Last checked at 16 Nov 2017 07:15
16 November 2017, Luxembourg
MHPSE
FINANCIAL RESULTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED 30 SEPTEMBER 2017
MHP SE (LSE: MHPC), the parent company of one of the leading agro-industrial companies in Ukraine with a focus on production of poultry and cultivation of grain, as well as other agricultural operations (meat processing and meat products ready for consumption) today announces its unaudited consolidated financial results for the third quarter and nine months ended 30 September 2017. Hereinafter, MHP SE and its subsidiaries are referred to as "MHP", "The Company" or "The Group".
OPERATIONAL HIGHLIGHTS
Q3 2017 highlights
· Poultry production in Q3 2017 137,005 tonnes, down 2% (Q3 2016: 139,740 tonnes)
· Average chicken meat price increased by 35% year-on-year to UAH 37.88 per kg (Q3 2016: UAH 28.07 per kg) (excluding VAT)
9M 2017 highlights
· The Company's poultry production facilities continued to operate at full capacity during the period and poultry production volumes remained relatively stable at 424,700 tonnes (9M 2016: 426,085 tonnes)
· Average chicken meat price increased by 23% year-on-year to UAH 34.06 per kg (9M 2016: UAH 27.67 per kg) (excluding VAT)
· Chicken meat exports increased by 23% to 123,042 176,015 tonnes (9M 2016: 142,790 tonnes) as a result of increased sales mainly to countries in the EU and Africa as well as to UAE and KSA
· The Company established a processing plant in Slovakia as part of its export strategy
FINANCIAL HIGHLIGHTS
Q3 2017 highlights
· Revenue US$ 370 million, up 9% year-on-year (Q3 2016: US$ 339 million)
· Export revenue US$ 212 million, 57% of total revenue (Q3 2016: US$ 201 million, 59% of total revenue)
· Operating profit US$ 92 million, up 24% year-on-year (Q3 2016: US$ 74 million); operating margin increased to 25% (Q3 2016: 22%)
· Adjusted EBITDA increased to US$ 105 million from US$ 100 million; adjusted EBITDA margin 28% (Q3 2016: 29%)
· Net profit of US$ 47 million, compared to net loss of US$ 9 million for Q3 2016, including US$ 17 million (Q3 2016: US$ 50 million) of non-cash foreign exchange translation loss
9M 2017 highlights
· Revenue US$ 970 million, up 18% year-on-year (9M 2016: US$ 822 million)
· Export revenue US$ 561 million, 58% of total revenue (9M 2016: US$ 455 million, 55% of total revenue)
· Operating profit US$ 318 million, up 14% year-on-year (9M 2016: US$ 278 million); operating margin 33% (9M 2016: 34%)
· Adjusted EBITDA increased to US$ 371 million from US$ 343 million; adjusted EBITDA margin decreased to 38% from 42%
· Net profit of US$ 257 million, compared to US$ 102 million for 9M 2016, including US$ 26 million of non-cash foreign exchange translation gain in 9M 2017 compared to US$ 90 million of non-cash foreign exchange translation loss in 9M 2016
FINANCIAL OVERVIEW
(in mln. US$, unless indicated otherwise) | Q3 2017
| Q3 2016
| % change* | 9M 2017
| 9M 2016
| % change*e* | ||||
Revenue | 370 | 339 | 9% | 970 | 822 | 18% | ||||
IAS 41 standard gains | (23) | (18) | 28% | 45 | 85 | -47% | ||||
Gross profit | 92 | 79 | 16% | 331 | 299 | 11% | ||||
Gross profit margin | 25% | 23% | 2pps | 34% | 36% | -2 pps | ||||
Operating profit** | 92 | 74 | 24% | 318 | 278 | 14% | ||||
Operating profit margin | 25% | 22% | 3 pps | 33% | 34% | -1 pps | ||||
Adjusted EBITDA | 105 | 100 | 5% | 371 | 343 | 8% | ||||
Adjusted EBITDA margin | 28% | 29% | -1 pps | 38% | 42% | -4 pps | ||||
Net profit before foreign exchange differences | 64 | 40 | 60% | 231 | 191 | 21% | ||||
Net profit margin before forex gain/(loss) | 17% | 12% | 5 pps | 24% | 23% | 1 pps | ||||
Foreign exchange gain/(loss) | (17) | (50) | -66% | 26 | (90) | -129% | ||||
Net profit/(loss) | 47 | (9) | -622% | 257 | 102 | 150% | ||||
Net profit margin | 13% | -3% | 16 pps | 26% | 12% | 14 pps |
* pps - percentage points
** Operating profit before loss on impairment of property, plant and equipment
Average official FX rate for Q3: UAH/US$ 25.9022 in 2017 and UAH/US$ 25.3760 in 2016
Average official FX rate for 9M: UAH/US$ 26.4711 in 2017 and UAH/US$ 25.4303 in 2016
CONVERSION TO MHP SE AND OTHER SUBSEQUENT EVENTS
According to the extract issued by the Luxembourg Trade and Companies Register on 08 August 2017, the Company has converted from a public limited liability company ("société anonyme") into a European company ("Societas Europaea") effective as of 07 August 2017 (the "Conversion").
During an EGM held on 24 October 2017:
- The shareholders of the Company approved the transfer of the registered office and the central administration of the Company from the Grand Duchy of Luxembourg to Cyprus in accordance with the draft terms of transfer proposal and the report issued by the board of directors. The Company shall continue in Cyprus and become a legal entity in the form of an SE Company, organized and existing under the laws of Cyprus and pursuant to the provisions of the SE Regulation. This is the second step towards the migration of the Company's registered office to enable simplification of the group's legal structure. The Company is expected to become registered in Cyprus by the end of 2017;
- The shareholders of the Company approved the appointment of Mr Raymond William Richards as a non-executive director of MHP SE with immediate effect and for a period ending with the annual general meeting of the shareholders of the Company to be held in 2019.
OUTLOOK
The next phase of the Group's capacity expansion, in the form of construction of Phase 2 of the Vinnytsia poultry complex, is proceeding to schedule and on budget. The first rearing sites are expected to be launched in the middle of 2018, which will increase poultry production by around 35,000 tonnes in 2018, with substantial further increases in capacity in subsequent years. The total capacity of Phase 2 is 260,000 tonnes, which will be commissioned in full during the next three years.
Following on from its strong performance in the first nine months of 2017, and in spite of challenging weather conditions during the summer, which have resulted in the total harvest being below preliminary expectations, the Group expects to deliver a strong performance for the 2017 full year.
With MHP's vertically integrated business model, supported by increasing production capacity and a significant and growing share of hard currency revenues from exports, we remain confident that the Group will continue to deliver strong operating and financial results in 2017 and beyond.
DIAL-IN DETAILS
MHP's management will host a conference call for investors and analysts followed by Q&A on the day of the results.
The dial-in details are:
Time: 09.00 New York / 14.00 London / 16.00 Kyiv / 16.00 Moscow
Title: Financial results for Q3 and 9М 2017
International/UK Dial in: +44 2030432440
USA free call: +1 8778874163
Russia free call +7 4952216523
Conference ID EV00064269
Participant PIN code 45510914#
In order to follow the presentation together with the management, please register using the following link:
http://event.onlineseminarsolutions.com/r.htm?e=1536041&s=1&k=ABE16F2C98DCCA9C7FFE8E8AD5DE9C23
For Investor Relations enquiries, please contact:
Anastasia Sobotiuk (Kyiv) +38 044 207 99 58 a.sobotyuk@mhp.com.ua
For Analysts enquiries, please contact:
Iryna Bublyk (Kyiv) +38 044 207 00 04 i.bublik@mhp.com.ua
Segment Performance
Poultry and related operations
Q3 2017 | Q3 2016 | % change | 9M 2017 | 9M 2016 | % change | ||
Poultry | |||||||
Sales volume, third parties tonnes | 134,885 | 154,965 | -13% | 419,080 | 403,390 | 4% | |
Incl. Export sales volume, tonnes | 52,990 | 57,525 | -8% | 176,015 | 142,790 | 23% | |
Price per 1 kg net of VAT, UAH | 37.88 | 28.07 | 35% | 34.06 | 27.67 | 23% | |
Sunflower oil | |||||||
Sales volume, third parties tonnes | 76,811 | 89,600 | -14% | 243,826 | 254,030 | -4% | |
Soybeans oil | |||||||
Sales volume, third parties tonnes | 8,225 | 10,305 | -20% | 22,530 | 24,340 | -7% |
Chicken meat prices
Aggregate volume of chicken meat sold to third parties slightly increased by 4% in 9M 2017. Domestic sales decreased by 7% to 243,065 tonnes in 9M 2017 (9M 2016: 260,600 tonnes), at the same time export sales increased by 23% to 176,015 tonnes (9M 2016: 142,790 tonnes).
Through the third quarter of 2017 the average chicken meat price (both domestic and export) constituted UAH 37.88 per 1 kg of natural weight (excluding VAT), increased by 35% year-on-year. In 9M 2017 average chicken meat price was UAH 34.06, which is 23% higher than in 9M 2016. The increase in price year-over-year is mainly driven by MHP's export product mix optimization as well as geographic diversification and slightly upward trends in price on international commodity markets.
Vegetable oil
During Q3 2017 MHP's sales of sunflower oil decreased by 14% compared to Q3 2016 to 76,811 tonnes, mainly due to the increased oil content in sunflower cake. Production of soybean oil remained relatively stable compared to 9M 2016, at the same time sales of soybean oil decreased by 20% compared to 9M 2016 to 8,225 tonnes, as a result of temporary increase in stock.
(in mln. US$, unless indicated otherwise) | Q3 2017 | Q3 2016 | % change* | 9M 2017 | 9M 2016 | % change* | |||
Revenue | 283 | 269 | 5% | 800 | 707 | 13% | |||
- Poultry and other | 218 | 191 | 14% | 600 | 490 | 22% | |||
- Vegetable oil | 65 | 78 | -17% | 200 | 217 | -8% | |||
IAS 41 standard gains | 2 | (10) | -120% | 16 | 16 | 0% | |||
Gross profit | 80 | 58 | 38% | 221 | 189 | 17% | |||
Gross margin | 28% | 22% | 6 pps | 28% | 27% | 1 pps | |||
Adjusted EBITDA | 100 | 72 | 39% | 270 | 222 | 22% | |||
Adjusted EBITDA margin | 35% | 27% | 8 pps | 34% | 31% | 3 pps | |||
Adjusted EBITDA per 1 kg (net of IAS 41) | 0.73 | 0.53 | 38% | 0.61 | 0.51 | 20% |
* pps - percentage points
Revenue of the poultry and related operations segment increased by 13% in 9M 2017 compared to 9M 2016, as a result of the increase in price and sales volume of chicken meat, partly offset by decreased price and sales volume of vegetable oil.
IAS 41 standard gain in Q3 2017 was US$ 2 million compared to loss of US$ 10 million in Q3 2016. Change is mainly attributable to the substantial IAS 41 loss in Q3 2016, related to decrease in poultry meat stocks.
Gross profit of the poultry and related operations segment for Q3 2017 increased by 38% to US$ 80 million mainly due to the increase in meat prices which was partly offset by increased production costs, reflecting higher prices of grain consumed as well as higher payroll costs.
EBITDA for the period increased mostly in line with the increase in gross profit. An additional positive impact was attributable to an increase in government grants income due to amendments in the Tax Code of Ukraine that became effective from 2017.
Grain growing operations
In 2017 the Company is to harvest around 360,000 hectares of land. This year unfavorable weather conditions have led to lower yields across all crops compared to preliminary forecasts and expectations, although these are still strong and well above Ukraine's average.
The Company's harvesting campaign of corn and soya is on track. As of the date of this report, MHP has harvested around 85% of corn and around 95% of soya. Sunflower harvesting is complete. Sowing of winter crops has been completed recently.
2017 [1] | 2016 [1] | ||||
Production volume | Cropped land | Production volume | Cropped land | ||
in tonnes | in hectares | in tonnes | in hectares | ||
Corn [3] | 941,769 | 121,933 | 1,057,437 | 123,337 | |
Wheat | 295,524 | 48,676 | 378,516 | 58,769 | |
Sunflower | 211,546 | 68,932 | 227,856 | 67,725 | |
Rapeseed | 104,947 | 31,969 | 68,925 | 20,180 | |
Soya [3] | 87,875 | 39,685 | 102,274 | 41,143 | |
Other [2] | 437,864 | 48,805 | 529,187 | 43,846 | |
Total | 2,079,525 | 360,000 | 2,364,195 | 355,000 | |
[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;
[3] Forecast, harvesting campaign 2017 is ongoing.
2017 | 2016 | ||||
MHP's average [1] | Ukraine's average [1] | MHP's average | Ukraine's average | ||
tonnes per hectare | tonnes per hectare | ||||
Corn | 7.7[2] | 5.1 | 8.6 | 6.0 | |
Wheat | 6.1 | 4.2 | 6.4 | 4.3 | |
Sunflower | 3.1 | 2.0 | 3.4 | 2.2 | |
Rapeseed | 3.3 | 2.9 | 3.4 | 2.6 | |
Soya | 2.2[2] | 1.9 | 2.5 | 2.3 | |
[1] MHP yields for wheat and rapeseed are net weight, rest crops - bunker weight; Ukraine - all crops are bunker weight;
[2] Forecast, harvesting campaign 2017 is ongoing.
(in mln. US unless indicated otherwise) | 9M 2017 | 9M 2016 | % change | |||
Revenue | 83 | 45 | 84% | |||
76 | ||||||
IAS 41 standard gains | 25 | 70 | -64% | |||
Gross profit | 92 | 99 | -7% | |||
| ||||||
Adjusted EBITDA | 97 | 119 | -18% |
Grain growing segment's revenue for 9M 2017 amounted to US$ 83 million compared to US$ 45 million in 9M 2016. The increase was mainly attributable to higher export sales of crops designated for sale in 9M 2017 compared to 9M 2016 as a result of the higher harvest in 2016 compared to 2015, a significant part of which was sold in 2017.
IAS 41 standard gain for 9M 2017 amounted to US$ 25 million compared with US$ 70 million in 9M 2016. IAS 41 standard mainly reflects lower financial results from grain growing operations due both to lower yields of main crops as a result of unfavorable weather conditions and increased costs reflecting higher prices of seeds for growing, as well as higher land lease, energy and payroll expenses.
Other agricultural operations
Meat processing products | Q3 2017 | Q3 2016 | % change | 9M 2017 | 9M 2016 | % change | |
Sales volume, third parties tonnes | 9,920 | 9,420 | 5% | 27,170 | 24,800 | 10% | |
Price per 1 kg net VAT, UAH | 49.82 | 42.93 | 16% | 46.96 | 41.86 | 12% |
Sales volume of meat processing products increased by 5% year-on-year to 9,920 tonnes in Q3 2017 mainly as a result of increased product promotion and advertising, as well as expansion of the product range and types of packaging.
The average processed meat price increased by 16% year-on-year to UAH 49.82 per kg in Q3 2017 in line with the poultry price increase.
(in mln. US$, except margin data) | Q3 2017 | Q3 2016 | % change* | 9M 2017 | 9M 2016 | % change | ||||||
Revenue | 33 | 27 | 22% | 88 | 69 | 28% | ||||||
- Meat processing | 19 | 16 | 21% | 48 | 40 | 21% | ||||||
- Other** | 14 | 11 | 20% | 40 | 29 | 35% | ||||||
IAS 41 standard gains | - | - | 100% | 3 | - | 100% | ||||||
| ||||||||||||
Gross profit | 6 | 4 | 50% | 18 | 11 | 64% | ||||||
Gross margin | 18% | 15% | 3 pps | 20% | 16% | 4 pps | ||||||
Adjusted EBITDA | 5 | 4 | 25% | 15 | 9 | 67% | ||||||
Adjusted EBITDA margin | 15% | 15% | 0 pps | 17% | 13% | 4 pps | ||||||
* pps - percentage points
** in 2017 the Group decided to include convenience food previously reported in poultry and related operations segment to other agricultural operations in line with how Group's chief operating decision maker evaluates performance of the segments. Comparative information was restated retrospectively.
Segment revenue of 9M 2017 increased by 28% year-on-year, in line with the increase in sales volume and price in meat processing to US$ 88 million. Gross profit and EBITDA increased mostly as a result of higher returns earned from meat processing, cattle and milk operations.
Current Group financial position and cash flow
(in mln. US$) | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 | |||||
Cash from operations | 98 | 65 | 242 | 151** | |||||
Change in working capital | 33 | 49 | (47) | 91 | |||||
Net Cash from operating activities | 131 | 114 | 195 | 242 | |||||
Cash used in investing activities | (48) | (25) | (16) | (72) | |||||
Net cash inflow on disposal of subsidiaries | - | - | (76) | - | |||||
CAPEX | (48) | (25) | (92) | (72) | |||||
Cash from financing activities | (60) | (57) | (189) | (150) | |||||
Incl. Dividends | (3) | (4) | (81) | (84) | |||||
Total financial activities | (60) | (57) | (189) | (150) | |||||
Total change in cash* | 23 | 32 | (10) | 20 |
* Calculated as Net Cash from operating activities plus Cash used in investing activities plus Total financial activities
** Cash from operations for 9M 2016 and in Q3 2016 includes an upfront payment of interest on Senior Notes in amount of US$ 31 million that is normally due in Q4, however as a result of non-banking days on 1-2 October 2016 payment was settled in Q3.
Cash flow from operations before changes in working capital for 9M 2017 amounted to US$ 242 million (9M 2016: US$ 151 million). Excluding an upfront payment of interest on Senior Notes, cash from operations before working capital changes increased during 9M 2017 compared to 9M 2016 mostly in line with the increase in net profit before foreign exchange differences.
Decrease in cash from changes in working capital during 9M 2017 compared to 9M 2016 is mostly related to lower investments in the stock of crops (sunflower) designated for internal consumption as of 31 December 2016 compared to 31 December 2015, and subsequently more investment required in inventory during 9M 2017 as well as an increase in VAT receivable as of 30 September 2017 compared to 30 September 2016 and a decrease in prepayments of sunflower oil and rapeseed.
In 9M 2017 total CAPEX amounted to US$ 92 million mainly related to preparation works related to Phase 2 of the Vinnytsia poultry complex.
Debt Structure and Liquidity
(in mln. US$) | 30 September 2017 | 31 December 2016 | 30 September 2016 | ||||
Total Debt | 1,150 | 1,236 | 1,238 | ||||
LT Debt | 1,114 | 991 | 968 | ||||
ST Debt | 36* | 245 | 270 | ||||
Cash and bank deposits | (146) | (155) | (78) | ||||
Net Debt | 1,004 | 1,081 | 1,160 | ||||
LTM EBITDA | 444 | 415 | 412 | ||||
Net Debt / LTM EBITDA | 2.26 | 2.60 | 2.82 |
*Short-term debt as of 30 September 2017 consists from current portion of long-term bank borrowings and finance lease obligations
As of September 30, 2017, the share of long-term debt in the total outstanding debt increased to 97% (80% of total debt as of 31 December 2016) due to repayment of short-term bank loans as of June 30, 2017. The weighted average interest rate is around 8%.
As of September 30, 2017, MHP's cash and cash equivalents amounted to US$ 146 million. Net debt decreased to US$ 1,004 million, compared to US$ 1,081 million as at 31 December 2016.
The Net Debt / LTM EBITDA ratio was 2.26 as of 30 September 2017, well within the Eurobond covenant limit of 3.0.
As a hedge for currency risks, revenue from the export of grain, sunflower and soybean oil, sunflower husks, and chicken meat are denominated in US Dollars, more than fully covering debt service expenses. Export revenue for 9M 2017 amounted to US$ 561 million or 58% of total revenue (US$ 455 million or 55% of total sales in 9M 2016).
DIVIDENDS
On 14 March 2017, the Board of Directors approved payment of an interim dividend of US$ 0.7492 per share, equivalent to approximately US$ 80 million, which were paid to shareholders during the nine-month period ended 30 September 2017.
Notes to Editors:
About MHP
MHP is the leading producer and processor of poultry products in Ukraine with the greatest market share and highest brand recognition for its products in Ukraine. MHP owns and operates each of the key stages of chicken production processes, from feed grains and fodder production to egg hatching and grow out to processing, marketing, distribution and sales (including through MHP's partnership outlets). Vertical integration reduces MHP's dependence on suppliers and its exposure to increases in raw material prices. In addition to cost efficiency, vertical integration also allows MHP to maintain strict biosecurity and to control the quality of its inputs and the resulting quality and consistency of its products through to the point of sale. To support its sales, MHP maintains a distribution network consisting of 11 distribution and logistical centres, within major Ukrainian cities. MHP uses its trucks for the distribution of its products, which Management believes reduces overall transportation costs and delivery times.
MHP also has a leading grain cultivation business in Ukraine growing corn to support the vertical integration of its chicken production and increasingly other grains, such as wheat and rape, for sale to third parties. MHP leases agricultural land located primarily in the highly fertile black soil regions of Ukraine.
Since May 15, 2008, MHP has traded on the London Stock Exchange under the ticker symbol MHPC.
Forward-Looking Statements
This press release might contain forward-looking statements that refer to future events or forecast financial indicators for MHP SE Such statements do not guarantee that these are actions to be taken by MHP SE in the future, and estimates can be inaccurate and uncertain. Actual final indicators and results can considerably differ from those declared in any forward-looking statements. MHP SE does not intend to change these statements to reflect actual results.
MHP SE AND ITS SUBSIDIARIES
Interim Condensed Consolidated Financial Statements
As of and for the nine-month period ended 30 September 2017
CONTENT
STATEMENT OF MANAGEMENT RESPONSIBILITY................................................................................ (a)
MANAGEMENT REPORT...................................................................................................................... (b)
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE NINE-MONTH PERIOD ENDED 30 September 2017
INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME............................. 5
INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION...................................... 6
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY...................................... 7
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS................................................. 9
1. Corporate information...................................................................................................................... 11
2. Changes in the group structure......................................................................................................... 12
3. Basis of preparation and accounting policies..................................................................................... 13
4. Segment information....................................................................................................................... 16
5. Profit for the period.......................................................................................................................... 17
6. VAT refunds and other government grants income.............................................................................. 17
7. Property, plant and equipment.......................................................................................................... 17
8. Inventories and agricultural produce.................................................................................................. 18
9. Biological assets............................................................................................................................ 18
10. Bank borrowings........................................................................................................................... 18
11. Bonds issued............................................................................................................................... 19
12. Related party balances and transactions........................................................................................ 21
13. Contingencies and contractual commitments.................................................................................. 22
14. Fair value of financial instruments................................................................................................... 23
15. Risk management policy............................................................................................................... 24
16. Dividends..................................................................................................................................... 24
17. Subsequent events....................................................................................................................... 25
18. Authorization of the interim condensed consolidated financial statements.......................................... 25
STATEMENT OF MANAGEMENT RESPONSIBILITY
To the best of our knowledge, the unaudited interim condensed consolidated financial statements ofMHP SE (the "Company") and its subsidiaries (collectively the "Group") as of and for the nine-month period ended 30 September 2017 prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" give a true and fair view of the consolidated assets, consolidated liabilities, consolidated financial position and consolidated financial performance of the Group taken as a whole, and the management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.
16 November 2017
On behalf of the Board:
Chief Executive Officer Yuriy Kosyuk
Chief Financial Officer Viktoria Kapelyushnaya
MANAGEMENT REPORT
Key financial highlights
During the nine-month period ended 30 September 2017 consolidated revenue increased by 18% to US$ 970.5 million, compared to US$ 822.0 million for the nine-month period ended 30 September 2016. Export sales for the nine-month period ended 30 September 2017 amounted to US$ 560.9 million and constituted 58% of total revenue compared to US$ 454.5 million or 55% of total revenue for the nine-month period ended 30 September 2016. The overall increase in revenue is mainly attributable to increased exports of chicken meat and grains as well as an increase in price for chicken meat, due to the Group's export product mix optimization, geography diversification and slightly upward trends in price on international commodity market.
Gross profit increased by 11% to US$ 330.7 million for the nine-month period ended 30 September 2017 compared to US$ 298.7 million for the nine-month period ended 30 September 2016. The increase is mostly related to the increase in meat prices, which was partly offset by increased production costs, reflecting higher prices of grain consumed as well as higher payroll costs.
In line with the increase in gross profit, operating profit increased by 15% to US$ 318.0 million for the nine-month period ended 30 September 2017 compared to US$ 276.9 million for the nine-month period ended 30 September 2016.
Profit for the period from continuing operations for the nine-month period ended 30 September 2017 amounted to US$ 257.4 million, including a foreign exchange gain of US$ 25.7 million, compared to profit of US$ 101.6 million for the nine-month period ended 30 September 2016, including a foreign exchange loss of USS 90.3 million. The foreign exchange gain is mainly related to bank borrowings and bonds issued in foreign currency and results from UAH appreciation against USD during the nine-month period ended 30 September 2017.
Dividends
On 14 March 2017, the Board of Directors approved an interim dividend of USD 0.7492 per share, equivalent to approximately US$ 80.0 million, which were paid to shareholders during the nine-month period ended 30 September 2017.
Internal control and risk management
During the nine-month period ended 30 September 2017 there were no changes to objectives, policies and processes for risks inherent to the Group. The summary of key risks faced by the Group and plans to mitigate them are disclosed in the Director's report for the period ended 31 December 2016.
16 November 2017
On behalf of the Board:
Chief Executive Officer Yuriy Kosyuk
Chief Financial Officer Viktoria Kapelyushnaya
INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the nine-month period ended 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
Notes | Nine-month period ended 30 September 2017 | Nine-month period ended 30 September 2016 (Restated, Note 3) | ||
Revenue | 4 | 970,464 | 822,023 | |
Net change in fair value of biological assets and agricultural produce | 4, 5 | 44,659 | 85,320 | |
Cost of sales | (684,417) | (608,648) | ||
Gross profit |
5
| 330,706 | 298,695 | |
Selling, general and administrative expenses | (53,604) | (41,386) | ||
VAT refunds and other government grants income | 6 | 40,856 | 19,927 | |
Other operating (expenses)/income, net | 46 | 1,107 | ||
Loss on impairment of property, plant and equipment | - | (1,443) | ||
Operating profit | 318,004 | 276,900 | ||
Finance income | 2,967 | 2,012 | ||
Finance costs | (85,180) | (80,729) | ||
Foreign exchange gain/(loss), net | 5,15 | 25,690 | (90,318) | |
Other expenses, net | (6,074) | (7,465) | ||
Other expenses, net | (62,597) | (176,500) | ||
Profit before tax | 255,407 | 100,400 | ||
Income tax benefit | 2,027 | 1,225 | ||
Profit for the period from continuing operations | 5 | 257,434 | 101,625 | |
Discontinued operations | ||||
Loss for the period from discontinued operations | 2 | (19,824) | (6,313) | |
Profit for the period | 237,610 | 95,312 | ||
Other comprehensive income | ||||
Items that will not be reclassified to profit or loss: | ||||
Effect of revaluation of property, plant and equipment | - | 140,791 | ||
Deferred tax on property, plant and equipment charged directly to revaluation reserve | - | (27,991) | ||
Items that may be reclassified to profit or loss: | ||||
Cumulative translation difference | 13,353 | (16,143) | ||
Other comprehensive income for the period | 13,353 | 96,657 | ||
Total comprehensive income for the period | 250,963 | 191,969 | ||
Income attributable to: | ||||
Equity holders of the Parent | 234,466 | 102,774 | ||
Non-controlling interests | 3,144 | 2,993 | ||
237,610 | 105,767 | |||
Total comprehensive income attributable to: | ||||
Equity holders of the Parent | 246,990 | 189,187 | ||
Non-controlling interests | 3,973 | 2,782 | ||
250,963 | 191,969 | |||
Earnings per share from continuing and discontinued operations | ||||
Basic and diluted income per share (USD per share) | 2,20 | 0.88 | ||
Earnings per share from continuing operations | ||||
Basic and diluted income per share (USD per share) | 2,38 | 0.98 |
On behalf of the Board:
Chief Executive Officer Yuriy Kosyuk
Chief Financial Officer Viktoria Kapelyushnaya
The accompanying notes on the pages 11 to 25 form an integral part of these interim condensed consolidated financial statements
INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as of 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
Notes | 30 September 2017 | 31 December 2016 | |||||
ASSETS | |||||||
Non-current assets | |||||||
Property, plant and equipment | 7 | 1,221,044 | 1,180,334 | ||||
Land lease rights | 46,539 | 43,845 | |||||
Deferred tax assets | 2,374 | 1,561 | |||||
Non-current biological assets | 19,819 | 14,558 | |||||
Long-term bank deposits | 828 | 577 | |||||
Other non-current assets | 24,032 | 13,554 | |||||
1,314,636 | 1,254,429 | ||||||
Current assets | |||||||
Inventories | 8 | 128,189 | 187,332 | ||||
Biological assets | 9 | 259,731 | 116,214 | ||||
Agricultural produce | 8 | 151,396 | 167,389 | ||||
Other current assets, net | 31,609 | 25,424 | |||||
Taxes recoverable and prepaid, net | 46,733 | 31,235 | |||||
Trade accounts receivable, net | 66,509 | 50,868 | |||||
Cash and cash equivalents | 146,053 | 154,570 | |||||
Assets classified as held for sale | - | 88,396 | |||||
830,220 | 821,428 | ||||||
TOTAL ASSETS | 2,144,856 | 2,075,857 | |||||
EQUITY AND LIABILITIES | |||||||
Equity | |||||||
Share capital | 284,505 | 284,505 | |||||
Treasury shares | (48,503) | (48,503) | |||||
Additional paid-in capital | 175,291 | 175,291 | |||||
Revaluation reserve | 525,759 | 570,649 | |||||
Retained earnings | 918,696 | 719,340 | |||||
Translation reserve | (993,830) | (1,024,916) | |||||
Equity attributable to equity holders of the Parent | 861,918 | 676,366 | |||||
Non-controlling interests | 16,593 | 16,698 | |||||
Total equity | 878,511 | 693,064 | |||||
Non-current liabilities | |||||||
Bank borrowings | 10 | 137,004 | 259,567 | ||||
Bonds issued | 11 | 968,972 | 725,361 | ||||
Finance lease obligations | 8,064 | 5,581 | |||||
Deferred tax liabilities | 9,971 | 11,264 | |||||
1,124,011 | 1,001,773 | ||||||
Current liabilities | |||||||
Trade accounts payable | 49,216 | 46,508 | |||||
Other current liabilities | 39,791 | 61,766 | |||||
Bank borrowings | 10 | 31,499 | 236,807 | ||||
Accrued interest | 10, 11 | 17,050 | 22,731 | ||||
Finance lease obligations | 4,778 | 8,044 | |||||
Liabilities directly associated with assets classified as held for sale | - | 5,164 | |||||
142,334 | 381,020 | ||||||
TOTAL LIABILITIES | 1,266,345 | 1,382,793 | |||||
TOTAL EQUITY AND LIABILITIES | 2,144,856 | 2,075,857 | |||||
On behalf of the Board:
Chief Executive Officer Yuriy Kosyuk
Chief Financial Officer Viktoria Kapelyushnaya
The accompanying notes on the pages 11 to 25 form an integral part of these interim condensed consolidated financial statements
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the nine-month period ended 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
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 as of 1 January 2017 | 284,505 | (48,503) | 175,291 | 570,649 | 719,340 | (1,024,916) | 676,366 | 16,698 | 693,064 | ||||||||
Profit for the period | - | - | - | - | 234,466 | - | 234,466 | 3,144 | 237,610 | ||||||||
Other comprehensive income | - | - | - | - | - | 13,286 | 13,286 | 67 | 13,353 | ||||||||
Total comprehensive income for the period | - | - | - | - | 234,466 | 13,286 | 247,752 | 3,211 | 250,963 | ||||||||
Transfer from revaluation reserve to retained earnings | - | - | - | (34,830) | 34,830 | - | - | - | - | ||||||||
Dividends declared by the Parent (Note 16 ) | - | - | - | - | (80,000) | - | (80,000) | - | (80,000) | ||||||||
Dividends declared by subsidiaries | - | - | - | - | - | - | - | (827) | (827) | ||||||||
Derecognition of interests in subsidiaries | - | - | - | (24,841) | 24,841 | 17,800 | 17,800 | (2,489) | 15,311 | ||||||||
Translation differences on revaluation reserve | - | - | - | 14,781 | (14,781) | - | - | - | - | ||||||||
Balance as of 30 September 2017 | 284,505 | (48,503) | 175,291 | 525,759 | 918,696 | (993,830) | 861,918 | 16,593 | 878,511 | ||||||||
On behalf of the Board:
Chief Executive Officer Yuriy Kosyuk
Chief Financial Officer Viktoria Kapelyushnaya
The accompanying notes on the pages 11 to 25 form an integral part of these interim condensed consolidated financial statements
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the nine-month period ended 30 September 2016
(in thousands of US dollars, unless otherwise indicated)
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 as of 1 January 2016 | 284,505 | (56,053) | 178,192 | 567,525 | 645,020 | (974,467) | 644,722 | 28,127 | 672,849 | ||||||||
Profit for the period | - | - | - | - | 92,321 | - | 92,321 | 2,991 | 95,312 | ||||||||
Other comprehensive income | - | - | - | 122,797 | - | (25,960) | 96,837 | (181) | 96,656 | ||||||||
Total comprehensive income for the period | - | - | - | 122,797 | 92,321 | (25,960) | 189,158 | 2,810 | 191,968 | ||||||||
Dividends | - | - | - | (30,817) | 30,817 | - | - | - | - | ||||||||
Transfer from revaluation reserve to retained earnings | - | - | - | - | (80,000) | - | (80,000) | (4,286) | (84,286) | ||||||||
Translation differences on revaluation reserve | - | - | - | (39,768) | 39,768 | - | - | - | - | ||||||||
Balance as of 30 September 2016 | 284,505 | (56,053) | 178,192 | 619,737 | 727,926 | (1,000,427) | 753,880 | 26,651 | 780,531 | ||||||||
On behalf of the Board:
Chief Executive Officer Yuriy Kosyuk
Chief Financial Officer Viktoria Kapelyushnaya
The accompanying notes on the pages 11 to 25 form an integral part of these interim condensed consolidated financial statements
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the nine-month period ended 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
Notes | Nine-month period ended 30 September 2017 | Nine-month period ended 30 September 2016 | ||
Operating activities | ||||
Profit before tax | 235,583 |
94,266 | ||
Non-cash adjustments to reconcile profit before tax to net cash flows | ||||
Depreciation and amortization expense | 4 | 53,318 | 70,327 | |
Loss on disposal of subsidiaries | 2 | 19,824 | - | |
Net change in fair value of biological assets and agricultural produce | 4, 5 | (44,659) | (82,579) | |
Change in allowance for irrecoverable amounts and direct write-offs | (681) | (395) | ||
Loss on disposal of property, plant and equipment and other non-current assets | - | 213 | ||
Loss on impairment of property, plant and equipment | - | 1,443 | ||
Finance income | (2,967) | (2,059) | ||
Finance costs | 85,180 | 80,729 | ||
Withholding tax related to interest | 619 | 3,582 | ||
Unrealized foreign exchange (gain)/ loss, net | 5, 15 | (25,690) | 87,734 | |
Operating cash flows before movements in working capital | 320,527 |
253,261 | ||
Working capital adjustments | ||||
Change in inventories | 8 | 61,330 | 102,214 | |
Change in biological assets | 9 | (70,019) | (41,038) | |
Change in agricultural produce | 8 | 13,926 | (18,450) | |
Change in other current assets | (5,600) | 3,655 | ||
Change in taxes recoverable and prepaid | (12,869) | 31,279 | ||
Change in trade accounts receivable | (15,032) | (11,663) | ||
Change in other liabilities | (25,124) | 8,509 | ||
Change in trade accounts payable | 5,387 | 16,047 | ||
Cash generated by operations | 272,526 | 343,814 | ||
Interest received | 2,970 | 2,058 | ||
Interest paid | 11 | (81,417) | (102,314) | |
Withholding tax related to interest | (606) | (1,863) | ||
Income taxes paid | (376) | (281) | ||
Net cash flows from operating activities | 193,097 | 241,414 | ||
Investing activities | ||||
Purchases of property, plant and equipment | 7 | (74,891) | (69,093) | |
Purchases of other non-current assets | (10,210) | (454) | ||
Purchase of land lease rights | (5,095) | (3,370) | ||
Proceeds from disposals of property, plant and equipment | 434 | 1,105 | ||
Net cash inflow on disposal of subsidiaries | 2 | 75,558 | - | |
Purchases of non-current biological assets | (1,653) | (1,196) | ||
Investments in short-term deposits | (158) | - | ||
Withdrawals of short-term deposits | 268 | 238 | ||
Loans provided to employees | (150) | (67) | ||
Loans (provided to)/repaid by related parties | (25) | 1,099 | ||
Net cash flows from/(used in) investing activities | (15,922) | (71,738) | ||
The accompanying notes on the pages 11 to 25 form an integral part of these interim condensed consolidated financial statements
INTERIM CONDENSED CONSOLIDATED CASH FLOW STATEMENT (continued)
for the nine-month period ended 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
Notes | Nine-month period ended 30 September 2017 | Nine-month period ended 30 September 2016 | ||||
Financing activities | ||||||
Proceeds from bank borrowings | 60,622 | 177,727 | ||||
Repayment of bank borrowings | (393,285) | (221,196) | ||||
Proceeds from bonds issued | 254,608 | - | ||||
Repayment of bonds | (6,308) | (245) | ||||
Repayment of finance lease obligations | (8,113) | (11,353) | ||||
Transaction costs related to corporate bonds issued | (14,236) | - | ||||
Transaction costs related to bank loans received | (1,749) | - | ||||
Dividends paid | (80,000) | (79,985) | ||||
Dividends paid by subsidiaries to non-controlling shareholders | (827) | (4,287) | ||||
Consent payment | 11 | - | (9,148) | |||
Withholding tax related to dividends paid | - | (1,718) | ||||
Net cash flows used in financing activities | (189,288) | (150,205) | ||||
Net decrease in cash and cash equivalents | (12,113) | 19,471 | ||||
Net foreign exchange difference | 1,324 | (508) | ||||
Cash and cash equivalents attributable to disposal group classified as held for sale | 2,098 | - | ||||
Cash and cash equivalents at 1 January | 150,982 | 59,343 | ||||
Cash and cash equivalents at 30 September | 142,291 | 78,306 | ||||
| ||||||
Non-cash transactions |
| |||||
Effect of revaluation of property, plant and equipment | - |
139,820 | ||||
Additions of property, plant and equipment under finance leases | 5,874 |
3,844 | ||||
Property, plant and equipment purchased for credit | 1,539 | 4,248 | ||||
On behalf of the Board:
Chief Executive Officer Yuriy Kosyuk
Chief Financial Officer Viktoria Kapelyushnaya
The accompanying notes on the pages 11 to 25 form an integral part of these interim condensed consolidated financial statements
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the nine-month period ended 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
1. Corporate information
MHP SE (the "Parent" or "MHP SE"), a limited liability company (Societas Europaea) registered under the laws of Luxembourg, was formed on 30 May 2006. MHP SE serves as the ultimate holding company of PJSC "Myronivsky Hliboproduct" ("MHP") and its subsidiaries. Hereinafter, MHP SE and its subsidiaries are referred to as the "MHP SE Group" or the "Group". The registered address of MHP SE is 5, rue Guillaume Kroll, L-1882 Luxembourg.
MHP has converted from a public limited liability company ("société anonyme") into a European company ("Societas Europaea") effective as of 07 August 2017 (the "Conversion").
The Conversion provided the Company with a legal framework, which is recognized in each of the European Union Member States. This will allow the Company's shareholders to transfer its registered office freely (subject to the applicable legal provisions) to any other place within the European Union without having to liquidate the Company or create a new legal entity.
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.
The principal business activities of the Group are poultry and related operations, grain growing, as well as other agricultural operations (meat processing and meat products ready for consumption). The Group's poultry and related operations integrate all functions related to the production of chicken, including hatching, fodder manufacturing, raising chickens to marketable age ("grow-out"), processing and marketing of branded chilled products and include the production and sale of chicken products, vegetable oil, mixed fodder. Grain growing comprises the production and sale of grains. Other agricultural operations comprise the production and sale of cooked meat, sausages, convenience food products, milk, goose meat, foie gras and feed grains. During the nine-month period ended 30 September 2017 the Group employed about 26,800 people (31 December 2016: 31,000 people).
The primary subsidiaries, the principal activities of the companies forming the Group and the Parent's effective ownership interest as of 30 September 2017 and 31 December 2016 were as follows:
Name | Country of registration | Year establishedacquired | Principal activities | 30 September 2017 | 31 December 2016 |
Raftan Holding Limited | Cyprus | 2006 | Sub-holding Company | 100.0% | 100.0% |
Larontas Limited | Cyprus | 2015 | Sub-holding Company | 100.0% | 100.0% |
MHP | Ukraine | 1998 | Management, marketing and sales | 99.9% | 99.9% |
Myronivsky Zavod po Vygotovlennyu Krup i Kombikormiv | Ukraine | 1998 | Fodder and sunflower oil production | 88.5% | 88.5% |
Vinnytska Ptahofabryka | Ukraine | 2011 | Chicken farm | 99.9% | 99.9% |
Peremoga Nova | Ukraine | 1999 | Breeder farm | 99.9% | 99.9% |
Druzhba Narodiv Nova1) | Ukraine | 2002 | Chicken farm | 0.0% | 100.0% |
Oril-Leader | Ukraine | 2003 | Chicken farm | 99.9% | 99.9% |
Tavriysky Kombikormovy Zavod | Ukraine | 2004 | Fodder production | 99.9% | 99.9% |
Myronivska Ptahofabryka | Ukraine | 2004 | Chicken farm | 99.9% | 99.9% |
Starynska Ptahofabryka | Ukraine | 2003 | Breeder farm | 100.0% | 100.0% |
Ptahofabryka Snyatynska Nova | Ukraine | 2005 | Geese breeder farm | 99.9% | 99.9% |
Zernoproduct | Ukraine | 2005 | Grain cultivation | 99.9% | 99.9% |
Katerynopilsky Elevator | Ukraine | 2005 | Fodder production and grain storage, sunflower oil production | 99.9% | 99.9% |
Druzhba Narodiv1) | Ukraine | 2006 | Cattle breeding, plant cultivation | 0.0% | 99.9% |
NPF Urozhay | Ukraine | 2006 | Grain cultivation | 99.9% | 99.9% |
Agrofort | Ukraine | 2006 | Grain cultivation | 86.1% | 86.1% |
Urozhayna Krayina | Ukraine | 2010 | Grain cultivation | 99.9% | 99.9% |
Ukrainian Bacon | Ukraine | 2008 | Meat processing | 79.9% | 79.9% |
AgroKryazh | Ukraine | 2013 | Grain cultivation | 99.9% | 99.9% |
Baryshevka | Ukraine | 2013 | Grain cultivation | 51.0% | 51.0% |
Zakhid-Agro MHP | Ukraine | 2015 | Grain cultivation | 100.0% | 100.0% |
Scylla Capital Limited | British Virgin Islands | 2014 | Trading in sunflower oil and poultry meat | 100.0% | 100.0% |
1) In February 2017 the Group sold its 100% ownership interest in the Crimean companies (Note 2)
Notes to the INTERIM CONDENSED Consolidated financial statements
for the nine-month period ended 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
1. Corporate information (continued)
The Group's operational facilities are located in different regions of Ukraine, including Kyiv, Cherkasy, Dnipropetrovsk, Donetsk, Lviv, Ternopil, Ivano-Frankivsk, Vinnytsia, Sumy and Khmelnitsk regions.
2. Changes in the group structure
Disposal of subsidiaries
Crimean companies
On 17 February 2017 the Group sold its 100% ownership interest in the Group's companies located in Autonomous Republic of Crimea for cash consideration of USD 77,785 thousand. The consideration consisted only of cash, there were no material direct costs related to disposal.
Assets and liabilities of Crimean companies as of the date of disposal were as follows:
17 February 2017 | |
Property, plant and equipment, net | 52,530 |
Other non-current assets | 1,451 |
Biological assets | 9,938 |
Agricultural produce | 9,242 |
Inventories | 11,795 |
Trade accounts receivable, net | 1,917 |
Taxes recoverable and prepaid, net | 2,913 |
Other current assets | 1,805 |
Cash and cash equivalents | 2,227 |
Total assets | 93,818 |
Trade accounts payable | (3,685) |
Other current liabilities | (1,796) |
Total liabilities | (5,481) |
Intragroup accounts receivable and payable eliminated on consolidation, net | (6,040) |
Net assets disposed | 82,297 |
The following table presents the net result of the transaction:
Consideration received | 77,785 | |
Net assets disposed | (82,297) | |
Non-controlling interest | 2,488 | |
Cumulative exchange loss in respect of the net assets of the subsidiaries reclassified from equity to profit or loss on loss of control in subsidiaries1) | (17,800) | |
Loss on disposal | (19,824) |
1) Upon disposal of subsidiaries, the total cumulative exchange differences attributable to devaluation of functional currency, which were previously a component of other comprehensive income, were reclassified to profit or loss. Previously recognised gain of revaluation surplus remaining in the revaluation reserve of property, plant and equipment were not reclassified to profit or loss, but transferred directly to retained earnings in the amount of USD 24,841 thousand.
Consideration received in cash and cash equivalents | 77,785 |
Less: cash and cash equivalents balances disposed | (2,227) |
Net cash inflow arising on the disposal | 75,558 |
The loss on disposal is included in the loss for the year from discontinued operations.
Information on financial result of subsidiaries for the period from 1 January 2017 until date of disposal have been considered immaterial for disclosure.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the nine-month period ended 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
3. Basis of preparation and accounting policies
Basis of preparation
The interim condensed consolidated financial statements for the nine-month period ended 30 September 2017 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.
The 31 December 2016 statement of financial position was derived from the audited consolidated financial statements.
Adoption of new and revised International Financial Reporting Standards
The adoption of the new or revised Standards did not have any material effect on the financial position or performance of the Group and did not result in any changes to the Group's accounting policies and the amounts reported in the nine-month period ended 30 September 2017 or prior periods.
For the Standards and Interpretations, as well as amendments to the Standards that were in issue but not yet effective management anticipates that their adoption will not have a material effect on the consolidated financial statements of the Group in future periods, except those disclosed in the Group's annual financial statements for the year ended 31 December 2016. The Management are currently assessing it's potential impact and expects to be able to provide such information at year-end 2017.
Functional and presentation currencies
The functional currency of Ukrainian, Cyprus and Luxemburg companies of the Group is the Ukrainian Hryvnia ("UAH"); the functional currency of the Autonomous Republic of Crimea companies of the Group is the Russian Rouble ("RUB"). Transactions in currencies other than the functional currency of the entities concerned are treated as transactions in foreign currencies. Such transactions are initially recorded at the rates of exchange ruling on the dates of the transactions. Monetary assets and liabilities denominated in such currencies are translated at the rates prevailing on the reporting date. All realized and unrealized gains and losses arising on exchange differences are recognised in the interim condensed consolidated statement of comprehensive income for the period.
These interim condensed 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 statement of financial position presented are translated at the closing rate as of the date of that statement of financial position;
· Income and expenses for each statement of comprehensive income are translated at exchange rates at the dates of the transactions;
· All resulting exchange differences are recognized 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 rates of exchange, if such translations reasonably approximate the results translated at exchange rates prevailing at the dates of the transactions.
The following exchange rates were used:
Currency | Closing rate as of 30 September 2017 | Average for nine- months ended30 September 2017 | Closing rate as of 31 December 2016 | Average for nine-months ended30 September 2016 | Closing rate as of 31 December 2015 |
UAH/USD | 26.5211 | 26.4711 | 27.1909 | 25.4578 | 24.0007 |
UAH/EUR | 31.2366 | 29.4226 | 28.4226 | 28.4150 | 26.2231 |
UAH/RUB | 0.4539 | 0.4542 | 0.4511 | 0.3642 | 0.3293 |
Notes to the INTERIM CONDENSED Consolidated financial statements
for the nine-month period ended 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
3. Basis of preparation and accounting policies (continued)
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 2016, except those adopted starting from 1 January 2017 as described below in this note.
Change in accounting policy
Shipping and handling costs charged to customers
During the nine-month period ended 30 September 2017 the Group voluntary changed its accounting policy for classification of shipping and handling costs charged to customers.
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.
Shipping costs include costs incurred to move the product from the Group's initial point of sale to the buyer's designated location and include payments to third-party shippers. They may also include costs incurred directly by the Group (e.g. salaries and overheads related to the activities to prepare the goods for shipment).
Handling costs include costs incurred to store, move and prepare the products for shipment. Handling costs are incurred from when the product is removed from finished goods to when the product is provided to the shipper and may include an allocation of internal overheads.
Shipping and handling costs had been previously reported as part of costs reported in sales, general and administrative expenses.
In the current period the Group decided to change its accounting policy with classification of Shipping and handling costs. The presentation of amounts billed to a customer for shipping and handling depends on an analysis of the principal versus agent considerations related to shipping and handling services. If control of the goods transfers on receipt by the customer, the Group will generally be considered to be the principal in the shipping and handling service. If the Group is considered to be a principal in shipping and handling, amounts related to shipping and handling billed to a customer in a sale transaction are accounted as revenues earned for the goods provided and costs related to such services are reported in cost of sales.
If control of the goods transfers when the goods are shipped, the Group will be generally considered as agent with respect to the shipping service. If the Group is considered to be an agent in shipping and handling, only the net commission received is reported as revenue.
Costs related to shipping and handling, which are not charged to the customer or otherwise included in the price are reported as selling, general and administrative expenses.
The Group's management believes that this change in the accounting policy will result in the financial statements providing more relevant and reliable information about the revenue, cost of sales and selling, general and administrative expenses.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the nine-month period ended 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
3. Basis of preparation and accounting policies (continued)
Change in accounting policy (continued)
The effect of the retrospective application of this policy on the consolidated statement of comprehensive income was as follows:
Nine-month period ended 30 September 2017 | Nine-month period ended 30 September 2016 | ||||
Cost of sales according to the old policy | (660,249) | (588,536) | |||
Effect of the change in accounting policy | (24,168) | (20,112) | |||
Cost of sales according to the new policy | (684,417) | (608,648) | |||
Selling, general and administrative expenses according to the old policy | (77,772) | (61,498) | |||
Effect of the change in accounting policy | 24,168 | 20,112 | |||
Selling, general and administrative expenses according to the new policy | (53,604) | (41,386) | |||
The change in accounting policies had no effect on earnings per share and on consolidated statement of financial position and on the consolidated statement of cash flows either in the current or previous periods.
Reclassifications and revisions
Certain comparative information presented in the interim condensed consolidated financial statements for the nine-month period ended 30 September 2016 has been revised in order to achieve comparability with the presentation used in the interim condensed consolidated financial statements for the nine-month period ended 30 September 2017. Such reclassifications and revisions were not significant to the Group financial statements.
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 crops and the effect of revaluation of agricultural produce harvested during the year. Also, grain growing segment has seasonal requirements for working capital increase from November to May, due to the sowing campaign.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the nine-month period ended 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
4. Segment information
The following table presents income statement information regarding the Group's operating segments for the nine-month period ended 30 September 2017:
Poultry and related operations | Grain growing | Other agricultural operations | Eliminations | Consolidated | |
External sales | 799,522 | 82,948 | 87,994 | - | 970,464 |
Sales between business segments | 23,908 | 109,240 | 194 | (133,342) | - |
Total revenue | 823,430 | 192,188 | 88,188 | (133,342) | 970,464 |
Segment results | 225,337 | 91,961 | 12,847 | - | 330,145 |
Unallocated corporate expenses | (12,141) | ||||
Other expenses, net1) | (62,597) | ||||
Profit before tax | 255,407 | ||||
Other information: | |||||
Depreciation and amortization expense2) | 44,609 | 5,491 | 2,518 | - | 52,618 |
Net change in fair value of biological assets and agricultural produce (Note 5) | 16,137 | 25,315 | 3,207 | - | 44,659 |
1) Includes finance income, finance costs, foreign exchange gain (net) and other expenses (net).
2) Depreciation and amortization for the nine-month period ended 30 September 2017 does not include unallocated depreciation and amortization in the amount of USD 700 thousand.
During the nine-month period ended 30 September 2017 the Group decided to include convenience food previously reported in poultry and related operations segment to other agricultural operations in line with how Group's chief operating decision maker ("CODM") started to evaluate performance of the segments. Based on the analysis of convenience food type and nature, the Group believes this disclosure provide more relevant information about the types of goods supplied by the Group's operating divisions. This change was accounted retrospectively as change in accounting policy, and all comparative information was restated retrospectively.
The following table presents income statement information regarding the Group's operating segments for the nine-month period ended 30 September 2016:
Poultry and related operations | Grain growing | Other agricultural operations | Eliminations | Consolidated | |
External sales | 707,350 | 45,204 | 69,469 | - | 822,023 |
Sales between business segments | 19,426 | 103,789 | 174 | (123,389) | |
Total revenue | 726,776 | 148,993 | 69,643 | (123,389) | 822,023 |
Segment results | 177,891 | 100,850 | 7,922 | - | 286,663 |
Unallocated corporate expenses | (8,320) | ||||
Loss on impairment of property, plant and equipment | (1,443) | ||||
Other expenses, net1) | (176,500) | ||||
Profit before tax | 100,400
| ||||
Other information: | |||||
Depreciation and amortization expense2) | 44,485 | 17,715 | 1,366 | - | 63,566 |
Net change in fair value of biological assets and agricultural produce (Note 5) | 15,781 | 69,539 | - | - | 85,320 |
1) Includes finance income, finance costs, foreign exchange loss (net) and other expenses (net).
2) Depreciation and amortization for the nine-month period ended 30 September 2016 does not include unallocated depreciation and amortization in the amount of USD 1,426 thousand.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the nine-month period ended 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
5. Profit for the period
The Group's gross profit for the nine-month period ended 30 September 2017 increased compared to the nine-month period ended 30 September 2016 and amounted to USD 330,706 thousand and USD 298,695 thousand respectively. The increase was primarily attributable to the to poultry segment due to increase export volumes of chicken meat, partly offset by increase in production costs.
The net change in fair value reflects IAS 41 adjustment relating to revaluation of crops in fields, poultry and breeder stock and other biological assets balances to the fair value as of 30 September.
The Group's net profit for the nine-month period ended 30 September 2017 increased compared to the nine-month period ended 30 September 2016 and amounted to USD 257,434 thousand and USD 101,625 thousand, respectively. The increase is mainly attributed to foreign exchange gains amounting to USD 25,690 for the nine-month period ended 30 September 2017 compared to foreign exchange losses of USD 90,318 thousand for the nine-month period ended 30 September 2016. The foreign exchange gain/loss mostly related to bonds and bank borrowings denominated in foreign currencies and was due to UAH appreciation/depreciation against USD and EUR.
6. VAT refunds and other government grants income
According to the Tax Code of Ukraine issued in December 2010 and effective since 1 January 2011 ("Tax Code"), companies that generated not less than 75% of gross revenues for the previous tax year from sales of own agricultural products are entitled to retain VAT on sales of agricultural products, net of VAT paid on purchases, for use in agricultural production.
During the year ended 31 December 2015 and before, VAT collected from agricultural producers was fully retained by these companies. On 24 December 2015, the Law "On amending the Tax Code of Ukraine and certain legislative acts of Ukraine in terms of ensuring the balanced budget receipts in 2016" was adopted effective 1 January 2016. In accordance with the new legislation, agricultural producers will be entitled to retain only a portion of VAT on agricultural operations. Producers of grain and industrial crops, cattle and dairy producers, poultry and other agriculture producers shall retain VAT in a portion of 15%, 80% and 50%, respectively.
On 30 December 2016 the President of Ukraine signed the Law No. 1791 On Amendments to the Tax Code of Ukraine Regarding the Balancing of Budget Revenues in 2017 (hereinafter the "Law No. 1791"). The Law No. 1791 introduces changes to VAT administration for agricultural companies which previously enjoyed a special VAT regime. The special VAT regime for agricultural companies was terminated as of 1 January 2017.
However, in order to continue state support for agricultural companies, the Law No. 1791 introduces budget subsidies for agricultural companies by amending the Law of Ukraine On State Support of Agriculture of Ukraine. From 2017 onwards, budget subsidies will be provided for 5 consecutive calendar years, until 1 January 2022. The agricultural producers eligible for the subsidies will include those involved in poultry production and animal farming, as well as fruit and vegetable farmers. For each agricultural producer, the amount of the subsidy is not to exceed the amount of VAT tax paid by the producers, and will be distributed on a monthly basis.
7. Property, plant and equipment
During the nine-month period ended 30 September 2017, the Group's additions to property, plant and equipment amounted to USD 82,304 thousand (nine-month period ended 30 September 2016: USD 48,306 thousand).
There were no significant disposals of property, plant and equipment during the nine-month period ended30 September 2017.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the nine-month period ended 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
8. Inventories and agricultural produce
Decrease in inventory and agricultural produce balances as of 30 September 2017 compared to 31 December 2016 is mainly attributable to internal consumption of corn and sunflower for chicken feed.
Changes of inventory balance apart from consumption of purchased grain stock have also occurred because as of 31 December 2016 expenses incurred in cultivating of fields which had to be planted in spring 2017 were capitalised in work in progress balance. As of 30 September 2017 those expenses were classified as crops in fields within biological assets, as the plants were already sown.
9. Biological assets
Increase in current biological assets as compared to 31 December 2016 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 2017 classified as biological assets as well as due to IAS 41 revaluation adjustment. As of 30 September 2017 the Group harvested around 17% of corn, around 70% of sunflower and around 51% of soya.
10. Bank borrowings
The following table summarizes bank borrowings and credit lines outstanding as of 30 September 2017 and31 December 2016:
30 September 2017 | 31 December 2016 | |||||||||
Bank | Currency | WAIR 1) | USD' 000 | WAIR 1) | USD' 000 | |||||
Non-current | ||||||||||
Foreign banks | USD | 7.46% | 124,003 | 8.09% | 241,823 | |||||
Foreign banks | EUR | 1.42% | 13,001 | 1.33% | 17,744 | |||||
137,004 | 259,567 | |||||||||
Current | ||||||||||
Ukrainian banks | USD | - | 7.20% | 68,752 | ||||||
Foreign banks | USD | - | 6.93% | 65,500 | ||||||
| ||||||||||
Current portion of long-term bank borrowings | 31,499 | 102,555 | ||||||||
31,499 | 236,807 | |||||||||
Total bank borrowings | 168,503 | 496,374 | ||||||||
1) WAIR represents the weighted average interest rate on outstanding borrowings.
As of 30 September 2017 and 31 December 2016 accrued interest on bank borrowings wasUSD 1,981 thousand and USD 7,606 thousand, respectively.
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 or quarterly basis. Interest on borrowings drawn with foreign banks is payable semi-annually and annually.
All bank loans and credit lines held by the Group as of 30 September 2017 and 31 December 2016 bear the floating interest rates.
Bank borrowings and credit lines outstanding as of 30 September 2017 and 31 December 2016 were repayable as follows:
30 September 2017 | 31 December 2016 | ||
Within one year | 31,499 | 236,807 | |
In the second year | 70,424 | 134,934 | |
In the third to fifth year inclusive | 55,720 | 113,798 | |
After five years | 10,860 | 10,835 | |
168,503 | 496,374 |
Notes to the INTERIM CONDENSED Consolidated financial statements
for the nine-month period ended 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
10. Bank borrowings (continued)
As of 30 September 2017, the Group had available undrawn facilities of USD 210,891 thousand(31 December 2016: USD 56,479 thousand). These undrawn facilities expire during the period from October 2017 until January 2020.
As of 30 June 2017, the deposit with carrying amount of USD 4,586 thousand (31 December 2016: USD 4,165 thousand) was restricted as collateral to secure bank borrowings.
The Group, as well as particular subsidiaries of the Group have to comply with certain covenants imposed by the banks providing the loans. The main covenants which are to be complied with by the Group are net debt to EBITDA ratio; EBITDA to interest expenses ratio; and current ratio. The Group subsidiaries are also required to obtain approval from lenders regarding property, plant and equipment to be used as collateral.
During the reporting periods ended 30 September 2017 and 31 December 2016 the Group has complied with all covenants defined by indebtedness agreement.
11. Bonds issued
Bonds issued and outstanding as of 30 September 2017 and 31 December 2016 were as follows:
30 September 2017 | 31 December 2016 | ||
8.25% Senior Notes due in 2020 | 495,600 | 750,000 | |
7.75% Senior Notes due in 2024 | 500,000 | - | |
Unamortized debt issue cost | (26,628) | (24,639) | |
Total long-term bonds issued | 968,972 | 725,361 |
As of 30 September 2017 and 31 December 2016 the amount of accrued interest on bonds issued wasUSD 15,069 thousand and USD 15,125 thousand, respectively.
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 amortized over the maturity period of the 7.75% Senior Notes due in 2024 in the amount of USD 9,830 thousand. Other related expenses, including part of consent fees, in the amount of USD 4,599 thousand were expensed as incurred.
The Senior Notes are jointly and severally guaranteed on a senior basis by MHP, Ptahofabryka Peremoga Nova, Oril-Leader, Myronivsky Zavod po Vygotovlennyu Krup i Kombikormiv, Zernoproduct, Myronivska Ptahofabryka, Starynska Ptahofabryka, Katerynopilsky Elevator, Agrofort, NPF Urozhay, Vinnytska Ptahofabryka, 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 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.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the nine-month period ended 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
11. Bonds issued (continued)
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 amortized over the maturity period of the 8.25% Senior Notes due in 2020 in the amount of USD 28,293 thousand.
Other related expenses, including consent fees, in the amount of USD 16,515 thousand were expensed as incurred.
The Senior Notes are jointly and severally guaranteed on a senior basis by MHP, Ptahofabryka Peremoga Nova, Oril-Leader, Myronivsky Zavod po Vygotovlennyu Krup i Kombikormiv, Zernoproduct, Myronivska Ptahofabryka, Starynska Ptahofabryka, Snyatynska Ptahofabryka, Katerynopilsky Elevator, Agrofort, NPF Urozhay, Vinnytska Ptahofabryka, 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 7 March 2016, the Group received consent from the Holders of the outstanding USD 750,000 thousand 8.25% Senior Notes for certain proposed amendments to the Indenture and the Notes. Amendments were obtained before the Consent Expiration Date (7 March 2016). The Amendments were implemented by way of execution of the Supplemental Indenture on 8 March 2016, and became effective from the Consent Settlement Date (9 March 2016).
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 are accepted by the Company the Consent Payment of USD 12.50 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 September 2017 and 31 December 2016 the Group has complied with all covenants defined by indebtedness agreement.
The weighted average effective interest rate on the Senior Notes is 9.31% per annum and 9.55% per annum for the nine-months ended 30 September 2017 and 2016, respectively.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the nine-month period ended 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
12. 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. Management believes that amounts receivable due from related parties do not require an allowance for irrecoverable amounts and that the amounts payable to related parties will be settled at cost.
Transactions with related parties during the nine-month periods ended 30 September 2017 and 2016 were as follows:
Nine-month period ended 30 September 2017 | Nine-month period ended 30 September 2016 | ||
Sales of goods to related parties | - | - | |
Sales of services to related parties | 64 | - | |
Purchases from related parties | 27 | 51 |
The balances owed to and due from related parties were as follows as of 30 September 2017 and31 December 2016:
30 September 2017 | 31 December 2016 | ||
Trade accounts receivable | 116 | 113 | |
Payables due to related parties | - | 6 | |
Advances and finance aid | 3,400 | 3,310 |
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 toUSD 12,103 thousand and USD 6,696 thousand for the nine-month periods ended 30 September 2017 and 2016, respectively.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the nine-month period ended 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
13. Contingencies and contractual commitments
Operating environment
In recent years, Ukraine experienced political and economic turmoil. Crimea, an autonomous republic of Ukraine, was effectively annexed by the Russian Federation. In 2017, armed conflict with separatists continued in certain parts of Luhansk and Donetsk regions. In January 2016, the agreement on the free trade area between Ukraine and the EU came into force. As a result, the Russian Federation implemented a trade embargo or import duties on key Ukrainian export products. In response, Ukraine implemented similar measures against Russian products.
For the nine-month period ended 30 September 2017 average inflation amounted to 10.2% comparing to 4.9% for the nine-month period ended 30 September 2016. The economic situation began to stabilize in 2017, which resulted in GDP growth around 2.5% for the nine-month period ended 30 September 2017 and stabilization of the Ukrainian Hryvnia. This allowed the National Bank of Ukraine to ease some foreign exchange restrictions imposed during 2014-2015, including a decrease in the required share of foreign currency proceeds sale to 50% and permission of dividends remittance. However, certain other restrictions were prolonged. Significant external financing is required to support the economy. In April 2017, Ukraine received the fourth tranche of extended fund facilities (EFF) agreed with the IMF. Further stabilization of the economic and political situation depends, to a large extent, upon the success of the Ukrainian government's efforts, yet further economic and political developments are currently difficult to predict.
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.
Facing current economic and political issues, the Government has implemented certain reforms in the tax system of Ukraine by adopting the Law of Ukraine 'On Amending the Tax Code of Ukraine and Certain Laws of Ukraine', which is effective from 1 January 2015, except for certain provisions which will take effect at a later date.
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 prepared all necessary documentation on controlled transactions for the year ended 31 December 2016 and plans to submit a report as required by legislation.
As of 30 September 2017, the Group's management assessed its possible exposure to tax risks for a total amount of USD 5,123 thousand related to corporate income tax (31 December 2016: USD 4,210 thousand). No provision was charged of such possible tax exposure.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the nine-month period ended 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
13. Contingencies and contractual commitments (continued)
Taxation and legal issues (continued)
As of 30 September 2017, companies of the Group were engaged in ongoing litigation with tax authorities for the amount of USD 4,495 thousand (2016: USD 6,069 thousand), including USD 1,903 thousand (2016: USD 2,689 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 4,149 thousand as of 30 September 2017 (2016: USD 4,965 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 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 nine-month period ended 30 September 2017, 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 September 2017, purchase commitments on such contracts were primarily related to the expansion of breeding farm as well as construction of new facilities at poultry rearing farms and amounted to USD 24,207 thousand (31 December 2016: USD 2,656 thousand).
14. Fair value of financial instruments
Fair value disclosures in respect of financial instruments are made in accordance with the requirements of International Financial Reporting Standards 7 "Financial Instruments: Disclosure" and 13 "Fair value measurement". Fair value is defined as the amount at which the instrument could be exchanged in a current transaction between knowledgeable willing parties in an arm's length transaction, other than in forced or liquidation sale. As no readily available market exists for a large part of the Group's financial instruments, 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, and trade accounts payable due to the short-term nature of the financial instruments.
Set out below is the comparison by category of carrying amounts and fair values of all the Group's financial instruments, excluding those discussed above, that are carried in the consolidated statement of financial position:
Carrying amount | Fair value | ||||
30 September 2017 | 31 December 2016 | 30 September 2017 | 31 December 2016 | ||
Financial liabilities | |||||
Bank borrowings (Note 10) | 170,484 | 503,980 | 159,699 | 490,923 | |
Senior Notes due in 2020, 2024 (Note 11) | 984,041 | 740,486 | 1,074,513 | 729,000 | |
Finance lease obligations | 12,842 | 13,625 | 13,312 | 14,079 | |
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 and finance lease obligations was estimated by discounting the expected future cash outflows by a market rate of interest for bank borrowings: market rate of interest for bank borrowings 7.48% (2016: 8.29%) and for finance lease obligations 8.73% (2016: 7.98%), 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. There were no transfers between any levels during the year.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the nine-month period ended 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
15. Risk management policy
During the nine-month period ended 30 September 2017 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.
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. The Group's 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 of30 September 2017 and 31 December 2016 were as follows:
30 September 2017 | 31 December 2016 | ||||
USD | EUR | USD | EUR | ||
Total assets | 164,748 | 12,390 | 141,301 | 10,934 | |
Total liabilities | (1,133,345) | (44,761) | (1,214,506) | (54,244) | |
Net position | (968,597) | (32,371) | (1,073,205) | (43,310) | |
The table below details the Group's sensitivity to strengthening/weakening of the Ukrainian Hryvnia 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 | Gain/(Loss) | ||
2017 | |||
Increase in USD exchange rate | 10% | (96,860) | |
Increase in EUR exchange rate | 10% | (3,237) | |
Decrease in USD exchange rate | 5% | 48,430 | |
Decrease in EUR exchange rate | 5% | 1,619 | |
2016 | |||
Increase in USD exchange rate | 10% | (107,321) | |
Increase in EUR exchange rate | 10% | (4,331) | |
| |||
Decrease in USD exchange rate | 5% | 53,660 | |
Decrease in EUR exchange rate | 5% | 2,166 | |
The effect of foreign currency sensitivity would prompt a fluctuation in the equity and profit and loss account by the amounts shown above. There are no hedging activities in the other comprehensive income, so the statement of comprehensive income and the statement of changes in equity impacts are the same. This analysis assumes that all other variables, in particular interest rates, remain constant.
During the nine-month period ended 30 September 2017, the Ukrainian Hryvnia depreciated against EUR by 9.0% and appreciated against USD by 2.5% (nine-month period ended 30 September 2016: EUR and USD depreciated by 9.8% and 7.4% relative to UAH, respectively). As a result, during the nine-month period ended 30 September 2017 the Group recognised a net foreign exchange gain of USD 25,690 thousand (nine-month period ended 30 September 2016: a net foreign exchange loss in the amount of USD 90,318 thousand) in the interim condensed consolidated statement of comprehensive income.
16. Dividends
On 14 March 2017, the Board of Directors of MHP SE approved the payment of an interim dividend of USD 0.7492 per share, equivalent to approximately USD 80,000 thousand, which were paid to shareholders during the nine-month period ended 30 September 2017.
Notes to the INTERIM CONDENSED Consolidated financial statements
for the nine-month period ended 30 September 2017
(in thousands of US dollars, unless otherwise indicated)
17. Subsequent events
At the EGM held on 24 October, 2017 shareholders of the Company approved the transfer of the registered office and the central administration of the Company from the Grand Duchy of Luxembourg to Cyprus in accordance with the draft terms of transfer proposal and the report issued by the Board of Directors.
The Company shall be domiciled in Cyprus and will become a legal entity in the form of an SE Company organized and existing under the laws of Cyprus and pursuant to the provisions of the SE Regulation. This is the second step towards the migration of the Company's registered office to enable simplification of the Group's legal structure. The Company is expected to become registered in Cyprus by the end of 2017.
18. 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 16 November 2017.