Management
THE PRINCIPAL RISKS FACING THE GROUP ARE SET OUT IN THE TABLE BELOW
Principal risk
BUSINESS RISKS
Year-on-year
change in risk
level
Impact
How we manage the risk
Fluctuations in prices for grains
and related products required for
production input
Fluctuations in prices of grains and related products in Ukraine and
globally may affect the cost of chicken production and therefore
the profitability of MHP’s grain growing operations, which could
materially affect MHP’s operating results.
Fluctuations in demand for and
market prices of chicken meat and
crops
MHP’s business and financial results are dependent upon prices for
chicken products and crops, both in Ukraine and worldwide.
to
Failure
implement growth
strategy and expansion into export
markets
MHP may be unsuccessful in its attempt to increase market share in
export markets for its chicken meat and may be impacted by import
restrictions imposed on agricultural commodities by other countries.
1 Company’s estimate
MHP drives cost efficiency across all its businesses, supported by its vertically-
integrated business model. MHP minimises the impact of fluctuations in world grain
prices by growing internally 100% of the corn required for poultry feed production.
The Company has also adopted an innovative approach by replacing a significant
proportion of expensive imported soybean protein with protein from sunflower seeds
grown by MHP.
Demand for chicken in Ukraine is expected to remain strong and to have further growth
potential as beef and pork are mostly produced by households and small farms and
are far more expensive to produce and purchase than chicken. Chicken meat is the
most affordable kind of meat from both a price and diet perspective. MHP products
are available for purchase through different sales channels at all times and the
Company offers competitive trade terms to its customers. MHP’s domestic strategy
and in particular its focus on higher value-add products are drivers for increasing the
Company’s profitability from chicken meat sales in Ukraine.
In international markets, MHP continues to execute upon its strategy of geographic
diversification of exports combined with product mix optimisation and a focus on
customised products for new potential markets.
The risk level increased year-on-year due to weak export prices as market prices of
crops (especially corn) and chicken exports (mainly to the EU) decreased substantially.
MHP has in place a long-term strategy for the Group’s expansion into diversified export
markets. MHP sees more uncertainty in the Middle East and Africa compared with the
EU. However, MHP’s market share of key poultry markets remains relatively low (less
than 10%) allowing MHP to redistribute volumes between markets without disruption
and to grow its presence gradually; this will be partly through growth in population and
consumption per capita and partly through offering better service and quality to our
customers.
The risk level increased year-on-year due to restrictions in place on sales to the
Kingdom of Saudi Arabia (“KSA”) - one of the Company's largest and most profitable
export markets. From September 2019 to February 2020, MHP was prohibited from
exporting poultry to KSA. To mitigate the revenue impact, MHP significantly increased
its share of whole frozen chicken and fillet sales to other countries during Q4 2019,
partially compensating for the loss in volumes to the KSA market. To reduce the impact
of any disruptions to trade flows in future, MHP will continue to execute its strategy of
geographic diversification.
BUSINESS REVIEWAnnual Report 2019 30
Risk Management
Principal risk
Year-on-year
change in risk
level
Impact
How we manage the risk
Avian flu and other diseases may result in:
• Geographic separation of poultry-rearing facilities with a significant distance between
To ensure the well-being of livestock at MHP’s facilities, the Company has implemented
high biosecurity standards and systems supplemented by a set of preventive veterinary-
sanitary and hygiene measures, including:
• Ongoing monitoring of avian flu cases worldwide followed by rigorous assessment of
MHP’s existing biosecurity systems based on identifuing the reasons causing those
cases;
Outbreaks of avian flu and other
livestock diseases
• loss of livestock;
• loss of customers;
• export restrictions;
• distribution of disease; and
• significant financial losses.
Moratorium on the sale of
agricultural land in Ukraine
Ukraine’s Verkhovna Rada voted on 30 March 2020 to abolish
a moratorium on the sale of agricultural land. The moratorium
preventing either individuals or legal entities from selling or
otherwise disposing of agricultural land, except through inheritance,
exchanges or government appropriation, was first imposed in 2001.
It was supposed to remain in force only until the beginning of 2005,
however, it has been extended every year since then.
The law will enter into force from July 2021, with only individuals
able to buy agricultural land for the first two years after this, and
no more than 100 hectares to one buyer. This will increase to 10
thousand hectares per buyer from 2023, with companies and other
legal entities then being allowed to buy agricultural land, although
only if they are owned by Ukrainian citizens. It is still a question of
whether foreigners will be allowed to buy land. These changes might
influence existing relationships with landlords for MHP.
each facility;
• Where any infected areas are identified, immediate actions are taken to limit the
access of all visitors to MHP facilities;
• Constant monitoring of poultry conditions, including analysis of indicators of their
well-being and health and investigation of the quality of raw materials (litter, food,
water) and products (poultry carcasses); and
• Monitoring compliance with biosafety rules.
The risk level remains high and increased year-on-year due to an outbreak of avian flu
at a third party’s facilities in the Vinnytsia region in January 2020.
MHP is also assisting all other poultry producers (mainly egg layers) in the Vinnytsia
region to strengthen their own biosecurity.
MHP supports the opening of the land market and free competition in this area. We
believe, that in most cases, owners of the land will not work on it, due to absence of
required technology and labour, thus, we will continue to rent land from owners. We
have long-term land lease agreements, and what can change for MHP is that hundreds
of individual agreements with physical persons might convert to consolidated contracts
with new bigger land owners. MHP does not see the economic feasibility of buying land
and will therefore continue renting it.
BUSINESS REVIEWAnnual Report 2019
31
Risk Management
Principal risk
Year-on-year
change in risk
level
Impact
How we manage the risk
Occurrence of a material
environmental or health and safety
incident
The occurrence of a material environmental or health and safety
incident could impact day-to-day operations, leading to financial
penalties and reputational harm.
MHP maintains robust environmental and health and safety policies, management
systems and procedures in line with best practice and legal requirements. These are
regularly reviewed and updated, and employees participate in frequent training and
development activities.
Occurrence of a material product
quality or product safety incident
The occurrence of a material product quality or product safety
incident could impact day-to-day operations, leading to financial
penalties and a reduction in brand value.
MHP prioritises product safety and quality in line with international best practice and
applicable regulations. It maintains robust quality and safety management systems and
has an excellent track record in this area.
Fluctuations in commodity prices
such as gas, fuel and energy
Changes
in commodity prices affect MHP’s production and
distribution costs and in turn impact operating results and cash flows.
MHP tightly monitors and controls its gas, fuel and energy costs. Energy price risks
are mitigated by a priority focus on developing renewable sources of energy and a
continued increase in the use of co-generation and alternative energy technology. The
processing of sunflowers results in the production of large volumes of husks that are
burned to generate steam heat for fodder complexes.
Unfavourable weather conditions
Extreme changes in temperature or rainfall including weather change
in summer and winter could influence agricultural productivity as
a whole and crop yield, harvesting and transportation costs in
particular.
Ukraine’s weather is generally temperate, with plenty of sunshine in summer and
adequate rainfall. This combines with extremely fertile soil to create excellent growing
conditions. MHP’s management team supports the use of modern technology to achieve
a yield which is significantly higher than the average for Ukraine1.
The integration of newly-acquired businesses in Europe might be
subject to a number of challenges and uncertainties, including: the
diversion of Management’s attention from other business issues
and potential disruption to MHP’s ongoing business; the potential
necessity of coordinating geographically-separated
facilities;
incurring unanticipated expenses; the consolidation of functional
areas where appropriate; adapting MHP’s business model and
practices to different jurisdictions; adapting any acquired companies’
practices and policies to those of MHP; and possible inconsistencies
in standards, controls, procedures and policies, operating systems
and business culture.
MHP has prepared a succession and development plan for the Company’s managers
which allows them to participate intensively in the management of new businesses.
MHP has also developed a plan of key controls and safeguards to be put in place. MHP
has experience of managing businesses located outside its main countries of operation
and such practices can be extended to cover newly-acquired businesses. During the
due diligence process on potential target acquisitions, MHP pays specific attention to
the production and safety standards of those potential acquisitions and develops plans
to align such standards with those of MHP. This is also factored into the Company’s
financial resource allocation.
Since taking control in February 2019, MHP has started integrating PP into the Group
and implementation of business processes at PP to MHP standards. This has led to
significant improvements in production efficiencies and improved financial performance
of PP during 2019. Many of the business functions were successfully centralised with
additional plans for 2020. Though full integration will continue over the next 2-3 years,
initial results show that risks are low that this integration of PP will not be completed
successfully.
Failure to successfully integrate
newly-acquired businesses
1 Company’s estimate
Annual Report 2019 BUSINESS REVIEW 32
Risk Management
Principal risk
Year-on-year
change in risk
level
Impact
How we manage the risk
Lack of highly-qualified staff at
level and production
strategic
enterprises
The agriculture industry is facing a number of personnel challenges
including: the migration of skilled workers to neighbouring countries;
move of labor force from villages to urban environment; the ageing of
the current workforce; and changes in the required skills base. A lack
of qualified science, engineering, technical and other employees
could increase risks to the long-term future of the business.
Outdated equipment and
technology
Changes in technology and global digital transformation may render
the current technologies and IT systems obsolete or require MHP to
make substantial capital investments.
Manufacturing processes in the agricultural industry are prone
to technological and process changes which may render MHP’s
current processes obsolete. Moreover, IT systems of the Group and
the processes within such systems might require transformation to
meet the challenges of the digital era. MHP might face a lack of
in-house expertise and/or resistance of process owners whilst it is
accomplishing its transformation strategy. In order to orchestrate
this transformation successfully, MHP may be required to invest
substantial sums of money to adopt newer technologies and
processes. The level of investment required could have a material
adverse effect on MHP’s business, results of operations, financial
position and prospects.
MHP works to maintain positive relationships with employees and strives to build upon
its reputation as a high-quality, responsible employer of choice. As part of this, MHP
provides a number of programmes designed to enrich its employees and the broader
community including:
• Education and professional programmes for the younger generation;
• “Personnel Reserve” and “New Horizon” training programmes for prospective and
high-performing employees respectively;
• A strategic action plan to build and support schools in regions where its facilities
operate; and
• Development of a digitalisation strategy that is in the process of implementation and
focusses on automating business processes and decision making (including artificial
intelligence).
The risk level increased year-on-year with the acquisition of Perutnina Ptuj at which
outdated equipment and technology limit production capacity and require gradual
replacement. MHP has developed and implemented an investment plan that addresses
this requirement.
A digital transformation strategy is in place across all entities within the MHP Group
focussing on the upgrades, optimisation and automation of key business processes.
Experienced and competent internal project managers and subcontractors are in place
to direct the successful implementation of the digitalisation strategy.
MHP has consistently invested in technology for the automation of the business
processes and improvement in productivity.
BUSINESS REVIEWAnnual Report 2019 33
Risk Management
Principal risk
Year-on-year
change in risk
level
Impact
How we manage the risk
Inefficient procurement and an
increase in production costs
An increase in MHP’s production costs could materially and adversely
affect its profitability.
MHP strives to continually improve its procurement procedures and production
processes. The procurement of strategic items is centralised with a high level of
regulation and control. KPIs are set and are closely monitored with a view to decreasing
the costs of production.
FINANCE RISKS
Fluctuations in foreign exchange
rates
MHP operates globally and has operations and transactions in
different currencies. Fluctuations in the value of the Ukrainian Hryvna
versus the US$ and other currencies give rise to transaction and
translation exposure.
Fluctuations in interest rates
Changes in interest rates affect the cost of borrowings, the value of
our financial instruments, profit and loss and shareholders’ equity.
The majority of MHP’s borrowings are denominated in US$. The resulting exposure
is hedged by the generation in 2019 of 58% of total revenue in US$ from the export
of sunflower and soybean oils, chicken meat and grain. The amount of export sales
will continue to increase with the further expansion of the Vinnytsia poultry complex
and the strengthening of the Group’s positions in export markets. The hard currency
revenue generated will be more than sufficient for MHP to continue to service all dollar-
denominated loans and payments.
The risk increased year-on-year due to the adverse impact of US$ transaction
exposure. The decline in Group profitability in Q4 2019 was partially driven by the 13%
strengthening of the UAH, as while 58% of the Group’s revenue is denominated in US$,
most costs are incurred in UAH. Profits were primarily impacted in the grain growing
operations and the impact was accentuated by the seasonality of operations with major
expenses incurred in H1 2019. At the same time the Group has US$ 185 million foreign
exchange gain in P&L, which is balancing the negative operational effect.
MHP monitors its interest rate exposure and analyses the potential impact of interest
rate movements on its net interest expenses.
MHP’s debt portfolio is well-balanced as of 2019 year end with an 98% / 2% share of
fixed / floating interest rates. The majority of MHP’s borrowings are from foreign banks
at rates lower than those available in Ukraine; a significant part of the Company’s debt
is also in the form of Eurobonds issued at fixed interest rates.
The proportion of fixed interest rate debt increased year-on-year, decreasing the risk of
an adverse impact from interest rate fluctuations.
BUSINESS REVIEWAnnual Report 2019 34
Risk Management
Principal risk
Year-on-year
change in risk
level
Impact
How we manage the risk
Credit risk
Counterparties involved in transactions with MHP may fail to make
scheduled payments, resulting in financial losses to MHP.
MHP has a diversified pool of customers. The amount of credit allowed to any one
customer or group of customers is strictly controlled. Credit offered to major groups
of customers, including supermarkets and franchisees is, on average, between 5 and
21 days. To hedge this risk, MHP procedures require verification of counterparties’
solvency prior to the signing of an agreement with contractors. Policies and operating
guidelines include limits in respect of counterparties to ensure that there is no significant
concentration of credit risk.
Credit risks are managed by security paragraphs, which are included in agreements
with customers. At foreign subsidiaries of MHP, an insurance company is involved to
approve the credit limit and to insure against risk of non-payment.
MHP maintains efficient budgeting and cash management processes to ensure that
adequate funds are available to meet its business requirements. MHP adopts a flexible
CAPEX programme enabling capital projects to be deferred if necessary. MHP has
an irreducible balance in hard currency on correspondent accounts and maintains a
certain level of undrawn credit lines.
In 2019, MHP refinanced the notes due in April 2020 (“2020 Notes”) through the issue
of a US$ 350 million Eurobond for an additional 10 years. As a result long-term debt
comprised more than 95% of MHP’s total debt portfolio (97% as of 2019 year end).
We assess that risk slightly increased according to potential influence of COVID-19.
If, in the long term, MHP is unable to generate and maintain positive
operating cash flows and operating income, it may need additional
funding. MHP’s inability to raise capital on favourable terms could
lead to a default on its payment obligations and could have a
material adverse effect on MHP’s business, results of operations,
financial condition and prospects.
Liquidity risk
Inefficient investments
Inefficient regulation of the Company’s investment appraisal and
realisation procedures or a lack of evaluation or proper authorisation
of investment projects could result in the implementation of
unauthorised and unprofitable investment decisions and subsequent
poor use of capital.
MHP has developed and implemented procedures to ensure due process in this
area. The Evaluation of Investment Projects procedure requires that the Investment
Committee approves investment projects. All of the Company’s investment projects
are documented with a formal investment appraisal report and financial model which
are jointly approved by the Investment Committee. All major investment decisions are
approved by the Board.
BUSINESS REVIEWAnnual Report 2019 35
Risk Management
Principal risk
Year-on-year
change in risk
level
STAKEHOLDER RELATIONS RISKS
Impact
How we manage the risk
Local communities
A deterioration in local community relationships may lead to
disruption in day-to-day business activities, adverse perceptions
about MHP’s approach to human rights, the environment and
negative reputational effects.
Investor and other stakeholder
relations
Inaccurate or out-of-date information about MHP and its activities
leads to negative impacts on the Company’s reputation and adverse
impacts on its relations with material stakeholders including its
shareholders.
MHP is in regular dialogue with its local communities and other stakeholders in
the regions in which it operates. The Company aims to conduct these relationships
sensitively and with mutual respect. It also prioritises the human rights of its local
communities. MHP has designed and implemented stakeholder relations programmes
in line with good international practice. This activity includes regular meetings with local
community representatives, roadshows to enable local people to meet the Company
and the design and maintenance of a variety of communication channels. MHP also
supports, designs and conducts a number of projects in conjunction with local authorities
and local communities that aim to improve local standards of living and infrastructure.
MHP further developed its local stakeholder relations in 2019 following the successful
implementation of a range of Corporate Responsibility projects including:
• The roll-out of educational programmes at all levels, from kindergarten to adult-
learning;
• The development and encouragement of local entrepreneurship through new
projects and programmes. Entrepreneurship is important for the development of
regions and local communities; it creates new jobs, develops infrastructure, and
encourages innovation and the rational use of resources. MHP works in partnership
with entrepreneurs to develop and improve local communities; and
• The development of infrastructure and safety, which includes environmental safety,
healthcare, product quality and safety, safety of buildings, structures and other
infrastructure.
MHP maintains an experienced and well-resourced communications and investor
relations team that is supported by a national and international network of
professional advisors. The team is tasked with ensuring that MHP’s investor and wider
communications activities are conducted in line with international good practice. The
team also ensures that information about the Company is distributed in a timely manner,
is accurate and up-to-date. MHP also monitors external commentary about its activities
to ensure that any inaccuracies are addressed promptly. A qualitative measurement
of the Company’s image is performed on a regular basis and monitored by its senior
management team and the Board.
BUSINESS REVIEWAnnual Report 2019 36
Risk Management
Year-on-year
change in risk
level
Impact
How we manage the risk
The Group’s businesses may be affected by regulatory developments
in any of the countries in which MHP operates, including changes
in fiscal, tax or other regulatory regimes. Potential impacts include
higher costs to meet new environmental requirements; the possible
expropriation of assets; other taxes; or new requirements for local
ownership.
MHP’s management team actively monitors regulatory developments in the countries
in which the Group operates. MHP’s financial control framework has adopted tax and
treasury approaches fully in compliance with relevant local laws in the jurisdictions in
which the business is registered. MHP pays its taxes in full in all jurisdictions in which
it operates. Moreover, MHP is consistently developing and integrating into its business
practices standards such as the Market Abuse Regulation and sustainability reporting.
Principal risk
COMPLIANCE RISKS
Legal and regulatory risk
Bribery and corruption
A material bribery or corruption incident could lead to significant
reputational harm, adverse stakeholder relations, financial penalties
and could threaten MHP’s licence to operate.
Failure to comply with the
covenants under loan agreements
A failure by MHP to comply with restrictive covenants under the
terms of its indebtedness could put MHP into default.
MHP maintains robust anti-bribery and corruption policies and procedures which are
regularly reviewed and monitored by the Audit Committee. These include a Code of
Ethical Conduct and investigation procedures which all employees are required to
adhere to, and address matters such as bribery, gifts, supplier and customer relations,
conflicts of interest and other areas of potentially corrupt activity. MHP operates a
whistle blower hotline for the reporting of suspected bribery and corruption
MHP has developed and follows control procedures to monitor compliance with the
covenants. In 2019, implemented a “Procedure for “consolidated leverage ratio more
than 3.0x“, which contains a roles and responsibility matrix, communication rules and a
modelling tool, which is used before approval and actioning of transactions which have
limitations according to the covenant.
BUSINESS CONTINUITY RISK
Failure of IT systems could
materially affect MHP’s business
MHP is becoming more dependent on IT systems and considers
these critical to successful business operations. MHP relies on
its IT systems in many areas of its business, including aspects of
accounting records, business monitoring, execution, production
of orders, invoicing, payment monitoring and health and safety.
Although MHP backs up its IT systems and has a disaster recovery
plan, the failure of IT systems could have a material adverse effect
on MHP’s business, results of operations, financial condition and
prospects.
A number of measures have been implemented across the Company to reduce the risk
of IT system failure. These include: the implementation of additional business continuity
measures; the organisation of reserved data channels; moving services to the Cloud;
and the establishment of an incident management process providing continuous support
for the business. In addition, the Information Security (“IS”) team performs regular audits
of critical IT services in order to determine any IS weakness and to perform penetration
testing of Company vulnerabilities. It also increases employee awareness of IS risks
and focusses on developing proper behaviours.
BUSINESS REVIEWAnnual Report 2019 37
Risk Management
Principal risk
Year-on-year
change in risk
level
Impact
How we manage the risk
COVID-2019
The global pandemic of Coronavirus (COVID-2019) might have
negative effects on MHP’s business:
1. If employees of MHP become infected, this may lead to temporary
disability or death of key personnel or temporary disability of a
critical number of personnel. As a result, this will lead to interruption
of the critical functions and business processes of the Company.
2. Global pandemic, quarantine and trade restrictions might result in
decrease of sales, loss of customers and revenue.
3. Potentially, there might be interruptions in supply and production.
4. Economic crisis, caused by the pandemic, COVID-19 have negative
effect on the banking system and counterparties of MHP that
potentially might also influence liquidity position of MHP.
1. As of April 2020, the level of absenteeism at MHP Group’s enterprises is at the same
level as in the previous years (3-5%). Company management implemented a range
of measures for preventing sickness and the spread of infection within the company
(remote working, additional medical screenings, corporate transfers and protective
masks etc.). In particular, at production facilities the work is organised in shifts of
small numbers of people that allows limiting contact and minimising the potential
for spread of infection. In addition to this, wait list of potential workers have been
developed, for the case if replacement of infected persons and of those who will be
on quarantine will be required. In addition to the prevention measures already taken,
the Company has updated contingency plans for all enterprises and offices which
provide management and employees with strict instructions on how they should
behave in the case of: employees were in contact with an infected person, employees
infected at office/production facility, death of employees due to coronavirus. These
rules of behaviour have been drawn up with a view to minimising the consequences
of and spread of the virus.
2. The main changes for sales in Ukraine occurred within the fresh chicken segment
where we observed temporary increases of sales due to changes in customers’
behaviour - increased demand when people were stocking up for the quarantine
period. Sales in the HoReCa channel have almost ceased. We also expect that
part of our franchising network will be closed due to quarantine restrictions. These
changes are not expected to have a significant impact on our total sales or revenues;
the volume will be redistributed to other channels (large chains, supermarkets).
In export markets we face restrictions on movements between EU countries, a number
of countries have suspended the operation of services and ports as a result of the
quarantine. We have maximised stock levels for EU sales and we have changed
our logistics routes by switching to sea transportation to Rotterdam. A number of
countries have imposed restrictions on movements of population, on the operation
of markets and wholesale bases. In some countries the work of licensing services
and the banking system has been partially suspended. Overall, we face a decrease
of sales in the food service sector and HoReCa. However, consumption in other
channels is increasing. Due to the current situation, orders are being redistributed
to new customers and partially increased to existing customers via current channels.
The volume reorientation process is very dynamic.
BUSINESS REVIEWAnnual Report 2019 38
Risk Management
Principal risk
Year-on-year
change in risk
level
Impact
How we manage the risk
COVID-2019
3. We have enough raw materials in stock to continue normal operations (grain growing
business, poultry production etc.) Although the company has high dependency on
imports, we have effectively managed our supply and have enough stock to ensure
continuity of our production and operations for Q2 2020 and are increasing stocks
for the next 2-3 months.
4. We are able to finance our needs by cash from operations, but in case additional
liquidity is required we will be able to finance it by short-term loans. Having good
long-term relationships with banks, we have preconfirmed limits for financing with
10 banks. In addition to this, we have started cooperation with several new financial
institutions for additional standby loans.
BUSINESS REVIEWAnnual Report 2019 39
S172 & Stakeholder Engagement
S172 STATEMENT & STAKEHOLDER ENGAGEMENT
SECTION 172(1) COMPANIES ACT 2006 STATEMENT
Recorded in the table below are MHP’s key stakeholder
groups, their material issues and how MHP engages with them.
Each stakeholder group requires a tailored engagement
foster effective and mutually beneficial
to
approach
relationships.
By understanding these stakeholders, MHP can factor into
Boardroom discussions the potential impact of its decisions on
each stakeholder group and consider their needs and concerns.
This in turn ensures that MHP continues to provide the
products
require, works effectively
with the workforce, makes a positive contribution to local
communities and achieves long-term sustainable returns for
its customers
that
its investors. Acting in a fair and responsible manner is a core
element of MHP’s business practice.
More information appears in the Corporate Responsibility
section on pages 41 to 45 and within the Non-Financial Report
which will be published in June 2020.
STAKEHOLDER ENGAGEMENT
Regular engagement, dialogue and feedback with MHP’s
material internal and external stakeholders is an important
element of the success of the business and the operation of
its business model. Understanding their views informs and
assists MHP’s decision-making process and helps drive progress
towards the achievement of MHP’s aims, objectives and strategy.
The following table summarises MHP’s key stakeholders, their
areas of interest and how the organisation engages with each
stakeholder group.
MHP regularly reviews
holder group,
interest and
their areas of
communications, reporting and dialogue activities.
its understanding of each stake-
its ongoing
MHP employs experienced and qualified employee teams
to conduct these activities. They include members of the
Board, senior management, investor relations staff, human
resources personnel and local stakeholder representatives.
These are supported when required by external advisors and
services.
Stakeholder
Key stakeholder issues
How we engage
WORKFORCE
MHP has a dedicated and experienced workforce that is committed
to and is a key element in achieving MHP’s aims and objectives
• A shared vision for MHP’s long-term success;
• Learning and development opportunities;
• Employee health and well-being;
• A conducive workplace featuring diversity, inclusion, flexibility,
responsible business practice and clear communication;
• Fair and transparent employment terms and conditions.
COMMUNITIES
MHP’s reputation and business continuity are supported by its aim
to be a proactive and supportive member of its local communities
and a good neighbour
• Transparency, clear communication and opportunities to engage;
• Development and support of local infrastructure and services;
• MHP’s approach to environmental, health and safety issues;
• Local employment opportunities.
• Regular two-way communication;
• Clear communication of Company and management goals;
• Training, education and mentoring;
• Programmes for the development of innovative thinking (Bank of ideas,
MHP accelerator);
• Corporate volunteering;
• Grievance mechanism;
• Regular surveys;
• Workplace wellness programme.
• Stakeholder Engagement Plan;
• Grievance mechanism;
• Regional recruiting programme;
• Medical assistance in the village programme;
• Regular public hearings;
• Regular investment in public infrastructure in partnership with local
stakeholders.
BUSINESS REVIEWAnnual Report 2019 40
S172 & Stakeholder Engagement
Stakeholder
Key stakeholder issues
How we engage
CUSTOMERS, BUSINESS PARTNERS AND SUPPLIERS
MHP’s ongoing and uninterrupted business continuity relies on
the strength of its relationships with its customers, suppliers and
business advisors
• MHP’s approach and performance relating to biosecurity, product
quality, environmental, health and safety matters;
• Dedicated staff teams to interact with customers, suppliers and
business advisors;
• Transparency, clear communication channels and opportunities to
• Provision of questionnaire facilities;
• Fair business conduct, terms and conditions;
• Interaction via tender platform;
SHAREHOLDERS, FINANCIERS AND THE INVESTMENT
COMMUNITY
MHP’s ongoing access to capital and liquidity depends on
maintaining strong and lasting relationships with investors, debt
providers, financiers and financial analysts
engage.
• Financial and share price performance;
• Credit rating;
• Strategy;
• Risk management;
• Environmental, social and governance (“ESG”) approach and
performance;
• Transparency, regular and proactive communication and reporting.
• Participation in regular customer due diligence processes.
• Regular provision of conference calls for the investment community;
• Investor Day in September 2019;
• Quarterly results announcements;
• One-to-one meetings with investors and financiers;
• Annual general meeting;
• Dedicated IR section on the Company’s website;
• Annual financial and non-financial reports;
• Site visits.
GOVERNMENTS AND REGULATORS
MHP’s licence to operate is dependent on its relations with
government and regulators and operating within the applicable
laws and regulations
MEDIA
An important element of all of MHP’s key stakeholder relations is
that the media reports timely and accurate information about its
activities
• Adherence to applicable laws and regulations;
• Support and cooperation with local economic development
• Regular meetings with local government;
agencies;
• Investment into infrastructure, education and medical
developments;
• Transparency, clear communication channels and opportunities to
engage.
• Receipt of timely, complete and up-to-date news and information
about MHP’s activities
• Contact information for the media
• Transparency, clear communication channels and opportunities to
engage
• Participation in local infrastructure, health and education projects;
• Close cooperation with local regulators over matters such as
maintenance of strict bio-security, health and safety and environmental
matters.
• Company website
• Regular distribution of Company news and information
• Availability of senior management for media interviews and briefings
• Site-visits for the media
BUSINESS REVIEWAnnual Report 2019 41
Corporate Responsibility
CORPORATE RESPONSIBILITY
THIS SECTION OF THE ANNUAL REPORT IS PROVIDED TO GIVE READERS AN OUTLINE UNDERSTANDING OF THE
COMPANY’S APPROACH TO CORPORATE RESPONSIBILITY MATTERS AND HOW THIS ASPECT OF THE BUSINESS IS
INTEGRATED INTO ITS OVERALL STRATEGY. DETAILED INFORMATION WILL BE PROVIDED IN THE FORTHCOMING
NON-FINANCIAL REPORT WHICH WILL BE PUBLISHED IN JUNE 2020. THE NON-FINANCIAL REPORT WILL APPLY THE
LATEST APPLICABLE GLOBAL REPORTING INITIATIVE (“GRI”) FRAMEWORK.
STRIVING TO ACHIEVE THE BEST INTERNATIONAL
STANDARDS
MHP strives to achieve best practice corporate responsibility
in line with international standards. Corporate responsibility
forms an integral part of the Company’s long-term corporate
vision. The Board views this aspect of MHP’s activities as
important to the achievement of its ambition of becoming
a leader in sustainable development, managing environ-
mental matters responsibly and proactively addressing
climate change. MHP also aims to create a healthy, safe and
conducive workplace, maintain
the highest standards
of product quality and safety, conduct its reporting and
communications transparently, be a responsible member of
its local communities and create a leadership platform for its
employees.
KEY FOCUS AREAS
MHP’s approach
this
seven key areas, which are
highlighting MHP’s corporate responsibility framework.
to responsible business
illustrated
focusses on
table,
in
CORPORATE RESPONSIBILITY FRAMEWORK
The table below illustrates the areas addressed in the Company’s policy framework and management systems.
Environment
& climate
change
Occupational
health & safety
Product
quality
& safety
Greenhouse gas
and atmospheric
emissions
Occupational
health
Biodiversity
management
Accident
prevention
Maintenance of
biological safety
standards
Product hygiene
Animal welfare
Business
conduct
People
Local
communities
Antibiotic-free
programme
Anti-bribery and
corruption
Workplace
diversity
Local stakeholder
engagement
Maintenance of
appropriate living
conditions
Regulatory and
legal compliance
Equal
opportunities
Effects of
business activity
Water use
Provision
of healthy
workplaces
Product quality
Constant access
to balanced food
and fresh water
Supplier and
customer
relationships
Training and
development
Reuse, recycling
and waste
management
Employee health
and well-being
Scientific analysis
Veterinary
supervision
Product labelling
and pricing
Fair working
conditions
Energy use
Quality of raw
materials
High-quality
bedding
materials
Data protection
and information
security
Approach to
organised labour
Local
infrastructure
investment
Contribution to
local economic
development
Minimise
impact on local
communities
BUSINESS REVIEWAnnual Report 2019 42
POLICY HIGHLIGHTS
Highlights of MHP’s policy framework, for each key focus area,
are recorded below.
PEOPLE
• Commitment to value each employee and promote equality of
opportunity;
ENVIRONMENT AND CLIMATE CHANGE COMMITMENTS
gas
• Reduce
intensity with
a long-term aim of making the Company’s activities carbon
neutral;
greenhouse
emissions
• Minimise the effects of the Company’s activities on the
• Prohibition of discrimination, forced and child labour;
• Commitment
bargaining.
freedom of association and collective
to
LOCAL COMMUNITIES
• Commitment to build trusting and mutually beneficial partner-
local environment;
ships;
• Minimise water use and discharges to water;
• Preserve local biodiversity;
• Minimise use of energy and use of renewable sources where
• Promotion of local living standard improvements;
• Commitment to respect human rights and the interests of local
stakeholders.
practicable.
OCCUPATIONAL HEALTH AND SAFETY
• A healthy and safe working environment;
• Commitment to incident prevention in line with industry best
practice.
PRODUCT QUALITY AND SAFETY
• Maintenance of the highest quality and safety standards
in line with industry best practice and applicable laws and
regulations;
• Constant monitoring of biological safety.
ANIMAL WELFARE
• Humane treatment of animals in line with industry best prac-
tice at all times;
• Antibiotic-free programme.
BUSINESS CONDUCT
• Zero tolerance approach to bribery and corruption;
• Commitment that all employees will adhere to responsible
standards of business behaviour.
MANAGEMENT SYSTEMS
is supported by comprehensive
framework
MHP’s policy
corporate responsibility management systems which have
industry best practice and
been developed
locations employ
international
environmental specialists and people responsible for the main-
tenance of environmental standards and compliance with
relevant laws and regulations.
in line with
All MHP
standards.
the
Occupational health and safety are governed by
Company’s Labour Protection Service. As well as compli-
ance and accident prevention, the department is tasked with
raising and maintaining employee awareness of health
and safety through a variety of training, dialogue and
communications mechanisms.
is of paramount
Product safety and quality
importance
to MHP and it is proud of its record in this area. A key
aspect of its management systems is its use of internal and
external laboratories to ensure this record is maintained.
All are certified for compliance with ISO/IEC 17025.
Corporate Responsibility
Animal welfare is a natural priority and the Company’s systems
ensure comfortable living conditions and high standards of
biological safety.
Antibiotic use is prohibited at rearing sites and the Company
does not use hormones or growth stimulants. Antibiotics are
used selectively based on a diagnosis which indicates that their
use is desirable and only with permissions from State and local
entity Chief Veterinary Officers. MHP has a programme in place to
reduce antibiotic use over time.
MHP’s anti-corruption and bribery procedures include regular
reviews of the Company’s risk management systems by the
security department and regular employee training.
emphasis on
include
MHP places
significant
training and
the New Horizons
development. Procedures
employee development programme that enables high-per-
forming employees to choose areas of the business in which to
further their careers and develop their knowledge base and
skills.
The Company continues to develop its stakeholder engage-
ment activities and relationships with its local communities.
This includes the rollout of the Stakeholder Engagement Plan
(details may be found on the Company website at www.mhp.
com.ua) and a programme of investment in local infrastructure
and facilities.
information about MHP’s stakeholder engagement
More
activities can be found on pages 38 to 39 of this Report.
BUSINESS REVIEWAnnual Report 2019 43
1. CASE STUDY – SECOND BIOGAS PLANT
MHP ADDRESSES CLIMATE CHANGE WITH THE LAUNCH
OF THE FIRST PHASE OF THE WORLD'S LARGEST POULTRY
INDUSTRY BIOGAS COMPLEX
The plant is a high-tech facility where organic waste from
poultry farming and agriculture is converted into clean, green
energy and organic
international
environmental standards are applied.
fertilisers. The highest
industry
to be a
transformational
MHP aims
in
applying environmentally-friendly production, green energy
generation and innovative technologies to address climate
change. An important element of this approach is MHP’s aim
to produce its own green energy and organic fertiliser from its
production facility waste.
leader
In December 2019, MHP launched the first phase of the
Ladyzhyn biogas plant as part of its innovative environ-
mental protection and climate change strategy. The first
phase has an installed energy capacity of 12 MW and is
based in the village of Vasyliivka, near Ladyzhyn in the
Tulchinskyi district of the Vinnytsia region. The project is
being implemented in two phases with an eventual planned
installed energy capacity of 24 MW. This will make the
facility the largest biogas complex in the world for processing
organic waste from broiler chickens.
“THE GOAL OF MHP IS TO PROVIDE
OUR PRODUCTION FACILITIES WITH
THEIR OWN GREEN ENERGY AND
MAKE OUR PRODUCTION AS
ENVIRONMENTALLY FRIENDLY AS
POSSIBLE. WE ARE DETERMINED
TO BE INDUSTRY LEADERS IN
ADDRESSING THE CHALLENGES
PRESENTED BY CLIMATE CHANGE“
Yuriy Kosyuk, CEO
Case Study – Second Biogas Plantplant
The operation of the first phase of the Ladyzhyn biogas complex
will reduce MHP’s greenhouse gas emissions by approximately
100,000 tonnes of CO2e (carbon dioxide equivalent) annually.
The second phase will increase this annual saving to around
200,000 tonnes of CO2e.
The
the
first phase will provide around 40% of
electricity requirements of the MHP agro-industrial cluster.
This includes the Vinnytsia poultry complex, which is the largest
in Europe. This comprises a processing complex, rearing sites,
feed mill, oil press plant, incubator station and a water filter
station.
to provide other
The project has also been designed
important environmental advances.
it will
provide a green solution to restoring soil fertility in Ukraine
through soil deoxidisation and the restoration of humus.
It will achieve this through the production of organic bio-
fertilisers with a high content of nutrients to support the
development of organic farming and the growth of crops.
In particular,
THE OPERATION OF THE FIRST PHASE OF THE BIOGAS LADYZHYN
COMPLEX WILL REDUCE MHP’S GREENHOUSE GAS EMISSIONS BY
APPROXIMATELY100,000TONNES CO2E ANNUALLY
BUSINESS REVIEWAnnual Report 2019 44
2. CASE STUDY - ANTIBIOTIC REDUCTION
MHP’S DOMESTIC NASHA RIABA BRAND PREPARES TO
EXTEND ITS REPUTATION FOR ANIMAL WELFARE, HIGH
QUALITY, HYGIENE AND CONSUMER SAFETY
Nasha Riaba is the leading Ukranian chilled chicken brand
which has, since its launch in 2001, attained the biggest
domestic market share1.
A key driver in the growth and development of the brand
has been its reputation for animal welfare, quality, stringent
hygiene standards and consumer safety.
highlight
the
Nasha Riaba product
the eradication of
brand’s
antibiotic use;
reinforce MHP’s
commitment to improving human health and healthy eating
targets and rigorous and robust testing.
labelling will
to
further
long-term commitment
this step will
The latter consists of the conduct of over 6,000 different
analysis methods which examine feed, raw materials, the
achievement of micro-biology and chemical parameters
and the maintenance of strict veterinary, biosecurity and
hygiene standards at all of MHP’s locations.
the
initiative of
in 2019, an
Following
important planned development of
in 2020
underlines MHP’s industry-leading commitment to eliminate
the use of antibiotics in the chicken meat production process.
the programme
the brand
the
illustrates past, current and
The chart on
expected future progress in the elimination of antibiotics in
MHP’s chicken meat production.
right
Case Study - Antibiotic Reduction
MHP FLOCKS PARTICIPATION IN THE
ANTIBIOTIC FREE PROGRAMME
80%
65%
50%
30%
15%
% of MHP’s flock on an antibiotic-free basis
2019e
2020e
2021e
2022e
2023e
90%
60%
30%
0
1 State Statistics Service of Ukraine
6,000DIFFERENT ANALYSIS METHODS
BUSINESS REVIEWAnnual Report 2019
45
BUSINESS REVIEW
Case Stady - COVID-19
3. CASE STADY - MHP SUPPORTS THE UKRAINIAN
REGIONS OF VINNYTSIA AND CHERKASY IN ADDRESSING
THE COVID-19 PANDEMIC
MHP’S CEO YURIY KOSYUK WAS ONE OF SEVERAL
LEADING UKRAINIAN BUSINESS LEADERS WHO MET
THE COUNTRY’S PRESIDENT, VLADIMIR ZELENSKY, ON
16 MARCH 2020 TO DISCUSS HOW THE COUNTRY’S
LEADING BUSINESSES COULD SUPPORT THE GOVERNMENT
IN ADDRESSING THE COVID-19 CRISIS.
Everyone within MHP’s management team and workforce
views this activity as an essential part of our role within
the Company’s local communities and we are proud to be
able to support the local population in this way during this
difficult time for everyone.
Since March 2020 to date, MHP has provided UAH 84 million
to support the government’s efforts and activities and those
of local stakeholders in the Vinnytsia and Cherkasy regions.
MHP’s subsequent activities
regions, which
are ongoing at the date of this report’s publication, hav
included:
• Working with local authorities, the Red Cross and other NGOs
to ensure that important medical and personal protective
equipment requirements are fully financed;
two
the
in
• Playing a leading role in coordinating efforts to address the
crisis through the delivery of MHP’s knowledge, skills and
human resources; and
• Facilitating and supporting local communication efforts to
ensure that the local population is kept fully up-to-date with
important news and information about the crisis.
84UAH, MILLION
HAS PROVIDED ITS SUPPORT TO GOVERNMENT
EFFORTS AND ACTIVITIES AND THOSE OF
LOCAL STAKEHOLDERS IN THE VINNYTSIA AND
CHERKASY REGIONS.
Annual Report 2019 46
GOVERNANCE
Annual Report 2019
Corporate Governance Report
CORPORATE GOVERNANCE
REPORT
MHP IS CONSTITUTED AS A EUROPEAN COMPANY (“SOCIETAS EUROPAEA”)
MHP was established on 30 May 2006. According to
the extract issued by the Luxembourg Trade and Companies
Register on 8 August 2017, the Company converted from a public
into a
limited
the
European company
previous day.
("Societas Europaea") effective
("société anonyme")
liability company
the Company’s registered
Effective 27 December 2017,
to
office and central administration was
Cyprus and the Company is currently registered in the Cyprus
for SE Companies, under number SE 27.
Registry
transferred
The Company’s registered office is situated at 16-18 Zinas
Kanther Street, Agia Triada, 3035 Limassol, Cyprus.
In December 2017, the Company also adopted a new
Memorandum and Articles of Association to comply with
the provisions of Cyprus Companies Law, Cap. 113, Council
Directive 2001/86/EC of 8 October 2001 supplementing
the Statute for a European company with regard to the
involvement of employees,
the
European Public Limited – Liability Company Regulations
2006, as applicable in Cyprus. This new Memorandum and
the SE Regulation and
Articles of Association can be found on the Group website
(www.mhp.com.cy). The Company’s corporate governance
structures, processes and procedures are outlined in its Code
of Corporate Governance which can also be viewed at the
corporate website.
The Company upholds and practises the highest standards
of corporate governance with its shareholders, the Board
of Directors, personnel, business community and other
stakeholders
regulatory
agencies.
government
including
and
Dr John Rich
Executive Chairman
N
NAI
John Grant
Senior Independent
Director
Roberto Banfi
Non-Executive Director
GOVERNANCE STRUCTURE
BOARD OF DIRECTORS
Yuriy Kosyuk
Chief Executive Officer
Roger Wills
Non-Executive Director (since 2019)
NAI
Viktoria Kapelyushnaya
Chief Financial Officer
Christakis Taoushanis
Non-Executive Director
AI
Yuriy Melnyk
Chief Operating Officer
Philip J Wilkinson OBE
Non-Executive Director (from March 2020)
I
AUDIT COMMITTEE
NOMINATIONS AND REMUNERATION COMMITTEE
SENIOR MANAGEMENT
Chief Executive Officer
Independent Director
I
Member of the Audit Commitee A
N
Member of the Nominations
and Remuneration Committee
GOVERNANCECorporate Governance ReportAnnual Report 2019 47
GOVERNANCE
Annual Report 2019
Corporate Governance Report
STATEMENT OF COMPLIANCE WITH THE UK CORPORATE
GOVERNANCE CODE 2018
The Company has been steadily developing its corporate
the
and
governance
processes
the achievement of
few years and aspires
last
standards.
line with
in
best practice
procedures
to
international
over
it undertook
important steps
far as practicable with
to
During 2019,
the UK Corporate
comply as
Governance Code 2018
the Financial
from
Reporting Council at www.frc.org.uk). MHP also complies with
the requirements of Cypriot law and regards the UK Corporate
international best
Governance Code as the appropriate
(available
in order
practice benchmark for its approach. It is the opinion of the
Board that during 2019 the Company complied with the princi-
ples and requirements of the UK Corporate Governance Code
except in relation to the matters noted below.
Provision
number
Provision requirement
Explanation
9
10
11
17
19
24
The Chair should be independent on appointment under the
criteria outlined in Provision 10.
The Board should identify in the annual report each
Non-Executive Director it considers to be independent.
Circumstances which are likely to impair, or could appear
to impair, a Non-Executive Director’s independence include
whether a Director has served on the Board for more than
nine years from the date of their first appointment. A clear
explanation should be provided if the Board nonetheless
considers the Non-Executive Director to be independent.
On his appointment in 2017, the Chairman had served on the Board as a Non-Executive Director since 2006. At the time of his appointment he was also employed by the
International Finance Corporation as a Senior Regional Consulting Agribusiness Industry Specialist. This role has subsequently ended. After considering the Chairman’s
credentials, experience, expertise and independence of thought, it was the Board’s view that the Chairman was independent at the time of his appointment.
In 2018, at the request of the Board, the Chairman agreed to support the Chief Executive Officer with the conduct of certain specific strategic projects where his extensive
knowledge and expertise are particularly helpful. Subsequently, in March 2019, his role was designated as Executive Chairman. Consequently, he can no longer be
regarded as independent. The Board is satisfied that, in view of his credentials, experience, expertise and independence of thought, these arrangements are in the best
interests of the Company, its shareholders and other stakeholders.
John Grant has served as a Non-Executive Director of the Company since 2006 and is the Senior Independent Director. The Board values his business perspective in
view of his extensive experience as a Director of a wide range of major public companies in a variety of business sectors and is satisfied that he possesses the necessary
independence of thought to be regarded as independent.
At least half the Board, excluding the Chair, should be
Non-Executive Directors whom the Board considers to be
independent.
The Board continues to work towards raising the number of independent Non-Executive Directors to meet this criterion in full. A further Non-Executive Director, Philip J
Wilkinson OBE, was appointed in March 2020. The Board is satisfied that the current Board contains sufficient credentials, experience, expertise and independence of
thought and that the current arrangements are in the best interests of the Company, its shareholders and other stakeholders.
A majority of the members of the Nomination Committee
should be independent.
Until March 2019 membership of the Nominations and Remuneration Committee consisted of one independent and one non-independent Board member.
This was addressed by the appointment of a further independent Board member in March 2019.
The Chair should not remain in post beyond nine years from
the date of their first appointment to the Board. To facilitate
effective succession planning and the development of a
diverse board, this period can be extended for a limited time,
particularly in those cases where the Chair was an existing
Non-Executive Director on appointment.
The Board should establish an Audit Committee of
independent Non-Executive Directors. The Chair of the
Board should not be a member.
32 to 41
Remuneration
The Chairman became a Non-Executive Director in 2006 and became Chairman in 2017 when the Board was satisfied of his independence of thought and viewed the
appointment as in the best interests of the Company, its shareholders and other stakeholders. His subsequent adoption of executive responsibilities was also viewed as
being in the best interests of these parties.
The Chairman was a member of the Audit Committee at the start of the year but stepped down in March 2019, upon taking up the Executive Chairman role. All members
of the Audit Committee are now independent.
In common with many listed companies based in Ukraine, the Company does not disclose detailed information about director remuneration and related processes and
is not legally required to do so. It is the responsibility of the Nominations and Remuneration Committee to ensure that the Executive Management are compensated
sufficiently in order to retain and attract high calibre talent and ensure that they are motivated to perform in the best interests of shareholders and other stakeholders. To
date, the Company has compensated the Executive Directors mainly in the form of competitive salaries, supplemented by performance related bonuses. As the Company
develops, consideration will be given to adopting other forms of incentive when the Board believes that this approach will be in the best interests of the Company,
shareholders and other stakeholders.
48
GOVERNANCE
Annual Report 2019
Corporate Governance Report
Changes to the Board of Directors and the Committees
during 2019 and the beginning of 2020
There were several changes to the Board and the Committees,
namely:
• March 2019 - Dr John Rich stepped down from the Audit
Committee and his role was designated as Executive
Chairman;
• March 2019 - Roger Wills joined the Nominations and
Remuneration and Audit Committees as a member. Mr
Wills was appointed Chairman of the Nominations and
Remuneration Committee on 13 April 2020;
• March 2020 - Philip J Wilkinson OBE was appointed to
the Board. Please see his biography on page 55. He is an
Independent Non-Executive Director and brings the number
of independent directors up to four.
Board meetings
The Board conducted five meetings during 2019 with a
100% attendance
in
person and occasionally via conference call. The Board of
Directors also approved certain decisions through 15 circular
resolutions.
rate. Directors attended meetings
At the end of each year, MHP’s Non-Executive Directors meet
to discuss and evaluate the performance of the executive
Directors and the Chairman. The results of the evaluation are
usually communicated to executive Directors at the first Board
meeting of the following year.
Directors and officers litigation statement
No member of the Board of Directors or of MHP’s senior
Management has, for at least five years:
• 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 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.
Directors’ interests
The interests of Directors in MHP’s GDRs are shown in the table
below
Dr John Rich
John Grant
Roberto Banfi
25,000
17,000
15,000
ABOUT THE BOARD
Biographies of the current Directors are set out on pages 53 to
55.
The Directors who served during the year were:
• Mr Roberto Banfi;
• Mr John Grant;
• Ms Viktoria Kapelyushnaya;
• Mr Yuriy Kosyuk;
• Mr Yuriy Melnyk;
• Dr John Rich;
• Mr Christakis Taoushanis;
• Mr Roger Wills.
More information on Board developments and changes during
the year can be found in the Chairman’s Statement on pages
10 to 12.
At 31 December 2019, the Board had eight directors, three
of whom are regarded by the Board as
independent.
Mr Banfi is not regarded as independent because of his
provision of other paid services to the Company. Dr Rich
was viewed by the Board as
independent on appoint-
ment as Chair in 2017 but is now viewed as not independent
to Executive
because of his change
Chairman. Accordingly, at
the Board meeting held on
19 March 2019, he resigned from the Audit Committee and
his role was designated as Executive Chairman. The Board
considers Mr Grant to be independent not withstanding his
period of service since 2006.
in 2019
in role
49
GOVERNANCE
Annual Report 2019
Corporate Governance Report
a part-time advisory basis, in part to enhance his knowledge of
the business. The NRC and Board are satisfied that this in no
way impaired his independence as a director.
independent due
is not regarded as
to his
Mr Banfi
provision of other paid services to the Company. Dr Rich
was viewed by the Board as independent on appointment
as Chairman in 2017 but is now not viewed as independent
subsequent performance of certain
because of his
executive management
in March
2019, he resigned from the Audit Committee and his role
was designated as Executive Chairman.
functions. Accordingly,
Board effectiveness
The Board is responsible for regular assessment of its
In 2019, the Board conducted an annual
effectiveness.
effectiveness review in order to evaluate its performance
as well as that of its Committees and individual Directors.
The evaluation process was initiated by a questionnaire. The
conclusions were analysed by the Board on 13 April 2020 to
further strengthen its composition and performance.
the
(and
relating
facts and
independence
circumstances
throughout
Non-Executive Director independence
The independence of each of the Non-Executive Directors is
considered on appointment. Each year, the NRC and the Board
to
consider
Director
the year, as
includes an assessment of
appropriate). This process
whether each Non-Executive Director
independent of
Management and any business or other relationships that
could materially interfere with his exercise of objective, unfet-
tered and independent judgement or his ability to act in the
best interests of the shareholders. In making its decision,
the Board considers relationships with Management, major
shareholders, associated companies and other parties with
whom the Company conducts business.
is
Independent Director, and has
At 31 December 2019, the Board had eight directors, three
of whom are independent. John Grant has served as a Non-
Executive Director of the Company since 2006 and has
been Senior
Independent Director since 2014. He has
therefore served on the Board for more than nine years from
the date of his first appointment. Mr Grant has had extensive
experience over many years as an
independent non-
executive director of a wide range of public and private
companies covering a variety of business sectors. He has been
Senior
the
Audit and/or Remuneration Committees, of several major
public
broad
The Board
business perspective and experience and continues to be
satisfied that he possesses the necessary independence of
character and judgement to be regarded as independent.
Christakis Taoushanis and Roger Wills, are also viewed as
Independent Non-Executive Directors.
Phil J Wilkinson OBE, who has extensive high-level
experience
industry, was
elected an Independ ent Non-Executive Director of MHP
in March 2020. Prior to becoming available to join the MHP
Board, he was retained by the Company for several months on
companies.
chaired
poultry
values
global
the
his
in
is
for
PRINCIPAL RESPONSIBILITIES OF THE BOARD
The Board
the overall conduct of
responsible
the Company’s business and has the powers, authorities and
duties vested in it by and pursuant to the relevant Cyprus laws
and regulations and the Articles of Association of the Company.
MHP's Articles of Association can be viewed at the corporate
website (www.mhp.com.cy).
The Company has a unitary governance structure and the
Board is the ultimate decision-making body, except for the
powers reserved for the Shareholders’ Meeting by law or
as specified in the Articles of Association (see also Board
Composition on pages 53 to 55).
The Board has a schedule of matters that are assigned to it for
discussion, debate and approval in line with the requirements of
the UK Corporate Governance Code.
These include:
• MHP’s strategy, aims and objectives and
review of
performance against those goals;
• MHP’s mergers and acquisitions strategy;
• MHP’s budgets, financial and operational targets;
• MHP’s annual, half yearly and quarterly financial results;
• MHP’s annual report and accounts;
• MHP’s dividend policy;
• Appointments to MHP’s Board, removal of Board members
and Board remuneration arrangements;
• MHP senior management appointments, removals and
remuneration arrangements;
• Membership and Chairman roles of MHP’s Board committees;
• Board and senior management succession planning;
• Approval of major capital expenditure projects, acquisitions
and divestments;
• Significant variations in MHP’s borrowings or borrowing
facilities;
• Financial and risk management policies and procedures; and
• Appointment and removal of the Company Secretary.
50
GOVERNANCE
Annual Report 2019
Corporate Governance Report
in
place
formal
procedures
Conflicts of interest
The Board
to
has
manage conflict of interest matters. Each Director is required
to inform the Board of any other directorship, office or
responsibility,
that are
taken up outside the Company during the term of office.
If, in the opinion of the Board, a conflict of interest exists, the
relevant Director does not participate in discussions and will
abstain from a Board vote on the affected matter.
including executive positions
The Company’s Conflict of
transactions
actual or potential) of:
• MHP’s Management team members, including Directors of
Interest Policy covers any
(whether
interest
conflicts of
involving
subsidiaries and branches (“key management”);
• MHP’s line managers who have authority to authorise
transactions on behalf of MHP (“line managers”);
• other MHP employees who are authorised to internally
approve any decisions as
transactions
based on internal policies and instructions (“responsible
employees”) or who have power to influence such decisions.
to significant
Other Professional Commitments
Every Director is required to allocate the time and attention
required
fulfillment of his duties. This
commitment includes limiting the number of other professional
commitments to the extent required.
the proper
for
Confidential information
All Board Directors are required to keep information received
in their capacity as Directors confidential and may not use it for
any other purpose than for fulfilling their remit.
Information and professional development
The Board ensures that Directors, especially Non-Executive
Directors, have access to independent professional advice
at the Company’s expense where they judge it necessary to
discharge their responsibilities as Directors. Board Committees
are also provided with sufficient resources to undertake their
duties.
is
to
responsible
All Directors have access to the advice and services of
the
the Company Secretary, who
Board for ensuring that Board procedures are complied
with. The Chairman is responsible for ensuring that the
information.
Directors receive accurate, timely and clear
The Company’s Executive Management team is obliged to
provide such information and Directors to seek clarification
or amplification where necessary. The Chairman ensures that
Directors continually update their skills, knowledge and famil-
iarity with the Company in order to fulfil their role both on the
Board and on Board Committees. The Company provides the
necessary means for developing and updating its Directors’
knowledge and capabilities.
responsible
is ultimately
risk management,
Internal control and risk management
for
The Board of Directors
internal
the Company’s governance,
control environment and processes and
their
effectiveness at least annually. Once identified, risks are
evaluated to establish financial or non-financial impact and
the likelihood of their occurrence. For risks assessed as
significant, a mitigation action-plan is determined by the opera-
tional business management team.
reviews
The summary of key risks is regularly discussed with MHP’s
Management team and reported at least annually to the Board
of Directors through the Audit Committee. The Company has an
independent risk and process management department whose
activities are overseen by the CFO and reported to the Audit
Committee. The Board of Directors, Management and employ-
ees follow principles of ethical business that are in line with the
Company’s approved Conflict of Interest Policy.
A summary of the Company’s framework for managing risks,
and the Company’s key business risks together with the actions
taken to mitigate them can be found on pages 27 to 38 of this
Report.
and
recognises
constructive
importance of
Engagement with shareholders
regular,
The Board
the
effective
its
shareholders and maintains a dedicated investor relations
department to facilitate this. The principal opportunity for
shareholders to engage with the Board is at the Annual General
Meeting.
communications with
results announcement
MHP announces its financial results on a quarterly basis.
This information is released to shareholders through the
appropriate regulatory news services and recorded on the
is
Company’s website. Each
accompanied by a conference call with MHP’s finance and
investor relations team during which investors and analysts have
the opportunity to discuss and ask questions about MHP’s perfor-
mance. During the year the Board and investors relations team
regularly engaged with shareholders and financial analysts
to discuss matters relating to MHP’s strategy and financial
performance. Additionally, MHP held a Capital Markets Day
in London in September 2019. At this event MHP’s senior
management team updated investors and analysts on the
Company’s strategy, goals and recent acquisition of PP, and
answered questions during a designated session.
Workforce engagement
MHP works closely with its workforce who play an active
role in the management of the business through day-to-day
dialogue and engagement with the senior management team.
One key element of this process is the Company's new HR
Cornerstone Digital management system. This includes the
provision of a
feedback mechanism allowing
employees to participate in the running of the business
and how it is managed.
two-way
information about MHP’s approach
More
to workforce
engagement is included within the People section of the
Non-Financial Report.
51
GOVERNANCE
Annual Report 2019
Corporate Governance Report
Diversity and inclusion
MHP values its distinctive culture and, in particular, its proactive
approach to creating senior management and development
opportunities for women. MHP believes that diversity and in-
clusion supports innovation and continuous improvement and
increases efficiency.
The Board and the NRC considered diversity and inclusion
regular assessment of Board
matters as part of the
effectiveness and the appointments process. The Board has
determined that it will not set specific targets with respect to
Board diversity but recognises the benefits that this brings to its
effectiveness. It is committed to promoting diversity throughout
the business.
will also make sure that there is sufficient time for making
decisions.
The Chairman is also responsible for ensuring that new
Directors receive a complete and tailored induction to the
Company prior to joining the Board and that existing Directors
continually update their skills and the knowledge and
familiarity with the Company required to fulfil their role both on
the Board and on Board Committees.
The Chairman of the Board represents the Board to share-
holders and the public and chairs Shareholders’ Meetings.
The Chairman serves as the interface between the Board and
major shareholders of the Company on matters of corporate
governance.
BOARD COMPOSITION AND ROLES
At 31 December 2019 the Board comprised the Chairman, Chief
Executive Officer, Chief Operational Officer, Chief Financial
Officer and four Non-Executive Directors (three of whom were
considered by the Board to be independent throughout 2019).
Details of the board’s composition are set out on pages 53 to 55
which contain biographical details of the Directors.
Role of the Chairman
The Board elects the Chairman from amongst members that
meet the Board’s criteria following the preparation of a job
specification by the NRC. The Company’s Corporate Gover-
nance Charter excludes the CEO from becoming Chairman.
is
of
responsible
the Board
functioning of
the calendar of
for
The Chairman
the Board.
the proper and efficient
The Chairman determines
the Board
and Committee meetings and the agenda of the Board’s
meetings after consultation with the CEO. Prior to each
receive
meeting,
the extent
complete and accurate
appropriate, a copy of any Management presentation to
be made at the Board meeting. The Chairman of the Board
the Chairman ensures
information and,
that Directors
to
Relationship between the Chairman and the CEO
A clear division of responsibilities is maintained between
the Chairman and the CEO. The CEO may not carry out
the duties of the Chairman of the Board and vice versa.
relations
The Chairman
with the CEO by giving him support and advice while
respecting
the CEO.
The CEO provides the Chairman of the Board with all the
information he requires to carry out his role.
to maintain close
responsibilities of
the executive
required
is
Role of the CEO
The CEO reports directly to the Board of Directors. The CEO
is entrusted by the Board with the day-to-day management
of the Company within the strategic parameters established
by the Board. He oversees the organisation and efficient day-
to-day management
and
joint ventures. The CEO is responsible for the execution and
management of the outcome of all Board decisions. The CEO
is delegated powers that are not exclusively reserved to the
Board or to the Shareholders’ Meetings.
The CEO can delegate authority for daily management to
subordinate executives but will retain ultimate accountability
subsidiaries,
affiliates
of
to the Board of Directors for the actions which are conducted
during the performance of the role and the actions of delegates.
Role of the Senior Independent Director
John Grant has been designated as the Board’s Senior
Independent Director since 2011.
The Senior Independent Director acts as an advisor to the
Chairman, is responsible for the evaluation of the Chairman and
acts as an intermediary for the other Directors and shareholders
when required.
He provides an alternative point of contact for shareholders
on matters where the usual channels of communication are
deemed inappropriate. In 2019, the Senior Independent Director
didn't receive any requests from shareholders/stakeholders.
Role of the Non-Executive Directors
The Non-Executive Directors bring an external perspective in
Board discussions. They offer specialist advice, constructive
challenge and strategic guidance to the Executive Directors as
well as holding them to account.
MHP benefits from the broad range of skills and experience that
the Non-Executive Directors provide from different businesses
and fields.
52
GOVERNANCE
Annual Report 2019
Corporate Governance Report
Role of the Company Secretary
The Company Secretary ensures that the Board receives
appropriate and timely information and provides advice and
support to the Chairman, the Board, Board Committees and
senior management on regulatory and governance matters.
All Directors have direct access to the advice and services of
the Company Secretary. Directors may also obtain independent
advice as required at the Company’s expense.
Appointment and re-appointment of Directors
There is a formal and rigorous procedure for the appointment of
new Directors. The Board may appoint an individual as a Director
to either fill a vacancy or as an additional member of the Board.
The process for new appointments is led by the Nominations
and Remuneration Committee which makes a recommendation
to the Board.
The Board may appoint any Director to hold any employment or
executive office and may revoke or terminate such appointment.
In line with the UK Corporate Governance Code, going forward,
all members of the Board are subject to annual re-election
by a majority of shareholders at the Annual General Meeting.
Directors may be re-elected an unlimited number of times.
Shareholders may, by ordinary resolution, also appoint a person
as a Director or remove any Director before the expiration of
their period in office.
ANNUAL GENERAL MEETING
The next Annual General Meeting will take place on 18 June
2020 at noon at 16-18 Zinas Kanther Street, Agia Triada, 3035
Limassol, Cyprus.
The 2020 AGM notice can be found within the investor
relations section at the Company’s website https://mhp.com.ua/
en/investor-relations/calendar.
NOMINATIONS AND REMUNERATION COMMITTEE
AUDIT COMMITTEE
BOARD COMMITTEES
Meetings attended
Dr John C Rich, Chairman up to April 2020
John Grant
Roger Wills, Chairman from April 2020
3/3
3/3
3/3
Meetings attended
John Grant, Chairman
John Rich (resigned March 2019)
Christakis Taoushanis
Roger Wills (from March 2019)
6/6
2/2
5/6
4/4
The Committee’s main tasks are disclosed in the updated 2018 Corporate
Governance Charter (Annex E):
https://www.mhp.com.ua/library/file/corporate-governance.pdf
The Committee’s main tasks are disclosed
Governance Charter (Annex C):
https://www.mhp.com.ua/library/file/corporate-governance.pdf
in the updated 2018 Corporate
During 2019, the Committee held three meetings with attendance as shown above.
The Nominations and Remuneration Committee Report is provided in a separate
section of the Annual Report on page 60.
During 2019, the Committee held six meetings with attendance as shown above.
The Audit Committee Report is provided in a separate section of the Annual Report on
page 56.
53
GOVERNANCE
Annual Report 2019
Board of Directors
BOARD OF DIRECTORS
DR JOHN C RICH
Executive Chairman
Dr Rich is a highly experienced senior business executive with
a strong background in food science.
YURIY KOSYUK
Chief Executive Officer
Mr Kosyuk has been Chief Executive Officer of MHP since he founded
the Company in 1998.
VIKTORIA KAPELYUSHNAYA
Chief Financial Officer1
Ms Kapelyushnaya has considerable senior financial and business
management experience and has been with MHP since 1998.
Nationality
Australian
Joined the Board
2006
Nationality
Ukrainian
Joined the Board
1998
Nationality
Ukrainian
Joined the Board
2006 (joined MHP in 1998)
Position
Member of the Nominations and Remuneration Committee (Chair-
man until April 2020)
Career and prior experience highlights
• Member of the Australian College of Veterinary Sciences and
a registered financial member of the Australian College of
Veterinary Surgeons;
• 1990-2003: Executive Director, Austasia Pty Ltd (agri-business
conglomerate);
• 1995-2002: Director AN-OSI Pty Ltd (supply chain management for
feedlot beef, poultry and dairy operations);
• Agri-business consultant to IFC and IFC-invested clients until 2018.
Current roles
• Managing Director of Australian Agricultural Nutrition and
Consulting Pty Ltd (AANC);
• Financial Board Advisor to ADM Capital and Independent
Non-Executive Director at three other poultry-related companies.
Career and prior experience highlights
• 1992: graduated as a process engineer in meat and milk
production from the Kiev Institute of the Food Industry;
• 1995: founded the Business Centre for the Food Industry in Kiev.
Career and prior experience highlights
• Diplomas in Processing Engineering (1992) and Financial Audit-
ing (1998) from the Kiev Institute of the Food Industry;
• Deputy and Chief Accountant at the Ukraine Business Centre for
the Food Industry (BCFI).
1 Ms Kapelyushnaya is also the Finance Director at PJSC MHP.
54
GOVERNANCE
Annual Report 2019
Board of Directors
JOHN GRANT
Senior Independent Director
Mr Grant has considerable senior business management, finance,
strategy and operational experience.
ROGER WILLS
Non-Executive Director
Mr Wills is an experienced business executive and investment
banker with a focus on Eastern Europe and emerging markets.
CHRISTAKIS TAOUSHANIS
Non-Executive Director
Mr Taoushanis is a highly experienced international financier and
senior manager.
Nationality
British
Joined the Board
2006
Position
Chairman of the Audit Committee and member of the Nominations
and Remuneration Committee.
Career and prior experience highlights
• Chairman, Gas Turbine Efficiency plc, Hasgo Group Limited, Motor
Sports Association Limited and Torotrak plc;
• Senior Independent Director, Melrose plc, Pace plc and Wolfson
Microelectronics plc;
• Non-Executive Director, National Grid plc, Corac Group plc and the
Royal Automobile Club Limited;
• 1992-1996: Finance Director, Lucas Industries plc, LucasVarity plc;
• 1990-1992: Executive Deputy Chairman, Jaguar Cars;
• 1989: Director of Corporate Strategy, Ford Motor Company.
Current roles
• Non-Executive Director of Augean plc and Chairman of the British
Racing Drivers’ Club Limited.
Nationality
New Zealander
Joined the Board
2019
Position
Member of the Audit Committee and Chairman of the Nominations
and Remuneration Committee (from April 2020).
Career and prior experience highlights
• Management consultant, Coopers & Lybrand Russia;
• Investment banking at Brunswick, including CEO at Brunswick
Capital;
• 2017-2018: Non-Executive Director, Cherkizovo Group.
Current roles
• Managing own family office since 2007 focussing on investment
opportunities in private equity, venture capital and public mar-
kets with a focus on Eastern Europe and emerging markets;
• 2015-current: Non-Executive Director, T-Plus Group;
• 2019-current: Non-Executive Director, Royal Automobile Club
Motor Sports Association Limited (Motorsport UK).
Nationality
Cypriot
Joined the Board
2018
Position
Member of the Audit Committee.
Career and prior experience highlights
• 30 years of banking experience including 4 years at Continental
Illinois Bank of Chicago, 18 years at HSBC Group in Hong Kong
and Cyprus, and 8 years as Chief Executive Officer at Cyprus
Development Bank.
Current roles
• Non-Executive Director of various regulated and listed companies;
• Advisor to a number of companies through the private firm, TTEG
& Associates.
55
GOVERNANCE
Annual Report 2019
Board of Directors
ROBERTO BANFI
Non-Executive Director
YURIY MELNYK
Chief Operating Officer
Mr Banfi is an experienced senior business manager with considerable
Mr Melnyk is an experienced executive manager and technical
brand management and operational experience working for companies
agricultural expert.
PHILIP J WILKINSON OBE
Non-Executive Director
Mr Wilkinson has considerable experience in international poultry
industries.
based all over the world.
Nationality
Italian
Joined the Board
2018
Position
Non-Executive Director (previously an advisor to MHP)
Career and prior experience highlights
• 2014-2016: General Manager for Europe and Eurasia for BRF S.A.
and also a Specialised Corporate Consultant to the company;
• 1998-2009: various executive positions at Sadia S.A. including Di-
rector of Sales and Marketing for Brazil and Director of Global Sales
and General Manager for Russia, Middle East and Africa;
• Director of National Sales, Brazil, for Best Foods (now part of
Unilever) after previous brand management experience (Knorr, Hell-
mann’s Mazola and Ades);
• Director, Swift Armor Brazil.
Other current roles
• Independent Consultant in the Food sector covering several
geographic regions and specialising in animal proteins.
Nationality
Ukrainian
Joined the Board
2010 (when appointed Deputy CEO)
Nationality
British
Joined the Board
2020
Career and prior experience highlights
• 1985: graduated from Ukraine Academy of Agriculture and is
Position
Non-Executive Director
a Doctor of Agriculture;
• A correspondent member of the National Academy of Sciences of
Ukraine since 2002;
• 2004: awarded the State Prize of Ukraine in science and technol-
ogy;
• Previously Agriculture Minister and Deputy Prime Minister of
Ukraine and also served as an advisor to the Prime Minister of
Ukraine.
Career and prior experience highlights
• Commercial Director of Arla Foods;
• Poultry industry: engaged in the launch of perceived higher-wel-
fare slower-growing broiler birds pioneered in conjunction with
supermarket Marks and Spencer (Oakham brand);
• Dairy industry: awarded an OBE in 2003 for Services to the Dairy
Industry; Chairman of the National Dairy Council; and the UK
representative to the European Dairy Association in Brussels.
Current roles
• Vice President of AVEC, the European Poultry Association
representing the interests of the broiler industry in Europe;
• Advisor to private equity firm TPG Capital and responsible for
assessing potential new opportunities.
56
GOVERNANCE
Annual Report 2019
Audit Committee Report
AUDIT COMMITTEE
REPORT
I AM PLEASED TO PRESENT THE 2019 REPORT OF THE AUDIT COMMITTEE WHICH DESCRIBES HOW
THE COMMITTEE CARRIED OUT ITS RESPONSIBILITIES DURING THE YEAR
THE AUDIT COMMITTEE (THE “COMMITTEE”)
IS RESPONSIBLE FOR THE INTEGRITY OF THE
GROUP’S FINANCIAL REPORTING AND ITS
INTERNAL CONTROL AND RISK MANAGEMENT
PROCESSES.
COMMITTEE ALSO MAKES RECOM-
THE
MENDATIONS TO THE BOARD ON THE
APPOINTMENT OF EXTERNAL AND INTERNAL
AUDITORS AND OVERSEES THEIR ACTIVITIES.
Member
John Grant (Chairman)
John Rich (resigned March 2019)
Christakis Taoushanis
Roger Wills (appointed March 2019)
No of meetings
6/6
2/2
5/6
4/4
in
the Company’s website
ROLE AND RESPONSIBILITIES
The Committee’s role and responsibilities are set
out in its terms of reference, which can be viewed
on
the Corporate
Governance Charter (Annex C) at https://mhp.com.
cy/wp-content/uploads/2017/08/Corporate-Govern-
ance-Charter-MHP-SE.pdf. The Committee accepts its
interests of
responsibility
integrity of
shareholders with
the Company
financial
and the effectiveness of the audit.
information published by
for protecting
respect
the
the
to
The Committee is specifically responsible for:
• reviewing and monitoring the integrity of the financial
statements, including the Annual Report and Interim
Report, and any formal announcements relating to
financial performance;
• reviewing and reporting to the Board on significant
reporting issues and the judgements they contain;
• ensuring compliance with
legal and regulatory
requirements;
• keeping under review the effectiveness of the
Company’s financial reporting, risk management
and internal control systems;
• reviewing and assessing annually the independ-
ence, objectivity and effectiveness of the external
auditors and making recommendations to the Board
regarding the appointment, re-appointment and
replacement of external auditors and the terms of
their engagement;
• reviewing policy and practice regarding the provision
of non-audit services by the external auditor;
• considering the requirement for, and monitoring the
effectiveness of, internal audit;
• ensuring compliance with accounting standards and
consistency of accounting policies;
• reviewing, challenging and reporting to the Board on
the going concern assumption and the basis of the
longer-term viability assessment;
• reviewing
the Annual Report and financial
statements to ensure they are fair, balanced and
understandable; and
• reviewing and overseeing
the arrangements
for employees to raise concerns in accordance with
the Company’s whistle-blowing policy.
57
GOVERNANCE
Annual Report 2019
Audit Committee Report
COMPOSITION
As from March 2019, the Committee comprises a minimum of
three non-executive directors, each of whom is deemed by the
Board to be independent (previously two were independent).
The Chairman of the Committee is John Grant, who has recent
and relevant financial experience in a wide range of senior
non-executive roles (see biography on page 54). Following
the expansion of Dr Rich’s role on his appointment as Executive
Chairman, he resigned from the Committee in March 2019 and
was replaced by Roger Wills (see biography on page 54).
invites
the Chief Financial
The Committee Chairman
Officer, the Head of Internal Audit and senior representatives
of the external auditor to attend meetings as appropriate.
The Committee has the right to invite any other director or
employee to attend meetings as it considers appropriate.
The Committee meets with the external auditors at least once a
year in the absence of Management.
least
MEETINGS IN THE YEAR
The Committee meets at
times a year.
The scheduling of meetings is intended to align with the
financial reporting timetable, enabling the Committee to
review the annual and quarterly financial statements, to agree
the audit plan in advance of the full year audit, and to maintain
oversight of the Group’s internal controls and processes.
four
In 2019, the Committee met six times; in addition to the four
scheduled meetings, exceptional meetings were held to
consider financial due diligence findings prior to completion
of the acquisition of Perutnina Ptuj and to select new external
auditors to replace Deloitte Cyprus with effect from the 2020
financial year. The attendance of members at these meetings is
shown in the table on page 56.
ISSUES RELATING TO THE FINANCIAL
SIGNIFICANT
STATEMENTS
The Committee undertook the following recurring activities in
relation to the financial statements:
• reviewed and agreed the scope of the audit work to be
undertaken by the external auditor;
• considered the external auditor’s report on their audit of the
full year results and their review of the interim financial report;
• reviewed the Annual Report and annual and quarterly
financial statements to ensure they were fair, balanced and
understandable and provided the information necessary
for shareholders to assess the Company’s position and
performance, business model and strategy, and advised the
Board accordingly;
• considered the processes in place for the valuation of
assets, including the reasonableness and consistency of
assumptions; and
• reviewed
the effectiveness of
management and internal controls.
the Company’s
risk
In addition, the Committee considered the following significant issues in relation to the financial statements.
Significant issue considered
How the issue was addressed by the Committee
VALUATION OF PROPERTY, PLANT AND EQUIPMENT
Except for land and other fixed assets that are carried at historical cost less accumulated depreciation, all other groups of
property, plant and equipment are carried at revalued amounts, being their fair value at the date of the revaluation less any
subsequent depreciation and impairment losses.
The Committee reviewed Management’s approach to the biennial revaluation of property, plant and equipment, including
the use of an independent external valuation expert and applying relevant market indices and other factors. The Committee
confirmed with Management the competence and independence of the valuer and verified that the methods and assumptions
used were appropriate and consistent with accounting standards and previous practice.
VALUATION OF LEASES
Adoption of the IFRS 16 standard caused significant timing difficulties as more than 200,000 land leases had to be re-assessed
in accordance with IFRS 16 right-of-use requirements. At the time of the interim results, Deloitte had not been able to complete
their review of the underlying data due to identified issues which were still under evaluation by Management. They had also
been unable to complete their review of restatement adjustments in respect of land lease commitments under IAS 17 as at 31
December 2018 and 2017 for the same reasons. This resulted in Deloitte issuing a qualified opinion on their interim review.
The Committee recognised the issues underlying Deloitte’s qualified review opinion and agreed with Management the actions
necessary to ensure the data base would be fit for purpose before year-end. The Committee subsequently monitored progress
to ensure full and satisfactory compliance with IFRS 16 requirements as of year-end and that the roll-back to the opening
position for the year had been performed on a consistent basis. In reviewing the outcome, the Committee was satisfied that the
methodologies used, and the resulting valuations, were appropriate.
58
GOVERNANCE
Annual Report 2019
Audit Committee Report
VALUATION OF BIOLOGICAL ASSETS
Valuation of biological assets requires the use of complex models to arrive at fair values.
The Committee reviewed the assumptions and judgements applied by Management and verified the reasonableness of input
data and the accuracy of calculations.
REVENUE RECOGNITION
There is а presumed risk of misstatement on revenue recognition due to fraud.
The Committee confirmed that appropriate controls and procedures had been undertaken to address the risk.
PERUTNINA PTUJ ACQUISITION ACCOUNTING
The acquisition of Perutnina Ptuj involved complexities in post-acquisition accounting, particularly in relation to identifying
cash-generating units, estimating the fair value of assets and liabilities, allocating goodwill and calculation of potential
impairments.
The Committee recognised that there was limited experience within the Company to successfully manage these complexities
and accepted Management’s proposal to contract PwC to provide specialist resource and expertise to help advise on this
project.
In reviewing the results, the Committee considered the assumptions and judgements incorporated in the opening balance
sheet, focussing in particular on valuations of property, plant and equipment, biological assets, intangible assets and the
adequacy of provisions and liabilities.
The Committee concluded that the assumptions used were reasonable and that the fair values of assets and liabilities were
appropriate and that no impairments were required.
COMPLIANCE WITH BOND AND BANK COVENANTS
Continued compliance with covenants included in bond and bank debt agreements is a prime focus for the Committee.
The Committee verified that appropriate stress tests, taking account of potential changes in the value of the Ukrainian currency
and other macro-economic conditions, had been performed and satisfied.
TAX RISKS
In view of the ambiguity of tax legislation, certain transactions may be challenged by relevant governmental authorities.
The Committee confirmed that tax and legal experts had been engaged to evaluate the Company’s tax position and that they
had reviewed the adequacy and accuracy of tax contingency disclosures in the financial statements.
GOING CONCERN AND VIABILITY
Assessment of the going concern assumptions and the basis of the viability statement.
The Committee reviewed the assumptions underlying the assessment of the Company’s ability to continue as a going
concern. Stress tests had been undertaken by Management to assess the potential impact of risks including extended
closure of certain export markets, lower prices for chicken and grain and the effect of the Coronavirus on both supply and
demand. As the Company enters a period of uncertainty with its debt secured and a strong cash position, the Committee
agreed with management’s conclusion that the Company is well-positioned to absorb these risks and accepted management’s
recommendation that the financial statements be prepared on a going concern basis.
EXTERNAL AUDIT
Auditor rotation
In accordance with European regulatory requirements and the
guidance provided by the Competition and Markets Authority
regarding the statutory audit of public-interest entities, the
Company conducted a tender process in 2016 to select the
provider of the statutory audit with effect from the 2017 financial
year.
As reported previously, at the conclusion of a comprehensive
its
selection process,
assessment of which of the four candidate firms had the strongest
capabilities, that Deloitte Audit S.a.r.l. should be re-appointed
the Committee decided, based on
as statutory auditor. In October 2017, due to the migration of the
corporate office from Luxembourg to Cyprus, the Company’s
shareholders resolved to terminate the mandate of Deloitte S.a.r.l.
and to appoint Deloitte Cyprus (“Deloitte”) as the auditor of the
Company. It was noted that there had been no conflict with
Deloitte S.a.r.l’s audit report.
fourth quarter of 2019,
In the
following the decision to
appoint a Deloitte partner to a senior executive position in MHP,
the Committee decided that, to avoid any compromise to the
independence of the auditor, Deloitte should be replaced as the
provider of the statutory audit with effect from the 2020
financial year. The ex-Deloitte partner concerned had no
involvement in the audit of MHP’s 2019 results. As in 2016,
the Company conducted a tender process, led by the Audit
Committee, between three candidate audit firms (other than
Deloitte) considered to have the capability to audit MHP.
At the conclusion of a comprehensive selection process, the
Committee agreed that Ernst & Young was best equipped to
handle the responsibility and, following completion of the audit of
the 2019 accounts by Deloitte, should be appointed as the auditor
of the Company with effect from the 2020 financial year, subject
to MHP's shareholders' confirmation of the decision at the AGM
in June 2020.
59
GOVERNANCE
Annual Report 2019
Audit Committee Report
Assessment of external auditor effectiveness
The Committee assessed the effectiveness of the auditor
following completion of the audit of the 2018 accounts. The
Committee remained satisfied with the quality, integrity and
effectiveness of the work undertaken by Deloitte.
Non-audit services
A policy is in place covering engagement of the external
auditor for the supply of non-audit services to ensure that its
independence and objectivity are not impaired. This requires
the Audit Committee Chairman to approve all material non-
audit services in advance of the service being provided.
Cumulative non-audit fees are reviewed at scheduled Com-
mittee meetings. An analysis of fees earned by the external
auditor for audit and non-audit services can be found in Note 8
to the financial statements.
EU and Competition Commission rules that became effective in
2016 specify that the cost of non-audit services provided by the
external auditor will be limited to 70% of the average audit fee
for the previous three years. As no cap applies during the first
three years, the first year for which the cap applies will be 2020.
The cap is not expected to have a material impact on the
Company. It is the Committee’s intention to ensure future
non-audit services are provided by a number of different firms
to ensure both independence of the external audit and best
quality and best value provision of non-audit services.
and objectivity have been maintained. Based on these require-
ments and procedures, the Committee remains confident that
auditor independence and objectivity have been and will be
maintained.
is
to provide
independent assurance
INTERNAL AUDIT
The Company has an Internal Audit function whose primary
to
purpose
Management and the Committee, and hence the Board,
on the Company’s risk management and control environment.
Internal Audit coverage includes all of the Company’s opera-
tions, resources, services and responsibilities to other bodies,
with no department or business unit of the Company being ex-
empt from review.
Internal Audit responsibilities include:
• examining and evaluating the adequacy of the Company’s
system of internal control;
• assessing the reliability and accuracy of information provided
to stakeholders;
• assessing compliance with statutory and
regulatory
requirements;
• assessing compliance with Company policies and
procedures;
• ensuring that the Company’s assets are properly accounted
for and safeguarded;
• assessing the efficiency and effectiveness with which
resources are employed;
Auditor objectivity and independence
The Committee has a policy and procedures in place to ensure
that auditor independence and objectivity are not compromised.
• liaising with external auditors in audit planning and assisting
the external auditors as required; and
• investigating any instances of fraud, irregularity or corruption.
These include approval requirements for engagement of the
external auditor for non-audit services, periodic review of the
cost of non-audit services provided by the external auditor
and requirements for rotation of the audit engagement partner
every 7 years. Each year, the auditor is required to provide
evidence to the Committee of how it believes its independence
The Internal Audit programme is approved annually by the
Committee and the Head of Internal Audit reports findings
periodically to the Committee.
At least annually, the Committee considers the role and
effectiveness of the Internal Audit function, taking account of
the resources available and required, the experience and
expertise of personnel, and
the quality of service
delivered. Consideration is also given to whether part of
function could more effectively be outsourced.
the
In May 2019, the Committee concluded that, under its new
leadership, the effectiveness of Internal Audit had continued to
improve and that it was delivering the level of service required.
RISK MANAGEMENT AND INTERNAL CONTROL
The Committee monitors the effectiveness of the Company’s
risk management and control systems through regular updates
from Management, reviews of the key findings of the external
and internal auditors and an annual review of the risk manage-
ment process and risk matrix.
Results are reported regularly to the Board, which has overall
responsibility for risk management.
The annual review covers key risks that could potentially
impact the achievement of MHP’s strategic and financial
objectives. New risks and changes in existing risks are
identified on a continuous basis.
A risk scoring system is used to help quantify both the
probability and potential impact of each major risk after the
effect of mitigating actions, to assess residual risks against
the Company’s risk appetite and to prioritise further risk
management actions. The Company’s approach to the identifica-
tion and assessment of risks, and the response to risks, is based on
best business practices and international COSO Enterprise Risk
Management standards.
No incidents of significant control weaknesses or failures were
identified at any time during the year.
John Grant
Chairman, Audit Committee
13 April 2020
60
GOVERNANCE
Annual Report 2019
Nominations and Remuneration
Committee Report
NOMINATIONS
AND REMUNERATION
COMMITTEE REPORT
THE NOMINATIONS AND REMUNERATION COMMITTEE (“THE COMMITTEE")
HAS OVERALL RESPONSIBILITY FOR MAKING RECOMMENDATIONS TO THE
BOARD ON ALL NEW APPOINTMENTS
The Comittee also has responsibility for ensuring that the Board
and its Committees have the appropriate balance of skills,
experience, independence, diversity and knowledge of the
Company to enable them to discharge their respective duties
and responsibilities effectively.
THE PRINCIPAL RESPONSIBILITIES OF THE COMMITTEE ARE
TO:
a. ensure that the Company has exceptional people who
occupy appropriate positions and who have incentives to
achieve, and are compensated for, exceptional performance;
b.
c.
set the overarching principles and parameters of Remunera-
tion Policy across the Company; and
review the Company’s needs for employees and ensure
sufficient depth of management to support expansion and
succession.
The Committee is expected to meet not less than twice a
year. During 2019, the Committee met three times and the
attendance of its members at these Committee meetings
table. The Committee’s
is shown
the accompanying
in
terms of reference, which were last revised in May 2018, are
available to view on the Company’s website in the Corporate
Governance Charter (Annex E) at https://www.mhp.com.ua/li-
brary/file/corporate-governance.pdf.
Further details regarding the Committee’s composition, areas of
focus in 2019 and diversity policy are set out below.
COMPOSITION
Until March 2019 the Committee had one independent (John
Grant) and one non-independent member (John Rich). To address
compliance with the UK Corporate Governance Code, Roger Wills,
an Independent Non-Executive Director, joined the Committee
in March 2019. This gave the Committee a majority of
independent members. After serving 12 months as a member,
Mr Wills replaced Dr Rich as Chairman of the Committee on
13 April 2020.
During 2019 the Committee was chaired by Dr John Rich.
John Grant served on the Committee throughout the year and
Roger Wills was a member of the Committee from appointment
on 19 March 2019 onwards.
The Company Secretary acts as
the
Committee. On occasion, the Committee invites the Chief
Executive, the Chief Financial Officer or the Group Human
Resources Director to attend discussions where their input is
required.
secretary
to
Member
No of meetings
Dr John Rich (Chairman until April 2020)
John Grant
Roger Wills (appointed March 2019,
Chairman as of April 2020)
3/3
3/3
3/3
further comply with
following his
the UK Corporate Governance
To
Code and
the appointment as Executive
Chairman in 2019, Dr Rich resigned from the position of
Chairman of the Comitee in April 2020.
61
GOVERNANCE
Annual Report 2019
Nominations and Remuneration
Committee Report
AREAS OF FOCUS IN 2019
The principal areas of focus for the Committee during 2019 are
set out below.
• The Committee considered the composition and balance of
the Board and the timing of future Board changes. The Com-
pany continued throughout the year and beyond to look for
opportunities to strengthen the Board.
• The Committee also reviewed the succession plans that
are currently in place and possible bonus schemes in
respect of Executive Directors and Non-Executive Directors in
conjunction with the provisions of the UK Corporate Govern-
ance Code and best practice.
• The Committee considered and approved the continuing
education programme for Non-Executive Directors for 2019.
This includes membership of the Institute of Directors (“IoD”)
and attendance at courses run by the IoD’s and Deloitte’s
respective academies. In addition, a plan incorporating
recommendations to be implemented as part of the con-
tinuing education programme has been made for senior
management executives, with an emphasis on courses being
held at well-known institutions in the UK and the USA.
• The Committee conducted a Remuneration Review of the
Board and the senior management team.
The Committee currently takes into account a variety of
factors before recommending any new appointments
to
the Board including skills relevant to performing the role,
experience and knowledge.
The most important priority of the Committee, however, has
been and will continue to be to ensure that the best candidate
is selected to join the Board and this approach will remain
in place going forward.
During 2019, changes to senior management salaries were
recommended and implemented.
• The Committee
interviewed several candidates
for a
Non-Executive Director position following which it recom-
mended that Philip J Wilkinson OBE should join the Board
in April 2020 (no search consultancy was used in his
recruitment). Mr Wilkinson has significant experience
in
large poultry companies and has a deep understanding of
international food and agriculture industries.
the
recognises
DIVERSITY POLICY
importance and value of
The Board
diversity
it geographical,
cultural or market-aligned, and encompassing, amongst
other factors, ethnicity, gender, experience and age. The Board is
committed to equality of opportunity for all employees.
the workforce, be
throughout
Dr John Rich
Chairman Nominations and Remuneration Committee
13 April 2020
THE COMMITTEE IS
EXPECTED TO MEET NOT
LESS THAN TWICE A YEAR
62
GOVERNANCE
Annual Report 2019
Managment Report
MANAGEMENT
REPORT
THE INFORMATION WITHIN THIS ANNUAL REPORT IS ALIGNED WITH THE REPORTING
REQUIREMENTS OF THE UK COMPANIES ACT 2006, THE UK DISCLOSURE AND
TRANSPARENCY RULES, THE LISTING RULES OF THE UK AND CYPRIOT REPORTING
REQUIREMENTS
a
is
leading
international
PRINCIPAL ACTIVITIES AND REVIEW OF THE BUSINESS
MHP
agro-industrial
company and the largest producer of chicken in Ukraine1.
The Company operates a vertically-integrated business
model, owning and operating each of the key stages of
chicken production processes, with the objectives of maximising
efficiency in production costs and increasing profitability by
consolidating multiple steps in the value-chain.
The business is organised into and operates through four
business segments: Poultry and Related Operations; Grain
Growing; Meat-processing and Other Agricultural Operations;
and European Operating Segment.
Key to the Company’s approach to managing waste is MHP’s
biogas programme, which enables the recycling of waste
(including husks and manure). Its #1 Biogas Complex (in the Dnipro
region) has a 5 MW capacity, and Phase 1 of #2 Biogas Complex
(in the Vinnytsia region) has a 12 MW capacity. Both are in full
operation. Phase 2 of #2 Biogas Complex with a 12 MW
capacity is currently being planned.
1 Source: SSSU
POULTRY AND RELATED OPERATIONS SEGMENT (MHP,
EXCLUDING PERUTNINA PTUJ)
The Poultry and Related Operations Segment produces,
processes and sells chicken meat (fresh and frozen), vegetable
oils (sunflower and soybean) and mixed fodder.
It incorporates three chicken meat complexes and two breeding
farms, three sunflower oil plants, one soybean crushing plant
and three feed mills.
2019 production figures were as follows:
• The chicken meat complexes produced 728,917 tonnes of
chicken meat;
• Breeding farms produced over 528 million hatching eggs
(100% of MHP’s requirement);
• Sunflower oil plants produced 366,135 tonnes of oil;
• Soybean crushing plant produced 47,743 tonnes of oil; and
• Feed mill plants produced 1,660,690 tonnes of mixed fodder
(100% of MHP’s requirement).
ABOUT THE NEWLY-ACQUIRED EUROPEAN OPERATING
SEGMENT (PERUTNINA PTUJ)
At the end of February of 2019, MHP acquired Perutnina Ptuj
(PP), a leading poultry meat and meat-processing company in
the Balkans, headquartered in Slovenia.
PP’s
total enterprise value was EUR 273 million,
including net debt of EUR 34.5 million and working capital.
MHP now owns 100% of PP.
PP has production assets
four Balkan countries:
Slovenia, Croatia, Serbia, Bosnia and Herzegovina. It owns
distribution companies
in Austria, North Macedonia and
Romania and supplies products to 15 countries in Europe.
in
Like MHP, PP is a vertically integrated company and its
operations encompass all stages of chicken meat production:
growing
breeding;
production;
slaughtering; sausage manufacture; and convenience food
production. It also has a Biogas Complex with 1 MW capacity.
hatching;
feed;
egg
63
GOVERNANCE
Annual Report 2019
Managment Report
Agriculture: PP produced 9,444
tonnes of corn and
10,442 tonnes of wheat. The corn production represented 12%
of the production requirement and wheat production represents
57% of the production requirement. PP’s total grain storage
capacity is approximately 90,000 tonnes.
FUTURE DEVELOPMENTS
The Executive Management team believes there are ample
opportunities for growth both internationally and within Ukraine.
In Ukraine, customers tend to buy domestically produced
chicken, choosing from the wide range of poultry products –
fresh chicken and processed meat products - that MHP develops
and offers to its customers.
These products are both more affordable than pork and beef
and fresher than imported meat. Exports of chicken meat have
increased MHP’s total sales and the available markets in recent
years. Typically, chicken meat exports have provided higher
margins than sales within Ukraine.
MHP’s strategy is:
• To increase production efficiency through modernisation and
innovation, improvement in cost and quality control, use of
up-to-date technology across all business segments, includ-
ing PP;
• To expand poultry production capacity during the period
2020-2023 at PP and up to 2022 at MHP (Phase 2 of the
Vinnytsia poultry complex);
• To explore merger and acquisition opportunities and to poten-
tially acquire further meat-processing and/or poultry produc-
tion companies internationally;
• To continue export expansion through sales diversification
and market targeting;
• To continue to establish international sales and distribution
offices and potentially joint ventures;
• To develop and remodel the markets where MHP is present,
changing trading channels;
• To maintain its “continuous improvement” approach including
optimising human productivity, high biosecurity standards,
environmental standards, health and safety procedures and
animal welfare practices (including, but not limited to, the
antibiotic-free programme);
• To promote and develop the Company’s strong brands
through consumer-driven innovation and the introduction of
new products;
• To increase the Company’s presence in value-added food
products such as processed meat, convenience food and the
Commercial Kitchen concept;
• To expand alternative energy projects (e.g. biogas); and
• To transform our people and our products, and to launch our
programme of industrialisation of our clients.
DIVIDEND POLICY
In March 2013 the Board of Directors approved the adoption of
a dividend policy that maintains a balance between the need
to invest in further development and the right of shareholders to
share the net profits of the Company.
Although the Company has over US$ 300 million of free cash,
and we feel well-placed to weather the uncertainties of the
months ahead, the Board felt it was prudent to take further
actions to conserve cash. As part of these actions, it agreed
that the dividend should be reduced from approximately
US$ 80 million in 2019 to approximately US$ 30 million.
SIGNIFICANT SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS
As of 31 December 2019, the Group had advanced loans to its
majority shareholder, WTI Trading Limited (“WTI”), in the aggre-
gate amount of USD 20,400 thousand. The facility was further
increased by the Board to USD 80,000 thousand on 21 Jan-
uary 2020. The Board considers that the loans are permitted
investments as they were issued at arm’s length terms and for
fair market value, that they are in the best interests and for the
commercial benefit of the Group and do not violate the terms of
the Senior Notes.
GRAIN GROWING SEGMENT
The Grain Growing Segment grows crops for fodder production
and for sale to third-parties.
In 2019 MHP’s total landbank constituted 378,293 hect-
ares (“ha”) of land of which the majority was used for grain
cultivation. The landbank comprises a number of arable farms
(enterprises) in Ukraine. MHP harvested 359,476 ha of land
yielding 2,407,589 tonnes of grain. Grain storage facilities
totaled 1,590,000 m3 with a capacity of 694,395 tonnes (in plas-
tic bags).
MEAT-PROCESSING & OTHER AGRICULTURAL OPERATIONS
SEGMENT
The Meat-Processing & Other Agricultural Operations
Segment produces and sells sausage and cooked meat,
convenience
from cattle and milk
operations. It incorporates two facilities for production of
prepared meat products and a number of farms. The meat
the Segment’s core business.
processing operation
It produced 35,260 tonnes of meat-processing products and
19,265 tonnes of convenience foods in 2019.
foods and produce
is
EUROPEAN OPERATING SEGMENT (EOS)1
Feed production: PP produced 19,956 tonnes of high-en-
ergy feed for cattle and pigs and 123,407 tonnes of feed for
poultry breeding. In-house production comprised 84% of the
overall requirement.
million
produced
Life
production:
eggs. The quantities of hatching eggs and
hatching
the overall production require-
turkeys covered all of
production
ment.
comprised 92% of
requirement.
Meat production: PP produced 79,358 tonnes of broilers and
5,111 tonnes of turkeys. PP produced 30,313 tonnes of sausages
and ready-made meals.
In-house parent stock/hatching eggs
the overall production
45.7
PP
1 10M 2019 - results of PP from 21 February 2019, when the acquisition was completed
64
GOVERNANCE
Annual Report 2019
Managment Report
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 a Group level, MHP has in place common accounting policies
and procedures on financial reporting and closing. Management
monitors the publication of new reporting standards and works
closely with the external auditors in evaluating in advance the
potential impact of these standards.
BRANCHES
MHP does not have any branches.
COMPENSATION OF KEY MANAGEMENT PERSONNEL
the Group’s key management
Total compensation of
personnel amounted to US$ 18,654 thousand for the year ended
31 December
thousand).
Compensation of key Management personnel consists of
contractual salary and performance bonuses.
(2018: US$
16,809
2019
Total compensation of the Group’s Non-Executive Directors,
which consists of contractual fees, amounted to US$ 679 thou-
sand in 2018 (2018: US$ 1,106 thousand).
Key Management personnel totalled 43 and 35 individuals as
of 31 December 2019 and 2018, respectively, including 3 and 4
Independent Non-Executive Directors as of 31 December 2019
and 2018, respectively.
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.
AUDITORS’ REMUNERATION
Remuneration of the external auditors totalled US$ 1,831
(2018:
thousand for the year ended 31 December 2019
includes both
US$ 1,605 thousand).
audit and non-audit services, with the statutory audit fees
component comprising US$ 990 thousand
for the year
ended 31 December 2019 (2018: US$ 430 thousand).
Such remuneration
Fees for other assurance services totalled US$ 309 thou-
sand (2018: US$ 458 thousand); for tax advisory services
US$ 23 thousand (2018: US$ 20 thousand); and for other non-
audit services US$ 509 thousand (2018: US$ 697 thousand).
The Company has rules and processes in place to ensure the
independence of the auditors, including non-audit fee limitations
set by the Board, and annual reviews by the Audit Committee
into whether any services provided are incompatible with the
independence of the auditors.
INTERNAL AUDIT
The Company maintains an internal audit function. The Head of
Internal Audit has the right of access to the Audit Committee and
the Chairman.
The Head of Internal Audit reports to the Audit Committee which
is responsible for:
• Monitoring and reviewing the effectiveness of the Company’s
internal audit function in the context of the Company’s overall
risk management and internal control systems; and
• Approving the appointment and removal of the Head of
Internal Audit.
RESEARCH AND DEVELOPMENT
Sustaining significant investment in R&D as well as innovation
is fundamental to the Company’s long-term growth strategy.
to sustain MHP's position as a world
Our
leader in efficient poultry production at the same time as
adopting a sustainable and responsible approach to society,
our employees, the environment and animal welfare.
target
is
BUSINESS REVIEW AND RISKS
A review of the Group’s performance and the key risks and
uncertainties which face the business as well as details on likely
developments can be found in the Chairman’s Statement on
page 10 and Risk Management on page 27 of this Report.
responsibility
initiated corporate
CORPORATE RESPONSIBILITY REPORTING
reporting
The Group
in 2015 and issues a separate Corporate Responsibility Report
(Non-Financial Report) annually. This Report includes infor-
mation for MHP’s material stakeholders and applies the latest
applicable Global Reporting
reporting
framework.
Initiative’s
(“GRI”)
The latest Corporate Responsibility Report (Non-Financial Report)
is for 2018 and can be found in the “Sustainable Development”
section of the Company’s website at: https://www.mhp.com.ua/
en/responsibility/sustainable-development.
The Company expects the 2019 Report to be available in June
2020. Summary Corporate Responsibility information is also
included on pages 41 to 45 within this Annual Report.
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.
the 2020 budget and
GOING CONCERN
After reviewing
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.
POLITICAL DONATIONS
The Group did not make any political donations or incur any
political expenditure during the year.
EVENTS AFTER THE BALANCE SHEET DATE
With the recent and rapid development of the Coronavirus
disease (COVID-19) outbreak, the world economy entered a
period of unprecedented health care crisis that has already
caused considerable global disruption in business activities and
everyday life.
Many countries have adopted extraordinary and economically
costly containment measures. Certain countries have required
companies to limit or even suspend normal business operations.
Governments, including in Ukraine, have implemented restric-
tions on travelling as well as strict quarantine measures.
Industries such as tourism, hospitality and entertainment are
expected to be directly disrupted significantly by these
measures. Other industries such as manufacturing and financial
services are expected to be indirectly affected and their results
to also be negatively affected.
The financial effect of the current crisis on the global economy
and overall business activities cannot be estimated with rea-
sonable certainty at this stage, due to the pace at which the
outbreak expands and the high level of uncertainties arising
from the inability to reliably predict the outcome.
65
GOVERNANCE
Annual Report 2019
Managment Report
Management has considered the unique circumstances and
the risk exposures of the Group and has expectted that there
is no significant impact in the Group’s profitability position. The
event is not expected to have an immediate material impact on
the business operations. Management will continue to monitor
the situation closely and will assess the need for additional
measures in case the period of disruption becomes more
prolonged.
Other information that is relevant to the Management Report,
and which is incorporated by reference into this Report, can be
located as follows:
Corporate Governance Report
Stakeholder Engagement
Pages
46
39
The Board views the event as a non-adjusting event and is
therefore not reflected in the recognition and measurement
of the assets and liabilities in the financial statements as at
31 December 2019.
The Company has chosen, in accordance with Section 414 C(11)
of the Companies Act 2006, and as noted in this Management
Report, to include certain matters in its Strategic Report that
would otherwise be required to be disclosed in this Management
Report. The Strategic Report can be found on pages 3 to 15.
APPROVAL
Approved by the Board and signed on its behalf by:
Dr John Rich
Executive Chairman
13 April 2020
DISCLOSURE OF INFORMATION TO AUDITORS
So far as each Director is aware, all information relevant to
the audit of the Group’s consolidated 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.
ADDITIONAL DISCLOSURES
At the date of this Annual Report, no takeover bids have been
made for 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 holders if a change in control
occurs as a result of a takeover bid.
There are no agreements between the Company and its
for compensation on
Directors or employees providing
loss of office or employment (whether through resignation,
purported
that would occur
because of a takeover bid.
redundancy or otherwise)
66
CONTENTS
STATEMENT OF THE BOARD OF DIRECTORS’ RESPONSIBILITIES FOR THE PREPARATION
AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR
ENDED 31 DECEMBER 2019 ................................................................................................................................. 67
INDEPENDENT AUDITOR’S REPORT .................................................................................................................68
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED
31 DECEMBER 2019
Consolidated statement of profit or loss and other comprehensive income ..........................................77
Consolidated statement of financial position ................................................................................................. 78
Consolidated statement of changes in equity ................................................................................................ 79
Consolidated statement of cash flows .............................................................................................................80
Notes to the Consolidated financial statements ............................................................................................82
1. Corporate information ........................................................................................................................................82
2. Changes in the group structure...................................................................................................................... 84
3. Summary of significant accounting policies ............................................................................................... 87
4. Critical accounting judgments and key sources of estimation uncertaint ....................................... 103
5. Segment information ........................................................................................................................................107
6. Revenue ............................................................................................................................................................... 110
7. Cost of sales ..........................................................................................................................................................111
8. Selling, general and administrative expenses ............................................................................................111
9. Deferred revenue ................................................................................................................................................111
10. Finance costs .................................................................................................................................................... 112
11. Income tax .......................................................................................................................................................... 112
12. Property, plant and equipment .....................................................................................................................114
13. Right-of-use assets ...........................................................................................................................................118
14. Intangible assets .............................................................................................................................................. 119
15. Goodwill ............................................................................................................................................................. 121
16. Other non-current assets, net ...................................................................................................................... 122
17. Biological assets .............................................................................................................................................. 122
18. Inventories ........................................................................................................................................................ 125
19. Agricultural produce ...................................................................................................................................... 125
20. Taxes recoverable and prepaid ................................................................................................................. 126
21. Trade accounts receivable, net .................................................................................................................. 126
22. Other current assets .......................................................................................................................................131
23. Cash and cash equivalents ..........................................................................................................................131
24. Shareholders’ equity .......................................................................................................................................131
25. Non-controlling interests ..............................................................................................................................132
26. Bank borrowings .............................................................................................................................................134
27. Bonds issued ....................................................................................................................................................135
28. Lease liabilities ................................................................................................................................................139
29. Other current liabilities ..................................................................................................................................139
30. Related party balances and transactions................................................................................................139
31. Contingencies and contractual commitments ..........................................................................................141
32. Dividends ..........................................................................................................................................................133
33. Fair value of financial instruments .............................................................................................................143
34. Risk management policies ...........................................................................................................................145
35. Pensions and retirement plans ...................................................................................................................149
36. Earnings per share .........................................................................................................................................149
37. Subsequent events .........................................................................................................................................149
38. Authorization of the consolidated financial statements ..................................................................... 150
FINANCIALSTATEMENTSFINANCIAL STATEMENTSFinancial StatementsAnnual Report 2019 67
STATEMENT OF THE BOARD OF DIRECTORS’
RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS AS OF
AND FOR THE YEAR ENDED 31 DECEMBER 2019
The Board of Directors is responsible for the preparation of
the consolidated financial statements that give a true and fair
view of the financial position of MHP SE (the “Company”) and its
subsidiaries (the “Group”) as of 31 December 2019 and of the
consolidated statements of profit or loss and other compre-
hensive income, changes in equity and cash flows for the year
then ended, and notes to the consolidated financial statements,
|including a summary of significant accounting policies.
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;
• providing additional disclosures when compliance with the
specific requirements in the International Financial Reporting
Standards (“IFRS”) are insufficient to enable users to under-
stand 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.
• The Board of Directors, within its competencies, is also
responsible for:
• designing, implementing and maintaining an effective and
sound system of internal controls over financial reporting,
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;
b.
• maintaining statutory accounting records in compliance with
local legislation and accounting standards in the respective
jurisdictions;
the Management report provides a fair review of the
developments and the performance of the business and the
financial position of the Group included in the consolidated
accounts taken as a whole, together with a description of the
main risks and uncertainties they face.
• taking such steps as are reasonably available to them to
On behalf of the Board:
Yuriy Kosyuk
John Grant
Viktoria Kapelyushnaya
John Clifford Rich
Yuriy Melnyk
Christakis Taoushianis
Roberto Banfi
Roger Wills
Philip J Wilkinson
Director
Director
Director
Director
Director
Director
Director
Director
Director
safeguard the assets of the Group; and
• preventing and detecting fraud and other irregularities.
The consolidated financial statements of the Group as of and for
the year ended 31 December 2019 were authorized for issue by
the Board of Directors on 13 April 2020.
Board of Directors’ responsibility statement
In accordance with Article 9 sections (3c) and (7) of the Trans-
parency Requirements (Traded Securities in Regulated Markets)
Law 190 (1) / 2007 until 2013, we, the members of the Board of
Directors responsible for the drafting of the consolidated
financial statements of MHP SE for the year ended 31 December
2019, on the basis of our knowledge, declare that:
a. the consolidated financial statements which are presented
on pages 77 to 150:
ii.
iii.
have been prepared in accordance with the applicable
International Financial Reporting Standards as adopted
by the European Union and the provisions of article 9
section (4) of the law, and
provide a true and fair view of the assets and liabili-
ties, the financial position and the profit or loss of the
Company and its subsidiaries, consolidated financial
statements as a whole and
Financial StatementsAnnual Report 2019 FINANCIAL STATEMENTS 68
Independent Auditor’s Report
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF MHP SE
REPORT ON THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS
OPINION
We have audited the consolidated financial statements of MHP
SE (the “Company”), and its subsidiaries (the “Group”), which
are presented in pages 77 to 150 of the consolidated financial
statements and comprise
the consolidated statement of
financial position as at 31 December 2019, and the consolidated
statements of profit or loss and other comprehensive income,
changes in equity and cash flows for the year then ended, and
notes to the consolidated financial statements, including a
summary of significant accounting policies.
In our opinion, the accompanying consolidated financial state-
ments give a true and fair view of the consolidated financial
position of the Group as at 31 December 2019, and of its
its
consolidated
financial
in
for
consolidated cash flows
accordance with International Financial Reporting Standards
(IFRSs), as adopted by
the
requirements of the Cyprus Companies Law, Cap. 113.
and
then ended
performance
the year
the European Union and
BASIS FOR OPINION
We conducted our audit in accordance with International
Standards on Auditing (ISAs). Our responsibilities under those
standards are further described in the Auditor’s Responsibil-
ities for the Audit of the Consolidated Financial Statements
section of our report. We remained independent of the Group
throughout the period of our appointment in accordance with the
International Ethics Standards Board for Accountants’ Code
of Ethics for Professional Accountants (IESBA Code) together
with the ethical requirements that are relevant to our audit of
the consolidated financial statements in Cyprus, and we have
fulfilled our other ethical responsibilities in accordance with
these requirements and the IESBA Code. We believe that the
audit evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
Annual Report 2019 FINANCIAL STATEMENTS 69
Independent Auditor’s Report
INDEPENDENT AUDITOR’S REPORT
KEY AUDIT MATTERS INCORPORATING THE MOST SIGNIFICANT RISKS OF MATERIAL MISSTATEMENTS, INCLUDING ASSESSED RISK OF MATERIAL MISSTATEMENTS DUE TO FRAUD
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period.
These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these
matters.
Why the matter was determined to be a key audit matter
How the matter was addressed in the audit
VALUATION OF PROPERTY, PLANT AND EQUIPMENT
As described in Note 3 to the consolidated financial statements, all classes of property, plant and equipment
(“PPE”), except for the land and other fixed assets, are measured after initial recognition at revalued amounts.
The latest revaluation was recognized as of 30 September 2019, on the basis of a valuation carried out by an
independent appraiser. As a result, the revaluation reserve was increased by USD 199,437 thousand, less the
effect of deferred income taxes of USD 17,053 thousand.
We have considered the valuation of property, plant and equipment to be a key audit matter as it requires
applying significant judgement and subjectivity in determining appropriate unobservable inputs and estimates
in assessing the fair values using the depreciated replacement cost and market comparable methods such as:
• changes in market prices of assets and construction materials from the date of their acquisition/ construction/
date of previous valuation to the date of this valuation;
• external market prices for vehicles;
• normative and remaining useful lives;
• rates of physical depreciation.
The results of revaluation based on the depreciated replacement cost and market comparable approaches
were compared by management to a valuation they performed using the income approach to test for
economic obsolescence. This exercise is based on assumptions such as discount rates, terminal growth rates,
expected production volumes and operating margins, the determination of which requires the exercise of
significant judgement.
Management provided more details in relation to the above in Note 4 “Critical Accounting Estimates and Key
Sources of Estimation Uncertainty” and Note 12 “Property, Plant, and Equipment” to the consolidated financial
statements.
We have performed, amongst others the following audit procedures, in order to address the risks of material
misstatement associated with this key audit matter:
• Оbtained an understanding of the internal controls surrounding the valuation process for PPE and assessed
their design and implementation.
• Assessed the competence, capabilities, experience, professional qualifications and objectivity of the
independent appraisal firm. In addition, we discussed the scope of their work with management and reviewed
the related terms of engagement to determine that there were no matters that affected their objectivity or
imposed scope limitations.
• With the support of our internal valuation specialists, (i) assessed whether the valuation methodology applied
is appropriate and in line with international valuation standards as well as industry norms, (ii) challenged the
appropriateness of the key parameters and assumptions used by the independent appraiser to estimate the
fair values.
• Carried out appropriate audit procedures to test the accuracy and completeness of the data provided by the
management to the independent appraisal firm taking into account our assessment of the relevant controls.
• With the support of our internal valuation specialists, we compared the 30th of September 2019 PPE values
with those of the previous revaluation as of 31 December 2017, and investigated any unexplained deviations
identified and challenged where necessary the underlying data and assumptions.
• In respect of the economic obsolescence exercise, with the support of our internal valuation specialists, (i)
challenged the reasonableness of the valuation assumptions in the management’s forecasts with reference to
past performance and market conditions to determine whether the assumptions used fell within an acceptable
range, (ii) assessed the historical forecasting and budgeting accuracy, and (iii) assessed the appropriateness
of the discount rates used.
• Checked the mathematical accuracy of the computations made in the valuation workings.
• Assessed completeness and accuracy of all related disclosures in the consolidated financial statements based
on the relevant international financial reporting standards, including significant assumptions and methods used
in the valuations and sensitivity analysis on the changes of the unobservable inputs.
All the above procedures were completed in a satisfactory manner.
Annual Report 2019 FINANCIAL STATEMENTS 70
Independent Auditor’s Report
INDEPENDENT AUDITOR’S REPORT
Why the matter was determined to be a key audit matter
How the matter was addressed in the audit
ADOPTION OF IFRS 16 “LEASES”
As described in Note 3 to the consolidated financial statements, the Group has adopted IFRS 16 “Leases”,
using the modified retrospective approach as of 1 January 2019. Upon adoption the Group recognized lease
liabilities of USD 177,093 thousand and right-of-use assets of USD 185,442 thousand, including reclassification
of liabilities and assets previously recorded under finance leases.
We consider the adoption of IFRS 16 “Leases” to be a key audit matter due to: (a) the degree of complexity
of the business process as a result of the large number of agricultural land lease contracts with individuals,
and (b) the significant judgement exercised by management to determine the following key parameters used
in the measurement of the lease liability such as (i) the value of lease payments for the non-contractual
changes of the payments which are made based on customary industry practice, and (ii) the determination of
appropriate incremental borrowing rates.
Management provides more details in relation to the above in Note 13 “Right-of-Use Asset” as well as Note 28
“Lease Liabilities” and Note 33 “Fair Value of Financial Instruments” to the consolidated financial statements.
We have performed amongst others the following audit procedures in order to address the risks of material
misstatement associated with this key audit matter:
• Assessed the appropriateness of the accounting policies adopted by management for the purpose of
identification, measurement and accounting of leases in accordance with the requirements of IFRS 16
“Leases”.
• Obtained an understanding of the internal controls pertaining to the accuracy and completeness of the lease
database and assessed their design and implementation.
• Challenged management’s assumptions relating to accounting of non-contractual changes of lease
payments in measuring the lease liability by analyzing historical data and market data to determine whether
the assumptions used fell within an acceptable range.
• Assessed the accuracy and completeness of the lease database by (i) agreeing for a sample, the amount
of the lease used in the measurement of lease liability to the actual payments, and (ii) examining the
reconciliation of total lease amount included in the database and used in the measurement of the lease
liability to the total actual payments adjusted to prepaid or unpaid lease balances as of 31 December 2019.
• On a sample basis, assessed the accuracy of the lease term contained in the database by reference to the
signed contracts and/or subsequent modifications.
• Checked the mathematical accuracy of the calculation determining the lease liability as of 31 December
2019.
• Recalculated the Group’s estimation of lease liabilities as of 1 January 2019 which was based on the verified
lease database as of 31 December 2019 and changes of non-contractual lease payments during the period
which were supported by the Group’s budgets and average increase of lease payments per locations.
• Assessed the appropriateness of the incremental borrowing rates used in the calculation of lease liabilities
with the support of our internal valuation specialists.
• Assessed completeness and accuracy of all related disclosures provided in the consolidated financial
statements with the requirements of international financial reporting standards.
All the above procedures were completed in a satisfactory manner.
Annual Report 2019 FINANCIAL STATEMENTS 71
Independent Auditor’s Report
INDEPENDENT AUDITOR’S REPORT
Why the matter was determined to be a key audit matter
How the matter was addressed in the audit
VALUATION OF BIOLOGICAL ASSETS
Biological assets are measured at fair value less costs to sell in accordance with IAS 41 “Agriculture”.
As of 31 December 2019, the carrying amount of biological assets was USD 235,399 thousand, of which USD
205,747 thousand was classified within current assets and USD 29,652 thousand within non-current assets.
Current biological assets mainly comprise of breeders held for hatchery egg production, broilers and crops in
fields. Non-current biological assets mainly comprise of milk cows.
For determining the fair value of biological assets, the Group uses the discounted cash flows technique as well
as the market prices of livestock of similar age, breed and genetic merit.
This valuation is a key audit matter since it requires applying assumptions affected by expected market or
economic conditions which can vary over time and complex and judgmental assessment process.
We have performed amongst others the following audit procedures in order to address the risks of material
misstatement associated with this key audit matter:
• Obtained an understanding of the internal controls surrounding the valuation process for biological assets
and assessed their design and implementation.
• Assessed whether the valuation methods used are in accordance with IAS 41 and consistent with international
valuation standards and industry norms.
• Evaluated the reasonableness and appropriateness of the discount rate with the support of our internal
valuation specialists.
• Performed a sensitivity analysis to identify the significant inputs and assumptions, and to assess the accuracy
The key assumptions and inputs used in the measurement of the fair values are:
of sensitivity disclosures in the financial statements.
• average meat output for broilers and livestock for meat production;
• average productive life of breeders and cattle held for laying eggs and milk production;
• expected yields;
• estimated market prices for poultry meat, crops, hatchery egg and milk;
• projected production costs and costs to sell; and
• discount rates.
Management provided more details in relation to the above in Note 4 “Critical Accounting Estimates and Key
Sources of Estimation Uncertainty” and Note 17 “Biological Assets” to the consolidated financial statements.
• Performed a recalculation of fair value of biological assets as of the reporting date using actual prices
subsequent to year end or observable future prices adjusted by logistic costs, industry rates like meat output
for broilers or number of hatchery eggs produced by one breeder, expected yields with a reference to past
performance, projected production costs from the approved budgets and the discount rates agreed with our
internal valuation specialists.
• Assessed the historical forecasting and budgeting accuracy.
• Assessed completeness and accuracy of all related disclosures provided in the consolidated financial
statements.
All the above procedures were completed in a satisfactory manner.
Annual Report 2019 FINANCIAL STATEMENTS 72
Independent Auditor’s Report
INDEPENDENT AUDITOR’S REPORT
Why the matter was determined to be a key audit matter
How the matter was addressed in the audit
PURCHASE PRICE ALLOCATION (”PPA”) ON THE ACQUISITION OF PERUTNINA PTUJ (“PERUTNINA”) AND
IMPAIRMENT ASSESSMENT OF GOODWILL AND INTANGIBLES WITH INDEFINITE LIFE THAT AROSE ON THE
ACQUISITION
As described in note 2 to the consolidated financial statements, the Group acquired 90,69% of the share
capital of Perutnina for USD 250,012 thousand. As part of the purchase price allocation (“PPA”), this amount
has been allocated to the fair value of identifiable assets acquired and liabilities assumed by cash generating
unit (“CGU”) resulting in the recognition of goodwill of USD 61,518 thousand.
The PPA and impairment assessment which was performed by directors with the use of independent specialists
is considered as a key audit matter since it is subject to significant judgement and estimation in the following
areas:
PPA exercise
• Identification of CGUs and intangible assets
• Valuation of tangible and intangible assets (including goodwill)
Impairment assessment
• Selection of the appropriate impairment model to be used
• Assessment and determination of the expected cash flows from the business of each CGU and trademarks
• Setting appropriate growth rates and operating margins by CGU
• Setting appropriate growth rates and royalty rate for trademarks
• Selection of the appropriate discount rate for each CGU and for each trademark identified
Management provided more details in relation to the above in Note 4 “Critical Accounting Estimates and Key
Sources of Estimation Uncertainty”, Note 14 “Intangible Assets” and Note 15 “Goodwill” to the consolidated
financial statements.
We have performed amongst others the following audit procedures with the support of our internal valuation
specialists, where deemed necessary, in order to address the risks of material misstatement associated with this
key audit matter:
• Оbtained an understanding of the internal controls surrounding the PPA and goodwill/intangible impairment
process and assessed their design and implementation.
• Assessed the competence, capabilities, experience, professional qualifications and objectivity of the
independent specialists. In addition, we discussed with the management the scope of their work and reviewed
the related terms of engagement to determine that there were no matters that affected their objectivity or
imposed scope limitations.
• Assessed the criteria used by management in the identification of the separate CGUs for their businesses.
• For the PPA exercise, assessed whether identifiable assets acquired and liabilities assumed were
appropriately valued and allocated to the appropriate CGU.
• Assessed whether valuation techniques and methodology used are appropriate and comply with generally
accepted valuation practices and industry norms.
• Assessed the valuation and business assumptions used in the PPA exercise as well as in the impairment
models by CGU, by reference to historical data and, where applicable, external benchmarks and data to
determine whether the assumptions used fell within an acceptable range.
• Carried out appropriate audit procedures to test the accuracy and completeness of the data provided by
the management to the independent appraisal firm taking into account our assessment of relevant controls.
• On a sample basis, checked the mathematical accuracy of the valuation models.
• Assessed completeness and accuracy of all related disclosures provided in the consolidated financial
statements with the requirements of international financial reporting standards.
All the above procedures were completed in a satisfactory manner.
Annual Report 2019 FINANCIAL STATEMENTS 73
Independent Auditor’s Report
INDEPENDENT AUDITOR’S REPORT
Why the matter was determined to be a key audit matter
How the matter was addressed in the audit
LOANS TO RELATED PARTIES
As described in Note 30 to the consolidated financial statements, the Group provided loans to related parties.
As of 31 December 2019, the balance of “loans and finance aid receivable” from related parties amounted
to USD 21,717 thousand and the balance of “loans to key management personnel” amounted to USD 4,945
thousand. As stated in Note 37, subsequent to the balance sheet date, additional loans were provided to
related parties.
We considered these transactions with related parties to be a key audit matter due to the following:
• Significant judgment is exercised by the Board of Directors in determining whether transactions are made
on an arm’s length basis;
• The complexity of judgement involved when determining if transactions with affiliates are subject to
certain bonds’ covenants’ restrictions;
• Accurate and complete disclosures of transactions with related parties are fundamental for the users of
financial statements.
Management provided more details in relation to the above in Note 4 “Critical accounting judgments and key
sources of estimation uncertainty” as well as Note 30 “Related party balances and transactions” and Note 37
“Subsequent events” to the consolidated financial statements.
We have performed amongst others the following audit procedures in order to address the risks of material
misstatement associated with this key audit matter:
• Obtained an understanding of the internal controls surrounding the provision of loans to related parties and
assessed their design and implementation.
• Obtained from those charged with governance and from management the list of all known related parties.
• Reviewed minutes of board meetings and management meetings to assess completeness of related party
disclosures.
• On a sample basis, reconciled the balances of loans to amounts per confirmations received from the related
parties.
• Traced individual related party transactions on a sample basis to supporting documentation.
• Reviewed underlying contracts to understand the terms of related party loans and assessed Board of
Directors’ considerations in the application of arm’s length principle.
• With the support of our internal legal specialists, challenged management’s assessment regarding impact
of related party transactions on compliance with bonds’ covenants by assessing the advice received by the
Group from their internal and external lawyers.
• Assessed completeness and accuracy of all related disclosures provided in the consolidated financial
statements.
All the above procedures were completed in a satisfactory manner.
Annual Report 2019 FINANCIAL STATEMENTS 74
Independent Auditor’s Report
INDEPENDENT AUDITOR’S REPORT
REPORTING ON OTHER INFORMATION
The Board of Directors is responsible for the other information.
The other information comprises the information included in the
annual report, including the corporate governance statement,
but does not include the consolidated financial statements
and our auditor’s report thereon. The Board of Directors is also
required pursuant to article 151 of the Cyprus Companies Law
Cap.113 to prepare and publish a Non-Financial Information
Report by 30 June 2020. This report has not been issued by the
date of this report.
Our opinion on the consolidated financial statements does not
cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the consolidated financial
statements, our responsibility is to read the other information
identified above and, in doing so, consider whether the
other information is materially inconsistent with the consolidated
financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated. If, based on the
work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report
that fact. We have nothing to report in this regard.
RESPONSIBILITIES OF THE BOARD OF DIRECTORS AND THOSE
CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED
FINANCIAL STATEMENTS
The Board of Directors is responsible for the preparation of
consolidated financial statements that give a true and fair view
in accordance with International Financial Reporting Standards
as adopted by the European Union and the requirements of the
Cyprus Companies Law, Cap. 113, and for such internal control
as 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.
In preparing the consolidated financial statements, the Board
of Directors is responsible for assessing the Group’s ability to
continue as a going concern, disclosing, as applicable, matters
related to going concern and using the going concern basis
of accounting unless the Board of Directors either intends to
liquidate the Group or to cease operations, or has no realistic
alternative but to do so.
Those charged with governance are responsible for overseeing
the Group’s financial reporting process.
AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE
CONSOLIDATED FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about wheth-
er the consolidated financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to
issue an auditor’s report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with ISAs will always de-
tect a material misstatement when it exists. Misstatements can
arise from fraud or error and are considered material if, individu-
ally or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of
these consolidated financial statements.
As part of an audit in accordance with ISAs, we exercise
professional judgment and maintain professional scepticism
throughout the audit.
We also:
• Identify and assess the risks of material misstatement of the
consolidated financial statements, whether due to fraud or
error, design and perform audit procedures responsive to those
risks, and obtain audit evidence that is sufficient and appropri-
ate to provide a basis for our opinion. The risk of not detecting
a material misstatement resulting from fraud is higher than for
one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of
internal control.
• Obtain an understanding of internal control relevant to the
audit in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Group’s internal control.
• Evaluate the appropriateness of accounting policies used and
the reasonableness of accounting estimates and related dis-
closures made by the Board of Directors.
• Conclude on the appropriateness of the Board of Directors’
use of the going concern basis of accounting and, based on the
audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt
on the Group’s ability to continue as a going concern. If we con-
clude that a material uncertainty exists, we are required to draw
attention in our auditor’s report to the related disclosures in the
consolidated financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based
on the audit evidence obtained up to the date of our auditor’s
report. However, future events or conditions may cause the
Group to cease to continue as a going concern.
Annual Report 2019 FINANCIAL STATEMENTS 75
Independent Auditor’s Report
INDEPENDENT AUDITOR’S REPORT
AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE
CONSOLIDATED FINANCIAL STATEMENTS (continued)
• Evaluate the overall presentation, structure and content of the
consolidated financial statements, including the disclosures,
and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves
a true and fair view.
• Obtain sufficient appropriate audit evidence regarding the
financial information of the entities or business activities within
the Group to express an opinion on the consolidated finan-
cial statements. We are responsible for the direction, super-
vision and performance of the group audit. We remain solely
responsible for our audit opinion.
We communicate with
those charged with governance
regarding, among other matters, the planned scope and timing of
the audit and significant audit findings, including any significant
deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a state-
ment that we have complied with relevant ethical requirements
regarding independence, and to communicate with them all
relationships and other matters that may reasonably be thought
to bear on our independence, and where applicable, related
safeguards.
From the matters communicated with those charged with
governance, we determine those matters that were of most
significance in the audit of the consolidated financial statements
of the current period and are therefore the key audit matters.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
Pursuant to the requirements of Article 10(2) of the EU Regulation
537/2014 we provide the following information in our Indepen-
dent Auditor’s Report, which is required in addition to the require-
ments of International Standards on Auditing.
APPOINTMENT OF THE AUDITOR AND PERIOD OF
ENGAGEMENT
We were first appointed as auditors of the Group on 24 October
2017 by a shareholders’ resolution. This is our third period of en-
gagement appointment.
CONSISTENCY OF THE ADDITIONAL REPORT TO THE AUDIT
COMMITTEE
We confirm that our audit opinion on the consolidated
financial statements expressed in this report is consistent
with the additional report to the Audit Committee of the
Company, which we issued on 13 April 2020 in accordance with
Article 11 of the EU Regulation 537/2014.
PROVISION OF NON-AUDIT SERVICES
We declare that no prohibited non-audit services referred to in
Article 5 of the EU Regulation 537/2014 and Section 72 of the
Auditors Law of 2017 were provided. In addition, there are no
non-audit services which were provided by us to the Group and
which have not been disclosed in the consolidated financial
statements or the consolidated management report.
OTHER LEGAL REQUIREMENTS
Pursuant to the additional requirements of the Auditors Law of
2017, we report the following:
• In our opinion, based on the work undertaken in the course
of our audit, the consolidated management report has been
prepared in accordance with the requirements of the Cyprus
Companies Law, Cap. 113, and the information given is consis-
tent with the consolidated financial statements.
• In light of the knowledge and understanding of the Group and
its environment obtained in the course of the audit, we are
required to report if we have identified material misstatements
in the consolidated management report. We have nothing to
report in this respect.
• In our opinion, based on the work undertaken in the course
of our audit, the information included in the corporate
governance statement in accordance with the requirements of
subparagraphs (iv) and (v) of paragraph 2(a) of Article 151 of
the Cyprus Companies Law, Cap. 113, have been prepared in
accordance with the requirements of the Cyprus Companies
Law, Cap, 113, and is consistent with the consolidated financial
statements.
• In our opinion, based on the work undertaken in the course
of our audit, the corporate governance statement includes all
information referred to in subparagraphs (i), (ii), (iii), (vi) and (vii)
of paragraph 2(a) of Article 151 of the Cyprus Companies Law,
Cap. 113. In respect of subparagraphs (ii) and (iii), the corporate
governance statement
report
included
(page 47) sets out the exceptions and the explanations there-
on in the application of the UK Corporate Governance Code,
which the Group applies, including the provision on the
independence of the Audit Committee Chairman.
the annual
in
• In light of the knowledge and understanding of the Group
and its environment obtained in the course of the audit, we
are required to report if we have identified material misstate-
ments in the corporate governance statement in relation to the
information disclosed for items (iv) and (v) of subparagraph
2(a) of Article 151 of the Cyprus Companies Law, Cap. 113. We
have nothing to report in this respect.
Annual Report 2019 FINANCIAL STATEMENTS 76
Independent Auditor’s Report
INDEPENDENT AUDITOR’S REPORT
OTHER MATTER
This report, including the opinion, has been prepared for and
only for the Company’s members as a body in accordance with
Article 10(1) of the EU Regulation 537/2014 and Section 69 of the
Auditors Law of 2017 and for no other purpose. We do not, in
giving this opinion, accept or assume responsibility for any other
purpose or to any other person to whose knowledge this report
may come to.
The engagement partner on
independent auditor’s report is Costas Georghadjis.
the audit resulting
in
this
Costas Georghadjis
Certified Public Accountant and Registered Auditor
for and on behalf of
Deloitte Limited
Certified Public Accountants and Registered Auditors
Limassol, 13 April 2020
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
77
Consolidated Statement of Profit or loss and other
Comprehensive Income
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME
Notes
2019
2018
Notes
2019
2018
Continuing operations
Revenue
Net change in fair value of biological assets
and agricultural produce
Cost of sales
Gross profit
Selling, general and administrative
expenses
6
5
7
8
2,055,943
1,552,206
Items that will not be reclassified to profit or loss:
Other comprehensive income
(39,515)
32,094
(1,618,596)
(1,162,727)
397,832
421,573
(179,156)
(99,577)
Effect of revaluation of property, plant and
equipment
Deferred tax on revaluation of property, plant and
equipment charged directly to other comprehensive
income as result of revaluation
Deferred tax on revaluation of property, plant and
equipment charged directly to other comprehensive
income as result of intercompany sales
12
(6,244)
(3,803)
Items that may be reclassified to profit or loss:
Other operating income/(expenses), net
3,071
(5,803)
Loss on impairment of property, plant and
equipment
Operating profit
Finance income
Finance costs
Foreign exchange gain, net
Other expenses, net
Profit before tax
Income tax expense
Profit for the year from continuing
operations
Discontinued operations
Loss for the year from discontinued
operations
Profit for the year
On behalf of the Board:
Chief Executive Officer Yuriy Kosyuk
Chief Financial Officer Viktoria Kapelyushnaya
10
34
11
2
215,503
8,034
312,390
4,457
(147,552)
(138,019)
185,291
(8,064)
253,212
(32,107)
11,638
(10,561)
179,905
(50,527)
221,105
129,378
Cumulative translation difference
Other comprehensive income
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
(5,822)
(1,274)
Earnings per share from continuing and discontinued operations
215,283
128,104
Basic and diluted earnings per share (USD per share)
2.04
Earnings per share from continuing operations
Basic and diluted earnings per share (USD per share)
36
2.10
1.17
1.18
The accompanying notes on the pages 82 to 150 form an integral part of these consolidated financial statements
12
11
199,437
(17,053)
-
-
15,162
49,357
175,928
373,474
588,757
14,054
63,411
191,515
25
218,441
(3,158)
124,926
3,178
215,283
128,104
585,943
186,828
2,814
4,687
588,757
191,515
Annual Report 2019 FINANCIAL STATEMENTS
For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
78
CONSOLIDATED STATEMENT
OF FINANCIAL POSITION
Notes
31 December
2019
31 December
2018
EQUITY AND LIABILITIES
Equity
Share capital
Treasury shares
Additional paid-in capital
Revaluation reserve
Retained earnings
Translation reserve
ASSETS
Non-current assets
Property, plant and equipment
Right-of-use asset
Intangible assets
Goodwill
Non-current biological assets
Long-term bank deposits
Deferred tax assets
Other non-current assets, net
Current assets
Inventories
Biological assets
Agricultural produce
Other current assets
Taxes recoverable and prepaid
Trade accounts receivable, net
Cash and cash equivalents
Assets classified as held for sale
TOTAL ASSETS
On behalf of the Board:
Chief Executive Officer Yuriy Kosyuk
Chief Financial Officer Viktoria Kapelyushnaya
12
13
14
15,2
17
11
16
18
17
19
22
20
21
23
2
2,049,298
1,498,530
Equity attributable to equity holders of the
Parent
229,244
106,522
64,843
29,652
3,298
2,284
23,713
-
52,059
2,509
23,392
3,387
-
54,110
2,508,854
1,633,987
208,389
205,747
215,816
52,573
30,030
124,474
340,735
3,877
273,522
179,290
224,789
32,858
45,146
69,305
211,768
-
1,181,641
1,036,678
3,690,495
2,670,665
Non-controlling interests
Total equity
Non-current liabilities
Bank borrowings
Bonds issued
Lease liabilities
Deferred revenues
Deferred tax liabilities
Other non-current liabilities
Current liabilities
Trade accounts payable
Other current liabilities
Bank borrowings
Accrued interest
Lease liabilities
Liabilities directly associated with assets
classified as held for sale
TOTAL LIABILITIES
TOTAL EQUITY AND LIABILITIES
Consolidated Statement of Financial Position
Notes
31 December
2019
31 December
2018
24
12
284,505
(44,593)
174,022
862,435
1,148,113
(842,188)
284,505
(44,593)
174,022
642,800
1,040,327
(1,015,591)
1,582,294
1,081,470
25
13,572
16,536
1,595,866
1,098,006
26
27
28
9
11
29
26
26,27
28
2
75,880
1,365,669
151,789
49,933
55,305
5,872
105,783
1,090,935
9,087
34,578
12,953
-
1,704,448
1,253,336
147,334
131,994
24,945
21,789
64,074
66,398
96,383
132,715
19,472
4,355
45
-
390,181
319,323
2,094,629
1,572,659
3,690,495
2,670,665
The accompanying notes on the pages 82 to 150 form an integral part of these consolidated financial statements
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
79
Consolidated Statement of Changes in Equity
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
ASSETS
Attributable to equity holders of the Parent
Share
capital
Treasury
shares
Additional
paid-in
capital
Revaluation
reserve
Retained
earnings
Translation
reserve
Total
Non-controlling
interests
Total
equity
Balance at 31 December 2017
284,505
(48,503)
175,291
661,454
925,978
(1,030,159)
968,566
17,141
985,707
Effect of adoption IFRS 9
Balance at 1 January 2018
Profit for the year
Other comprehensive income
Total comprehensive income for the year
Transfer from revaluation reserve to retained earnings
Dividends declared by the Parent
Dividends declared by subsidiaries
Non-controlling interests acquired
Derecognition of interests in subsidiaries
Translation differences on revaluation reserve
Balance at 31 December 2018
Profit/(loss) for the year
Other comprehensive income
Total comprehensive income for the year
Transfer from revaluation reserve to retained earnings
Dividends declared by the Parent
Dividends declared by subsidiaries
Non-controlling interests acquired
Increase of Group’s effective ownership interest in subsidiaries
(Note 2)
Translation differences on revaluation reserve
-
-
-
-
2,904
-
2,904
284,505
(48,503)
175,291
661,454
928,882
(1,030,159)
971,470
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,910
(1,269)
-
-
-
-
-
124,926
-
49,357
49,357
(73,587)
-
-
-
(1,950)
7,526
-
124,926
73,587
(80,000)
-
997
(539)
(7,526)
12,545
12,545
-
-
-
-
2,023
-
124,926
61,902
186,828
-
(80,000)
-
3,638
(466)
-
284,505
(44,593)
174,022
642,800
1,040,327
(1,015,591)
1,081,470
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
218,441
-
218,441
194,099
-
173,403
367,502
194,099
218,441
173,403
585,943
(80,271)
80,271
-
-
-
-
(80,000)
-
-
(5,119)
105,807
(105,807)
-
-
-
-
-
-
-
(80,000)
-
-
-
17,141
3,178
1,509
4,687
-
-
(9,369)
(3,638)
7,715
-
16,536
(3,158)
5,972
2,814
-
-
(6,082)
15,526
2,904
988,611
128,104
63,411
191,515
-
(80,000)
(9,369)
-
7,249
-
1,098,006
215,283
373,474
588,757
-
(80,000)
(6,082)
15,526
(5,119)
(15,222)
(20,341)
-
-
-
Balance at 31 December 2019
284,505
(44,593)
174,022
862,435
1,148,113
(842,188)
1,582,294
13,572
1,595,866
On behalf of the Board:
Chief Executive Officer Yuriy Kosyuk
Chief Financial Officer Viktoria Kapelyushnaya
The accompanying notes on the pages 82 to 150 form an integral part of these consolidated financial statements
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
80
Сonsolidated Statement of Сash Flows
CONSOLIDATED STATEMENT OF CASH FLOWS
Notes
2019
2018
Notes
Operating activities
Profit before tax
Non-cash adjustments to reconcile profit
before tax to net cash flows
253,212
179,905
Interest received
Interest paid
Income taxes paid
Net cash flows from operating activities
Loss before tax from discontinued operations
(5,822)
(1,274)
Investing activities
Depreciation and amortization expense
Net change in fair value of biological assets and
agricultural produce
5
5
Change in allowance for unrecoverable amounts and
direct write-offs
206,195
134,953
Purchases of property, plant and equipment
Purchases of other non-current assets
Payments for renewal of lease agreements
39,515
(32,094)
3,858
3,333
2019
7,789
2018
4,288
(142,894)
(97,464)
(11,543)
501,771
(13,398)
260,905
(111,766)
(210,038)
(743)
(42,032)
-
(9,404)
Loss on impairment of property, plant and equipment
12
6,244
3,803
Loss on disposal of property, plant and equipment
and other non-current assets
Finance income
Finance costs
Released deferred revenue
Non-operating foreign exchange gain, net
Operating cash flows before movements in working
capital
512
1,953
(8,034)
(4,457)
10
147,552
138,019
(1,862)
-
(185,291)
(11,638)
456,079
412,503
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 current liabilities
Change in trade accounts payable
Cash generated operations
125,887
(21,032)
20,109
(29,338)
8,474
7,806
21,954
(12,964)
(6,663)
(6,327)
(19,420)
(16,003)
(9,269)
36,799
39,607
7,696
648,419
367,479
Government grants received
9
12,935
35,371
Net cash inflow on disposal of subsidiaries
Additions to right-of-use assets
Proceeds from disposals of property, plant and
equipment
Purchases of non-current biological assets
Withdrawals of short-term deposits
Investments in short-term deposits
-
(8,618)
7,249
-
2,476
2,138
(284)
-
-
(2,747)
4,452
(5,673)
Acquisition of subsidiaries, net of cash acquired
(205,724)
-
Loans provided to employees, net
Loans provided to related parties
Loans repaid by related parties
(3,408)
(28,004)
10,115
(420)
(8,091)
5,322
Net cash flows used in investing activities
(333,021)
(223,873)
The accompanying notes on the pages 82 to 150 form an integral part of these consolidated financial statements
Annual Report 2019 FINANCIAL STATEMENTS
For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
81
Сonsolidated Statement of Сash Flows
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
Financing activities
Proceeds from bank borrowings
Repayment of bank borrowings
Proceeds from bonds issued
Repayment of bonds
Transaction costs related to corporate bonds issued
Transaction costs related to bank loans received
Repayment of lease liabilities
Dividends paid
Dividends paid by subsidiaries to non-controlling
shareholders
Notes
2019
2018
213,809
255,024
(405,749)
(201,531)
27
350,000
550,000
(79,417)
(416,183)
(4,751)
(697)
(15,806)
(44,468)
(384)
(4,416)
32
(80,000)
(80,000)
(5,249)
(9,369)
Acquisition of non-controlling interest
(20,341)
-
Consent payment related to corporate bonds
27
-
(48,201)
120,549
(992)
47,681
84,713
Net cash flows (used in)/from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents attributable to disposal
group classified as held for sale in the year
Net foreign exchange difference
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
Non-cash transactions
Effect of revaluation of property, plant and equipment
Additions of property, plant and equipment under
leases
Additions of property, plant and equipment financed
through direct bank-lender payments to the vendor
Property, plant and equipment purchased for credit
Non-cash repayments of lease liabilities
23
12
1
-
8,417
211,768
1,501
125,554
340,735
211,768
-
193,193
-
-
-
5,647
1,318
11,377
-
(10,842)
6,287
-
Chief Executive Officer
Chief Financial Officer
On behalf of the Board:
Yuriy Kosyuk
Viktoria Kapelyushnaya
The accompanying notes on the pages 82 to 150 form an integral part of these consolidated financial statements
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
82
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
limited
(the “Parent” or “MHP SE”), a
1. CORPORATE INFORMATION
MHP SE
liability
company (Societas Europaea) registered under the laws of
Cyprus, was formed on 30 May 2006. Hereinafter, MHP SE and its
subsidiaries are referred to as the “MHP SE Group” or the
“Group”. The registered address of MHP SE is 16-18 Zinas
Kanther Street, Agia Triada, 3035 Limassol, Cyprus.
The controlling shareholder of MHP SE is Mr. Yuriy Kosyuk
(“Principal Shareholder”), who owns 100% of the shares of
WTI Trading Limited (“WTI”), which is the immediate majority
shareholder of MHP SE, which in turn directly owns of
59,7% of the total outstanding share capital of MHP SE.
The principal business activities of the Group are poultry and
related operations, grain growing, as well as meat processing
and other agricultural operations (meat processing and meat
products ready for consumption). The Group’s poultry and
related operations integrate all functions related to the produc-
tion of chicken, including hatching, fodder manufacturing, raising
(“grow-out”), processing and
chickens to marketable age
the
marketing of branded chilled products and
include
production and sale of chicken products, vegetable oil, mixed
fodder. Grain growing comprises the production and sale of
grains. Meat processing and other agricultural operations
comprise the production and sale of cooked meat, sausages,
convenience food products, milk and feed grains. During the
year ended 31 December 2019 the Group employed 31,427
people (2018: 28,575 people).
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
83
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The primary subsidiaries, the principal activities of the companies forming the Group and the Parent’s effective ownership interest as of 31 December 2019 and 2018 were as follows:
Name
Raftan Holding Limited
Larontas Limited
Hemiak Investments Limited
MHP Lux S.A.
Myronivsky Hliboprodukt
Myronivsky Plant of Manufacturing Feeds and Groats
Vinnytska Ptakhofabryka
Peremoga Nova
Oril-Leader
Myronivska Pticefabrika
Starynska Ptakhofabryka
Ptakhofabryka Snyatynska Nova
Zernoprodukt MHP
Katerinopilskiy Elevator
SPF Urozhay
Agrofort
Urozhayna Krayina
Ukrainian Bacon
AgroKryazh
Agro-S
Zakhid-Agro MHP
Scylla Capital Limited
Perutnina Ptuj
MHP Trading FZE
MHP Food Trading
Country of
registration
Cyprus
Cyprus
Cyprus
Luxembourg
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
Ukraine
British Virgin Islands
Slovenia
United Arab Emirates
United Arab Emirates
Year
established/
acquired
2006
2015
2018
2018
1998
1998
2011
1999
2003
2004
2003
2005
2005
2005
2006
2006
2010
2008
2013
2013
2015
2014
2019
2018
2016
Principal activities
Sub-holding Company
Sub-holding Company
Sub-holding Company
Finance Company
Management, marketing and sales
Fodder and vegetable oil production
Chicken farm
Breeder farm
Chicken farm
Chicken farm
Breeder farm
Geese breeder farm
Grain cultivation
Fodder production and grain storage, vegetable oil production
Grain cultivation
Grain cultivation
Grain cultivation
Meat processing
Grain cultivation
Grain cultivation
Grain cultivation
Trading in sunflower oil and poultry meat
Poultry production
Trading in sunflower oil and poultry meat
Trading in sunflower oil and poultry meat
31 December
2019
31 December
2018
100.0%
100.0%
100.0%
100.0%
99.9%
88.5%
99.9%
99.9%
99.9%
99.9%
99.9%
100.0%
100.0%
100.0%
99.9%
88.5%
99.9%
99.9%
99.9%
99.9%
100.0%
100.0%
99.9%
99.9%
99.9%
99.9%
99.9%
99.9%
79.9%
51.0%
51.0%
100.0%
100.0%
100.0%
100.0%
100.0%
99.9%
99.9%
99.9%
99.9%
99.9%
99.9%
79.9%
51.0%
51.0%
100.0%
100.0%
-
100.0%
100.0%
The Group’s primary operational facilities are located in different regions of Ukraine as well as in Southeast Europe, including Slovenia, Serbia, Croatia and Bosnia and Herzegovina.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
84
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. CHANGES IN THE GROUP STRUCTURE
Acquisitions
On 21 February 2019, the Group acquired 90.69% of the
issued share capital and
thereby obtained control of
Perutnina Ptuj, a Slovenian based international meat-pro-
cessing company, who is a producer of poultry meat and
poultry meat products in Southeast Europe. Perutnina Ptuj
together with its subsidiaries has production capacity of 55,000
tonnes per annum of poultry meat and more than 35,000 tonnes
per annum of value-added meat products. Perutnina Ptuj was
acquired in line with MHP’s strategy and will provide a platform
for further development and opportunities in the EU with further
capacity expansion planned over the next 3 to 5 years.
The fair values of identifiable assets acquired and liabilities
assumed and any non-controlling interests are as set out in the
table below.
The final fair value of the total identifiable assets acquired was
increased by USD 10,087 thousand from previously reported
provisional amounts mainly as a result of finalizing the neces-
sary valuations of intangible assets (Note 14).
The consideration was paid as follows: USD 23,302 thousand
in 2018 as a prepayment and USD 226,710 thousand in 2019.
Acquisition-related costs amounted to USD 2,689 thousand.
The final fair value of the trade receivables is USD 36,198 thou-
sand and a gross contractual value of USD 38,474 thousand.
The best estimate at acquisition date of the contractual cash
flows not to be collected are USD 2,276 thousand.
The goodwill of USD 61,518 thousand arising from the acquisi-
tion attributed to the expected synergies and other benefits from
combining the assets and activities of Perutnina Ptuj with those
of the Group:
• the acquisition was in line with the Group’s strategy to
extend a presence
in EU markets. Perutnina Ptuj has
production assets in four Balkan countries: Slovenia, Croatia,
Serbia, Bosnia and Herzegovina; owns distribution compa-
nies in Austria, North Macedonia and Romania and supplies
products
in Europe. Perutnina has
strong brands and customer base;
15 countries
to
• Perutnina Ptuj has the ability to increase production of
poultry products using existing production capacities.
Inventories
Biological assets
Trade accounts receivable, net
Cash and cash equivalents
Other current liabilities less other current assets
Property, plant and equipment
Right-of-use asset
Identifiable intangible assets
Trade accounts payable
Deferred tax liabilities net of deferred tax assets
Other non-current liabilities less other non-current assets
Bank borrowings and lease liabilities1
Contingent liabilities
Total identifiable assets
Goodwill
Non-controlling interest of in 7.61 % of Perutnina Ptuj2
Total consideration due and payable
Cash consideration paid
Less: amount paid in 2018
1 includes USD 16,466 thousand of lease liabilities recognised in accordance with the
adoption of IFRS 16 (Note 3).
2 At the date of acquisition, there were 200,488 treasury shares
Less: cash and cash equivalent balances acquired
Net cash outflow arising on acquisition
As a leading cost-efficient poultry producer, the Group has solid
expertise in cost optimization and the management expects to
improve the profitability of Perutnina Ptuj;
• Perutnina Ptuj will provide the Group a platform for further pro-
duction capacity expansion in Europe.
None of the goodwill is expected to be deductible for income tax
purposes
21 February 2019
35,371
8,721
36,198
20,986
(8,103)
179,581
14,564
53,448
(34,283)
(18,338)
(6,073)
(74,960)
(3,092)
204,020
61,518
(15,526)
250,012
250,012
(23,302)
(20,986)
205,724
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
85
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. CHANGES IN THE GROUP STRUCTURE (continued)
The non-controlling
interest
Perutnina Ptuj) recognised at the acquisition date was measured
as a proportionate share of the acquired entity’s net identifiable
assets and amounted to USD 15,526 thousand.
(7.61% ownership
interest
to 100% through the purchase of a non-controlling interest for
the amount USD 20,341 thousand. The difference between
the carrying value of the net assets acquired and consideration
paid was recognised as an adjustment to the retained earnings
in the amount of USD 5,119 thousand.
Perutnina Ptuj contributed USD 271,297 thousand revenue
and USD 20,914 thousand to the Group’s profit for the period
between the date of acquisition and the reporting date.
If the acquisition of Perutnina Ptuj had been completed on the
first day of the financial year, the Group revenues for the year
ended 31 December 2019 would have been USD 2,103,867
thousand and the Group profit would have been USD 216,682
thousand.
Changes in non-controlling interests in subsidiaries
Since acquisition date and up to 31 of December 2019, the Group
has increased its effective ownership interest in Perutnina Ptuj
Plan to dispose of the Snyatynska poultry farm
The Board of Directors has authorized the management
of the Group to cease production of goose meat and foie
gras. At the end of July 2019, by virtue of a Board resolution,
management of the Group committed to a plan to dispose of the
Snyatynska poultry farm, a wholly owned subsidiary that is
located
in Ukraine, and was previously presented with-
in Meat processing and other agricultural operations
segment. The management believes that the production
of foie gras is not consistent with the Group’s strategy and
policy of being a global leader in Environmental Sustainability
and Animal Welfare.
At 31 December 2019 the management of the Group was in ne-
gotiation with potential buyers for its Snyatynska poultry farm
and expected to complete the sale within 6 months.
No impairment loss was recognised on classification disposal of
group as held for sale as the management of the Group expects
that the fair value less costs to sell either equals or is higherless
than the carrying amount.
Analysis of profit for the year from discontinued operations
The combined results of the discontinued operations are set out
from
below. The comparative
discontinued operations have been represented to include
those operations classified as discontinued in the current year.
losses and cash flows
Results from discontinued operations for year ended
31 December
Cash flows from discontinued operations for year ended
31 December
Earnings per share from discontinued operations
Revenue
Expenses
Loss before tax
Income tax expense
2019
2,310
(8,132)
(5,822)
-
2018
3,771
(5,045)
(1,274)
-
(5,822)
(1,274)
Net cash (outflows)/inflows
from operating activities
Net cash outflows from invest-
ing activities
Net cash inflows/(outflows)
from financing activities
Net decrease in cash and
cash equivalents
2019
2018
(3,269)
853
(93)
(357)
3,357
(501)
(5)
(5)
Basic and diluted earnings per
share (USD per share)
2019
2018
(0.06)
(0.01)
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
86
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
production machinery, vehicles and agricultural machinery,
biological assets, agricultural produce and certain financial
instruments, which are carried at fair value. Historical cost is
generally based on the fair value of the consideration given in
exchange for goods and services.
Correction of prior period disclosure errors
Subsequent to the issuance of the consolidated financial
statements as of and for the year ended 31 December 2018, the
management of the Group identified errors in the disclosure of
the operating land lease commitments due to the fact that not
all constructive obligations were captured in the calculation
and thus included with a disclosure restatement to correct this
disclosure error in these financial statements.
The effect of restatement of the disclosure provided in the
consolidated financial statements as of and for the year ended
31 December 2018 is summarized below.
2. CHANGES IN THE GROUP STRUCTURE (continued)
The major classes of assets and liabilities of the Snyatynska
poultry farm at the end of the reporting period are as follows:
31 December 2019
Property, plant and equipment,
net
Agricultural produce
Inventories
Cash and cash equivalents
Total assets classified as held
for sale
Other current liabilities
Total liabilities associated
with assets classified as held
for sale
Intragroup accounts receivable
and payable eliminated on
consolidation, net1
Net assets of disposal group
3,599
149
128
1
3,877
(45)
(45)
1,048
4,880
The Snyatynska poultry farm has been classified and accounted
for at 31 December 2019 as a disposal group held for sale.
Discontinued operations are excluded from the results of
continuing operations and are presented as a single amount
as profit or loss after tax from discontinued operations in the
consolidated statement of profit or loss. All other notes to the
financial statements include amounts for continuing operations,
unless otherwise mentioned.
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
(IFRS) as adopted by the European Union and the requirements
of the Cyprus Companies Law Cap 113. The operating subsidiar-
ies of the Group maintain their accounting records under local
accounting standards.
Local principles and procedures may differ
those
generally accepted under IFRS. Accordingly, the consolidated
financial statements, which have been prepared from the Group
entities’ local accounting records, reflect adjustments necessary
in order for the financial statements to be presented in accor-
dance with IFRS.
from
Basis of preparation
These consolidated financial statements have been prepared
on the assumption that the Group is a going concern and will
continue in operation for the foreseeable future.
1 intragroup balances that are eliminated in the Group’s consolidated financial statements
have been included herein to illustrate the balances that will be transferred with the
disposal group and convert to third party balances
The consolidated financial statements of the Group are
prepared on the basis of historical cost except for revalued
amounts of buildings and structures, grain storage facilities,
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
87
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Contractual and constructive obligations
agricultural land operating leases as of 31 December 2018:
in
respect of
As
previously
reported
31,330
104,346
Effect of
restatement
As
restated
17,837
49,167
57,994
162,340
Within one year
In the second to the
fifth year inclusive
After fifth year
112,078
39,278
151,356
Total commitments
on land operating
leases
247,754
115,109
362,863
In addition, the Company disclosed
in the consolidated
financial statements as of and for the year ended 31 December
2018 that the analysis conducted by the Group in relation to
the initial application of IFRS 16 indicated a probable recogni-
tion of right of use of asset and lease liability in the amount not
higher than USD 103,933 thousand. The preliminary assessment
was underestimated due to the fact that not all constructive
obligations were captured in the calculation.
The corrected amounts for the right of use assets and lease
liabilities are disclosed in “IFRS 16 leases” section of Note 3
thousand and
below and amounted
USD 177,093 thousand, respectively.
to USD 185,442
impact on
restatements had no
The
the consolidated
statement of financial position as of 31 December 2018,
consolidated statement of profit or loss and other compre-
hensive income, consolidated statement of changes in equity,
consolidated statement of cash flows and basic and diluted
earnings per share for the years then ended.
IFRS 16 Leases
IFRS 16 changes how
leases
previously classified as operating lease under IAS 17, which were
off-balance-sheet.
the Group accounts
for
The Group’s
individuals (Ukrainian citizens) for agricultural purposes.
leases mainly represent rent of
land from
INTERNATIONAL
ADOPTION OF NEW AND REVISED
FINANCIAL REPORTING STANDARDS
A number of new or amended standards became applicable for
the current reporting period and the Group had to change its
accounting policies and make adjustments as a result of
adopting IFRS 16 Leases.
The group has adopted IFRS 16 retrospectively from 1 January
2019, but has not restated comparatives for the 2018 reporting
period, as permitted under the specific transitional provisions in
the standard. The reclassifications and adjustments arising from
the new leasing rules are therefore recognised in the opening
balance sheet on 1 January 2019. The nature and effect of these
changes are disclosed below.
The Group applied the practical expedient to retain the
classification of existing contracts as leases under the previous
International Accounting Standard 17 “Leases” (“IAS 17”) instead
of reassessing whether existing contracts contain a lease at the
date of initial application.
Impact on transition
The Group has elected to apply the following other transitional
reliefs permitted by the Standard:
• The application of a single discount rate for portfolio of leases
with reasonably similar characteristic;
• The exclusion of initial direct costs of obtaining a lease from
the measurement of right-of-use assets at the date of initial
application.
• Right-of-use assets are measured at an amount equal to
the lease liability, adjusted by the amount of any prepaid or
accrued lease payments relating to that lease recognised
in the statement of financial position immediately before the
date of initial application.
Several other amendments and interpretations apply for the first
time in 2019, but did not result in any changes to the Group’s
accounting policies and
the
consolidated financial statements of the Group.
the amounts
reported
in
Annual Report 2019 FINANCIAL STATEMENTS
For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
88
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
ADOPTION OF NEW AND REVISED
FINANCIAL REPORTING STANDARDS (continued)
INTERNATIONAL
IFRS 16 Leases (continued)
The table below shows the amount of adjustment for each
financial statement line item affected by the application of
IFRS 16:
Impact on assets,
liabilities and
equity as at 1
January 2019
Opening
balance as at
1 January
2019
IFRS 16
As
adjustments
presented
Property, plant and
equipment
Right-of-use
assets, net
Other non-current
assets1
Other current
assets1
Net impact on
total assets
1,498,530
(21,449)
1,477,081
-
185,442
185,442
54,110
(6,092)
48,018
32,858
(69)
32,789
1,585,498
157,832
1,743,330
Lease liabilities
9,087
114,042
123,129
Current portion of
lease liabilities
Other current
liabilities2
Net impact on
total labilities
4,355
49,609
53,964
96,383
(5,819)
90,564
109,825
157,832
267,657
Retained earnings
1,040,327
-
1,040,327
On adoption of IFRS 16, the Group recognised lease liabilities
in relation to leases which had previously been classified as
operating leases under the principles of IAS 17. These liabilities
were measured at the present value of future lease payments,
discounted using the lessee’s incremental borrowing rate as of
1 January 2019. Future lease payments consist of:
• fixed payments (including in-substance fixed payments);
• variable lease payment that are based on a market index
or a rate, initially measured using the index or rate as at the
commencement date. Regardless of the lease payments
stated in the lease contracts, customary business practic-
es complement the contractual terms in a way that at each
particular date the rate
is a market rate. Since the
entire market operates on the basis of expectations of a
periodic revision of rates (based on current market rates),
rates are
management has
determined by the market mechanism. In substance, non-
contractual changes in lease payments are driven by compet-
itive forces and changes in payments are based on average
changes of lease payments in the region.
concluded
that
the
The reconciliation between the operating lease commitments as
of 31 December 2018 and the opening balance for the lease lia-
bilities as of 1 January 2019 is as follows:
Thousand US dollars
Land lease commitments as of 31
December 2018 (as restated)
Discounted lease commitments
as of 1 January 2019
Add: accrued payable for land
lease as of 31 December 2018
Add: lease liabilities as of 31
December 2018 (Note 28)
Lease liabilities as of 1 January
2019
362,863
157,832
5,819
13,442
177,093
The weighted average lessee’s incremental borrowing rate
applied to the lease liabilities on 1 January 2019 was 20%.
Incremental borrowing rate was determined as the rate of
interest that the Group would have to pay to borrow over a
similar term the funds necessary to obtain an asset of
a similar value to the right-of-use asset in a similar economic
environment. The majority of the Group’s leases are denominat-
ed in UAH.
The average maturity of lease agreements is 7 years.
1 consists of prepayments for land lease
2 accrued payable for land lease
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
89
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
ADOPTION OF NEW AND REVISED
FINANCIAL REPORTING STANDARDS (continued)
INTERNATIONAL
IFRS 16 Leases (continued)
The recognised right-of-use assets relate to the following types
of assets:
Land
Property, plant and
equipment
Total right-of-use
assets
31 December
2019
198,711
30,533
1 January
2019
163,993
21,449
229,244
185,442
Property, plant and equipment held under lease arrangements
previously presented within property, plant and equipment is
now presented within the line item right-of-use assets. There has
been no change in the amount recognised.
Adoption of IFRS 16 has no impact on the Group’s land lease
rights acquired in a business combination and capitalized costs
for renewal of contracts recognised before 1 January 2019.
STANDARDS AND INTERPRETATIONS IN ISSUE BUT NOT
EFFECTIVE
At the date of authorization 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
Amendments to IFRS 10 and IAS 28
– Sale or contribution of assets
between an investor and its
associate or joint venture1
Amendments to IAS 1– Classification
of liabilities as current or
non-current
Effective for annual
period beginning on
or after
Not determined
1 January 2022
IFRS 17 Insurance Contracts2
1 January 2021
Amendments to IAS 1 and IAS 8:
Definition of Material2
Amendments to IFRS 3 Business
Combinations
Amendments to IFRS 9, IAS 39 and
IFRS17: Interest Rate Benchmark
Reform2
Amendments to References to the
Conceptual Framework in IFRS
Standards2
1 January 2020
1 January 2020
1 January 2020
1 January 2020
these Standards and
For
Interpretations, management
anticipates that their adoption will not have a material effect
on the consolidated financial statements of the Group in future
periods.
Functional and presentation currency
The functional currency of Ukrainian companies of the Group
is the Ukrainian Hryvnia (“UAH”); the functional currency of the
Cyprus companies and Luxembourg company of the Group is
US Dollars (“USD”), the functional currency of the Slovenian
companies of the Group is EURO (“EUR”). 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
at the dates of the transactions. Monetary assets and liabilities
denominated in such currencies are translated at the rates prevailing
on the reporting date. All realized and unrealized gains and losses
arising on exchange differences are recognised
the
consolidated statement of profit or loss and other comprehensive
income for the period.
in
These consolidated financial statements are presented in
US Dollars (“USD”), which is the Group’s presentation currency.
1 Early application is allowed
2 Standards have been already endorsed for use in the European Union
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
90
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Functional and presentation currency (continued)
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
profit or loss are translated at exchange rates at the dates of the
transactions;
• All resulting exchange differences are recognised as a
separate component of equity;
• All equity items, except for the revaluation reserve, are
translated at the historical exchange rate. The revaluation
reserve is translated at the closing rate as of the date of the
statement of financial position.
For practical reasons, the Group translates items of income and
expenses for each period presented in the financial statements
using the quarterly average exchange rates, if such translations
reasonably approximate the results translated at exchange rates
prevailing at the dates of the transactions.
The relevant exchange rates were:
Currency
Closing
rate as
of 31
December
2019
Average
for 2019
Closing
rate as
of 31
December
2018
Average
for 2018
UAH/USD
23.6862
25.8373
27.6883
27.2016
UAH/EUR
26.4220
28.9406
31.7141
32.1341
Basis of consolidation
The consolidated financial statements
the
financial statements of the MHP SE and its subsidiaries.
Control is achieved when the Company:
• has power over the investee;
• is exposed, or has rights, to variable returns from its
incorporate
involvement with the investee; and
• has the ability to use its power to affect its returns.
The Company reassesses whether or not
it controls an
investee, if facts and circumstances indicate that there are
changes to one or more of the three elements of control listed
above. Consolidation of a subsidiary begins when the Company
obtains control over the subsidiary and ceases when the
Company loses control of the subsidiary. Specifically, income
and expenses of a subsidiary acquired or disposed of during
the year, are included in the consolidated statement of profit or
loss and other comprehensive income from the date the
Company gains
the
Company ceases to control the subsidiary. Profit or loss
and each component of other comprehensive
income
are attributed to the owners of the Company and to the
non-controlling
income of
subsidiaries is attributed to the owners of the Company and to
the non-controlling interests even if this results in the non-con-
trolling interests having a deficit balance.
interests. Total comprehensive
the date when
control until
intercompany
transactions, balances and
All significant
unrealized gains or losses on transactions are eliminated on
consolidation, except when the intragroup losses indicate an
impairment
the consolidated
financial statements.
that requires recognition
in
Where necessary, adjustments are made to the financial state-
ments of subsidiaries to bring the accounting policies used in line
with those adopted by the Group.
Accounting for acquisitions
The acquisitions of subsidiaries
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.
from
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 sub-
sidiary. Acquisition-related costs are generally recognised in the
consolidated statement of profit or loss as incurred.
When the consideration transferred by the Group in a business
combination includes assets and liabilities resulting from a con-
tingent 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.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
91
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 are available to
measure fair value, maximizing the use of relevant observable
inputs and minimizing the use of unobservable inputs.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
interests
Accounting for acquisitions (continued)
that are present ownership
Non-controlling
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 measure-
ment 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 consid-
eration 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 profit or
loss, 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
the amount by
in subsidiaries. Any difference between
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.
liabilities of subsidiaries acquired
Accounting for transactions with entities under common
control
from
The assets and
entities under common control are recorded in these consolidated
financial statements at pre-acquisition carrying values.
Any difference between the carrying value of net assets of
these subsidiaries, and the consideration paid by the Group is
accounted for in these consolidated financial statements as an
adjustment to shareholders’ equity. The results of the acquired
entity are reflected from the date of acquisition.
Any gain or loss on disposals to entities under common control
are 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 presump-
tion 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 by the Group.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
92
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Fair value measurement (continued)
All assets and liabilities for which fair value is measured or
disclosed in the financial statements are categorized 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 unobserv-
able
Investment income earned on the temporary investment of
specific borrowings pending their expenditure on qualifying
assets is deducted from the borrowing costs eligible for
capitalization.
All other borrowing costs are recognised in the statement of
profit or loss and other 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.
segments
Reportable
the Group’s principal
represent
business activities. Poultry and related operations segment
include sales of chicken meat, sales of by-products such as
vegetable oil and related products and other poultry-relat-
ed products. CODM is considering oil extraction as a part
of mixed fodder production rather than a separate line of
business as primarily the quality and effectiveness of mixed fod-
der production prevails over oil output. Grain growing operations
include sale of grain other than feed grains and mixed-fodder.
The meat processing and other agricultural operations segment
primarily includes sales of other than poultry meat and
processed meat products, feed grains and milk. The Europe
operating
of
comprises
Perutnina Ptuj and include sales of meat processing and
chicken meat products in Southeast Europe.
operations
segment
the
liabilities
that are
recognised
the
in
For assets and
financial statements on a
the Group
determines whether transfers have occurred between Levels
in the hierarchy by re-assessing categorization (based on the
lowest
fair value
measurement as a whole) at the end of each reporting period.
recurring basis,
is significant
input
level
that
the
to
Borrowing costs
Borrowing costs include interest expense, finance charges on
leases and other interest-bearing long-term payables and debt
service costs.
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 identi-
fied 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.
to
Borrowing costs directly attributable
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.
Based on the current management structure, the Group has
identified the following reportable segments:
• Poultry and related operations;
• Grain growing operations;
• Meat processing and other agricultural operations;
• Europe operating segment.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
93
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
The Group does not present information on segment assets and
liabilities as the CODM does not review such information for
decision-making purposes.
Non-current assets held for sale
Non-current assets and disposal groups are classified as
held for sale if their carrying amount will be recovered
principally through a sale transaction rather than through
continuing use. This condition is regarded as met only when
the asset (or disposal group) is available for immediate sale in
its present condition subject only to terms that are usual and
customary for sales of such asset (or disposal group) and its
sale is highly probable. Management must be committed to the
sale, which should be expected to qualify for recognition as a
completed sale within one year from the date of classification.
When the Group is committed to a sale plan involving loss of
control of a subsidiary, all of the assets and liabilities of that
subsidiary are classified as held for sale when the criteria
described above are met, regardless of whether the Group will
retain a non-controlling interest in its former subsidiary after the
sale.
Non-current assets (and disposal groups) classified as held for
sale are measured at the lower of their carrying amount and fair
value less costs to sell.
Revenue recognition
The Group generates revenue primarily from the sale of agricul-
tural products to the end customers. Revenue is measured based
on the consideration to which the Group expects to be entitled
in a contract with a customer and excludes amounts collected
on behalf of third parties. The Group recognises revenue when it
transfers control of a product or service to a customer.
Non-monetary exchanges or swaps of goods which are of similar
nature and value are not treated as transactions which generate
revenue.
The Group recognises revenue from the following major sources:
• chicken meat;
• vegetable oil and related products;
• other poultry related sales (delivery services, sunflower and
soybean meals, sunflower husk and other);
• grain;
• meat processing products and other meat;
• other agricultural operations (milk, feed grains and other);
Revenue is measured based on the consideration to which the
Group expects to be entitled in a contract with a customer. The
Group recognises revenue at a point in time when it transfers
control of a product or service to a customer.
The major part of the Group’s sales are generated from the
wholesale market. Revenue is recognised when control of
the goods has transferred, being when the goods have been
shipped to the wholesaler’s specific location or delivered to
major Ukrainian sea ports. Following delivery, the wholesaler
has full discretion over the manner of distribution and price to
sell the goods, has the primary responsibility when on-selling the
goods, and bears the risks of obsolescence and loss in relation
to the goods. A receivable is recognised by the Group when
the goods are delivered to the wholesaler as this represents the
point in time at which the right to consideration becomes uncon-
ditional. Under the Group’s standard contract terms, customers
have no right of return.
The Group sells its products for export on various terms,
some of which include shipping and handling costs in the
price of the product. Sales price of products for local market
predominantly includes shipping and handling costs in the price
of the product. Such services are recognised as a separate
performance obligation. The transaction price for shipping and
handling services is determined based on the costs of such
its performance obligation
services. The Group satisfies
associated with transferring the promised goods or services to
a customer when the customer obtains control of those assets.
Government grants
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
the extent
finance costs
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, which is
recognised in profit or loss on a systematic basis over the useful
life of the related assets.
for agricultural producers. To
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
94
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Government grants (continued)
Other government grants are recognised at the moment when
the decision to disburse the amounts to the Group is made.
Government grants are not
is
reasonable assurance that the Group will comply with the
conditions attached on them and that the grants will be received.
recognised until
there
Property, plant and equipment
All groups of property, plant and equipment are carried at reval-
ued amounts, being their fair value at the date of the revaluation
less any subsequent depreciation and impairment losses, except
for land and other fixed assets that are carried at historical cost
less accumulated depreciation.
The historical cost of an item of property, plant and equip-
ment 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 capitalized in accordance
with the Group’s accounting policy.
Subsequently capitalized 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 capitalization are charged to the
consolidated statement of profit or loss as incurred.
the model
For all groups of property, plant and equipment carried at
revaluation
revaluations are performed with
sufficient regularity such that the carrying amount does
not differ materially from that which would be determined
the asset’s
using
carrying amount is increased as a result of a revaluation, the
increase is credited directly to equity as a revaluation reserve.
the reporting date.
fair values at
If
However, such increase is recognised in the consolidated
statement of profit or loss to the extent that it reverses a reval-
uation decrease of the same asset previously recognised in the
consolidated statement of profit or loss. If the asset’s carrying
amount is decreased as a result of a revaluation, the decrease is
recognised in the consolidated statement of profit or loss.
However, such decrease is debited directly to the revalua-
tion 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 consoli-
dated statement of profit or loss. The excess of depreciation
charge on the revalued asset over the depreciation that would
have been charged based on the historical cost of the asset is
transferred from revaluation reserve directly to retained earn-
ings over the assets useful life. 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.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
95
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Property, plant and equipment (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
Production machinery
Auxiliary and other machinery
Utilities and infrastructure
Vehicles and agricultural machinery
Other fixed assets
15 - 55 years
20 - 60 years
10 - 25 years
5 - 25 years
20 - 50 years
5 - 15 years
3 - 10 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.
Assets held under 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 useful
residual value,
The
lives and depreciation
method are reviewed at each financial year-end. The effect of
for
any changes
prospectively as a change in an accounting estimate.
from previous estimates
is accounted
Amortization of intangible assets is recognised on a straight line
basis over their estimated useful lives. The period of estimated
useful life of intangibles is as follows:
Land lease rights
Customer relationship
Trademarks
Other intangible assets
3 - 15 years
20 years
not amortised
3 - 10 years
The amortization period and the amortization method for
intangible assets with finite useful lives 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.
The gain or loss arising on sale or disposal of an item of proper-
ty, plant and equipment is determined as the difference between
the sales proceeds and the carrying amount of the asset and is
recognised in the consolidated statement of profit or loss.
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 consist primarily of
lease rights,
trademarks and customer relationship which are acquired in a
business combination.
land
Intangible assets acquired in a business combination are
identified and recognised separately from goodwill where they
satisfy the definition of an intangible asset. The cost of such
intangible assets is their fair value at the acquisition date.
Subsequent to initial recognition, intangible assets acquired in
a business combination are reported at cost less accumulated
amortization and accumulated impairment losses.
Intangible assets assessed as having an indefinite useful life are
not amortised and are examined for impairment annually or more
frequently where there is an indication of impairment. Where the
carrying amount of an asset is greater than the amount that it is
estimated to be recoverable, it is written down to its recoverable
amount.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
96
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
land
(Ukrainian citizens)
Right-of-use assets
from
Right-of-use assets mainly represents rent of
individuals
for agricultural purposes.
The Group recognises right-of-use assets at the commence-
ment date of the lease (i.e., the date the underlying asset is
available for use). Right-of-use assets are measured at cost,
less any accumulated depreciation and
impairment
losses, and adjusted for any remeasurement of lease liabilities.
The cost of right-of-use assets includes the amount of lease
liabilities recognized, adjusted by the amount of any prepaid
or accrued lease payments relating to that lease recognised
in the statement of financial position. Right-of-use assets are
depreciated over the period of lease term. The depreciation
starts at the commencement date of the lease. The Group
recognises depreciation of right-of-use assets based on
the lease term, presented within cost of goods sold in the
consolidated statement of profit or loss.
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
recognised
immediately in the consolidated statement of profit or loss
unless the relevant asset is carried at a revalued amount, in
which case the impairment loss is treated as a revaluation
decrease.
impairment
loss
is
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 in-
creased carrying amount does not exceed the carrying amount
that would have been determined had no impairment loss been
recognised for the asset (cash-generating unit) in prior years. A
reversal of an impairment loss is recognised immediately in the
consolidated statement of profit or loss, unless the relevant as-
set is carried at a revalued amount, in which case the reversal of
the impairment loss is treated as a revaluation increase.
the purposes of
Impairment of goodwill
For
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.
testing, goodwill
impairment
A cash-generating unit
to which goodwill has been
allocated is tested for impairment annually, or more frequent-
ly when there is an indication that the unit may be impaired.
If the recoverable amount of the cash-generating unit is less
than its carrying amount, the impairment loss is allocated first to
reduce the carrying amount of any goodwill allocated to
the unit and then to the other assets of the unit pro rata
based on the carrying amount of each asset in the unit. Any
impairment loss for goodwill is recognised directly in the
consolidated statement of profit or loss. An impairment loss
recognised on 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-assess-
able or non-tax deductible. It is calculated using tax rates that
have been enacted by the reporting date.
is accounted
Deferred tax
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 utilized.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
97
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Income taxes (continued)
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 report-
ing period, to recover or settle the carrying amount of its assets
and liabilities.
Deferred tax is charged or credited to the consolidated state-
ment of profit or loss, 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
realize 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).
No formal requirements exist to the above documents and,
in practice, such documents may include evidence that the
recipient of income has a real office, employees and that the
recipient is fully entitled to manage and dispose the received
income without limitations.
income
(dividends,
Passive
from
Slovenian sources that is paid to non-resident entities is subject
to WHT at the rate of 5%.
royalties, etc)
interest,
Inventories
Inventories are stated at the lower of cost and net realizable
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
realizable value is determined as the estimated selling price
less all estimated costs of completion and costs to be incurred in
related
marketing, selling and distribution. Agriculture
production process results in production of joint products:
main and by-products. A by-product arising from the process is
measured at net realizable value and this value is deducted from
the cost of the main product.
Withholding tax
Passive income (dividends, interest, royalties, etc) from Ukrainian
sources that is paid to non-resident entities is generally subject
to withholding tax (WHT).
The WHT tax rate of 15% (base rate) should be applied
unless more favorable rates (reduced rates) are provided by a
relevant double
(DTT) signed between
Ukraine and foreign country. In order to benefit from reduced tax
rate in DTT, the non-resident recipient of income must confirm
its tax residency and should also be considered the beneficial
owner of such income.
taxation
treaty
Tax residency status should be confirmed by tax residency
certificate issued by tax authorities of the recipient’s country of
residence for tax year in which the income is paid.
According to the Tax Code of Ukraine, agents, nominee
holders, and other intermediaries in respect of received income
cannot be beneficial owners of income sourced in Ukraine and
are not entitled to favorable treaty provisions. The Ukrainian tax
authorities use both legal and economic substance approach for
the beneficial owner definition considering also economicsub-
stance of the transaction and the substance of the recipient of
income.
As result, in order to prove the beneficial ownership status of the
non-resident recipient, there should be additional documental
support to justify the substance of transactions.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
98
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Based on the above policy, the principal groups of biological
assets and agricultural produce are stated as follows:
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 recognizes a biological asset or agricultural produce
when the Group controls the asset as a result of past events, it is
probable that future economic benefits associated with the asset
will flow to the Group, and the fair value or cost of the asset can
be measured reliably.
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 profit or loss. Costs to sell include all costs that
would be necessary to sell the assets, including costs necessary
to get the assets to market.
The difference between fair value less costs to sell and total
production costs is allocated to biological assets held in stock as
of each reporting date as a fair value adjustment.
The change in this adjustment from one period to another is
recognised as “Net change in fair value of biological assets and
agricultural produce” in the consolidated statement of profit or
loss.
Agricultural produce harvested from biological assets is mea-
sured 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 consolidated
statement of profit or loss.
Biological Assets
i. Broiler chickens
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 42-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 regenera-
tion 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. 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 harve
sted crops, with an allowance for costs to be incurred
and risks to be faced during the remaining transformation
process.
v. Hatchery eggs
The fair value of hatchery eggs is determined by reference
to market prices at the point of harvest.
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
The fair value of fodder grain 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 chickens
intended for the production of meat, as well as pork and
meat cows. Bearer biological assets include poultry held
for hatchery eggs production, milk cows and breeding
bulls.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
99
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Financial instruments
Financial assets and financial liabilities are recognised in the
Group’s statement of financial position when the Group becomes
a party to the contractual provisions of the instrument.
Financial assets and financial liabilities of the Group are
represented by cash and cash equivalents, trade accounts
receivable, net, bank borrowings, bonds
trade
accounts
liabilities.
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
payable
issued,
other
and
liabilities are
Financial assets and financial
initially
fair value. Transaction costs that are di-
recognised at
rectly 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
initial
recognition. Transaction costs directly attributable to the acquisi-
tion of financial assets or financial liabilities at fair value through
profit or loss are recognised immediately in profit or loss.
liabilities, as appropriate, on
Financial assets
All recognised financial assets are measured subsequently in
their entirety at either amortised cost or fair value, depending on
the classification of the financial assets.
Classification of financial assets
instruments that meet the following conditions are
Debt
measured subsequently at amortised cost (this category is the
most relevant to the Group):
• the financial asset is held within a business model whose
objective is to hold financial assets in order to collect contrac-
tual cash flows; and
• the contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of
principal and interest on the principal amount outstanding.
instruments that meet the following conditions are
Debt
measured subsequently at FVTOCI:
• the financial asset is held within a business model whose
objective is achieved by both collecting contractual cash flows
and selling the financial assets; and
• the contractual terms of the financial asset give rise on speci-
fied dates to cash flows that are solely payments of principal
and interest on the principal amount outstanding.
By default, all other financial assets are measured
subsequently at FVTPL.
Financial assets at amortised cost are subsequently measured
using the effective interest (EIR) method and are subject to im-
pairment. The effective interest method is a method of calcula
ing the amortised cost of a debt instrument and of allocating in-
terest income over the relevant period.
The amortised cost of a financial asset is the amount at which
the financial asset is measured at initial recognition minus the
principal repayments, plus the cumulative amortisation using
the effective interest method of any difference between that
initial amount and the maturity amount, adjusted for any loss
allowance. The gross carrying amount of a financial asset is the
amortised cost of a financial asset before adjusting for any loss
allowance.
Impairment of financial assets
The Group recognises an allowance for expected credit
losses (ECLs) for all debt instruments not held at fair value
through profit or loss. ECLs are estimated as the difference
between all contractual cash flows that are due to the Group in
accordance with the contract and all the cash flows that the
Group expects to receive, discounted at the original effective
interest rate. The amount of expected credit losses is updated at
each reporting date to reflect changes in credit risk since initial
recognition of the respective financial instrument.
For trade accounts receivable and contract assets, the Group
applies a simplified approach in calculating ECLs. Therefore, the
Group does not track changes in credit risk, but instead recog-
nises a loss allowance based on lifetime ECLs at each reporting
date. The Group has established a provision matrix that is based
on its historical credit loss experience, adjusted for forward-look-
ing factors specific to the debtors and the economic environment.
For all other financial instruments, the Group recognises lifetime
ECL when there has been a significant increase in credit risk
since initial recognition. However, if the credit risk on the finan-
cial instrument has not increased significantly since initial recog-
nition, the Group measures the loss allowance for that financial
instrument at an amount equal to 12-month ECL.
Lifetime ECL represents the expected credit losses that will
result from all possible default events over the expected life of a
financial instrument. In contrast, 12-month ECL represents
the portion of lifetime ECL that is expected to result from
default events on a financial instrument that are possible within
12 months after the reporting date.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
100
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Significant increase in credit risk
In assessing whether the credit risk on a financial instrument
has increased significantly since initial recognition, the Group
compares the risk of a default occurring on the financial
instrument at the reporting date with the risk of a default occur-
ring on the financial instrument at the date of initial recognition.
In making this assessment, the Group considers both quantitative
and qualitative information that is reasonable and supportable,
including
forward-looking
experience
and
is available without undue cost or
information
effort. Forward-looking information considered includes the
future prospects of the industries in which the Group’s debtors
operate, obtained from economic expert’s reports, financial
analysts, governmental bodies, as well as consideration of
various external sources of actual and forecast economic
information that relate to the Group’s core operations.
historical
that
Irrespective of the outcome of the above assessment, the
Group presumes that the credit risk on a financial asset has
increased significantly since initial recognition when contractual
payments are more than 30 days past due, unless the Group has
reasonable and supportable information that demonstrates
otherwise.
Low credit risk financial instruments
Despite the foregoing, the Group assumes that the credit risk on
a financial instrument has not increased significantly since ini-
tial recognition if the financial instrument is determined to have
low credit risk at the reporting date. A financial instrument is
determined to have low credit risk if:
i. The financial instrument has a low risk of default,
ii. The debtor has a strong capacity to meet its contractual cash
flow obligations in the near term, and
iii. Adverse changes in economic and business conditions in the
longer term may, but will not necessarily, reduce the ability of
the borrower to fulfil its contractual cash flow obligations.
Default definition
The Group considers
that default has occurred when
a financial asset is more than 90 days past due unless the Group
has reasonable and supportable information to demonstrate
that a more lagging default criterion is more appropriate.
there
Write-off policy
The Group writes off a financial asset when
is
information indicating that the debtor is in severe financial
difficulty and there is no realistic prospect of recovery, e.g. when
the debtor has been placed under liquidation or has entered
into bankruptcy proceedings, or in the case of trade accounts
receivable, when the amounts are over three years past due,
whichever occurs sooner. Financial assets written off may still
be subject to enforcement activities under the Group’s recovery
procedures, taking into account legal advice where appropriate.
Any recoveries made are recognised in profit or loss.
Inputs, assumptions and estimation
techniques used by
measurement and recognition of expected credit losses are
disclosed in respective Notes 14 and 19 to financial assets.
Credit impaired financial assets
A financial asset is credit-impaired when one or more events that
have a detrimental impact on the estimated future cash flows
of that financial asset have occurred. Evidence that a financial
asset is credit-impaired includes observable data about the
following events:
• significant financial difficulty of the issuer or the borrower;
• a breach of contract, such as a default or past due event;
• the lender(s) of the borrower, for economic or contractual
reasons relating to the borrower’s financial difficulty, having
granted to the borrower a concession(s) that the lender(s)
would not otherwise consider;
is becoming probable
that the borrower will enter
• it
bankruptcy or other financial reorganisation; or
• the disappearance of an active market for that financial asset
because of financial difficulties.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
101
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Derivative financial instruments
The Group enters into derivative financial instruments to
purchase sunflower seeds and sales of grains. Derivatives are
initially recognised at fair value at the date the derivative con-
tracts 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.
Trade and other accounts payable
Accounts payable are measured at initial recognition at fair
value, and are subsequently measured at amortised cost using
the effective interest rate method.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Financial liabilities
Initial recognition and measurement
The Group’s financial
include trade and other
payables, loans and borrowings, leases and derivative financial
instruments.
liabilities
All financial liabilities are recognised initially at fair value and
are measured subsequently at amortised cost using the effective
interest method.
The effective interest method is a method of calculating the
amortised cost of a financial liability and of allocating interest
expense over the relevant period. The effective interest rate is
the rate that exactly discounts estimated future cash payments
(including all fees and points paid or received that form an inte-
gral part of the effective interest rate, transaction costs and other
premiums or discounts) through the expected life of the financial
liability, or (where appropriate) a shorter period, to the amortised
cost of a financial liability.
Derecognition of financial liabilities
The Group derecognises financial liabilities when, and only
when, the Group’s obligations are discharged, cancelled or have
expired. The difference between the carrying amount of the
financial liability derecognised and the consideration paid and
payable is recognised in profit or loss.
When the Group exchanges with the existing lender one debt
instrument into another one with the substantially different terms,
such exchange is accounted for as an extinguishment of the
original financial liability and the recognition of a new financial
liability. Similarly,
for substantial
modification of terms of an existing liability or part of it as
an extinguishment of the original financial liability and the
the Group accounts
recognition of a new liability. It is assumed that the terms are
substantially different if the discounted present value of the cash
flows under the new terms, including any fees paid net of any
fees received and discounted using the original effective rate is
at least 10 per cent different from the discounted present value
of the remaining cash flows of the original financial liability. If the
modification is not substantial, the difference between:
1. the carrying amount of the liability before the modification; and
2. the present value of the cash flows after modification should
be recognised in profit or loss as the modification gain or loss.
Trade accounts receivable, net
Trade accounts receivable, net are measured at
initial
recognition at transaction price, and are subsequently measured
at amortised cost using the effective interest rate method. Trade
accounts receivable, net which are non-interest bearing, are
stated at their nominal value.
Cash and cash equivalents
Cash and cash equivalents include cash in hand, cash with
banks, deposits and marketable securities with an maturity of
less than three months from the date of acquisition.
issued and other
Bank borrowings, corporate bonds
long-term payables
Interest-bearing bank borrowings, bonds issued and other
long-term payables are initially measured at fair value net of
directly attributable transaction costs, and are subsequently
measured at amortised cost using the effective interest rate
method. Any difference between the proceeds (net of trans-
action costs) and the settlement or redemption amount is
recognised over the term of the borrowings and recorded as
finance costs.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
102
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Lease liabilities
The Group assesses whether a contract is or contains a lease, at
inception of the contract.
The Group recognises lease liabilities in the consolidated
statement of financial position, initially measured at the present
value of future lease payments. The Group does not apply the
short term and low-value lease exemptions.
The Group measures the lease liability at the present value of
the lease payments that are not paid at the commencement
date, discounted by using the interest rate implicit in the lease.
If this rate cannot be readily determined, the Group uses its
incremental borrowing rate. The incremental borrowing rate
is defined as the rate of interest that the lessee would have to
pay to borrow over a similar term, and with a similar security the
funds necessary to obtain an asset of a similar value to the right
of use asset in a similar economic environment.
The lease liability is presented as a separate line in the
consolidated statement of financial position. The lease liability
is subsequently measured by increasing the carrying amount
to reflect interest on the lease liability (using the effective
interest method) and by reducing the carrying amount to reflect
the lease payments made. The Group recognises interest on
lease liabilities based on incremental borrowing rate, presented
within interest expenses in the consolidated statement of profit
or loss.
The Group remeasures the lease liability (and makes a
corresponding adjustment to the related right-of-use asset)
whenever:
• The lease term has changed or there is a change in the as-
sessment of exercise of a purchase option, in which case the
lease liability is remeasured by discounting the revised lease
payments using a revised discount rate.
• The lease payments change due to changes in an index
or rate or market rate, in which cases the lease liability is
remeasured by discounting the revised lease payments using
the initial discount rate (unless the lease payments change is
due to a change in a floating interest rate, in which case a
revised discount rate is used).
A lease contract is modified and the lease modification is not
accounted for as a separate lease, in which case the lease
liability
lease
is remeasured by discounting the revised
payments using a revised discount rate.
In the statement of cash flows the Group separates the
total amount of cash paid into a principal portion (presented
(presented within
within financing activities) and
interest
operating activities).
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 out-
flow of resources will be required to settle the obligation and a
reliable estimate of the obligation can be made.
Annual Report 2019 FINANCIAL STATEMENTS 103
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES
OF ESTIMATION UNCERTAINTY
In the application of the Group’s accounting policies, which
are described in Note 3, management is 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 judgments, apart from those involv-
ing 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.
Determination of variable lease payments
As described in Note 3, the Group measures lease liabilities at
the present value of future lease payments, discounted using
the lessee’s incremental borrowing rate. Future lease payments
consist of both fixed payments (including in-substance fixed
payments) and variable lease payments. Management of the
Group make significant judgement in determination of variable
lease payments. Regardless of the lease payments stated in the
lease contracts, customary business practices complement the
contractual terms in a way that at each particular date the rate
is a market rate. Since the entire market operates on the basis of
expectations of a periodic revision of rates (based on current
market rates), management has concluded that the rates are
determined by the market mechanism. In substance non-contrac-
tual changes in lease payments are driven by the competitive
forces and payments change is based on the average changes
of lease payments in the region.
Revaluation of property, plant and equipment
As described in Note 3, the Group applies the revaluation
model to the measurement of all groups of property, plant and
equipment, except land and other fixed assets. At each
reporting date, the Group carries out a review of the carrying
amount of items of property, plant and equipment accounted
for using a revaluation model to determine whether the carrying
amount differs materially from fair value.
When determining whether to perform a fair value assessment
in a given period, the management of the Group considers
development of macroeconomic indicators like changes in
prices, inflation rates and devaluation of Ukrainian Hryvnia
(“UAH”) against USD and EUR. Based on the results of this
review,
that
buildings and structures, grain storage facilities, utilities and
infrastructure, vehicles and agricultural machinery, auxiliary and
other machinery should be revalued as of 30 September 2019.
the Group concluded
the management of
Loans to related parties
As described in Note 30, as of 31 December 2019, the Group had
advanced loans to its majority shareholder, WTI Trading Limit-
ed (“WTI”), in the aggregate amount of USD 20,400 thousand
pursuant to a USD 50,000 thousand facility approved by the
Board of Directors. The facility was further increased by the
Board to USD 80,000 thousand on 21 January 2020. The loans
were granted on arm’s length basis.
The Board has exercised significant judgement in assessing
whether the granted loans were made on terms equivalent with
those prevailing in arm’s length conditions and entitle market in-
terest rate. In addition management has exercised judgement in
assessing whether the granting of loans affect the compliance
of the Group with the various provisions stipulated by the inden-
tures of Senior Notes, including assessment of compliance with
criteria related to restricted payments and exemptions, assess-
ment of compliance with limitations on transactions with affili-
ates, as well as compliance with loans granted with definition of
permitted investments.
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.
Impairment of goodwill and intangibles not amortised
As disclosed in Notes 14 and 15, the Group determines at least
on an annual basis whether indefinite life intangible assets and
goodwill are impaired. This requires an estimate of an asset’s
recoverable amount which is the higher of an asset’s or cash
generating unit’s (CGU’s) fair value less costs of disposal and
its value in use and it is determined for an individual asset,
unless the asset does not generate cash inflows that are large-
ly independent of those from other assets or groups of assets.
Estimating a value-in-use amount requires management to make
an estimate of the expected future cash flows from the cash
generating unit and also to choose a suitable discount rate and
growth rates in order to calculate the present value of those cash
flows.
Annual Report 2019 FINANCIAL STATEMENTS
For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
104
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
independent appraiser
Key assumptions used by the
in
assessing the fair value of property, plant and equipment
using the depreciated replacement cost and market comparable
methods were as follows:
• changes in market prices of assets and construction materials
from the date of their acquisition/construction/date of previous
valuation to the date of this valuation;
• external prices for vehicles;
• normative and remaining useful lives; and
• rates of physical depreciation.
The results of revaluation based on the depreciated replace-
ment cost and market comparable approaches were compared
with a revaluation performed using the income approach to
check for impairment indicators of revalued assets, if any. For all
CGUs in Ukraine the Group used discount factor 12.0% and ter-
minal growth rate 4.7% for projected cash flows beyond five-year
projected period for revaluation performed using the income
approach. For CGUs in Poultry and related operations segment,
Grain growing operations segment and Meat processing and
other agricultural operations segment the revenue growth rates
within five-year period are 7.0%, 5.1% and 7.0%, respectively.
Assumptions used in the impairment testing of the assets related
to Perutnina Group are disclosed in Note 15.
4. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES
OF ESTIMATION UNCERTAINTY (continued)
Key sources of estimation uncertainty
Fair value measurement on business combinations and
identification of cash generating units
As disclosed in Note 2, the Group acquired Perutnina Ptuj during
2019 and based on IFRS 3 recognised the underlying assets
and liabilities and consideration given at fair value. The fair
value has been determined by adopting a variety of techniques
that are appropriate for the respective assets and liabilities
and are normally assessed by market valuation practitioners.
The fair value estimates and techniques used as well as the
identification of cash generating units, requires significant
judgement to be exercised by management.
Revaluation of property, plant and equipment
During the year ended 31 December 2019, the management of
the Group appointed an independent appraiser to perform a
revaluation of buildings and structures, grain storage facilities,
utilities and infrastructure, vehicles and agricultural machinery,
auxiliary and other machinery as of 30 September 2019.
The independent appraiser has performed the valuation in
accordance with International Valuation Standards applying the
following techniques:
• depreciated replacement cost for grain storage facilities,
utilities and infrastructure;
• market comparable approach for vehicles and agricultural
machinery; and
• depreciated replacement cost and market comparable
approach, if applicable, for buildings and structures, auxiliary
and other machinery.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
105
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (continued)
The following unobservable inputs were used to measure Buildings and structures, Utilities and infrastructure, Grain storage facilities, Vehicles and agricultural machinery, Auxiliary and other
machinery and Production machinery:
Description
Fair value
as at 31
December
2019
Fair value
as at 31
December
2018
Valuation technique(s)
Unobservable inputs
Range of
unobservable
inputs 2019
(average)
Range of
unobservable
inputs 2018
(average)
Buildings and structures
1,029,998
N/A1
Depreciated replacement
cost method
Utilities and infrastructure
152,629
N/A1
Depreciated replacement
cost method
Grain storage facilities
105,569
N/A1
Depreciated replacement
cost method
Index of physical depreciation
0 - 70%
(28.42%)
Cumulative index of inflation
of construction works
1.00 - 11.23
(1.09)
Index of physical depreciation
0 - 70%
(30.47%)
Cumulative index of inflation
of construction works
1.00 - 11.23
(1.08)
Index of physical depreciation
0 - 70%
(44.67%)
Cumulative index of inflation
of construction works
1.00 - 9.57
(1.07)
Vehicles and agricultural
machinery
183,258
N/A1
Market comparable approach Index of physical depreciation
Auxiliary and other machinery
61,717
N/A1
Market comparable approach Index of physical depreciation
0 - 90%
(17.17%)
0 - 90%
(35.49%)
N/A1
N/A1
N/A1
N/A1
N/A1
N/A1
N/A1
N/A1
Relationship of unobservable
inputs to fair value
The higher the index of physical
depreciation, the lower the fair
value
The higher the index, the higher
the fair value
The higher the index of physical
depreciation, the lower the fair
value
The higher the index, the higher
the fair value
The higher the index of physical
depreciation, the lower the fair
value
The higher the index, the higher
the fair value
The higher the index of physical
depreciation, the lower the fair
value
The higher the index of physical
depreciation, the lower the fair
value
1 Due to the absence of revaluation during the year ended 31 December 2018
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
106
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES
OF ESTIMATION UNCERTAINTY (continued)
Revaluation of property, plant and equipment
If the above unobservable inputs to the valuation model were
5 percentage points higher/lower while all other variables were
held constant, the carrying amount of the property, plant and
equipment under revaluation would decrease/increase by USD
35,386 thousand and USD 33,466 thousand, respectively.
less costs to sell of biological assets and
Fair value
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
Determination of incremental borrowing rate
As described in Note 3, the Group uses incremental borrowing
rate as discounting factor for the purpose of calculation of lease
liability, if the rate implicit in the lease is not readily determin-
able. Incremental borrowing rate is determined as available rate
for the Group adjusted for specifics of particular lease contracts.
The weighted average lessee’s incremental borrowing rate
applied to the lease liabilities on 1 January 2019 was 20%. If the
above rate was 5 percentage points higher/lower, the carrying
amount of lease liabilities recognized as of 1 January 2019 would
decrease/increase by USD 21,399 thousand and USD 28,315
thousand, respectively.
regeneration and milk production;
• Expected crops output;
• Estimated changes in future sales prices;
• Projected production costs and costs to sell; and
• Discount rate.
During the year ended 31 December 2019, the fair value of
biological assets was estimated using discount factors of 12.0%
and 12.0% for non-current and current assets, respectively (31
December 2018: 15.7% and 18.0%).
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 17).
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 estimates based upon
experience with similar assets. In determining the useful life
of an asset, management considers the expected usage, esti-
mated 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.
Deferred tax assets
Deferred tax assets, including those arising from unused tax
losses are recognised to the extent that it is probable that they
will be recovered, which is dependent on the generation of
sufficient
taxable profit. Based on management’s
assessment, the Group determined it was appropriate to
recognize d ferred tax assets on unused tax losses, which
will be utilized in future against existing deferred tax liabilities
and available future tax profits.
future
The estimation uncertainty therefore pertains to the level of
deferred tax assets to be recognised.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
107
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 and loss on impairment
of property, plant and equipment. Unallocated corporate
expenses include management remuneration, representative
expenses, and expenses incurred in respect of the main-
tenance of office premises. This is the measure reported
to the CODM for the purposes of resource allocation and
assessment of segment performance.
Europe operating segment primarily
includes sales of
chicken meat and meat processing products, produced in the
facilities of Perutnina Ptuj. However, the CODM manages
this as a single segment, on the basis that each of research,
development, manufacture, distribution and selling of chicken
meat and meat processing products requires single marketing
strategies, centralised budgeting process and centralised man-
agement of production operations.
The Group does not disclose geographical
revenue
information as it is not available and the cost to develop it
would be excessive.
5. SEGMENT INFORMATION
In 2019, following the acquisition of operations in Europe
(Perutnina Ptuj),
the Group’s chief operating decision
maker (“CODM”) reviews the results and operations of the Europe
operating segment separately from the other segments of
the group. This is a new operating segment and therefore this
change has not impacted the composition of the other operating
segments. As this is a new segment for 2019, there is no need for
prior year segment information to be presented.
The Group’s business is managed on a worldwide basis, but
operates manufacturing facilities and sales offices primarily in
Ukraine and Europe.
Reportable segments are presented in a manner consistent with
the internal reporting to the CODM.
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 as follows:
Poultry and related operations segment:
• sales of chicken meat;
• sales of vegetable oil and related products;
• other poultry related sales.
Grain growing operations segment:
• sales of grain.
Meat processing and other agricultural operations segment:
• sales of meat processing products and other meat;
• other agricultural operations (milk, feed grains and other).
Europe operating segment:
• sales of meat processing and chicken meat products in
Southeast Europe.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
108
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. SEGMENT INFORMATION (continued)
As of 31 December and for the year then ended the Group’s segmental information from continuing operations was as follows:
Year ended 31 December 2019
External sales
Poultry
and related
operations
1,367,554
Sales between business segments
49,633
268,419
246,477
514,896
28,972
1,417,187
182,778
Grain growing
operations
Meat processing and other
agricultural operations
Europe operating
segment
Total
reportable
segments
Eliminations
Consolidated
148,673
271,297
2,055,943
-
2,055,943
949
149,622
12,820
-
297,059
(297,059)
-
271,297
25,196
249,766
2,353,002
(297,059)
2,055,943
Total revenue
Segment result
Unallocated
corporate expenses
Loss on impairment of property,
plant and equipment4
Other income, net1
Profit before tax from continuing
operations
OTHER INFORMATION:
Additions to property, plant and
equipment2
Depreciation and amortization
expense3
Net change in fair value of bio-
logical assets and agricultural
produce
(2,653)
(3,004)
(163)
-
(5,820)
92,836
98,526
4,116
80,115
2,985
7,544
10,547
110,484
18,523
204,708
8,732
(49,875)
1,577
51
(39,515)
-
-
-
-
-
249,766
(28,019)
(6,244)
37,709
253,212
110,484
204,708
(39,515)
1 Include finance income, finance costs, foreign exchange gain, net and other expenses, net.
2 Additions to property, plant and equipment in 2019 do not include unallocated additions in the amount of USD 9,744 thousand and additions due to acquisitions of subsidiaries in the amount
of USD 179,581 thousand.
3 Depreciation and amortization for the year ended 31 December 2019 does not include unallocated depreciation and amortization in the amount of USD 983 thousand.
4 Loss on impairment of property, plant and equipment for the year ended 31 December 2019 includes unallocated loss in amount of USD 424 thousand.
Annual Report 2019 FINANCIAL STATEMENTS 109
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. SEGMENT INFORMATION (continued)
As of 31 December and for the year then ended the Group’s segmental information from continuing operations was as follows:
Year ended 31 December 2018
External sales
Poultry
and related
operations
1,241,181
Sales between business segments
50,181
180,976
244,151
425,127
106,401
130,049
324
130,373
9,270
1,291,362
229,293
Grain growing
operations
Meat processing and other
agricultural operations
Europe operating
segment
Total revenue
Segment result
Unallocated
corporate expenses
Loss on impairment of property,
plant and equipment
Other income, net1
Profit before tax from continuing
operations
OTHER INFORMATION:
Additions to property, plant and
equipment2
Depreciation and amortization
expense3
Net change in fair value of bio-
logical assets and agricultural
produce
189,677
82,093
30,747
44,503
(934)
33,028
12,496
6,668
-
1 Include finance income, finance costs, foreign exchange gain, net and other expenses, net.
2 Additions to property, plant and equipment in 2018 do not include unallocated additions in the amount of USD 5,948 thousand.
3 Depreciation and amortization for the year ended 31 December 2018 does not include unallocated depreciation and amortization in the amount of USD 802 thousand.
Total
reportable
segments
1,552,206
Eliminations
Consolidated
-
1,552,206
294,656
(294,656)
-
1,846,862
(294,656)
1,552,206
344,964
-
344,964
(28,771)
(3,803)
(132,485)
179,905
232,920
133,264
32,094
232,920
133,264
32,094
-
-
-
-
-
-
-
-
-
-
Annual Report 2019 FINANCIAL STATEMENTS 110
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. SEGMENT INFORMATION (continued)
The Group’s export sales to external customers by major product
types were as follows during the years ended 31 December 2019
and 2018:
As of 31 December 2019 and for the year then ended, the Group’s
manufacturing facilities were located mainly within Ukraine.
There is not a single customer who contributed more than 10%
amount to the Group’s revenue in either 2019 or 2018.
Chicken meat and related products
588,903
471,177
Vegetable oil and related products
302,600
274,313
2019
2018
Grain
Other agricultural segment
products
251,836
156,511
42,362
21,703
1,185,701
923,704
Export sales includes revenue from shipping and handling
in the amount of USD 68,543 thousand as of
services
31 December 2019 (2018: USD 33,325 thousand).
Export sales of vegetable oil and related products and export
sales of grains are primarily made to global trading companies.
The major markets for the Group’s export sales of chicken meat
are MENA and EU countries.
Non-current assets based on the geographic location of the
manufacturing facilities were as follows as of 31 December 2019
and 31 December 2018:
Ukraine
Europe
2019
2018
2,251,447
1,613,243
234,209
-
2,485,656
1,613,243
Non-current assets excluding deferred tax assets and non-current financial assets.
6. REVENUE
Revenue for the years ended 31 December 2019 and 2018 was
as follows:
2019
2018
Poultry and related operations segment
Chicken meat
977,576
870,851
Vegetable oil and related products
296,999
271,122
Shipping and handling services
56,199
43,586
Other poultry related sales
36,780
55,622
1,367,554
1,241,181
Grain growing operations segment
Grain
235,095
168,118
Shipping and handling services
33,324
12,858
268,419
180,976
Meat processing and other agricultural operations
segment
Other meat
112,586
97,190
Shipping and handling services
5,583
5,313
Other agricultural sales
30,504
27,546
Europe operating segment
Chicken meat
Other meat
Other agricultural sales
Shipping and handling services
148,673
130,049
150,456
91,679
26,472
2,690
271,297
-
-
-
-
-
2,055,943
1,552,206
Annual Report 2019 FINANCIAL STATEMENTS 111
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
7. COST OF SALES
Cost of sales for the years ended 31 December 2019 and 2018
was as follows:
8. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the years
ended 31 December 2019 and 2018 were as follows:
Poultry and related operations
1,050,849
891,065
Payroll and related expenses
72,986
43,653
2019
2018
2019
2018
Grain growing operations
241,917
154,053
Services
Meat processing and other
agricultural operations segment
131,723
117,609
Depreciation expense
Europe operating segment
194,107
-
1,618,596
1,162,727
Advertising expense
Representative costs and business
trips
Fuel and other materials used
Insurance expense
Bank services and conversion fees
Other
45,868
21,957
18,914
9,960
14,392
9,830
13,957
5,638
1,381
1,290
7,779
2,715
492
431
4,730
2,760
179,156
99,577
Payroll and related expenses includes social security contribu-
tions amounted to USD 7,773 thousand for the year ended 31 De-
cember 2019 (2018: USD 3,624 thousand).
Remuneration to the auditors, included in Services above,
amounted to USD 1,831 thousand for the year ended 31
December 2019 (2018: USD 1,605 thousand). Such remuneration
includes both audit and non-audit services, with the statutory
audit fees component amounted to USD 990 thousand (2018:
USD 430 thousand) for the year ended 31 December 2019 and
fees for other assurance services component approximating
USD 309 thousand (2018: USD 458 thousand), for tax adviso-
ry services component approximating USD 23 thousand (2018:
USD 20 thousand) and for other non-audit services component
approximating USD 509 thousand (2018: USD 697 thousand) for
the year ended 31 December 2019.
9. DEFERRED REVENUE
The Ukrainian Government supports domestic agricultural
producers and attracts investments into the agricultural sector.
According to the Law “On the State Budget for 2019”, UAH
5,709 million were allocated to support the agricultural
sector in 2019 via a compensation program, including UAH 3,500
million to support the livestock sector and up to UAH 900
million to purchase agricultural machinery produced in Ukraine.
Also during the year ended 31 December 2019, the Group
received government compensations
in accordance with
EU farming subsidies policy and other compensations in
accordance with the EU national programs of employment,
assigned contributions for employees, and refunds of excise
duties.
For the years ended 31 December 2019 and 2018 following
government grants were received:
Compensation of construction and
reconstruction of livestock farms
2019
2018
7,554
34,371
Compensation received in EU
4,063
Compensation of the cost of
machinery and equipment
Other compensations
395
923
12,935
-
-
1,000
35,371
Government grants for compensation of construction and
reconstruction of livestock farms and compensation of cost of
machinery and equipment are presented in the statement of the
financial position as deferred revenues, which is recognised in
profit or loss on a systematic basis over the useful life of the
related assets. All other compensations
received were
recognised in consolidated statement of profit or loss and other
comprehensive income in full.
For the years ended 31 December 2019 and 2018 cost of sales
comprised the following:
Costs of raw materials and other
inventory used
2019
2018
1,041,184
751,747
Payroll and related expenses
236,788
161,708
Depreciation and amortization
expense
Other costs
186,777
124,106
153,847
125,166
1,618,596
1,162,727
Social security contributions, included in Payroll and related ex-
penses above, amounted to USD 38,645 thousand for the year
ended 31 December 2019 (2018: USD 25,519 thousand).
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
112
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
10. FINANCE COSTS
Finance costs for the years ended 31 December 2019 and 2018
were as follows:
2019
2018
Interest on corporate bonds
94,970
93,200
Interest on obligations under
leases
37,784
1,154
Interest on bank borrowings
12,951
11,852
Bank commissions and other
charges
Costs related to corporate bonds
(Note 27)
6,827
4,417
2,164
32,915
Total finance costs
154,696
143,538
LESS:
Finance costs included in the cost
of qualifying assets
(7,144)
(5,519)
147,552
138,019
For qualifying assets, the weighted average capitalization rate
on funds borrowed during the year ended 31 December 2019
was 8.10% (2018: 8.60%).
corporate bonds
Interest on
the years ended
31 December 2019 and 2018 includes the amortization of
premium and debt issue costs on bonds issued in the amounts of
USD 6,885 thousand and USD 6,196 thousand, respectively.
for
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. The net results
of the Group companies incorporated in jurisdictions other than
Ukraine were insignificant during the years ended 31 December
2019 and 2018.
During the year ended 31 December 2019, the Group’s
companies that have the status of Corporate Income Tax (the
“CIT”) payers in Ukraine were subject to income tax. The Tax
Code of Ukraine introduced an 18% income tax rate effective from
1 January 2014. The deferred income tax assets and liabilities as
of 31 December 2019 and 2018 are measured based on the tax
rates expected to be applied to the period when the temporary
differences are expected to reverse.
The components of income tax expense/(benefit) were as follows
for the years ended 31 December 2019 and 2018:
Current income tax expense
Withholding tax
Deferred tax expense
Income tax charge
2019
5,171
7,073
19,863
32,107
2018
2,169
10,927
37,431
50,527
The reconciliation between profit before tax from continuing
operations multiplied by the statutory tax rate and the tax
expense for the years ended 31 December 2019 and 2018 was
as follows:
Profit before income tax
253,212
179,905
2019
2018
al
of
the
status
agricult
(poultry
The majority of the Group companies that are involved in
agricultural production
farms and other entities
engaged
in agricultural production) benefit substantially
producer.
an
from
The tax rates for agricultural producers is calculated as a
percentage of the target-ratio based mon tary valuation per
hectare of agricultural land resulting in substantially lower tax
charges compared to CIT. Agricultural manufacturers are eligi-
ble to apply for a single tax if they meet both the following two
requirements:
• The share of the entity’s revenue from agricultural production
(i.e. sale of the entity’s cultivated and processed products) to
the total share of its income equals or exceeds 75 per cent;
and
• These agriproducts were cultivated on
land that such
agricultural manufacturers own or lease, and the ownership
title and leases have been duly registered.
Income tax expense calculated
at rates effective during the year
ended in respective jurisdictions
TAX EFFECT OF:
Income generated by FAT payers
and other exempt from income tax
Derecognition and utilisation of
previously recognised tax losses/
assets
Withholding tax
Non-deductible expenses
Expenses not deducted for tax
purposes
Translation loss
Income tax charge
45,954
36,360
(13,461)
(33,400)
(17,734)
30,802
7,073
3,915
10,927
1,894
-
2,129
6,360
1,815
32,107
50,527
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
113
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME TAX (continued)
Derecognition of previously recognised tax losses results
from the reversal of deferred tax liabilities related to property
revaluation that were the source of taxable income relied on
previously to support recognition.
As of 31 December 2019 and 2018 deferred tax assets and
liabilities recognised the following:
Deferred income tax assets and liabilities are offset when there
is a legally enforceable right to offset 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 2019 and 2018:
The movements in net deferred tax liabilities for the years ended
31 December 2019 and 2018 were as follows:
Net deferred tax liabilities as of
beginning of the year
2019
2018
(12,953)
(23,609)
Deferred tax expense
(19,866)
(37,431)
2019
2018
Deferred tax assets
2019
2018
6,640
12,189
Deferred tax liabilities acquired from the
acquisition of subsidiaries
(18,338)
DEFERRED TAX ASSETS ARISING FROM:
Other current liabilities
Inventories
Tax losses
3,244
432
1,235
354
26,423
60,048
Total deferred tax assets
30,099
61,637
DEFERRED TAX LIABILITIES ARISING FROM:
Property, plant and equipment
(78,906)
(61,908)
Inventories
(159)
(493)
Total deferred tax liabilities
(79,065)
(62,401)
Net deferred tax liabilities
(48,966)
(764)
Deferred tax liabilities
(55,305)
(12,953)
Deferred tax assets not recognised
(4,356)
(12,189)
(53,021)
(12,953)
During the years ended 31 December 2019 and 2018, the Group
did not recognize tax losses in the amount of USD 23,086 (USD
4,356 thousand of deferred tax assets), USD 67,717 thousand
(USD 12,189 thousand of deferred tax asset), respectively, as the
Group did not intend to deduct the relevant expenses for tax
purposes in subsequent periods, as there are uncertainties on
whether sufficient taxable profits will be generated by particular
companies of the Group in the future. There is no expiration date
of accounting tax losses according to the Tax Code of Ukraine.
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.
Deferred tax on revaluation of property,
plant and equipment charged directly to
other comprehensive income as result of
revaluation
Deferred tax on revaluation of property,
plant and equipment charged directly to
other comprehensive income as result of
intercompany sales
-
-
(17,053)
15,162
49,357
Translation difference
27
(1,270)
Net deferred tax liabilities as of end of
the year
(53,021)
(12,953)
Deferred tax benefit on revaluation of property, plant and
equipment is related to the intercompany sale of fixed assets
from CIT-payers entity to FAT-payers (tax-exempt) entity, which
has led to reversal of the respective part of the deferred tax
liability.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
114
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. PROPERTY, PLANT AND EQUIPMENT
The following table represents movements in property, plant and equipment for the year ended 31 December 2019:
Land
Buildings and
Grain storage
Production
Auxiliary and other
Utilities and
Vehicles and
Other fixed
Construction
structures
facilities
machinery
machinery
infrastructure
agricultural machinery
assets1
in progress2
Total
Cost or fair value:
At 31 December 2018
4,363
670,095
78,376
332,493
51,387
105,540
Adoption of IFRS 16
At 1 January 2019
Additions
-
-
4,363
670,095
1,044
19,841
Acquisitions of subsidiaries (Note 2)
29,689
114,757
-
78,376
5,954
1,193
-
(3)
-
11,886
10,716
-
332,493
9,057
26,794
37,065
(957)
(1,854)
(6,476)
63,116
3,551
63,934
(2)
-
-
(758)
(320)
60,099
530
119,078
39,175
1,046,726
108,122
459,238
-
-
-
-
-
-
-
-
-
-
23,915
5,498
34,704
-
23,915
31,750
(356)
296
-
5,498
6,447
(2)
-
(45,216)
(11,038)
949
5,390
16,728
323
1,325
2,553
-
34,704
50,811
(235)
(183)
(2)
2
9,567
94,664
4,363
646,180
72,878
39,175
1,029,998
105,569
297,789
364,574
-
51,387
7,694
1,388
-
(142)
(113)
(3,368)
8,465
65,311
6,696
-
6,696
7,450
(28)
(54)
(13,615)
1,496
1,649
3,594
44,691
61,717
Transfers
Disposals
Reclassified as held for sale
Revaluations
Translation difference
At 31 December 2019
Accumulated depreciation:
At 31 December 2018
Adoption of IFRS 16
At 1 January 2019
Depreciation charge for the year
Elimination upon disposal
Reclassified as held for sale
Elimination on revaluation
Impairment loss
Translation difference
At 31 December 2019
Net book value
At 31 December 2018
At 31 December 2019
1 Other fixed assets include bearer plants, office furniture and equipment
2 Construction in progress include advances for property plant and equipment, machinery and equipment not in use, construction materials and spare parts, projects in progress.
-
105,540
6,092
632
13,542
(34)
(388)
9,882
19,763
155,029
5,851
-
5,851
6,940
(4)
(32)
(11,462)
70
1,037
2,400
235,845
(23,857)
211,988
6,541
405
2,779
(2,973)
(1,110)
(50,483)
36,801
203,948
52,144
(2,408)
49,736
53,147
(1,395)
(238)
(96,564)
3,404
12,600
20,690
9,803
146,494
1,634,396
-
-
(23,857)
9,803
146,494
1,610,539
596
3,051
513
(255)
(33)
-
1,666
15,341
7,058
-
7,058
3,466
(134)
(26)
-
-
1,417
11,781
63,409
120,228
1,672
179,581
(121,384)
-
(18)
(18)
-
(5,142)
(3,836)
21,540
18,663
278,798
108,818
2,201,708
-
-
-
-
-
-
-
-
-
-
135,866
(2,408)
133,458
160,011
(2,154)
(237)
(177,897)
6,244
32,985
152,410
99,689
152,629
183,701
183,258
2,745
3,560
146,494
1,498,530
108,818
2,049,298
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
115
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. PROPERTY, PLANT AND EQUIPMENT (continued)
The following table represents movements in property, plant and equipment for the year ended 31 December 2018:
Land
Buildings and
Grain storage
Production
Auxiliary and other
Utilities and
Vehicles and
Other fixed
Construction
structures
facilities
machinery
machinery
infrastructure
agricultural machinery
assets1
in progress2
Total
Cost or fair value:
At 1 January 2018
Additions
Disposals
Transfers
Impairment loss
Translation difference
At 31 December 2018
Accumulated depreciation:
At 1 January 2018
Depreciation charge for the year
Elimination upon disposal
Transfers
Translation difference
At 31 December 2018
Net book value
At 1 January 2018
2,816
586,297
76,837
269,093
43,494
1,515
47,748
-
21
-
11
(573)
29,955
-
6,668
4,363
670,095
497
(1)
-
-
1,043
78,376
-
-
-
-
-
-
-
-
24,090
5,596
(154)
-
(21)
23,915
-
-
(98)
5,498
2,816
586,297
76,837
41,730
(1,652)
20,707
-
2,615
332,493
-
35,511
(186)
-
(621)
34,704
5,535
(137)
2,031
-
464
51,387
-
6,838
(22)
-
(120)
6,696
269,093
297,789
43,494
44,691
90,111
10,477
(24)
3,996
-
980
198,903
38,887
(2,524)
166
(1,697)
2,110
8,697
1,242
(286)
49
-
101
113,351
91,237
(149)
1,389,599
238,868
(5,346)
(56,925)
-
(2,106)
1,086
(3,803)
15,078
105,540
235,845
9,803
146,494
1,634,396
-
5,960
(5)
-
(104)
5,851
90,111
99,689
-
53,720
(643)
-
(933)
52,144
198,903
183,701
6,497
1,134
(245)
-
(328)
7,058
2,200
2,745
-
-
-
-
-
-
6,497
132,849
(1,255)
-
(2,225)
135,866
113,351
1,383,102
146,494
1,498,530
At 31 December 2018
4,363
646,180
72,878
1 Other fixed assets include bearer plants, office furniture and equipment
2 Construction in progress include advances for property plant and equipment, machinery and equipment not in use, construction materials and spare parts, projects in progress.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
116
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. PROPERTY, PLANT AND EQUIPMENT (continued)
As of 31 December 2019, included within construction in
progress were prepayments for property, plant and equipment in
the amount of USD 12,083 thousand (2018: USD 13,117 thousand).
As of 31 December 2019, included within property, plant and
equipment were fully depreciated assets with the original cost of
USD 11,096 thousand (2018: USD 7,040 thousand).
As of 31 December 2019, certain of the Group’s property,
plant and equipment with the carrying amount of USD 99,878
thousand (2018: USD nil thousand) were pledged as collateral to
secure its bank borrowings.
Impairment assessment
The Group reviews its property, plant and equipment each pe-
riod to determine if any indication of impairment exists. Based
on these reviews, there were no indicators of impairment as of
31 December 2019 and 2018, except for the impairment of cer-
tain assets in the amount of USD 6,244 thousand and USD 3,803
thousand as of 31 December 2019 and 2018, respectively.
Revaluation of vehicles and agricultural machinery
During the year ended 31 December 2019, the Group engaged
independent appraisers to revalue its vehicles and agricultural
machinery. The effective date of revaluation was 30 Septem-
ber 2019. The valuation, which conformed to the International
Valuation Standards, was determined using market compa-
rable approach adjusted based on age and condition of the
machinery. During the year ended and as of 31 December 2018,
the Group evaluated whether the fair value of vehicles and
agricultural machinery was materially different from the reported
book values. Based on analysis of fluctuations of the cumulative
index of producer’s prices, the index of physical depreciation and
the functional currency depreciation, Management assessed
the fair value of vehicles and agricultural machinery not to be
materially different from the reported book values.
Revaluation of production machinery
During years ended and as of 31 December 2018 and 31
December 2019, the Group evaluated if the fair value of
production machinery was materially different from the reported
book values. Based on analysis of fluctuations of the cumulative
index of producer’s prices, the index of physical depreciation and
the functional currency depreciation, Management assessed the
fair value of such production machinery not to be materially
different from the reported book values.
Revaluation of buildings and structures
During the year ended 31 December 2019, the Group engaged
independent appraisers to revalue its buildings and structures.
The effective date of revaluation was 30 September 2019.
The valuation, which conformed to the International Valuation
Standards, was determined using depreciated replacement
cost method by reference to observable prices in an active
market adjusted based on age and condition of the buildings and
structures. During the year ended and as of 31 December 2018, the
Group evaluated if the fair value of buildings and structures was
materially different from the reported book values. Based on
analysis of the fluctuations of the cumulative index of inflation of
index of physical depreciation,
construction works and
Management assessed the fair value of such buildings and
structures not to be materially different from the reported book
values.
Revaluation of Grain storage facilities
During the year ended 31 December 2019, the Group engaged
independent appraisers to revalue its grain storage facilities as
of 30 September 2019. The valuation, which conformed to the
International Valuation Standards, was determined using
depreciated
to
replacement cost method by
observable prices in an active market adjusted based on age
and condition of the facilities. During the year ended and as of
31 December 2018, the Group evaluated if the fair value of grain
storage facilities was materially different from the reported book
values. Based on analysis of fluctuations of the cumulative index
of inflationof construction works and the index of physical
depreciation, Management assessed the fair value of grain
storage facilities not to be materially different from the reported
book values.
reference
Revaluation of Auxiliary and other machinery
During the year ended 31 December 2019, the Group engaged
an independent appraiser to determine the fair value of its
Auxiliary and other machinery as of 30 September 2019.
The valuation, which conformed to the International Valua-
tion Standards, was determined using the market comparable
approach adjusted based on age and condition of the machinery
or for items of specialized nature depreciated replacement cost
method. During the year ended and as of 31 December 2018,
the Group evaluated if the fair value of Auxiliary and other ma-
chinery was materially different from the reported book values.
Based on analysis of fluctuations of the cumulative index of
inflation of construction works and the index of physical
depreciation, Management assessed the fair value of Auxiliary
and other machinery not to be materially different from the re-
ported book values.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
117
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. PROPERTY, PLANT AND EQUIPMENT (continued)
Revaluation of Utilities and infrastructure
During the year ended 31 December 2019, the Group engaged independent appraisers to revalue its utilities and infrastructure as
of 30 September 2019. The valuation, which conformed to the International Valuation Standards, was determined using depreciated
replacement cost method by reference to observable prices in an active market adjusted based on age and condition of the facilities.
During the year ended and as of 31 December 2018, the Group evaluated if the fair value of utilities and infrastructure was mate-
rially different from the reported book values. Based on analysis of fluctuations of the cumulative index of inflation of construction
works and the index of physical depreciation, Management assessed the fair value of utilities and infrastructure not to be materially
different from the reported book values.
Had the Group’s property plant and equipment been measured on a historical cost basis, their carrying amount would have been
as follows:
Fair value hierarchy
Fair value
Net book value if carried at cost
Buildings and structures
Production machinery
Vehicles and agricultural machinery
Utilities and infrastructure
Grain storage facilities
Auxiliary and other machinery
Level 3
Level 2, 3
Level 2
Level 3
Level 3
Level 2, 3
2019
2018
1,029,998
646,180
364,574
297,789
183,258
183,701
152,629
99,689
105,569
61,717
72,878
44,691
2019
451,618
260,606
90,043
70,669
40,554
35,842
2018
266,075
171,600
93,489
51,771
31,189
27,195
There are no restrictions on the distribution of the revaluation surplus to the shareholders.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
118
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
13. RIGHT-OF-USE ASSETS
The following table represents movements in right-of-use assets for the years ended 31 December 2019 and 31 December 2018:
Land
Vehicles
Total
Cost:
As of 31 December 2018
Effect of adoption of IFRS 16
As of 1 January 2019
Additions
Disposals
Change in terms
Acquisitions of subsidiaries (Note 2)
Translation difference
As of 31 December 2019
Accumulated amortization:
As of 31 December 2018
Effect of adoption of IFRS 16
As of 31 December 2018
Amortization charge for the year
Disposals
Translation difference
At 31 December 2018
Net book value:
As of 1 January 2019
As of 31 December 2019
-
163,993
163,993
18,693
(756)
12,273
5,677
30,554
230,434
-
-
-
29,885
(756)
2,594
31,723
163,993
198,711
-
23,857
23,857
914
(756)
-
8,887
3,892
36,794
-
2,408
2,408
3,365
(105)
593
6,261
21,449
30,533
-
187,850
187,850
19,607
(1,512)
12,273
14,564
34,446
267,228
-
2,408
2,408
33,250
(861)
3,187
37,984
185,442
229,244
Annual Report 2019 FINANCIAL STATEMENTS
For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
119
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
14. INTANGIBLE ASSETS
The following table represents movements in intangible assets for the year ended 31 December 2019:
Land lease
rights
Trademarks
Customer rela-
tions
Other intangible
assets
Total
Cost:
As of 1 January 2019
70,704
Additions
Disposals
Acquisitions of subsidiaries (Note 2)
Translation difference
As of 31 December 2019
Accumulated amortization:
As of 1 January 2019
Amortization charge for the year
Disposals
Translation difference
As of 31 December 2019
Net book value:
As of 1 January 2019
As of 31 December 2019
-
-
-
12,079
82,783
21,895
6,977
-
4,334
33,206
48,809
49,577
-
-
-
31,975
(648)
31,327
-
-
-
-
-
-
31,327
-
-
-
19,907
(404)
19,503
-
815
-
(3)
812
-
18,691
6,125
3,701
(53)
1,566
1,327
12,666
2,875
2,263
(27)
628
5,739
3,250
6,927
76,829
3,701
(53)
53,448
12,354
146,279
24,770
10,055
(27)
4,959
39,757
52,059
106,522
Annual Report 2019 FINANCIAL STATEMENTS
For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
120
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
14. INTANGIBLE ASSETS (continued)
The following table represents movements in intangible assets for the year ended 31 December 2018:
Land lease
rights
Trademarks
Customer
relations
Other intangible
assets
Cost:
As of 1 January 2018
Additions
Disposals
Translation difference
As of 31 December 2018
Accumulated amortization:
As of 1 January 2018
Amortization charge for the
year
Translation difference
As of 31 December 2018
Net book value:
As of 1 January 2018
As of 31 December 2018
60,697
9,340
-
667
70,704
15,287
6,513
95
21,895
45,410
48,809
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,665
2,607
(154)
7
6,125
1,728
1,144
3
2,875
1,937
3,250
Total
64,362
11,947
(154)
674
76,829
17,015
7,657
98
24,770
47,347
52,059
Through the acquisition of subsidiaries (Note 2), the Group has recognised certain trademarks and customer relationships as a part of
intangible assets. Customer relationships were identified among customers of the core products portfolio of acquired subsidiaries.
The remaining useful life of customer relationships was estimated at 20 years.
The trademarks acquired by the Group mainly consist of poultry meat brands – PP and Topiko and meat processing products
brand – Poli. T. The Group believes that, since these trademarks are well-positioned and recognizable within a stable and mature
industry, there are no technical barriers that would limit their lifetime, and as a result of further promotion of the trademarks, the
Group will obtain economic benefits from them for an indefinite period of time. Accordingly, the trademarks that belong to the
Group are considered to have an indefinite useful life and thus are not amortized but tested for impairment by comparing their
recoverable amount with their carrying amount annually.
The Group allocates trademarks to individual entities as to
separate cash-generating units (CGU). A summary of allocation
to separate CGUs is presented below:
Segment
Cash-
generating unit
Trademarks carrying value
Europe
operating
Slovenia
Serbia
Bosnia and Her-
zegovina
Croatia
2019
17,892
2,261
5,764
5,410
31,327
2018
-
-
-
-
-
impairment testing of the value of trademarks was
The
performed by an independent appraiser. The recoverable
amount of trademarks of all cash-generating units is determined
based on value in use method which uses cash flow projec-
tions covering a seven-year period, and a weighted average
discount rate of 14.2%. The revenue within a seven-year period was
extrapolated using a weighted average 3.8% sales growth rate
and 1.5% terminal growth rate for revenue beyond this period.
Weighted average royalty rate used in calculation of cash flows
was set at a level of 2.4%. The initial five-year period of projec-
tion was extended to gradually decrease the revenue growth
rates towards the terminal growth rate. The directors believe
that any reasonably possible change in the key assumptions
on which the recoverable amount is based would not cause the
aggregate carrying amount
the aggregate
recoverable amount of the related CGUs.
to exceed
As of 31 December 2019, no impairment of trademarks was
identified.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
121
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
15. GOODWILL
The following table represents movements in goodwill for the
years ended 31 December:
The Group allocates goodwill to individual entities as to separate cash-generating units (CGU). A summary of goodwill allocation
to separate CGUs is presented below:
Cost:
2019
2018
Segment
Cash-Generating
Unit
Goodwill carrying
value
2019
2018
Methodology assumptions and methods used for goodwill
As of 1 January
2,509
2,442
Acquisitions of subsidiaries
61,518
Translation difference
816
-
67
As of 31 December
64,843
2,509
Net book value:
As of 1 January
As of 31 December
2,509
64,843
2,442
2,509
The recoverable amount of cash-generating units is determined
based on a value in use calculation which uses cash flow
projections based on financial budgets approved by the
directors.
industry
rates used
trends. The growth
cash-generating unit and
for cash flows extrapolations
The growth
trends such as consumer
are supported by
prosperity and dietary
rates were
estimated by the directors of the Group based on past
performance of
their
the
expectations of market development. The
initial five-year
period of projection was extended by three years, to gradually
decrease the revenue growth rates towards the terminal growth
rate. The directors believe that any reasonably possible change
in the key assumptions on which the recoverable amount is
based would not cause the aggregate carrying amount to
exceed the aggregate recoverable amount of the related CGUs.
As of 31 December 2019 and 2018, no impairment of goodwill
was identified.
Grain
growing
operations
(Ukraine)
Grain growing
2,933
2,509
Slovenia
38,818
Europe
operating
Serbia
4,024
BiH
11,206
Croatia
7,862
-
-
-
-
64,843
2,509
Average sales growth: 5.1%
Terminal sales growth: 4.7 %
Discount rate: 12.0%
Projection period: 5 years
Average sales growth: 3.4%
Terminal sales growth: 1.5%
Discount rate: 7.1%
Projection period: 8 years
Average sales growth: 3.3%
Terminal sales growth: 1.5%
Discount rate: 9.8%
Projection period: 8 years
Average sales growth: 3.4%
Terminal sales growth: 1.5%
Discount rate: 12.1%
Projection period: 8 years
Average sales growth: 3.3%
Terminal sales growth: 1.5%
Discount rate: 7.8%
Projection period: 8 years
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
122
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
17. BIOLOGICAL ASSETS
The balances of non-current biological assets were as follows as of 31 December 2019 and 2018:
Thousand units
Carrying amount
Thousand units Carrying amount
2019
2018
15.9
0.3
1.9
25,725
242
8
25,975
3,677
3,677
29,652
18.1
0.1
1.9
19,953
88
539
20,580
2,812
2,812
23,392
16. OTHER NON-CURRENT ASSETS, NET
The balances of other non-current assets, net were as follows as
of 31 December 2019 and 2018:
2019
2018
Financial assets at amortised cost
Loan receivables
Other financial assets
15,345
2,271
15,980
1,377
Non-financial instruments
Prepayment for business
acquisition (Note 2)
Other non-financial
instruments
Milk cows, units
Boars and sows, units
Other non-current bearer biological assets
Total bearer non-current biological assets
-
23,771
Non-current cattle and pigs, units
6,097
23,713
12,982
54,110
Total consumable non-current biological
assets
Total non-current biological assets
Loan receivables are represented by loans with fixed interest at
2.5% with maturity as of 31 January 2022 and 31 January 2023.
Total gross amortised cost of loans granted as of 31 December
2019 and 2018 is USD 19,161 thousand and USD 18,766 thousand
respectively.
The Group determines the lifetime expected credit loss of other
non-current loan receivables and other financial assets based
on different scenarios of probability of default and expected
loss applicable to each of the material underlying balances. The
movement in loss allowance for loan receivables classified at
amortised cost is detailed below:
Total bearer current
biological assets
Broiler chickens, units
Hatchery eggs, units
Crops in fields, hectare
Cattle and pigs, units
1 January 2019
Charged during the year
31 December 2019
2019
(2,786)
(1,030)
(3,816)
Other current consumable biological assets
Total consumable current biological assets
Total current biological assets
The balances of current biological assets were as follows as of 31 December 2019 and 2018:
Breeders held for hatchery eggs production,
units
4,891
78,063
3,954
66,509
Thousand units
Carrying amount
Thousand units Carrying amount
2019
2018
51,343
57,747
74
6
78,063
79,382
10,328
35,036
1,273
1,665
127,684
205,747
44,199
33,063
92
6
66,509
64,519
8,253
37,416
2,132
461
112,781
179,290
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
123
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
17. BIOLOGICAL ASSETS (continued)
The balances of non-current biological assets were as follows as of 31 December 2019 and 2018:
Milk cows, boars, sows
Breeders held for hatchery eggs
production
Broiler chickens
As of 31 December 2017
Costs incurred
Gains 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
As of 31 December 2018
Costs incurred
Business acquisition (Note 2)
Gains 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
As of 31 December 2019
18,040
2,553
17,889
-
1,395
(143)
(19,918)
225
20,041
11,209
510
8,339
-
6,063
(818)
(22,925)
3,548
25,967
55,716
129,737
6,071
(110,376)
-
-
(15,222)
583
66,509
161,345
2,966
(19,919)
(123,100)
-
-
(20,601)
10,863
78,063
54,207
585,798
243,746
110,376
-
-
(930,190)
582
64,519
720,366
3,689
374,537
123,100
-
-
(1,218,042)
11,213
79,382
Information on movements in hatchery eggs and cattle, pigs groups have been considered immaterial for disclosure.
Crops
in fields
20,623
295,960
120,541
-
-
-
(399,998)
290
37,416
318,535
-
17,154
-
-
-
(343,345)
5,276
35,036
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
124
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
17. BIOLOGICAL ASSETS (continued)
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 a similar age,
breed and genetic merit, and which are therefore measured at fair value within Level 2 of the fair value hierarchy. There were no transfers between any levels during the year.
The following unobservable inputs were used to measure biological assets:
Description
Fair value
as of 31
December
2019
Fair value
as of 31
December
2018
Valuation
technique(s)
Unobservable inputs
Range of
unobservable inputs
(average) 2019
Range of
unobservable inputs
(average) 2018
Relationship of unobservable inputs to fair
value
Crops in fields
35,036
37,416
Discounted cash
flows
Crops price – per tonne
USD 134 - 405 (235)
USD 160 - 380
(253)
The higher the market price, the higher the fair
value
Crops yield - tonnes per
hectare
3.3 – 6.3 (4.5)
3.5 – 6.1 (4.9)
The higher the crops yield, the higher the fair
value
Breeders held
for hatchery
eggs production
78,063
66,509
Discounted cash
flows
Broiler chickens
79,382
64,519
Cash flows
Discount rate
Number of hatchery eggs pro-
duced by one breeder
12.0%
165
18.0%
165
Hatchery egg price – per egg
USD 0.25
USD 0.25
The higher the discount rate, the lower the fair
value
The higher the number, the higher the fair
value
The higher the market price, the higher the fair
value
The higher the discount rate, the lower the fair
value
Discount rate
Average weight of one broiler
- kg
Poultry meat price – per kg
12.0%
2.45
15.7%
2.33
The higher the weight, the higher the fair value
UAH 26.38
2.92 EUR1
UAH 30.36
The higher the market price, the higher the fair
value
Daily milk yield - litre per cow
12.25 - 17.89 (15.81)
15.89 - 19.76 (18.55)
The higher the milk yield, the higher the fair
value
Weight of the cow - kg per cow
545 - 571 (557)
523 - 567 (548)
The higher the weight, the higher the fair value
Discounted cash
flows
Milk price – per litre
Meat price – per kg
UAH 8.70 – 9.31
(8.93)
UAH 7.62 – 8.68 (7.93)
The higher the market price, the higher the fair
value
UAH 18.91 - 26.46
(23.08)
UAH 18.69 – 24.22
(22.81)
The higher the market price, the higher the fair
value
Discount rate
12.0%
15.7%
The higher the discount rate, the lower the fair
value
Milk cows
25,725
19,953
1 data of Europe operating segment
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
125
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
18. INVENTORIES
The balances of inventories were as follows as of 31 December
2019 and 2018:
19. AGRICULTURAL PRODUCE
The balances of agricultural produce were as follows as of 31
December 2019 and 2018:
Components for mixed fod-
der production
Work in progress
Other raw materials
Spare parts
Mixed fodder
Sunflower oil
Meat processing products
Packaging materials
Other inventories
2019
2018
70,481
157,203
43,205
42,105
20,079
7,398
7,365
6,774
6,679
4,303
33,155
37,471
16,010
3,016
22,140
-
3,455
1,072
208,389
273,522
and
2019
the amount of USD 43,205
31 December
in
in
As
of
thousand and
progress
USD 33,155
comprised mainly of
expenses incurred in cultivating fields to be planted in the years
2020 and 2019, respectively.
thousand was
2018, work
Thousand
tonnes
Carrying
amount
Thousand
tonnes
Carrying
amount
2019
2018
714
118,879
1,105
168,044
62.5
86,208
29.7
40,651
N/A1
N/A1
9,438
N/A1
13,947
1,291
N/A1
2,147
215,816
224,789
Grain
Chicken
meat
Other
crops
Other
meat
The fair value of Agricultural produce was estimated based on
market price as of date of harvest and is within Level 2 of the fair
value hierarchy.
As of 31 December 2019, agricultural produce was not pledged
as collateral to secure bank borrowings (2018: USD 23,750).
17. BIOLOGICAL ASSETS (continued)
If the above unobservable inputs to the valuation model were
5% higher/lower while all the other variables were held constant,
the carrying amount of the current and non-current biological
assets would increase /decrease by USD 35,967 thousand
(2018: USD 33,958 thousand) and USD 34,157 thousand
(2018: USD 32,336 thousand), respectively.
In 2019 management has revised the unobservable inputs to the
valuation model for biological assets to 5% on the basis that, in
the context of the 2019 consolidated financial statements as a
whole, this amount would trigger a material change in the fair
value of the biological assets. Management has updated the
2018 sensitivity to align with this revision.
1 Due to the diverse composition of noted produce unit of measurement is not applicable.
Annual Report 2019 FINANCIAL STATEMENTS
For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
126
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20. TAXES RECOVERABLE AND PREPAID
Taxes recoverable and prepaid were as follows as of 31
December 2019 and 2018:
21. TRADE ACCOUNTS RECEIVABLE, NET
The balances of trade accounts receivable were as follows as of
31 December 2019 and 2018:
An individual assessment is used for the individually significant
debtors with credit risk characteristics that are not aligned with
others.
VAT recoverable
24,527
39,834
Chicken meat
95,824
57,834
2019
2018
2019
2018
Miscellaneous taxes prepaid
5,503
30,030
5,312
45,146
Meat processing and
convenience food
Grain
Sunflower oil sales
Due from related parties
(Note 30)
19,109
12,761
9,056
1,482
197
3,748
508
111
Other agriculture operations
12,278
6,724
Less: allowance for
unrecoverable amounts
(13,472)
(12,381)
124,474
69,305
The average credit period on sales of poultry is 30 days and on
sales of agricultural goods is 60 days. No interest is charged
on outstanding trade accounts receivable. The Group always
measures the loss allowance for trade accounts receivable at an
amount equal to lifetime exprected credit losses (ECL). The ECL
on trade accounts receivable are estimated on a collective basis
using a provision matrix and on individual basis using different
scenarios of probability of default.
The provision matrix is used by reference to past default ex-
perience of the debtor and an analysis of the debtor’s current
financial position, adjusted for factors that are specific to the
debtors, general economic conditions of the industry in which
the debtors operate and an assessment of both the current as
well as the forecast direction of conditions at the reporting date.
The Group has recognised a loss allowance of 100% against all
trade accounts receivable over 270 days past due, which are
assessed on a
collective basis, because historical
experience has indicated that these trade accounts receivable
are generally not recoverable.
There has been no change in the estimation techniques or
significant assumptions made during the current reporting
period. The Group writes off a trade accounts receivable when
there is information indicating that the debtor is in severe financial
difficulty and there is no realistic prospect of recovery, e.g. when
the debtor has been placed under liquidation or has entered into
bankruptcy proceedings, or when the trade accounts receivable
are over 3 years past due, whichever occurs earlier. None of the
trade accounts receivable that have been written off are subject
to enforcement activities.
the
following
table details
risk profile of
The
trade
accounts receivable based on the Group’s provision matrix.
It discloses chicken meat Ukraine, chicken meat export and agri-
cultural Ukraine, agricultural export sales and Europe operating
segment as separate classes of financial instruments and applies
the simplified approach to its trade accounts receivable so that
the loss allowance is always measured at an amount equal to
lifetime expected credit losses. There have been no changes in the
estimation techniques or significant assumptions made during
the current reporting period.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
127
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
21. TRADE ACCOUNTS RECEIVABLE, NET (continued)
The following table illustrates the use of a provision matrix as a risk profile disclosure under the simplified approach as at 31 December 2019:
31 December 2019
Portfolio assessment:
Chicken meat Ukraine
ECL rate, %
Estimated total gross carrying amount at default
Lifetime ECL
Chicken meat export
ECL rate, %
Estimated total gross carrying amount at default
Lifetime ECL
Agricultural Ukraine
ECL rate, %
Estimated total gross carrying amount at default
Lifetime ECL
Agricultural export
ECL rate, %
Estimated total gross carrying amount at default
Lifetime ECL
Europe operating segment
ECL rate, %
Estimated total gross carrying amount at default
Lifetime ECL
Estimated total gross carrying amount at default
Total lifetime ECL
Not past due
< 30
31-90
91-270
>270
Total
Trade accounts receivable – days past due
0.01%
25,502
(2)
0.20%
13,993
(28)
0.26%
22,442
(59)
0.13%
8,033
(10)
0.64%
28,666
(185)
0.02%
2,259
(1)
0.39%
8,218
(32)
0.28%
2,961
(8)
3.08%
54
(2)
1.14%
4,907
(56)
0.37%
89
-
1.03%
4,690
(48)
0.51%
31
-
1.16%
250
(3)
4.93%
609
(30)
0.89%
1,373
(12)
100%
147
(147)
100%
722
(722)
100%
1,014
(1,014)
10.39%
13.49%
100%
29
(3)
13
(2)
5.64%
13.91%
732
(41)
168
(23)
-
-
100%
585
(585)
28,247
(153)
28,232
(860)
27,821
(1,093)
8,129
(17)
35,058
(890)
127,487
(3,013)
Annual Report 2019 FINANCIAL STATEMENTS
For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
128
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
21. TRADE ACCOUNTS RECEIVABLE, NET (continued)
The following table illustrates the use of a provision matrix as a risk profile disclosure under the simplified approach as at 31 December 2019:
31 December 2019
Portfolio assessment:
Individual assessment:
ECL rate, %
Estimated total gross carrying amount at default
Lifetime ECL
Estimated total gross carrying amount at default
Total lifetime ECL
Not past due
< 30
31-90
91-270
>270
Total
Trade accounts receivable – days past due
100%
-
-
100%
-
-
100%
385
(385)
100%
277
(277)
100%
9,797
(9,797)
10,459
(10,459)
137,946
(13,472)
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
129
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
21. TRADE ACCOUNTS RECEIVABLE, NET (continued)
The following table illustrates the use of a provision matrix as a risk profile disclosure under the simplified approach as at 31 December 2018:
31 December 2019
Portfolio assessment:
Chicken meat Ukraine
ECL rate, %
Estimated total gross carrying amount at default
Lifetime ECL
Chicken meat export
ECL rate, %
Estimated total gross carrying amount at default
Lifetime ECL
Agricultural Ukraine
ECL rate, %
Estimated total gross carrying amount at default
Lifetime ECL
Agricultural export
ECL rate, %
Estimated total gross carrying amount at default
Lifetime ECL
Estimated total gross carrying amount at default
Total lifetime ECL
Not past due
< 30
31-90
91-270
>270
Total
Trade accounts receivable – days past due
0.01%
19,984
(2)
0.21%
15,241
(32)
0.23%
15,266
(35)
0.07%
4,288
(3)
0.3%
1,591
(4)
0.16%
7,224
(12)
1.30%
2,262
(29)
1.47%
-
-
1.24%
8.92%
100.0%
54
(1)
0.55%
1,559
(9)
1.76%
1,342
(24)
13
(1)
5.71%
444
(25)
3.08%
212
(7)
42.24%
42.90%
8
(3)
7
(3)
30
(30)
100.0%
1,705
(1,705)
100.0%
347
(347)
100%
120
(120)
21,672
(38)
26,173
(1,783)
-
19,429
(442)
4,423
(129)
71,697
(2,392)
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
130
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
21. TRADE ACCOUNTS RECEIVABLE, NET (continued)
The following table illustrates the use of a provision matrix as a risk profile disclosure under the simplified approach as at 31 December 2018:
31 December 2019
Portfolio assessment:
Individual assessment:
ECL rate, %
Estimated total gross carrying amount at default
Lifetime ECL
Estimated total gross carrying amount at default
Total lifetime ECL
Not past due
< 30
31-90
91-270
>270
Total
Trade accounts receivable – days past due
0.00%
-
-
0.00%
-
-
0.00%
0.00%
-
-
-
-
100%
9,989
(9,989)
9,989
(9,989)
81,686
(12,381)
The following table shows the movement in lifetime ECL that has been recognised for trade and other accounts receivable in accordance with the simplified approach set out in IFRS 9.
Collectively assessed
Individually assessed
1 January 2019
Charged during the year
31 December 2019
2,392
621
3,013
9,989
470
10,459
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
131
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
22. OTHER CURRENT ASSETS
The balances of other current assets, net wereas follows as of
31 December 2019 and 2018:
23. CASH AND CASH EQUIVALENTS
The balances of other current assets, net were as follows as of
31 December 2019 and 2018:
In accordance with the international rating agency of Moody’s,
credit ratings of the banks with which the Group had the
accounts opened as of 31 December were as follows:
Financial assets at amortised cost
Loans and finance aid receivable
from related parties (Note 30)
2019
2018
2019
2018
Deposit
rates
USD’
000
Deposit
rates
USD’
000
21,717
5,950
Cash and cash equivalents at banks and on hand in
Other financial assets
7,620
1,409
Non-financial instruments
Prepayments to suppliers
Other non-financial instruments
14,495
8,741
52,573
19,106
6,393
32,858
Ukrainian Hryvnia
Euro
US Dollars
Other currencies
17,269
37,304
125,348
1,328
32,301
20,938
83,246
1,448
Short-term deposits with an original maturity of less than
92 days:
The Group determines the lifetime expected credit loss of loans
and finance aid receivable from related parties and other finan-
cial assets based on different scenarios on probability of default
and expected loss applicable to each of the material underlying
balances.
The movement in loss is detailed below:
Ukrainian Hryvnia
US Dollars
Total cash and
equivalents
11.75-
16.50%
1.56-
3.50%
61,006
98,480
5.00-
18.9%
1.17-
2.33%
9,835
64,000
340,735
211,768
2019
1 January 2019
-
Charge for the year (Note 30)
(3,128)
31 December 2019
(3,128)
International banks with Aa3
rating
Ukrainian subsidiaries of
international banks without
international ratings
Ukrainian state owned bank
with Caa1
2019
2018
200,972
158,784
101,596
37,008
36,571
9,296
Foreign banks without ratings
1,596
6,680
340,735
211,768
24. SHAREHOLDERS’ EQUITY
Share capital
As of 31 December 2019 and 2018 the authorized, issued and
fully paid share capital of MHP SE comprised the following
number of shares:
2019
2018
Number of shares issued and
fully paid
110,770,000
110,770,000
Number of shares outstanding
107,038,208
107,038,208
The authorized share capital as of 31 December 2019 and 2018
was EUR 221,540 thousand represented by 110,770,000 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.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
132
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
25. NON-CONTROLLING INTERESTS
The table below shows details of non-wholly owned subsidiaries of the Group that have material non-controlling interests:
Name of subsidiary
Myronivsky Zavod po Vygotov-
lennyu Krup i Kombikormiv
AgroKryazh
Agro-S
Other subsidiaries with immate-
rial non-controlling interests
Proportion of ownership interests
and voting rights held byn
on-controlling interests
Profit/(loss) allocated to
non-controlling interests
Accumulated
non-controlling interests
2019
2018
2019
2018
2019
2018
11.5%
49.0%
49.0%
n/a
n/a
11.5%
49.0%
49.0%
n/a
n/a
(524)
(900)
5,234
3,816
(348)
-
(2,444)
2,806
4,587
2,761
5,016
6,544
158
(3,158)
1,272
3,178
990
1,160
13,572
16,536
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
133
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
25. NON-CONTROLLING INTERESTS (continued)
Summarised financial information in respect of each of the Group’s subsidiaries that has material non-controlling interests is set out below. The summarised financial information below represents
amounts before intragroup eliminations.
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Equity attributable to owners of the Group
Revenue
Expenses
Profit (loss) for the year
Profit (loss) attributable to owners of the Group
Profit (loss) attributable to the non-controlling interests
Profit (loss) for the year
Other comprehensive income attributable to owners of the Company
Other comprehensive income attributable to the non-controlling interests
Other comprehensive income for the year
Total comprehensive (loss)/income attributable to owners of the Company
Total comprehensive (loss)/income attributable to the non-controlling interests
Total comprehensive (loss)/income for the year
Dividends paid to non-controlling interests
Net cash inflow/(outflow) from operating activities
Net cash outflow from investing activities
Net cash outflow from financing activities
Myronivsky Zavod po Vygotovlennyu Krup
i Kombikormiv
AgroKryazh
Agro-S
2019
91,051
121,956
134,610
43,544
29,619
118,186
2018
171,327
112,646
167,829
84,971
27,357
317,802
2019
2018
2019
2018
44,482
18,441
50,250
3,505
4,581
22,569
20,748
12,013
19,837
-
7,908
19,518
55,476
30,044
25,202
16,234
69,032
27,830
4,531
9,196
35,658
-
7,062
17,759
(122,743)
(325,631)
(23,279)
(15,952)
(40,646)
(12,033)
(4,557)
(4,033)
(524)
(4,557)
14,944
1,942
16,886
10,911
1,418
12,329
-
485
(855)
-
(7,829)
(6,929)
(900)
(7,829)
4,149
539
4,688
(2,780)
(361)
(3,141)
-
10,666
(10,318)
-
(710)
(362)
(348)
(710)
1,539
1,478
3,017
1,177
1,130
2,307
(1,559)
8,017
(440)
(7,568)
3,566
3,566
-
3,566
23
22
45
3,589
22
3,611
(3,130)
4,202
(977)
(4,988)
(2,544)
(2,444)
(4,988)
1,889
1,815
3,704
(655)
(629)
(1,284)
(3,154)
(1,889)
(587)
(3,216)
(5,500)
5,726
2,920
2,806
5,726
85
82
167
3,005
2,888
5,893
(5,236)
(1,794)
(558)
(5,225)
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
134
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
26. BANK BORROWINGS
The following table summarizes bank borrowings and credit lines outstanding as of 31 December 2019 and 2018:
Currency
2019
2018
WAIR1
USD2 000
WAIR1
USD2 000
Non-current
Foreign banks
Foreign banks
Current
Ukrainian banks
Ukrainian banks
Foreign banks
Current portion of long-term bank
borrowings
Total bank borrowings
-
3.64%
-
-
2.72%
USD
EUR
EUR
USD
EUR
EUR
-
75,880
75,880
-
-
4,406
20,539
24,945
100,825
7.99%
4.72%
3.76%
4.50%
-
56,718
49,065
105,783
12,943
48,000
-
71,772
132,715
238,498
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. The interest on the borrowings drawn with the Ukrainian banks is payable on a monthly basis. Interest on borrowings
drawn with foreign banks is payable semi-annually.
As of 31 December 2019 and 31 December 2018, all of the Group’s bank term loans and credit lines bear floating and fixed interest
rates.
Term loans and credit line facilities were as follows as of
31 December 2019 and 2018:
Credit lines
Term loans
2019
2018
3,348
97,477
60,943
177,555
100,825
238,498
Bank borrowings and credit lines outstanding as of 31 December
2019 and 2018 were repayable as follows:
Within one year
In the second year
In the third to fifth year
inclusive
2019
24,945
17,484
2018
132,715
56,719
27,837
42,271
After five years
30,559
6,793
100,825
238,498
1 WAIR represents the weighted average interest rate on outstanding borrowings.
Annual Report 2019 FINANCIAL STATEMENTS
For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
135
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
26. BANK BORROWINGS (continued)
As of 31 December 2019, the Group had available undrawn
facilities of USD 224,683 thousand
(2018: USD 316,429
thousand). These undrawn facilities expire during the period from
June 2020 until March 2023.
The Group, as well as particular subsidiaries of the Group
have to comply with certain covenants imposed by the banks
providing the loans. The Group shall ensure the ongoing
compliance with the following maintenance covenants: EBITDA
to interest expenses ratio, current ratio and liabilities to equity
ratio. Separately, there are negative covenants in respect of
restricted payments, including dividends, capital expenditures,
additional indebtedness and restrictions on mergers or con-
solidations, limitations on liens and dispositions of assets and
limitations on transactions with affiliates in case of excess of Net
Debt to EBITDA ratio. The Group subsidiaries are also required
to obtain approval from lenders regarding property, plant and
equipment to be used as collateral. During the years ended
31 December 2019 and 2018 the Group has complied with all
covenants imposed by banks providing the borrowings.
As at 31 December 2019 the Net Debt to EBITDA ratio of the
Group exceeded the limit imposed by the banks providing the
loans, however it does not constitute the breach of the covenant.
This will lead to introduction of additional control measures by
the Group described above. Thus, since the moment of publi-
cation of these audited consolidated financial statements as of
and for the year ended 31 December 2019, the aforementioned
restrictions will be binding on the Group.
The Group’s bank borrowings are jointly and severally guar-
anteed by Myronivsky Hliboprodukt, Myronivsky Plant of
Manufacturing Feeds and Groats, Oril-Leader, Peremoga Nova,
Starynska Ptakhofabryka, Zernoproduct MHP, Katerinopilskiy
Elevator, Agrofort, SPF Urozhay, MHP SE, Scylla Capital Limited,
Myronivska Pticefabrika, Ptakhofabryka Snyatynska Nova,
Vinnytska Ptakhofabryka, Zakhid-Agro MHP, Urozhayna
Krayina, Raftan Holding Limited and Merique Holding Limited.
As of 31 December 2019, the deposit with carrying amount of
USD 3,298 thousand (31 December 2018: USD 3,387 thousand)
was restricted as collateral to secure bank borrowings.
As of 31 December 2019, the Group had borrowings of USD 49,731
thousand that were secured by property, plant and equipment
with a carrying amount of USD 99,878 thousand (31 December
2018: nill). As of 31 December 2018, the Group had borrowings of
USD 19,000 thousand that were secured by agricultural produce
with a carrying amount of USD 23,750 thousand.
As of 31 December 2019 and 31 December 2018, accrued
interest on bank borrowings was USD 1,033 thousand and USD
3,150 thousand, respectively.
27. BONDS ISSUED
Bonds issued and outstanding as of 31 December 2019 and 2018
were as follows:
8.25% Senior Notes due in 2020
2019
-
2018
79,417
7.75% Senior Notes due in 2024
500,000
500,000
6.95% Senior Notes due in 2026
550,000
550,000
6.25% Senior Notes due in 2029
350,000
-
Unamortised debt issuance cost
(34,331)
(38,482)
Total long-term portion of
bonds issued
1,365,669
1,090,935
As of 31 December 2019 and 2018, accrued interest on bonds
issued was USD 20,756 thousand and USD 16,322 thousand,
respectively.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
136
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
27. BONDS ISSUED (continued)
6.25% Senior Notes
On 19 September 2019, MHP Lux S.A., a public company with
limited liability (société anonyme) incorporated in 2018 un-
der the laws of the Grand Duchy of Luxembourg, issued USD
350,000 thousand 6.25% Senior Notes due in 2029 at par value.
Received funds were used to satisfy and discharge 8.25% Senior
Notes due in April 2020, debt refinancing and general corporate
purposes.
All expenses associated with placement of 6,25% Senior Notes
amounted to USD 2,888 thousand were capitalized.
The Senior Notes are jointly and severally guaranteed on a
senior basis by MHP SE, Raftan Holding Limited, PrJSC “Oril –
Leader”, PrJSC “Myronivska Pticefabrika”, “SPF “Urozhay” LLC,
“Starynska Ptakhofabryka” ALLC, “Vinnytska Ptakhofabryka”
LLC, “Peremoga Nova” SE, “Katerinopolskiy Elevator” LLC,
PrJSC “Myronivsky Hliboproduct”, PrJSC “Zernoprodukt MHP”
and PrJSC “Agrofort”.
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 ad-
ditional indebtedness in excess of Net Debt to EBITDA ratio as
defined by the indenture, restrictions on mergers or consolida-
tions, limitations on liens and dispositions of assets and limita-
tions on transactions with affiliates. If the Group fails to comply
with the covenants imposed, the Trustee or the Holders of at
least 25% in principal amount of outstanding Notes may, upon
written notice to the Group, declare all outstanding Senior Notes
to be due and payable immediately. If a change of control oc-
curs, 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 100% of the aggregate principal amount
thereof, plus accrued and unpaid interest and additional
amounts, if any.
6.95% Senior Notes
On 3 April 2018, MHP Lux S.A., a public company with limited
liability (société anonyme) incorporated in 2018 under the laws of
the Grand Duchy of Luxembourg, issued USD 550,000 thousand
6.95% Senior Notes due in 2026 at par value. Out of the total
issue amount USD 416,183 thousand were designated for
redemption and exchange of existing 8.25% Senior Notes due
in 2020.
Early redemption of 8.25% Senior Notes due in 2020 out of issue
of 6.95% Senior Notes due in 2026, which were placed with the
same holders and where the change in the net present value
of the future cash flows discounted using the original effective
interest rate was less than 10%, was accounted as an exchange
and thus, all the related expenses, including part of consent fees,
were capitalized and will be amortised over the maturity period
of the 6.95% Senior Notes due in 2026.
The part of expenses, connected with placement of 6,95% Senior
Notes amounted to USD 11,564 thousand were capitalized, in-
cluding USD 10,413 thousands related to the exchange. All other
related expenses in the amount of USD 32,915 thousand were
expensed as incurred.
As a result of a non-substantial modification, the difference
between the present value of the cash flows under the
original and modified terms discounted at the original effec-
tive interest rate was recognised as a gain in the amount of
in
thousand at
USD 4,733
the consolidated statement of profit or loss.
the date of modification
The Senior Notes are jointly and severally guaranteed on
a senior basis by MHP SE, PrJSC “Myronivsky Hliboprodukt”,
PJSC “Myronivsky Plant of Manufacturing Feeds and Groats”,
PrJSC “Zernoprodukt MHP”, PrJSC “Agrofort”, PrJSC “Oril-Lead-
er”, PrJSC “Myronivska Pticefabrika”, “SPF “Urozhay” LLC,
“Starynska Ptakhofabryka” ALLC, “Vinnytska Ptakhofabryka”
LLC, “Peremoga Nova” SE, “Katerinopolskiy Elevator” LLC,
Scylla Capital Limited and Raftan Holding Limited.
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 the indenture, 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, the Trustee or the Holders
of at least 25% in principal amount of outstanding Notes may,
upon written notice to the Group, declare all outstanding Senior
Notes to be due and payable immediately. If a change of con-
trol 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 there-
of, plus accrued and unpaid interest and additional amounts,
if any.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
137
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
27. BONDS ISSUED (continued)
7.75% Senior Notes
On 10 May 2017, MHP SE issued USD 500,000 thousand 7.75%
Senior Notes due in 2024 at par value. Out of the total issue
amount USD 245,200 thousand were designated for redemption
and exchange of existing 8.25% Senior Notes due in 2020.
Early redemption of 8.25% Senior Notes due in 2020 out of issue
of 7.75% Senior Notes due in 2024, which were placed with the
same holders and where the change in the net present value
of the future cash flows discounted using the original effective
interest rate was less than 10% was accounted as an exchange
and thus, all the related expenses, including part of consent fees,
were capitalized and will be amortised over the maturity period
of the 7.75% Senior Notes due in 2024.
The part of expenses, connected with placement of 7.75% Senior
Notes amounted to USD 9,830 thousand were capitalized, in-
cluding USD 7,318 thousands related to the exchange. All other
related expenses, including part of consent fees, in the amount
of USD 4,599 thousand were expensed as incurred.
The carrying amount of the Senior Notes was adjusted on tran-
sition to IFRS 9. Under IFRS 9, as a result of a non-substantial
modification, the difference between the present value of the
cash flows under the original and modified terms discounted at
the original effective interest rate should be recognised as a gain
at the date of modification. The difference between the carry-
ing amount of the Senior Notes under IAS 39 and IFRS 9 was
recognised in opening retained earnings in the amount of USD
7,566 thousand.
“Myronivska Pticefabrika”,
“Myronivsky Plant of Manufacturing Feeds and Groats”, PrJSC
“Zernoprodukt MHP”, PrJSC “Agrofort”, PrJSC “Oril-Leader”,
PrJSC
“Urozhay” LLC,
“Starynska Ptakhofabryka” ALLC, Vinnytska Ptakhofabryka LLC,
SE “Peremoga Nova”, “Katerinopolskiy Elevator” LLC, Scylla
Capital Limited and Raftan Holding Limited.
“SPF
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 the indenture, restrictions on mergers or consol-
idations, limitations on liens and dispositions of assets and
limitations on transactions with affiliates. If the Group fails to
comply with the covenants imposed, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes
may, upon written notice to the Group, declare all outstanding
Senior Notes to be due and payable immediately. If a change
of control occurs, the Group shall make an offer to each hold-
er of the Senior Notes to purchase such Senior Notes at a pur-
chase price in cash in an amount equal to 101% of the principal
amount thereof, plus accrued and unpaid interest and additional
amounts, if any.
8.25% Senior Notes
On 8 April 2013, MHP SE issued USD 750,000 thousand 8.25%
Senior Notes due in 2020 at an issue price of 100% of the princi-
pal amount. USD 350,000 thousand out of issued USD 750,000
thousand 8.25% Senior Notes were used to early redemption
and exchange of its existed 10.25% Senior Notes due in 2015.
The Senior Notes are jointly and severally guaranteed on
a senior basis by PrJSC “Myronivsky Hliboprodukt”, PJSC
Early redemption of 10.25% Senior Notes due in 2015 out of issue
of 8.25% Senior Notes due in 2020, which were placed with the
same holders and where the change in the net present value
of the future cash flows discounted using the original effective
interest rate was less than 10% was accounted as an exchange
and thus all the related expenses, including consent fees, were
capitalized and will be amortised over the maturity period of the
8.25% Senior Notes due in 2020.
The part of expenses, connected with placement of 8.25%
Senior Notes amounted to USD 28,293 thousand were capitalized,
including USD 22,813 thousands related to the exchange. All
other related expenses, including part of consent fees, in the
amount of USD 16,515 thousand were expensed as incurred.
The carrying amount of the Senior Notes was adjusted on tran-
sition to IFRS 9. Under IFRS 9, as a result of a non-substantial
modification, the difference between the present value of the
cash flows under the original and modified terms discounted
at the original effective interest rate should be recognised as
a gain at the date of modification. The difference between the
carrying amount of the Senior Notes under IAS 39 and IFRS 9
was recognised in opening retained earnings in the amount of
USD 3,260 thousand.
The Senior Notes are jointly and severally guaranteed on
“Myronivsky Hliboprodukt”,
a senior basis by PrJSC
SE “Peremoga Nova”, PrJSC “Oril-Leader”, PJSC “Myronivsky Plant
of Manufacturing Feeds and Groats”, PrJSC “Zernoproduct MHP”,
PrJSC “Myronivska Pticefabrika”, “Starynska Ptakhofabryka”
ALLC, Snyatynska Ptakhofabryka, “Katerinopolskiy Elevator” LLC,
PrJSC
Vinnytska
Ptakhofabryka LLC, Scylla Capital Limited, Raftan Holding
Limited and Merique Holding Limited.
“Urozhay”
“Agrofort”,
“SPF
LLC,
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
138
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
27. BONDS ISSUED (continued)
8.25% Senior Notes (continued)
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 the 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,
the Trustee or the Holders of at least 25% in princ pal amount of
the then outstanding Notes may, upon written notice to the Group,
declare all outstanding S nior Notes to be due and payable
immediately. 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 rincipal amount thereof, plus accrued and
unpaid interest and additional amounts, if any.
On 21 October 2019 the Group redeemed all USD 79,471
thousand of the aggregate principal amount outstanding of its
8.25% Senior Notes due in 2020 in accordance with the terms
of the indenture. The redemption price amounted to USD 81,917
thousand. Difference between redemption price and principal
outstanding in the amount of USD 2,164 thousand was recognised
in the consolidated statement of profit or loss as incurred.
Consent solicitation
On 12 October 2018, the Group received consent from the
Holders of the outstanding USD 79,417 thousand 8.25% Senior
Notes for certain proposed amendments to the Indenture and the
Notes. The Amendments were implemented by way of execution
of the Supplemental Indenture on 15 October 2018, and became
effective from the Consent Settlement Date (17 October 2018).
In relation to the Notes, the Company has, on the Consent
Settlement Date, paid to those Holders from whom valid
Consents were delivered and not revoked on or prior to the Consent
Expiration Date and which Consents were accepted by
the Company the Consent Payment of USD 10.00 for each USD
1 thousand in principal amount of the Notes that were subject of
the relevant Electronic Instructions.
As at 31 December 2019 the leverage ratio of the Group is 3.01
to 1, higher than the defined limit of 3.0 to 1. Thus, since the
moment of publication of these audited consolidated financial
statements as of and for the year ended 31 December 2019, the
aforementioned restrictions will be binding on the Group.
for
the Group
indebtedness,
to make certain
restrictions under
the
incurrence of additional
Covenants
indebtedness agreements
Certain
restricted
(e.g.
payments, dividends payment) are dependent on
the
leverage ratio. Once the leverage ratio exceeds 3.0 to 1, it is
notpermitted
restricted
payments, declare dividends exceeding USD 30 million in any
financial year, incur additional debt except that is defined as a
Permitted Debt. According to the indebtedness agreement, the
consolidated leverage ratio is tested on the date of incurrence of
additional indebtedness or restricted payment and after giving
pro forma effect to such incurrence or restricted payment as if it
had been incurred or done at the beginning of the most recent
four consecutive fiscal quarters for which financial statements
are publicly available (or are made available). The Group has
tested all the transactions occurred prior to publication of these
financial statements and has complied with all the covenants
defined by indebtedness agreement during the reporting periods
ended 31 December 2019 and 31 December 2018.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
139
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
lease obligations
28. LEASE LIABILITIES
represent amounts due
Long-term
under agreements for the leasing of agricultural land, trucks,
agricultural machinery and equipment. As of 31 December 2019,
the weighted average interest rates on lease obligations were
4.97%, 6.5% and 20.2% for lease obligations denominated in
EUR, USD and UAH respectively (2018: 6.40% and 8.61% and
n/a).
The amount of interest expense on lease liabilities for the year
ended 31 December 2019 was USD 37,784 thousand. The total
cash outflow for leases for the year ended 31 December 2019
was USD 53,590 thousand.
29. OTHER CURRENT LIABILITIES
Other current liabilities were as follows as of 31 December 2019
and 2018:
2019
2018
Financial liabilities at amortised cost
Accrued payroll
42,344
37,698
Amounts payable for property,
plant and equipment
14,478
16,146
Other financial liabilities
3,230
6,327
Non-financial instruments
Advances from third parties
61,293
30,388
The amount of depreciation charge for right-of-use assets and
additions to right-of-use assets for the year ended 31 December
2019 was USD 33,250 thousand and USD 19,607 respectively.
Payroll related taxes
Other non-financial instruments
4,807
5,842
3,138
2,686
131,994
96,383
Advances from third parties as of 31 December 2018 in the
amount of USD 30,388 were recognized as revenue during the
year ended 31 December 2019.
The carrying amount of lease liabilities as at 31 December 2019
includes USD 199,233 thousand of land lease liabilities.
The following is the maturity analysis of lease payments under
the lease agreements as of 31 December 2019 and 2018:
2019
2018
Payable within one year
64,074
5,409
Payable in the second to fifth years
205,137
10,424
Payable after five years
176,219
-
445,430
15,833
LESS:
Future finance charges
(229,567)
(2,391)
Present value of lease obligations
215,863
13,442
LESS:
Current portion
(64,074)
(4,355)
Lease obligations, long-term portion
151,789
9,087
30. RELATED PARTY BALANCES AND TRANSACTIONS
For the purpose 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.
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.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
140
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
30. RELATED PARTY BALANCES AND TRANSACTIONS
(continued)
The transactions with the related parties during the years ended
31 December 2019 and 2018 were as follows:
Loans provided to key
management personnel
Sales of goods
Purchases from related parties
Loans provided
Loans repaid
Interest charged on loans and
finance aid provided
Loss allowance against loans and
finance aid provided
2019
2018
4,895
768
10
10
35,204
17,315
854
3,128
-
44
8,091
5,322
50
-
The balances owed to and due from related parties were as
follows as of 31 December 2019 and 2018:
Loans and finance aid receivable
24,845
5,950
2019
2018
Less: allowance for unrecoverable
amounts
Loans to key management
personnel
(3,128)
-
21,717
5,950
4,945
971
Trade accounts receivable (Note 21)
Payables due to related parties
197
19
111
19
Loans and finance aid receivable
On 11 February 2019, the Board approved a loan facility of USD
20,000 thousand to its principal shareholder, WTI Trading Limit-
ed (“WTI”) to meet WTI’s general liquidity requirements and other
corporate purposes for a maximum of three years. The facility
was increased to USD 50,000 thousand on 4 December 2019.
The facility was further increased by the Board to USD 80,000
thousand on 21 January 2020.
As of 31 December 2019, the Group had advanced loans to WTI
in the aggregate amount of USD 20,400 thousand. The loans,
with a maturity in July 2020, bear interest at a rate of 8.25% and
are unsecured.
Subsequent to 31 December 2019, the total amount of loans ad-
vanced was increased to USD 55,400 thousand, including USD
20,000 thousand to be repaid in September 2020. The Group’s
Directors believe that the loans were issued at arm’s length
terms and for fair market value, and that they were in the best
interests and for the commercial benefit of the Group and does
not violate the terms of the Senior Notes (Note 27).
During the year, the Group advanced to other affiliated com-
panies under the common control of WTI, short term unsecured
loans which were fully repaid within the year and carried interest
at rates between 2.5% - 8.25%.
included primarily
Compensation of key management personnel
the Group’s key management
Total compensation of
personnel
in selling, general and
administrative expenses in the accompanying consolidated
statements of profit and loss and other comprehensive income
amounted to USD 18,654 thousand and USD 16,809 thousand
for the years ended 31 December 2019 and 2018, respectively.
Compensation of key management personnel consists of
contractual salary and performance bonuses.
Total compensation of the Group’s independent non-executive
directors, which consists of contractual salary, amounted to
USD 679 thousand and USD 1,106 thousand in 2019 and 2018,
respectively.
Key management personnel totalled 43 and 35 individuals as
of 31 December 2019 and 2018, respectively, including 3 and 4
independent non-executive directors as of 31 December 2019
and 2018, respectively.
Loans to key management personnel
The Group has provided several of its key management person-
nel with short-term unsecured loans at interest-free rates. The
loans to key management personnel include the loans provided
by the Ukrainian subsidiaries to the Group’s directors amount-
ed to USD 4,253 thousand and USD 562 thousand in 2019 and
2018, respectively.
increased
the Group
Other transactions with related parties
In December 2018
its effective
ownership interest in Agrofort to 100% through the acquisition
of a non-controlling interest previously held by one of its key
management personnel in exchange for 256,414 treasury shares
held by the Group. The difference between fair value of shares
the amount of
transferred and
USD 1,269 thousand was recognised as an adjustment to
additional paid-in capital. The difference between fair value of
shares transferred and the carrying value of non-controlling
interest was recognised as an adjustment to retained earnings in
the amount of USD 997 thousand.
their carrying value
in
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
141
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
31. CONTINGENCIES AND CONTRACTUAL COMMITMENTS
Operating Environment
Since 2016, the Ukrainian economy has demonstrated signs
of stabilization after years of political and economic ten-
sion. In 2019, the Ukrainian economy continued its recovery
and achieved real GDP growth of around 3.6% (2018: 3.3%),
modest annual inflation of 4.1% (2018: 9.8%), and stabilization of the
national currency (appreciation of the national currency by
around 5% to USD and 11% to EUR comparing to previous year
averages).
Ukraine continues to limit its political and economic ties with
Russia, given annexation of Crimea, an autonomous republic
of Ukraine, and an armed conflict with separatists continued in
certain parts of Luhanska and Donetska regions. As a result of
this, the Ukrainian economy is refocusing on the European Union
(the “EU”) market by realizing potentials of established Deep and
Comprehensive Free Trade Area with the EU.
To further facilitate business activities in Ukraine, the Nation-
al Bank of Ukraine (the “NBU”) from 20 June 2019 has lift-
ed the surrender requirement for foreign currency proceeds,
cancelled all limits on repatriation of dividends since July 2019
and gradually decreased its discount rate for the first time in two
years, from 18.0% in April 2019 to 11.0% in January 2020.
The degree of macroeconomic uncertainty for Ukraine in 2019
still remains high due to a significant amount of public debt
requires
scheduled
mobilizing substantial domestic and external financing in an
increasingly challenging financing environment for emerging
markets.
in 2019-2020, which
repayment
for
Taxation and legal issues
Ukrainian tax authorities are increasingly directing their attention
to the business community as a result of the overall Ukrainian
economic environment. The local and national tax environment
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 are new
significant changes to the tax legislation that may be introduced
in the near future.
At the same time, Ukraine has passed through the period of
presidential and parliamentary elections. All newly elected
authorities have demonstrated their commitment to introduce
reforms in order to boost economic growth, while maintaining
macro-fiscal stability and liberalizing economic environment.
These changes have resulted in, inter alia, improved Fitch’s
rating of Ukraine’s Long-Term Foreign and Local-Currency
Issuer Default Ratings from ‘B-’ to ‘B’, with a positive outlook.
Further economic growth depends, to a large extent, upon
success of
realization of
planned structural reforms and effective cooperation with the
International Monetary Fund (the “IMF”).
the Ukrainian government
in
In addition, starting from early 2020 a new coronavirus
disease (COVID-19) has begun rapidly spreading all over
the world resulting in announcement of pandemic status by the
World Health Organization in March 2020. Responses put in
place by many countries to contain the spread of COVID-19 are
resulting in significant operational disruption for many compa-
nies and have significant impact on global financial markets. As
the situation is rapidly evolving it may have a significant effect on
business of many companies across a wide range of sectors, in-
cluding, but not limited to such impacts as disruption of business
operations as a result of interruption of production or closure
of facilities, supply chain disruptions, quarantines of personnel,
reduced demand and difficulties in raising financing. In addition,
the Group may face the increasingly broad effects of COVID-19
as a result of its negative impact on the global economy and
major financial markets. The significance of the effect of
COVID-19 on the Group’s business largely depends on the
duration and the incidence of the pandemic effects on the world
and Ukrainian economy.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
142
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
32. DIVIDENDS
On 21 March 2019, the Board of Directors of MHP SE approved
a payment of the interim dividends of USD 0.7474 per share,
equivalent to USD 80,000 thousand, which were paid to share-
holders during the year ended 31 December 2019.
31. CONTINGENCIES AND CONTRACTUAL COMMITMENTS
(continued)
Taxation and legal issues (continued)
Management believes that the Group has been in compliance
with all requirements of effective tax legislation.
The Group exports vegetable oil, chicken meat and related
products, and performs intercompany transactions, which may
potentially be in the scope of the Ukrainian transfer pricing (“TP”)
regulations. The Group has submitted the controlled transaction
report for the year ended 31 December 2018 within the required
deadline, and is in the process of preparation of all necessary
documentation on controlled transactions for the years ended 31
December 2019 as required by legislation and plans to submit
reports by 1st October 2020.
As of 31 December 2019, the Group’s management assessed its
possible exposure to tax risks for a total amount of USD 6,516
thousand related to corporate income tax (31 December 2018:
USD 4,452 thousand). No provision was recognised relating to
such possible tax exposure.
As of 31 December 2019, companies of the Group were engaged
in ongoing litigation with tax authorities for the amount of USD
23,201 thousand (2018: USD 2,831 thousand), including USD
11,016 thousand (2018: USD 2,108 thousand) of litigations with
the tax authorities related to disallowance of certain amounts of
VAT refunds and deductible expenses claimed by the Group. Of
this amount, USD 1,241 thousand as of 31 December 2019 (2018:
USD 1,228 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.
Management believes that based on the past history of court
resolutions of similar lawsuits by the Group, it is unlikely that
a significant settlement will arise out of such lawsuits and,
therefore, no respective provision is required in the Group’s
financial statements as of the reporting date.
Contractual commitments on purchase of property, plant
and equipment
During the years ended 31 December 2019 and 2018, 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 2019, purchase commitments amounted to
USD 10,340 thousand (2018: USD 16,826 thousand).
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
143
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
33. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value disclosures in respect of financial instruments are
made in accordance with the requirements of IFRS 7 “Financial
Instruments: Disclosure” and IFRS 13 “Fair value measurement”.
Fair value is defined as the amount at which the instrument could
be exchanged in a current transaction between knowledge-
able willing parties in an arm’s length transaction, other than in
forced or liquidation sale. As no readily available market exists
for a large part of the Group’s financial instruments, judgment is
necessary in arriving at fair value, based on current economic
conditions and specific risks attributable to the instrument. The
estimates presented herein are not necessarily indicative of the
amounts the Group could realize 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, other current assets and trade accounts
payable due to the short-term nature of the financial instruments.
Fair value of other non-current assets and liabilities does not
differ materially from it carrying amount and are classified as
level 3 fair values in the fair value hierarchy due to the inclusion
of unobservable inputs including counterparty credit risk.
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 26)
Carrying amount
Fair value
2019
2018
2019
2018
101,858
241,648
99,417
233,898
Senior Notes due in 2020, 2024, 2026, 2029 (Note 27)
1,386,425
1,107,257
1,468,144
1,027,226
Lease obligations (Note 28)
215,863
13,442
243,352
13,726
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
144
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
33. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The fair value of bank borrowings and lease obligations
was estimated by discounting the expected future cash
outflows by a market rate of interest for bank borrowings 5.4%
(31 December 2018: 8.0%) and for lease obligations 18.0%
(31 December 2018: 8.2%), and is within Level 2 of the fair value
hierarchy. The market rate applied to the land lease obligations
is 15.6%.
Bank borrowings
Bonds issued
Lease obligations
Accrued interest
Total
As of 31 December 2018
238,498
1,090,935
Effect of adoption IFRS 16
-
-
As at 1 January 2019
238,498
1,090,935
13,442
163,651
177,093
19,472
-
19,472
1,362,347
163,651
1,525,998
Cash flow from proceeds /
(repayments)
(191,940)
270,583
(53,590)
(101,510)
(76,457)
Transaction costs payments
(697)
(4,751)
-
-
(5,448)
The fair value of Senior Notes was estimated based on market
quotations and is within Level 1 of the fair value hierarchy.
Non-cash movements
Foreign exchange movements
Reconciliation of liabilities arising from financing activities
The tables below details changes in the Group’s liabilities
arising from financing activities, including both cash and
non-cash changes. Liabilities arising from financing activities are
those for which cash flows were, or future cash flows will be,
classified in the Group’s consolidated statement of cash flows as
cash flows from financing activities.
In 2019 management has revised the format of table on changes
in liabilities arising from financing activities on the basis that, in
the context of the 2019 consolidated financial statements as a
whole, this form would be more appropriate for disclosure. Man-
agement has updated the 2018 information to align with this re-
vision.
Acquisition of subsidiaries
Non-cash additions and
change in terms
Non-cash repayments of
lease liabilities
Interest charged
Amortisation and write-off of
transaction costs
Translation difference
As of 31 December 2019
As at 1 January 2018
Cash flow from proceeds /
(repayments)
Transaction costs payments
Non-cash movements
Foreign exchange movements
Acquisition of subsidiaries
Interest charged
Non-cash additions and
change in terms
Translation difference
As of 31 December 2018
(45,419)
58,514
1,318
-
-
1,839
38,712
100,825
175,734
53,493
(384)
(6,554)
11,377
-
1,232
3,600
238,498
(303)
-
-
-
-
9,205
-
1,365,669
959,262
(1,945)
16,446
23,278
(10,842)
37,784
-
27,639
215,863
11,450
(3,014)
256
-
-
(50,681)
75,216
24,596
(10,842)
100,836
138,620
-
5,749
21,789
17,955
11,044
72,100
1,704,146
1,164,401
133,817
(5,569)
(92,959)
88,782
(45,460)
-
-
(45,844)
-
-
-
43,336
(20)
(401)
6,774
1,154
-
34
(335)
-
94,773
-
38
1,090,935
13,442
19,472
(7,290)
18,151
95,927
44,568
3,652
1,362,247
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
145
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
34. RISK MANAGEMENT POLICIES
During the years ended 31 December 2019 and 2018, 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 gearing ratio of not higher
than 2.5. The Group defines its gearing ratio as the proportion of
total liabilities to total equity.
As of 31 December 2019 and 2018 the gearing ratio was as
follows:
Total Liabilities
Total Equity
2019
2018
2,094,629
1,595,866
1,572,659
1,098,006
Total liabilities to Equity
1.31
1.43
Major categories of financial instruments
Financial assets:
Cash and cash equivalents
(Note 23)
Trade accounts receivable, net
(Note 21)
2019
2018
340,735
211,768
124,474
69,305
Other current assets (Note 22)
29,337
7,359
Other non-current assets, net (Note 16 )
Long-term bank deposits
17,616
3,298
17,357
3,387
515,460
309,176
Financial liabilities:
Bonds issued (Note 27)
1,365,669 1,090,935
Lease obligations (Note 28)
215,863
13,442
Trade accounts payable
147,334
66,398
Bank borrowings (Note 26)
100,825
238,498
Accrued payroll (Note 29)
42,344
37,698
Accrued interest (Note 26,27)
21,789
19,472
Amounts payable for property,
plant and equipment (Note 29)
14,478
16,146
Other payables (Note 29)
3,230
6,327
1,911,532
1,488,916
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.
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
does not hold any collateral or other credit enhancements to
cover its credit risks associated with its financial assets. The
carrying amount of financial assets disclosed in the table “Ma-
jor categories of financial instruments” represent the maximum
credit exposure.
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 10-30 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. As of 31 December 2019 around 19% (2018:
26%) of trade accounts receivable comprise amounts due from
12 large supermarket chains, which have the shortest contractual
receivable settlement period among customers.
As of 31 December 2019 about 49% (2018: 72%) of cash and cash
equivalents comprise amounts on the accounts with 2 banks.
The credit risk on liquid funds is limited because the counterpar-
ties are banks with high credit-ratings assigned by international
credit-rating agencies.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
146
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
34. RISK MANAGEMENT POLICIES (continued)
Liquidity risk
Liquidity risk is the risk that the Group will not be able to settle
all liabilities as they are due. The Group’s liquidity position is
carefully monitored and managed. The Group has in place a
detailed budgeting and cash forecasting process to help
ensure that it has adequate cash available to meet its payment
obligations.
The following table details the Group’s remaining contractu-
al 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 2019 and 2018. 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.
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 2019 and 2018, the current
ratio was as follows:
Current assets
Current liabilities
Current ratio
2019
2018
1,181,641
1,036,678
390,181
3.03
319,323
3.25
Year ended 31 December 2019
Bank borrowings
Bonds issued
Lease obligations
Total
Year ended 31 December 2018
Bank borrowings
Bonds issued
Lease obligations
Total
Carrying
amount
Contractual
Amounts
Less than
1 year
From 2nd to 5th
year
After
5th year
101,858
108,128
1,386,425
2,041,588
215,863
1,704,146
445,430
2,595,146
241,648
257,354
1,107,257
1,639,058
13,442
15,833
1,362,347
1,912,245
27,698
98,850
64,074
190,622
142,301
83,527
5,409
231,237
80,430
876,025
205,137
1,161,592
107,944
390,593
10,424
508,961
-
1,066,713
176,219
1,242,932
7,109
1,164,938
-
1,172,047
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
147
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
34. RISK MANAGEMENT POLICIES (continued)
Currency risk
Currency risk is the risk that the value of a financial instru-
ment 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.
1 Bonds were
issued by MHP Lux S.A. and MHP SE, which
functional
currency is USD. Proceeds from bonds issue were transferred in the form of USD
denominated intragroup loans to Ukrainian subsidiaries of the Group, which uses UAH at
its functional currency, is UAH therefore the Group treats bonds issued balance as foreign
currency denominated balance. Foreign exchange gain/loss on such intragroup loans is
recognized in the consolidated statement of profit or loss, while loan balances themselves
are eliminated on consolidation.
The carrying amounts of the Group’s foreign currency denominated monetary assets and liabilities as of 31 December were as
follows:
2019
2018
ASSETS
Long-term bank deposits
Other non-current assets, net
Trade accounts receivable, net
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 lease obligations
Non-current liabilities
Long-term bank borrowings
Bonds issued1
Long-term lease obligations
USD
-
16,381
23,635
15,998
106,658
162,672
2,101
5
20,758
-
74
22,938
57
1,365,669
-
1,365,726
1,388,664
EUR
3,298
-
9,431
-
1,461
14,190
7,211
2,327
720
16,683
4,238
31,179
34,224
-
5,565
39,789
70,968
USD
-
15,980
26,072
3,601
151,535
197,188
2,536
31
18,877
110,771
2,290
134,505
56,702
1,090,935
3,072
1,150,709
1,285,214
EUR
3,387
-
5,434
-
17,088
25,909
2,543
6,916
595
21,944
2,066
34,064
49,081
-
6,014
55,095
89,159
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 year end for possible change in foreign currency rates.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
148
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
61,300
Grain
251,836
156,511
34. RISK MANAGEMENT POLICIES (continued)
Currency risk
Change
in foreign
currency
exchange
rates
Effect on
profit
before tax,
gain/(loss)
2019
Increase in USD exchange rate
Increase in EUR exchange rate
Decrease in USD exchange rate
Decrease in EUR exchange rate
2018
Increase in USD exchange rate
Increase in EUR exchange rate
Decrease in USD exchange rate
Decrease in EUR exchange rate
10%
10%
5%
5%
10%
10%
5%
5%
(122,599)
(5,678)
2,839
(108,803)
(6,325)
54,401
3,164
During the year ended 31 December 2019, the Ukrainian Hryvnia
appreciated against the EUR and USD by 20.03% and 16.90%
respectively (2018: appreciated against the EUR by 5.62% and
1.37% against the USD). As a result, during the year ended 31
December 2019 the Group recognised net foreign exchange gain
in the amount of USD 185,291 thousand (2018: foreign exchange
gain in the amount of USD 11,638 thousand) in the consolidated
statement of profit or loss and other comprehensive income.
risk
The currency
the existence of
is mitigated by
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 2019 and 2018:
Chicken meat and related
products
Vegetable oil and related
products
2019
2018
588,903
471,177
302,600
274,313
Other agricultural segment
products
42,362
21,703
1,185,701
923,704
Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect primarily borrowings by changing either
their fair value (fixed rate debt) or future cash flows (variable rate
debt). For variable rate borrowings, interest is linked to LIBOR or
EURIBOR.
table
illustrates
the Group’s sensitivity
The below
to
increases or decreases of interest rates by 5% (2018: 5%).
The analysis was applied
liabilities
to
(bank borrowings, 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.
interest bearing
The effect of interest rate sensitivity on shareholders’ equity is
equal to that on the consolidated statement of profit or loss.
Increase/
(decrease)
of floating
rate
Effect on
profit
before tax,
gain/(loss)
5%
-5%
5%
-5%
5%
-5%
5%
-5%
(7)
7
(3,036)
3,036
(8,642)
8,642
(3,955)
3,955
2019
LIBOR
LIBOR
EURIBOR
EURIBOR
2018
LIBOR
LIBOR
EURIBOR
EURIBOR
Livestock disease risk
The Group’s agro-industrial business is subject to risks of out-
breaks of various diseases. The Group faces the risk of out-
breaks 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 minimize and manage this risk. The Group’s manage-
ment 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.
Annual Report 2019 FINANCIAL STATEMENTS For the year ended 31 December 2019
(in thousands of US dollars, unless otherwise indicated)
149
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
34. 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 vertical integration strat-
egy, and also accumulates sufficient commodity stock to meet
its production needs.
35. 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 2019 was USD 48,702 thousand,
out of which USD 100 thousand correspond to directors, and
is recorded in the consolidated statement of profit or loss and
other comprehensive income on an accrual basis (2018: USD
33,097 thousand), out of which USD 74 thousand correspond to
directors).
The employees of the Group receive pension benefits from the
government. In accordance with the legislative regulations,
collective contract, and internal rules, the companies of the
Europe operating segment are committed to the payment of
loyalty bonuses to employees and the severance payments
upon their retirement for which long-term provisions are made.
Provisions are recognized in other operating expenses in the
consolidated statement of profit or loss and other comprehen-
sive income and in other non-current liabilities in the statement of
financial position.
36. EARNINGS PER SHARE
The earnings and weighted average number of ordinary shares
used in calculation of earnings per share are as follows:
From continued operations
2019
2018
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)
224,263
126,200
224,263
126,200
107,036,256
106,804,274
2.10
1.18
The Group has neither potentially dilutive ordinary shares nor
other dilutive instruments; therefore, the diluted earnings per
share equal basic earnings per share. The denominators used
are the same as those detailed above for both basic and diluted
earnings per share from discontinued operations presented in
Note 2.
37. SUBSEQUENT EVENTS
Implications of the coronavirus outbreak on the business
operations
With the recent and rapid development of the Coronavirus
disease
(COVID-19) outbreak the world economy entered
a period of unprecedented health care crisis that has already
caused considerable global disruption in business activities and
everyday life.
Many countries have adopted extraordinary and economically
costly containment measures. Certain countries have required
companies to limit or even suspend normal business operations.
Governments, including the Ukraine and Slovenia, have imple-
mented restrictions on travelling as well as strict quarantine
measures.
Industries such as tourism, hospitality and entertainment are ex-
pected to be directly disrupted significantly by these measures.
Other industries such as manufacturing and financial services
are expected to be indirectly affected and their results to also be
negatively affected.
The financial effect of the current crisis on the global economy
and overall business activities cannot be estimated with rea-
sonable certainty at this stage, due to the pace at which the
outbreak expands and the high level of uncertainties arising from
the inability to reliably predict the outcome.
Annual Report 2019 FINANCIAL STATEMENTS 150
Notes to the Consolidated Financial Statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
38. AUTHORIZATION OF THE CONSOLIDATED FINANCIAL
STATEMENTS
These consolidated financial statements were authorized for
issue by the Board of Directors of MHP SE on 13 April 2020.
37. SUBSEQUENT EVENTS (continued)
Management has considered all available information about the
future, which was obtained after 31 December 2019, including the
impact of the COVID-19 outbreak on customers, suppliers and
staff, as well as actual and projected foreseeable impact from
various factors, such as the following:
• whether the entity can continue to operate if staff were not
able to physically be present;
• the duration that the entity could survive given the availability
of cash resources and the flexibility of its cost base;
• whether there has been a significant decline in revenue;
• whether there has been a significant erosion of profits due to
higher costs or incurrence of unforeseen expenses;
• whether there is a likelihood of potential breach of debt
covenants as a result of the adverse impact on its financials;
• whether there have been any concerns on the continuation of
receipt of goods/services from suppliers.
Management has concluded that there is no significant impact
in the Group’s profitability position. The event is not expected to
have an immediate material impact on the business operations.
Management will continue to monitor the situation closely and
will assess the need for addition measures in case the period of
disruption becomes prolonged.
Despite COVID-19 outbreak, the Group continues to fulfill its
liabilities. The Group made coupon payments in an amount of
USD 10,938 thousand on 18 March 2020 in respect of the 6.25%
Senior Notes and USD 19,113 thousand on 2 April 2020 in respect
of the 6,95% Senior Notes.
The event is considered as a non-adjusting event and is therefore
not reflected in the recognition and measurement of the assets
and liabilities in the financial statements as at 31 December 2019.
Loans and finance aid receivable
Subsequently to 31 December 2019, the limit of the facility to
parent company WTI was increased by resolution of the Board
of Directors to USD 80,000 thousand and the total amount
of loans advanced totalled USD 55,400 thousand, including
USD 20,000 thousand to be repaid in September 2020
(Note 30). The Group’s Directors believe that the loans were
issued at arm’s length terms and for fair market value, and that
they were in the best interests and for the commercial benefit of
the Group.
Dividends
On 13 April 2020, the Board of Directors approved payment
of an interim dividend of USD 0.2803 per share, equivalent to
USD 30,000 thousand, to be paid to shareholders by the end of
April 2020.
Annual Report 2019 FINANCIAL STATEMENTS 151
SHAREHOLDER INFORMATION
Shareholder Information
SHAREHOLDER
INFORMATION
FINANCIAL CALENDAR
MHP’s financial calendar can be found here:
http://www.mhp.com.ua/en/investor-relations/calendar.
The calendar is updated to show relevant events and dates.
KEY CONTACTS & ADVISORS
Company Registered Office
16-18 Zinas Kanther Street, Ayia Triada, 3035 Limassol, Cyprus
Company Office
EB 1, Nicolaides Sea View City Block AB, 3-7 Archbishop
Makarios III Avenue, 6017 Larnaca, Cyprus
Director of Investor Relations
Anastasiya Sobotyuk
Email: a.sobotyuk@mhp.com.ua
Website
Shareholders are encouraged to visit our websites:
www.mhp.com.ua and www.mhp.com.cy, to obtain information on the Company
including its history, reports, news and press information.
Auditor
Deloitte Limited
Maximos Plaza, Tower 1, 3rd Floor
213 Archbishop Makarios III Avenue
CY-3030 Limassol
Cyprus
Registrar
Citigroup Global Markets Deutschland AG
Reuterweg 16
60323 Frankfurt Germany
Annual Report 2019 152
SHAREHOLDER INFORMATION
AС
AGM
AI
Broiler
CAPEX
CEO
CFO
CIS
Company
COSO
CO2
CO2e
CSR
EBITDA
Audit Committee
Annual general meeting
Artificial Intelligence
A young chicken raised for meat
Capital expenditure
Chief Executive Officer
Chief Financial Officer
Commonwealth of Independent States
MHP SE
Committee of Sponsoring Organisations
Carbon Dioxide
Carbon Dioxide Equivalent
Corporate Social Responsibility
Earnings before interest, tax, depreciation
and amortisation
EBRD
European Bank for Reconstruction and Development
EGM
Extraordinary general meeting
EOS
European Operating Segment
ESG
Environmental, Social and Governance
EU
European Union
Fodder
Food for livestock
FX
Foreign Exchange
GCC
Gulf Cooperation Council
GDP Gross Domestic Product
GDR
GMO Genetically Modified Organisms
Greenfield
GRI
Group
Grow-out
Ha
HR
IAS
IFC
Relating to previously undeveloped sites
Global Reporting Initiative
MHP SE and its subsidiaries
The period during which the broilers are raised
Hectares
Human resources
International Accounting Standards
International Finance Corporation
Global depositary receipt
IFI
IFRS
IR
JV
Kg
KPIs
KSA
LHS
LTM
M&A
MENA
MW
NBU
NED
NGO
NBC
OECD
PP
pps
R&D
RHS
SE
SKU
SPOT
UAE
UAH
UK
UNIC
US
US$ /USD
y/y
VAT
International financial institution
International Financial Reporting Standards
Investor relations
Joint venture
Kilograms
Key performance indicators
Kingdom of Saudi Arabia
Left Hand Scale
Last twelve months
Mergers and acquisitions
Middle East and North Africa region
Megawatt
National Bank of Ukraine
Non-executive director
Non-governmental organisation
Nominations and Remuneration Committee
Organisation for Economic Co-operation
and Development
Perutnina Ptuj, acquired during 2019
Persentage Points
Research and development
Right Hand Scale
Societas Europaea
Stock keeping unit, or distinct type of item for sale
A contract for immediate settlement on the spot date
United Arab Emirates
Ukrainian Hryvnia
United Kingdom
Ukrainian Network of Integrity and Compliance
United States
United States Dollar
Year-on-year
Value-added tax
Annual Report 2019 Glossary of Terms