Notes to the INTERIM CONDENSED Consolidated financial statements
for the six-month period ended 30 June 2019
(in thousands of US dollars, unless otherwise indicated)
2. Basis of preparation and accounting policies
Basis of preparation
The interim condensed consolidated financial statements for the six-month period ended 30 June 2019 have been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting".
Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with International Financial Reporting Standards ("IFRS") have been condensed or omitted. However, such information reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of the Group management, necessary to fairly state the results of interim periods. Interim results are not necessarily indicative of the results to be expected for the full year.
These interim condensed 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.
The 31 December 2018 statement of financial position was derived from the audited consolidated financial statements, which were prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union (EU) and the requirements of the Cyprus Companies Law, Cap.113.
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 disclosure of operating land lease commitments due to the fact that not all constructive obligations were captured in the calculation and proceeded 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.
Contractual and constructive obligations in respect of agricultural land operating leases as of
31 December 2018:
|
|
As previously reported |
|
Effect of restatement |
|
As restated |
|
|
|
|
|
|
|
Within one year |
|
31,330 |
|
17,837 |
|
49,167 |
In the second to the fifth year inclusive |
|
104,346 |
|
57,994 |
|
162,340 |
After fifth year |
|
112,078 |
|
39,278 |
|
151,356 |
Total commitments on land operating leases |
|
247,754 |
|
115,109 |
|
362,863 |
Contractual and constructive obligations in respect of agricultural land operating leases as of
31 December 2017:
|
|
As previously reported |
|
Effect of restatement |
|
As restated |
|
|
|
|
|
|
|
Within one year |
|
20,833 |
|
15,562 |
|
36,395 |
In the second to the fifth year inclusive |
|
69,896 |
|
50,061 |
|
119,957 |
After fifth year |
|
60,933 |
|
35,126 |
|
96,059 |
Total commitments on land operating leases |
|
151,662 |
|
100,749 |
|
252,411 |
|
|
|
|
|
|
|
|
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 recognition 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 2 below and amounted to USD 185,442 thousand and USD 177,093 thousand, respectively.
The restatements had no impact on the consolidated statement of financial position as of 31 December 2018 and as of 31 December 2017, consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity, consolidated statement of cash flows and basic and diluted earnings per share for the years then ended.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the six-month period ended 30 June 2019
(in thousands of US dollars, unless otherwise indicated)
2. Basis of preparation and accounting policies (continued)
Adoption of new and revised International 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 the 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.
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 amounts reported in the interim condensed consolidated financial statements of the Group.
IFRS 16 Leases
IFRS 16 changes in how the Group accounts for leases previously classified as operating leases under IAS 17, which were off-balance-sheet.
Lease mainly represents rent of land from individuals (Ukrainian citizens) for agricultural purposes.
Accounting policies under IFRS 16
The Group has adopted new accounting policies in relation to leases following the adoption of IFRS 16 on 1 January 2019, as follows:
The Group assesses whether a contract is or contains a lease, at inception of the contract.
The Group recognises right-of-use assets and 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 assessment 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 is remeasured by discounting the revised lease payments using a revised discount rate.
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 contract term, presented within cost of goods sold in the consolidated statement of profit or loss.
In the statement of cash flows the Group separates the total amount of cash paid into a principal portion (presented within financing activities) and interest (presented within operating activities).
The Group applies IAS 36 to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the six-month period ended 30 June 2019
(in thousands of US dollars, unless otherwise indicated)
2. Basis of preparation and accounting policies (continued)
Adoption of new and revised International Financial Reporting Standards (continued)
IFRS 16 Leases (continued)
The Group applied the modified retrospective approach. Under this approach, the Group did not restate prior year amounts reported and applied the practical expedient to retain the classification of existing contracts as leases under the previous accounting standard (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.
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 |
|
As if IAS 17 still applied |
|
IFRS 16 adjustments |
|
As presented |
Property, plant and equipment |
|
1,498,530 |
|
(21,449) |
|
1,477,081 |
Right-of-use assets, net |
|
- |
|
185,442 |
|
185,442 |
Other non-current assets1) |
|
57,360 |
|
(6,092) |
|
51,268 |
Other current assets1) |
|
32,858 |
|
(69) |
|
32,789 |
Net impact on total assets |
|
1,588,748 |
|
157,832 |
|
1,746,580 |
Lease liabilities |
|
9,087 |
|
114,042 |
|
123,129 |
Current portion of lease liabilities |
|
4,355 |
|
49,609 |
|
53,964 |
Other current liabilities2) |
|
96,383 |
|
(5,819) |
|
90,564 |
Net impact on total labilities |
|
109,825 |
|
157,832 |
|
267,657 |
Retained earnings |
|
1,040,327 |
|
- |
|
1,040,327 |
1) consists of prepayments for land lease
2) accrued payable for land lease
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 "Leases". 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 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-contractual 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.
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. Majority of Group's leases are denominated in UAH.
The average maturity of lease agreements is 7 years.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the six-month period ended 30 June 2019
(in thousands of US dollars, unless otherwise indicated)
2. Basis of preparation and accounting policies (continued)
Adoption of new and revised International Financial Reporting Standards (continued)
IFRS 16 Leases (continued)
The reconciliation between the operating lease commitments as of 31 December and the opening balance for the lease liabilities as of 1 January 2019 is as follows:
|
|
Thousand US dollars |
Land lease commitments as of 31 December 2018 (as restated) |
|
362,863 |
Discounted lease commitments as of 31 December 2018 |
|
157,832 |
Add: accrued payable for land lease as of 31 December 2018 |
|
5,819 |
Add: finance lease liabilities as of 31 December 2018 |
|
13,442 |
Lease liabilities as of 1 January 2019 |
|
177,093 |
Amount of interest expense on lease liabilities for the six-month period ended 30 June 2019 was USD 18,802 thousand. The total cash outflow for leases for the six-month period ended 30 June 2019 was USD 17,929 thousand.
The recognised right-of-use assets relate to the following types of assets:
|
30 June 2019 |
|
01 January 2019 |
|
|
|
|
Land |
198,157 |
|
163,993 |
Property, plant and equipment |
21,045 |
|
21,449 |
Total right-of-use assets |
219,202 |
|
185,442 |
Property, plant and equipment held under finance 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.
Amount of depreciation charge for right-of-use assets and additions to right-of-use assets for the six-month period ended 30 June 2019 was USD 15,071 thousand and USD 25,743 respectively.
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.
Functional and presentation currencies
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 in the consolidated statement of profit or loss and other comprehensive income for the period.
These consolidated financial statements are presented in US Dollars ("USD"), which is the Group's presentation currency.
The results and financial position of the Group are translated into the presentation currency using the following procedures:
· assets and liabilities for each consolidated statement of financial position presented are translated at the closing rate as of the reporting date of that statement of financial position;
· income and expenses for each consolidated statement of profit or loss and other comprehensive income are translated using the average exchange rate for the quarter;
· 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.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the six-month period ended 30 June 2019
(in thousands of US dollars, unless otherwise indicated)
2. Basis of preparation and accounting policies (continued)
Functional and presentation currencies (continued)
The following exchange rates were used:
Currency |
Closing rate as of 30 June 2019 |
Average for six months ended 30 June 2019 |
Closing rate as of 31 December 2018 |
Average for six months ended 30 June 2018 |
UAH/USD |
26.1664 |
26.9316 |
27.6883 |
26.7462 |
UAH/EUR |
29.7302 |
30.4277 |
31.7141 |
32.4092 |
Significant accounting policies
The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual financial statements for the year ended 31 December 2018, except those adopted starting from 1 January 2019 as described above in this note.
Seasonality of operations
Poultry and related operations as well as other agricultural operations are not significantly exposed to seasonal fluctuations.
Grain growing segment, due to seasonality and implications of IAS 41, in the first half of the year mainly reflects sales of carried forward agricultural produce and the effect of biological assets revaluation, while during the second half of the year it reflects sales of grain and the effect of revaluation of agricultural produce harvested during the year. Also, the grain growing segment has seasonal requirements for working capital increase during November to May, due to the sowing campaign.
3. Changes in the group structure
Acquisitions
On 21 February 2019, the Group acquired 90.69% of the issued share capital and thereby obtaining control of Perutnina Ptuj, a Slovenian based international meat-processing company and the most important and largest 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. Perutnina Ptuj was acquired in line with MHP 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 preliminary fair values of identifiable assets acquired and liabilities assumed and any non-controlling interests are as set out in the table below.
|
|
21 February 2019 |
Inventories |
|
25,442 |
Biological assets |
|
10,598 |
Agricultural produce |
|
8,196 |
Trade accounts receivable, net |
|
36,313 |
Cash and cash equivalent |
|
20,986 |
Other current liabilities less other current assets |
|
(6,738) |
Property, plant and equipment |
|
178,918 |
Right-of-use asset |
|
14,588 |
Identifiable intangible assets |
|
34,689 |
Trade accounts payable |
|
(36,127) |
Deferred tax liabilities net of deferred tax assets (of USD thousand 3,535) |
|
(11,762) |
Other non-current liabilities less other non-current assets |
|
(5,555) |
Bank borrowings and lease liabilities 1) |
|
(75,615) |
Total identifiable assets |
|
193,933 |
Goodwill |
|
70,837 |
Non-controlling interest of in 7.61 % of Perutnina Ptuj |
|
(14,758) |
Total consideration due and payable |
|
250,012 |
Notes to the INTERIM CONDENSED Consolidated financial statements
for the six-month period ended 30 June 2019
(in thousands of US dollars, unless otherwise indicated)
3. Changes in the group structure (continued)
Acquisitions (continued)
Net cash outflow arising on acquisition: |
|
|
Cash consideration paid |
|
250,012 |
Less: amount paid in 2018 |
|
(23,302) |
Less: cash and cash equivalent balances acquired |
|
(20,986) |
|
|
205,724 |
1) includes USD 15,392 thousand of lease liabilities recognised in accordance with the adoption of IFRS 16 (Note 2).
The consideration was paid as follows: USD 23,302 thousand in 2018 as prepayment and USD 226,710 thousand in 2019. Acquisition-related costs amounted to USD 2,689 thousand.
The initial accounting for the acquisition of Perutnina Ptuj has only been provisionally determined at the end of the reporting period. At the date of finalisation of these interim condensed consolidated financial statements, the necessary market valuations and other calculations had not been finalised and they have therefore only been provisionally determined based on the directors' best estimate of the likely market values.
The fair value of the trade receivables is USD 36,313 thousand and a gross contractual value of USD 36,500 thousand. The best estimate at acquisition date of the contractual cash flows not to be collected are USD 187 thousand.
The goodwill of USD 70,837 thousand arising from the acquisition 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 on EU market. Perutnina Ptuj has production assets in four Balkan countries: Slovenia, Croatia, Serbia, Bosnia and Herzegovina; owns distribution companies in Austria, Macedonia and Romania and supplies products to 15 countries in Europe. Perutnina has strong brand and customers base;
· Perutnina Ptuj has the ability to increase production of poultry products using existing production capacities. As a cost leading 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 for the Group a platform for further production capacity expansion in Europe.
None of the goodwill is expected to be deductible for income tax purposes.
The non-controlling interest (7.61% ownership 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 14,758 thousand.
Perutnina Ptuj contributed USD 107,304 thousand revenue and USD 7,214 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 six-months period ended 30 June 2019 would have been USD 993,399 thousand and the Group profit would have been USD 173,712 thousand (unaudited figures).
Changes in non-controlling interests in subsidiaries
In May 2019 the Group increased its effective ownership interest in Perutnina Ptuj to 99.2% through the purchase of a non-controlling interest for the amount USD 18,223 thousand. The difference between the carrying value of the net assets acquired and consideration paid was recognised as an adjustment to retained earnings in the amount of USD 4,952 thousand.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the six-month period ended 30 June 2019
(in thousands of US dollars, unless otherwise indicated)
4. 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. Respective comparative information for the six-month period ended 30 June 2018 has been presented in order to achieve comparability with the presentation used in interim condensed consolidated financial statements for the six-month period ended 30 June 2019.
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 chief operating decision maker.
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 convenience foods • other agricultural operations (milk, cattle, and other) |
Europe operating segment |
• sales of meat processing and chicken meat products in Southeast Europe (Note 3) |
The accounting policies of the reportable segments are the same as the Group's accounting policies described in Note 2. 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 maintenance of office premises. This is the measure reported to the chief operating decision maker for the purposes of resource allocation and assessment of segment performance.
Europe operating segment includes primarily sales of chicken meat and meat processing products, produced in the facilities of Perutnina Ptuj. However, CODM manages this as a single segment, because research, development, manufacture, distribution and selling of chicken meat and meat processing products requires single marketing strategies.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the six-month period ended 30 June 2019
(in thousands of US dollars, unless otherwise indicated)
4. Segment information (continued)
The following table presents revenue and profit information regarding the Group's operating segments for the six-month period ended 30 June 2019:
|
Poultry and related operations |
Grain growing |
Meat processing and other agricultural operations segment |
Europe operating segment |
Total reportable segments |
Eliminations |
Consolidated |
|
|
|
|
|
|
|
|
|
External sales |
687,762 |
83,160 |
67,807 |
107,304 |
946,033 |
- |
946,033 |
Sales between business segments |
20,532 |
96,424 |
138 |
- |
117,094 |
(117,094) |
- |
Total revenue |
708,294 |
179,584 |
67,945 |
107,304 |
1,063,127 |
(117,094) |
946,033 |
Segment results |
115,256 |
61,352 |
3,764 |
8,984 |
189,356 |
- |
189,356 |
Unallocated corporate expenses |
|
|
|
|
|
|
(12,365) |
Other expenses, net 1) |
|
|
|
|
|
|
(420) |
Profit before tax |
|
|
|
|
|
|
176,571 |
Other information: |
|
|
|
|
|
|
|
Depreciation and amortization expense 2) |
45,837 |
12,999 |
3,952 |
6,884 |
69,672 |
- |
69,672 |
|
|
|
|
|
|
|
|
Net change in fair value of biological assets and agricultural produce |
16,787 |
25,971 |
(910) |
(703) |
41,145 |
- |
41,145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1) Includes finance income, finance costs, foreign exchange gain (net) and other expenses (net).
2) Depreciation and amortization for the six-month period ended 30 June 2019 does not include unallocated depreciation and amortization in the amount of USD 402 thousand.
The following table presents revenue and profit information regarding the Group's operating segments for the six-month period ended 30 June 2018:
|
Poultry and related operations |
Grain growing |
Meat processing and other agricultural operations segment |
Europe operating segment |
Total reportable segments |
Eliminations |
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales |
615,997 |
13,288 |
64,477 |
- |
693,762 |
- |
693,762 |
Sales between business segments |
21,465 |
95,018 |
168 |
- |
116,651 |
(116,651) |
- |
Total revenue |
637,462 |
108,306 |
64,645 |
- |
810,413 |
(116,651) |
693,762 |
Segment results |
116,619 |
99,764 |
8,253 |
- |
224,636 |
- |
224,636 |
Unallocated corporate expenses |
|
|
|
|
|
|
(12,222) |
Other expenses, net 1) |
|
|
|
|
|
|
(14,997) |
Profit before tax |
|
|
|
|
|
|
197,417 |
Other information: |
|
|
|
|
|
|
|
Depreciation and amortization expense 2) |
37,788 |
9,862 |
2,667 |
- |
50,317 |
- |
50,317 |
|
|
|
|
|
|
|
|
Net change in fair value of biological assets and agricultural produce |
(8,093) |
78,137 |
2,503 |
- |
72,547 |
- |
72,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
1) Includes finance income, finance costs, foreign exchange gain (net) and other expenses (net).
2) Depreciation and amortization for the six-month period ended 30 June 2018 does not include unallocated depreciation and amortization in the amount of USD 249 thousand.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the six-month period ended 30 June 2019
(in thousands of US dollars, unless otherwise indicated)
4. Segment information (continued)
The following table presents revenue and profit information regarding the Group's operating segments for the three-month period ended 30 June 2019 (unreviewed):
|
Poultry and related operations |
Grain growing |
Meat processing and other agricultural operations segment |
Europe operating segment |
Total reportable segments |
Eliminations |
Consolidated |
|
|
|
|
|
|
|
|
|
External sales |
360,085 |
30,650 |
37,352 |
81,622 |
509,709 |
- |
509,709 |
Sales between business segments |
5,455 |
55,827 |
47 |
- |
61,329 |
(61,329) |
- |
Total revenue |
365,540 |
86,477 |
37,399 |
81,622 |
571,038 |
(61,329) |
509,709 |
Segment results |
66,279 |
57,577 |
2,818 |
6,123 |
132,797 |
- |
132,797 |
Unallocated corporate expenses |
|
|
|
|
|
|
(5,802) |
Other expenses, net 1) |
|
|
|
|
|
|
14,169 |
Profit before tax |
|
|
|
|
|
|
141,164 |
Other information: |
|
|
|
|
|
|
|
Depreciation and amortization expense 2) |
23,256 |
5,515 |
2,025 |
6,001 |
36,797 |
- |
36,797 |
|
|
|
|
|
|
|
|
Net change in fair value of biological assets and agricultural produce |
6,267 |
42,793 |
(369) |
(1,286) |
47,405 |
- |
47,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1) Includes finance income, finance costs, foreign exchange gain (net) and other expenses (net).
2) Depreciation and amortization for the three-month period ended 30 June 2019 does not include unallocated depreciation and amortization in the amount of USD 218 thousand.
The following table presents revenue and profit information regarding the Group's operating segments for the three-month period ended 30 June 2018 (unreviewed):
|
Poultry and related operations |
Grain growing |
Meat processing and other agricultural operations segment |
Europe operating segment |
Total reportable segments |
Eliminations |
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales |
348,450 |
5,827 |
33,909 |
- |
388,186 |
- |
388,186 |
Sales between business segments |
11,426 |
48,986 |
115 |
- |
60,527 |
(60,527) |
- |
Total revenue |
359,876 |
54,813 |
34,024 |
- |
448,713 |
(60,527) |
388,186 |
Segment results |
60,116 |
98,539 |
1,527 |
- |
160,182 |
- |
160,182 |
Unallocated corporate expenses |
|
|
|
|
|
|
(9,722) |
Other expenses, net 1) |
|
|
|
|
|
|
(42,376) |
Profit before tax |
|
|
|
|
|
|
108,084 |
Other information: |
|
|
|
|
|
|
|
Depreciation and amortization expense 2) |
17,380 |
4,792 |
1,363 |
- |
23,535 |
- |
23,535 |
|
|
|
|
|
|
|
|
Net change in fair value of biological assets and agricultural produce |
(10,392) |
89,246 |
(922) |
- |
77,932 |
- |
77,932 |
1) Includes finance income, finance costs, foreign exchange gain (net) and other expenses (net).
2) Depreciation and amortization for the three-month period ended 30 June 2018 does not include unallocated depreciation and amortization in the amount of USD 124 thousand.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the six-month period ended 30 June 2019
(in thousands of US dollars, unless otherwise indicated)
4. Segment information (continued)
Non-current assets based on the geographic location of the manufacturing facilities were as follows as of
30 June 2019 and 31 December 2018:
|
2019 |
|
2018 |
|
|
|
|
Ukraine |
1,912,478 |
|
1,613,243 |
Europe |
226,548 |
|
- |
|
2,139,026 |
|
1,613,243 |
Non-current assets excluding deferred tax assets and non-current financial assets.
As of 31 December 2018 and for the year then ended the Group's manufacturing facilities were located mainly within Ukraine.
5. Profit for the period
The Group's gross profit for the six-month period ended 30 June 2019 decreased compared to the six-month period ended 30 June 2018 and amounted to USD 250,828 thousand and USD 262,359 thousand, respectively. The decrease was driven mainly by decrease of the gross profit in the grain growing operations segment, partly offset by increase in the poultry and related operations and Europe operating segment.
The Group's operating profit decreased at a higher rate compared to gross profit mainly due to the inclusion of additional expenses of Perutnina Ptuj as well as an increase in administration, sales and distribution expenses primarily attributable to the increase in consulting services, advertising expense and representative costs.
The Group's profit for the six-month period ended 30 June 2019 decreased compared to the six-month period ended 30 June 2018 and amounted to USD 171,481 thousand and USD 190,479 thousand, respectively. The decrease is driven mainly by increase in selling, general and administrative expenses partly offset by higher finance costs for the six-month period ended 30 June 2018 due to transaction costs related to Eurobond issued in April 2018.
6. Deferred revenues
The Ukrainian Government supports domestic agri 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. During the year ended 31 December 2018, the Group received government grants in accordance to the compensation program for construction and reconstruction of livestock farms in an amount of UAH 960,666 thousand (USD 34,371 thousand). During the six-month period ended 30 June 2019, the Group received government grants in accordance with this program in an amount of UAH 158,132 thousand (USD 5,996 thousand).
Government grants are presented in the statement of the financial position as deferred revenues, which are recognised in profit or loss on a systematic basis over the useful life of the related assets.
7. Property, plant and equipment
During the six-month period ended 30 June 2019, the Group's additions to property, plant and equipment amounted to USD 62,530 thousand (six-month period ended 30 June 2018: USD 115,505 thousand) mainly related to construction works for Phase 2 of the Vinnytsia poultry project. Additional increase relates to an acquisition of Perutnina Ptuj (Note 3).
There were no significant disposals of property, plant and equipment during the six-month period ended
30 June 2019.
8. Inventories and agricultural produce
A decrease in inventory and agricultural produce balances for six-month period ended 30 June 2019 was mainly as a result of internal consumption of corn, sunflower and soya.
Changes of inventory balances apart from consumption of purchased grain stock have also occurred because as of 31 December 2018 expenses incurred in cultivating of fields which had to be planted in spring 2019 were capitalised in work in progress balance. As of 30 June 2019 these expenses were classified as crops in fields within biological assets, as the plants were already sown.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the six-month period ended 30 June 2019
(in thousands of US dollars, unless otherwise indicated)
9. Biological assets
The increase in current biological assets as compared to 31 December 2018 is primarily related to crops in fields balance. The increase in crops in fields balance mainly relates to spring crops seeded in the first half of 2019 classified as biological assets as well as due to IAS 41 revaluation adjustment.
10. Trade accounts receivable, net and trade accounts payable
Increase in trade accounts receivable, net and trade accounts payable mainly related to the inclusion of corresponding balances of acquired subsidiary (Perutnina Ptuj). An additional impact was attributable to an increase in receivables for export sales due to increase of sales volume as well as increase in amounts payable for seeds and plant protection products to be paid in the third quarter of 2019.
11. Share capital
As of 30 June 2019 and 31 December 2018 the authorized, issued and fully paid share capital of MHP SE comprised the following number of shares:
|
30 June 2019 |
|
31 December 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 30 June 2019 and 31 December 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.
12. Bank borrowings
The following table summarizes bank borrowings and credit lines outstanding as of 30 June 2019 and 31 December 2018:
|
|
|
|
30 June 2019 |
|
31 December 2018 |
|
Bank |
|
Currency |
|
WAIR 1) |
USD' 000 |
|
WAIR 1) |
USD' 000 |
|
Non-current |
|
|
|
|
|
|
|
|
|
Foreign banks |
|
USD |
|
7.75% |
18,069 |
|
7.99% |
56,718 |
|
Foreign banks |
|
EUR |
|
4.33% |
119,514 |
|
4.72% |
49,065 |
|
|
|
|
|
|
137,583 |
|
|
105,783 |
|
Current |
|
|
|
|
|
|
|
|
|
Ukrainian banks |
EUR |
|
3.02% |
30,353 |
|
3.76% |
12,943 |
|
Ukrainian banks |
|
USD |
|
4.15% |
49,699 |
|
4.50% |
48,000 |
|
Foreign banks |
|
EUR |
|
4.23% |
68,678 |
|
- |
- |
|
Current portion of long-term bank borrowings |
|
USD, EUR |
|
|
103,500 |
|
|
71,772 |
|
|
|
|
252,230 |
|
|
132,715 |
|
Total bank borrowings |
|
|
389,813 |
|
|
238,498 |
|
1) WAIR represents the weighted average interest rate on outstanding borrowings.
The Group's borrowings are drawn from various banks as term loans, credit line facilities and overdrafts. Repayment terms of the principal amounts of bank borrowings vary from monthly repayment to repayment on maturity depending on the agreement reached with each bank. Interest on borrowings drawn from the Ukrainian banks is payable on a monthly basis. Interest on borrowings drawn with foreign banks is payable semi-annually and annually.
As of 30 June 2019 and 31 December 2018, the Group's bank term loans and credit lines bear floating and fixed interest rates.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the six-month period ended 30 June 2019
(in thousands of US dollars, unless otherwise indicated)
12. Bank borrowings (continued)
Bank borrowings and credit lines outstanding as of 30 June 2019 and 31 December 2018 were repayable as follows:
|
30 June 2019 |
|
31 December 2018 |
|
|
|
|
Within one year |
252,230 |
|
132,715 |
In the second year |
42,052 |
|
56,719 |
In the third to fifth year inclusive |
91,900 |
|
42,271 |
After five years |
3,631 |
|
6,793 |
|
389,813 |
|
238,498 |
As of 30 June 2019, the Group had available undrawn facilities of USD 109,995 thousand (31 December 2018: USD 316,429 thousand). These undrawn facilities expire during the period from October 2019 until July 2021.
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, restrictions on mergers or consolidations, 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. As of 30 June 2019 and 31 December 2018, the Group has complied with all covenants imposed by banks providing the borrowings.
As of 30 June 2019, the Group had borrowings of USD 72,452 that were secured. These borrowings were secured by inventories and property, plant and equipment with a carrying amount of USD 118,318 thousand. As of 31 December 2018, the Group had borrowings of USD 19,000 thousand that were secured. These borrowings were secured by agricultural produce with a carrying amount of USD 23,750 thousand.
As of 30 June 2019, the Group had borrowings of USD 113,620 that were secured by the pledge of 100% of the share capital of Hemiak Investments Limited holding circa 99.2% of Shares of Perutnina Ptuj (Note 3).
As of 30 June 2019, a deposit with a carrying amount of USD 3,360 thousand (31 December 2018:
USD 3,387 thousand) was restricted as collateral to secure bank borrowings.
As of 30 June 2019 and 31 December 2018, accrued interest on bank borrowings was USD 3,866 thousand and USD 3,150 thousand, respectively.
13. Bonds issued
Bonds issued and outstanding as of 30 June 2019 and 31 December 2018 were as follows:
|
30 June 2019 |
|
31 December 2018 |
|
|
|
|
8.25% Senior Notes due in 2020 |
79,417 |
|
79,417 |
7.75% Senior Notes due in 2024 |
500,000 |
|
500,000 |
6.95% Senior Notes due in 2026 |
550,000 |
|
550,000 |
Unamortized debt issuance cost |
(35,053) |
|
(38,482) |
Total bonds issued |
1,094,364 |
|
1,090,935 |
Less: |
|
|
|
Current portion of bonds issued |
(78,078) |
|
- |
Total long-term portion of bonds issued |
1,016,286 |
|
1,090,935 |
As of 30 June 2019 and 31 December 2018 amount of accrued interest on bonds issued was USD 16,217 thousand and USD 16,322 thousand, respectively.
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
Notes to the INTERIM CONDENSED Consolidated financial statements
for the six-month period ended 30 June 2019
(in thousands of US dollars, unless otherwise indicated)
13. Bonds issued (continued)
6.95% Senior Notes (continued)
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, including 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 effective interest rate was recognised as a gain in the amount of USD 4,733 thousand at the date of modification in the consolidated statement of profit or loss.
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-Leader", 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 control occurs, the Group shall make an offer to each holder of the Senior Notes to purchase such Senior Notes at a purchase price in cash in an amount equal to 101% of the principal amount thereof, plus accrued and unpaid interest and additional amounts, if any.
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, including 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 transition 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 as at 1 January 2018 in the amount of USD 7,566 thousand.
The Senior Notes are jointly and severally guaranteed on a senior basis by PrJSC "Myronivsky Hliboprodukt", PJSC "Myronivsky Plant of Manufacturing Feeds and Groats", PrJSC "Zernoprodukt MHP", PrJSC "Agrofort", PrJSC "Oril-Leader", PrJSC "Myronivska Pticefabrika", "SPF "Urozhay" LLC, "Starynska Ptakhofabryka" ALLC, Vinnytska Ptakhofabryka LLC, SE "Peremoga Nova", "Katerinopolskiy Elevator" LLC, Scylla Capital Limited, 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 the then outstanding Notes may, upon written notice to the Group, declare all outstanding Senior Notes to be
Notes to the INTERIM CONDENSED Consolidated financial statements
for the six-month period ended 30 June 2019
(in thousands of US dollars, unless otherwise indicated)
13. Bonds issued (continued)
7.75% Senior Notes (continued)
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 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 principal 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.
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 transition 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 as at 1 January 2018 in the amount of USD 3,260 thousand.
The Senior Notes are jointly and severally guaranteed on a senior basis by PrJSC "Myronivsky Hliboprodukt", 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 "Agrofort", "SPF "Urozhay" LLC, Vinnytska Ptakhofabryka LLC, Scylla Capital Limited, Raftan Holding Limited, Merique 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 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 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 holder of the Senior Notes to purchase such Senior Notes at a purchase price in cash in an amount equal to 101% of the principal amount thereof, plus accrued and unpaid interest and additional amounts, if any.
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 Group 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 Group 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.
During the reporting periods ended 30 June 2019 and 31 December 2018 the Group has complied with all covenants defined by indebtedness agreement.
The weighted average effective interest rate on the Senior Notes is 8.43% per annum and 8.60% per annum for the six-month ended 30 June 2019 and year ended 31 December 2018, respectively.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the six-month period ended 30 June 2019
(in thousands of US dollars, unless otherwise indicated)
14. Related party balances and transactions
For the purposes of these financial statements, parties are considered to be related if one party controls, is controlled by, or is under common control with the other party, or exercises significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.
Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms and conditions as transactions between unrelated parties.
Transactions with related parties under common control
The Group enters into transactions with related parties that are 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.
Terms and conditions of sales to related parties are determined based on arrangements specific to each contract or transaction.
Transactions with related parties during the six-month periods ended 30 June 2019 and 30 June 2018 were as follows:
|
2019 |
|
2018 |
|
|
|
|
Loans and finance aid provided |
15,098 |
|
- |
Loans and finance aid repaid |
17,393 |
|
- |
Loans provided to key management personnel |
1,783 |
|
405 |
Purchases from related parties |
8 |
|
22 |
|
|
|
|
The balances owed to and due from related parties were as follows as of 30 June 2019 and 31 December 2018:
|
30 June 2019 |
|
31 December 2018 |
|
|
|
|
Loans and finance aid receivable |
4,045 |
|
5,950 |
Loans to key management personnel |
2,598 |
|
971 |
Trade accounts receivable |
113 |
|
111 |
Payables due to related parties |
21 |
|
19 |
The Group has provided related parties and key management personnel with short-term loans at rates comparable to the average commercial rate of interest. The loans to related parties and key management personnel are unsecured.
Compensation of key management personnel
Total compensation of the Group's key management personnel (including compensation to Mr. Yuriy Kosyuk), which consists of contractual salary and performance bonuses amounted to USD 4,818 thousand and USD 5,940 thousand for the six-month period ended 30 June 2019 and 30 June 2018, respectively.
15. Contingencies and contractual commitments
Operating environment
The Ukrainian economy proceeded recovery from the economic and political crisis of previous years and demonstrated sound real GDP growth of around 2.5% year on year for the six-month periods ended 30 June 2019 (2018: 2.8%), modest annual inflation of 9.0% (2018: 13.2%), and stabilization of national currency.
Also Ukraine continued to limit its political and economic ties with Russia, given annexation of Crimea, an autonomous republic of Ukraine, and a frozen armed conflict with separatists in certain parts of Luhanska and Donetska regions. Amid such events, the Ukrainian economy demonstrated further refocusing on the European Union ("EU") market realizing all potentials of established Deep and Comprehensive Free Trade Area with EU, in such a way effectively reacting to mutual trading restrictions imposed between Ukraine and Russia. As a result, the weight of the export and import to/from Russia substantially fell from 18.2% and 23.3% in 2014 to around 7.7% and 14.2% in 2018, respectively.
In terms of currency regulations, the new currency law was adopted in 2018 and came into force on 7 February 2019. It purports to enable the NBU to promulgate more liberal currency regulation and soften a number of currency restrictions, such as: requirement to register loans obtained from non-residents with the
Notes to the INTERIM CONDENSED Consolidated financial statements
for the six-month period ended 30 June 2019
(in thousands of US dollars, unless otherwise indicated)
15. Contingencies and contractual commitments (continued)
Operating environment (continued)
NBU, 180-day term for making payments in foreign economic transactions, required 50% share of mandatory sale of foreign currency proceeds, etc.
Further economic growth depends, to a large extent, upon success of the Ukrainian government in realization of planned reforms and cooperation with the International Monetary Fund ("IMF").
The management of the Group believes that the negative impact of the political and economic turmoil at the Group's entities is reasonably limited due to the Group's significant portion of export sales, its access to the international financial markets and the significant distance of its main production sites from any conflict zones.
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 have been many new tax and foreign currency laws and related regulations introduced in recent years which are not always clearly written.
Management believes that the Group has been in compliance with all requirements of effective tax legislation and currently is assessing the possible impact of the introduced amendments.
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 2017 within the required deadline, and has prepared all necessary documentation on controlled transactions for the year ended 31 December 2018 as required by legislation and plans to submit reports by 1 October 2019.
As of 30 June 2019, the Group's management assessed its possible exposure to tax risks for a total amount of USD 4,647 thousand related to corporate income tax (31 December 2018: USD 4,452 thousand). No provision was charged of such possible tax exposure.
As of 30 June 2019, companies of the Group were engaged in ongoing litigation with tax authorities for the amount of USD 3,760 (31 December 2018: USD 2,831 thousand), including USD 2,805 thousand
(31 December 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. Out of this amount,
USD 1,732 thousand as of 30 June 2019 (31 December 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.
Manage-ment 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 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 six-month period ended 30 June 2019, 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 30 June 2019, purchase commitments on such contracts were primarily related to expansion of the Vinnytsya poultry complex and amounted to USD 11,655 thousand (31 December 2018: USD 16,826 thousand).
16. 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 the price that would be expected to be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (most advantageous) market at the measurement date under current market conditions. Where available, market values have been used to determine fair values. When market values are not available, fair values have been calculated by discounting expected cash flows at prevailing market interest and exchange rates. The estimated fair values have been determined using market information and
Notes to the INTERIM CONDENSED Consolidated financial statements
for the six-month period ended 30 June 2019
(in thousands of US dollars, unless otherwise indicated)
16. Fair value of financial instruments (continued)
appropriate valuation methodologies, but are not necessarily indicative of the amounts that the Group could realise in the normal course of business.
The fair value is estimated to approximate the carrying value for cash and cash equivalents, short-term bank deposits, trade accounts receivable, and trade accounts payable, other financial assets and other financial liabilities due to the short-term nature of the financial instruments.
Set out below is the comparison by category of carrying amounts and fair values of all the Group's financial instruments, excluding those discussed above, that are carried in the consolidated statement of financial position:
|
Carrying amount |
|
Fair value |
|
30 June
2019 |
31 December 2018 |
|
30 June 2019 |
31 December 2018 |
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
Bank borrowings (Note 12) |
393,679 |
241,648 |
|
387,847 |
233,898 |
Senior Notes due in 2020, 2024, 2026 (Note 13) |
1,110,581 |
1,107,257 |
|
1,174,315 |
1,027,226 |
The carrying amount of Bank borrowings and Senior Notes issued includes interest accrued at each of the respective dates.
The fair value of bank borrowings was estimated by discounting the expected future cash outflows by a market rate of interest for bank borrowings 5.8% (31 December 2018: 8.0%) and is within Level 2 of the fair value hierarchy.
The fair value of Senior Notes was estimated based on market quotations and is within Level 1 of the fair value hierarchy.
17. Risk management policy
During the six-month period ended 30 June 2019 there were no changes to objectives, policies and processes for credit risk, capital risk, liquidity risk, currency risk, interest rate risk, livestock diseases risk and commodity price and procurement risk managing.
Liquidity risk
Liquidity risk is the risk that the Group will not be able to settle all liabilities as they are due. The Group's liquidity position is carefully monitored and managed. The Group has in place a detailed budgeting and cash forecasting process to help ensure that it has adequate cash available to meet its payment obligations.
The following table details the Group's remaining contractual maturity for its non-derivative financial liabilities. The table has been drawn up based on the undiscounted cash flows of financial liabilities using the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows as of 30 June 2019 and 31 December 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.
|
Carrying amount |
Contractual Amounts |
Less than
1 year |
From 2nd to 5th year |
After 5th year |
30 June 2019 |
|
|
|
|
|
Bank borrowings |
393,679 |
408,990 |
258,694 |
146,508 |
3,788 |
Bonds issued |
1,110,581 |
1,597,294 |
162,944 |
807,900 |
626,450 |
Lease liabilities |
224,969 |
461,928 |
61,015 |
193,255 |
207,658 |
Total |
1,729,229 |
2,468,212 |
482,653 |
1,147,663 |
837,896 |
|
|
|
|
|
|
31 December 2018 |
|
|
|
|
|
Bank borrowings |
241,648 |
257,354 |
142,301 |
107,944 |
7,109 |
Bonds issued |
1,107,257 |
1,639,058 |
83,527 |
390,593 |
1,164,938 |
Lease liabilities |
13,442 |
15,833 |
5,409 |
10,424 |
-
|
Total |
1,362,347 |
1,912,245 |
231,237 |
508,961 |
1,172,047 |
|
|
|
|
|
|
The carrying amount of lease liabilities as at 30 June 2019 includes USD 211,066 thousand of land lease obligations.
All other financial liabilities (excluding those disclosed above) are repayable within one year.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the six-month period ended 30 June 2019
(in thousands of US dollars, unless otherwise indicated)
17. Risk management policy (continued)
Currency risk
Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group undertakes certain transactions denominated in foreign currencies.
The Group does not use any derivatives to manage foreign currency risk exposure, Group management sets limits on the level of exposure to foreign currency fluctuations.
The carrying amounts of the Group's foreign currency denominated monetary assets and liabilities as of
30 June 2019 and 31 December 2018 were as follows:
|
30 June 2019 |
|
31 December 2018 |
|
USD |
EUR |
|
USD |
EUR |
|
|
|
|
|
|
Total assets |
156,004 |
9,640 |
|
197,188 |
25,909 |
Total liabilities |
1,257,013 |
215,654 |
|
1,285,214 |
89,159 |
The table below details the Group's sensitivity to strengthening/(weakening) of the UAH against USD and EUR. This sensitivity range represents management's assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for possible change in foreign currency rates.
|
Change in foreign currency exchange rates |
|
Effect on profit before tax |
2019 |
|
|
|
|
|
|
|
Increase in USD exchange rate |
10% |
|
(110,101) |
Increase in EUR exchange rate |
10% |
|
(20,601) |
|
|
|
|
Decrease in USD exchange rate |
5% |
|
55,050 |
Decrease in EUR exchange rate |
5% |
|
10,301 |
|
|
|
|
2018 |
|
|
|
|
|
|
|
Increase in USD exchange rate |
10% |
|
(108,803) |
Increase in EUR exchange rate |
10% |
|
(6,325) |
|
|
|
|
Decrease in USD exchange rate |
5% |
|
54,401 |
Decrease in EUR exchange rate |
5% |
|
3,164 |
|
|
|
|
The effect of foreign currency sensitivity on shareholders' equity is equal to that reported in the interim condensed consolidated statement of profit or loss and other comprehensive income.
During the six-month period ended 30 June 2019, the Ukrainian Hryvnia appreciated against the EUR by 6.7% and against the USD by 5.8% (six-month period ended 30 June 2018: appreciated against the EUR and USD by 9.6% and 7.2% respectively). As a result, during the six-month period ended 30 June 2019 the Group recognised net foreign exchange gain in the amount of USD 72,696 thousand (six-month period ended 30 June 2018: foreign exchange gain in the amount of USD 71,055 thousand) in the consolidated statement of profit or loss and other comprehensive income.
18. 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 approximately USD 80,000 thousand, which were paid to shareholders during the six-month period ended 30 June 2019.
19. Subsequent events
There are no subsequent events to mention.
20. Authorization of the interim condensed consolidated financial statements
These interim condensed consolidated financial statements were authorized for issue by the Board of Directors of MHP SE on 5 September 2019.