Financial results for the Q1 2019

Notes to the INTERIM CONDENSED Consolidated financial statements

for the three-month period  ended 31 March 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 three-month period  ended 31 March 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.

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 how the Group accounts for leases previously classified as operating lease under IAS 17, which were off-balance-sheet.

Applying IFRS 16, 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;

·          Recognises depreciation of right-of-use assets and interest on lease liabilities in the consolidated statement of profit or loss;

Upon adoption of IFRS 16, the Group applied a single recognition and measurement approach for all leases.

The tables below show the amount of adjustment for each financial statement line item affected by the application of IFRS 16:

Impact on profit (loss) for the period:		2019
Increase in finance costs		(7,993)
Decrease in profit for the period		(7,993)

 

 

Notes to the INTERIM CONDENSED Consolidated financial statements

for the three-month period  ended 31 March 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)

Impact on assets, liabilities and equity as at 31 March 2019		As if IAS 17 still applied		IFRS 16 adjustments		As presented
Right-of-use assets, net		-		175,573		175,573
Other non-current assets		73,003		(6,443)		66,560
Inventories		310,624		(6,764)		303,860
Other current assets, net		50,564		(70)		50,494
Net impact on total assets		434,191		162,296		596,487
Lease liability		9,182		134,045		143,227
Current portion of lease liability		5,558		51,225		56,783
Other current liabilities		249,166		(14,981)		234,185
Net impact on total labilities		263,906		170,289		434,195
Retained earnings		1,009,226		(7,993)		1,001,233

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 the remaining lease payments, discounted using the lessee's incremental borrowing rate as of 1 January 2019. The weighted average lessee's incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 20%.  The difference between operating lease commitments disclosed as at 31 December 2018 and lease liability recognized as at 1 January 2019 arises from the effect of discounting lease payments and adjustments as a result of a different treatment of liability and advances for land lease.

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 recognized 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 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 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 three-month period ended 31 March 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            31 March 2019	Average for three months ended     31 March 2019	Closing rate as of 31 December 2018	Average for three  months ended    31 March 2018
UAH/USD	27.2488	27.3058	27.6883	27.3203
UAH/EUR	30.5677	31.0293	31.7141	33.5633

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 crops and the effect of revaluation of agricultural produce harvested during the year. Also, grain growing segment has seasonal requirements for working capital increase during November to May, due to the sowing campaign.

Reclassifications and revisions

Certain comparative information presented in the interim condensed consolidated financial statements for the three-month period  ended 31 March 2018 has been revised in order to achieve comparability with the presentation used in the interim condensed consolidated financial statements for the three-month period  ended 31 March 2019. Such reclassifications and revisions were not significant to the Group financial statements.

3.    Changes in the group structure

Acquisitions

On 21 February 2019, the Group acquired 90.69 per cent of the issued share capital and thereby obtaining control of Perutnina Ptuj d.d., 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 d.d. together with its subsidiaries has production capacity of 55,000 tonnes per annum of poultry meat and more then 35,000 tonnes per annum of value-added meat. Perutnina Ptuj d.d. 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 amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below.

 

 

 

 

 

 

 

 

 

Notes to the INTERIM CONDENSED Consolidated financial statements

for the three-month period ended 31 March 2019

(in thousands of US dollars, unless otherwise indicated)

3. Changes in the group structure (continued)

Acquisitions (continued)

		21 February 2019
Inventory		26,728
Biological assets		8,775
Agricultural produce		8,196
Other current assets less other current liabilities		10,011
Property, plant and equipment		160,468
Right-of-use asset		15,432
Identifiable intangible assets		36,805
Other non-current liabilities less other non-current assets		(10,014)
Bank borrowings and lease liability 1)		(76,714)
Total identifiable net assets		179,687
Goodwill		88,727
Non-controlling interest of 9,31 % of Perutnina Ptuj d.d.		(16,729)
Total consideration due and payable		251,685
Net cash outflow arising on acquisition:
Cash consideration paid		200,243
Less: cash and cash equivalent balances acquired		(20,986)
		179,257

¹⁾         includes USD 15,392 thousand of lease liability recognised in accordance with the adoption of IAS 16 (Note 2).

The initial accounting for the acquisition of Perutnina Ptuj d.d. 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 other current assets includes trade receivables with a fair value of USD 36,354 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 146 thousand.

The goodwill of USD 88,727 thousand arising from the acquisition attributed to the expected synergies and other benefits from combining the assets and activities of Perutnina Ptuj d.d. with those of the Group. None of the goodwill is expected to be deductible for income tax purposes.

The non-controlling interest (9.31% ownership interest Perutnina Ptuj d.d.) recognised at the acquisition date was measured as proportionate share of the acquired entity's net identifiable assets and amounted to
USD 16,729 thousand.

Acquisition-related costs amounted to USD 2,581 thousand.

Perutnina Ptuj d.d.contributed USD 25,683 thousand revenue and USD 2,112 thousand to the Group's profit for the period between the date of acquisition and the reporting date.

If the acquisition of Perutnina Ptuj d.d. had been completed on the first day of the financial year, Group revenues for the year would have been USD 483,690 thousand and Group profit would have been
USD 35,572 thousand.

 

 

 

 

 

 

 

 

Notes to the INTERIM CONDENSED Consolidated financial statements

for the three-month period  ended 31 March 2019

(in thousands of US dollars, unless otherwise indicated)

4.    Segment information

The following table presents revenue and profit information regarding the Group's operating segments for the three-month period  ended 31 March 2019:

 

	Poultry and related operations	Grain growing	Other agricultural operations	Eliminations	Consolidated
External sales	342,121	52,510	41,693	-	436,324
Sales between business segments	15,077	40,547	91	(55,715)	-
Total revenue	357,198	93,057	41,784	(55,715)	436,324
Segment results	49,022	3,775	3,763	-	56,560
Unallocated corporate expenses					(6,564)
Other expenses, net 1)					(14,589)
Profit before tax					35,407
Other information:
Depreciation and amortization expense 2)	23,465	7,484	1,927	-	32,876
Net change in fair value of biological assets and agricultural produce (Note 5)	11,102	(16,822)	(541)	-	(6,261)

¹⁾ Includes finance income, finance costs, foreign exchange gain (net) and other expenses (net).

²⁾ Depreciation and amortization for the three-month period  ended 31 March 2019 does not include unallocated depreciation and amortization in the amount of USD 183 thousand.

 

The following table presents revenue and profit information regarding the Group's operating segments for the three-month period  ended 31 March 2018:

 

	Poultry and related operations	Grain growing	Other agricultural operations	Eliminations	Consolidated
External sales	267,547	7,461	30,568	-	305,576
Sales between business segments	10,039	46,032	53	(56,124)	-
Total revenue	277,586	53,493	30,621	(56,124)	305,576
Segment results	56,503	1,225	6,727	-	64,455
Unallocated corporate expenses					(2,501)
Other income, net 1)					27,379
Profit before tax					89,333
Other information:
Depreciation and amortization expense 2)	20,409	5,070	1,305	-	26,784
Net change in fair value of biological assets and agricultural produce (Note 5)	2,301	(11,110)	3,424	-	(5,385)

¹⁾ Includes finance income, finance costs, foreign exchange gain (net) and other expenses (net).

²⁾ Depreciation and amortization for the three-month period  ended 31 March 2018 does not include unallocated depreciation and amortization in the amount of USD 501 thousand.

 

 

 

 

 

 

 

Notes to the INTERIM CONDENSED Consolidated financial statements

for the three-month period  ended 31 March 2019

(in thousands of US dollars, unless otherwise indicated)

5.    Profit for the period

The Group's gross profit for the three-month period  ended 31 March 2019 dereased compared to the three-month period  ended 31 March 2018 and amounted to USD 80,647 thousand and USD 81,039 thousand, respectively.

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 31 March 2019 as well as revaluation of agricultural produce to the fair value at the date of harvest.

The Group's operating profit decreased mainly due to an increase in administration, sales and distribution expenses primarily attributable to the increase in payroll cost, logistics costs and consulting services.

In line with the decrease in operating profit, the Group's profit for the period from continuing operations for the three-month period  ended 31 March 2019 decreased compared to the three-month period  ended
31 March 2018 from USD 89,784 thousand to USD 33,347 thousand, respectively. An additional negative impact was attributable to a decrease of an unrealized foreign exchange gain amounted to USD 20,859 thousand for the three-month period ended 31 March 2019 compared to USD 54,633 thousand for the three-month period ended 31 March 2018. Unrealized foreign exchange gain mostly attributable to bonds and bank borrowings denominated in foreign currencies due to UAH appreciation against USD and EUR.

6.    Deferred revenues

Ukrainian Government supports domestic agri producers and attract investments into agricultural sector. According to the Law "On the State Budget for 2019", UAH 5,709 million were allocated to support agricultural sector in 2019 via compensation program, including UAH 3,500 million to support 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 three-month period ended 31 March 2019, the Group has not yet received government grants in accordance with this program.

Government grants are presented in the statement of the financial position as deferred revenues, which is recognised in profit or loss on a systematic basis over the useful life of the related assets.

7.    Property, plant and equipment

During the three-month period  ended 31 March 2019, the Group's additions to property, plant and equipment amounted to USD 29,814 thousand (three-month period  ended 31 March 2018: USD 46,050 thousand) mainly related to construction works for Phase 2 of the Vinnytsia poultry project.

There were no significant disposals of property, plant and equipment during the three-month period ended 31 March 2019.

8.    Inventories and agricultural produce

An increase in inventory balance as of 31 March 2019 compared to 31 December 2018 is mainly attributable to costs incurred by grain growing entities in respect of forthcoming spring sowing campaign, partly offset by internal consumption of sunflower for chicken feed.

A decrease of agricultural produce for three-month period ended 31 March 2019 was mainly as a result of internal consumption of corn, wheat and sunflower.

9.    Biological assets

Increase in current biological assets as compared to 31 December 2018 is primarily related to crops in fields balance mainly relates to spring crops seeded in the first half of 2019 classified as biological assets  as well as by increase in broiler chickens stock due to the launch of new rearing sites.

 

 

 

 

Notes to the INTERIM CONDENSED Consolidated financial statements

for the three-month period  ended 31 March 2019

(in thousands of US dollars, unless otherwise indicated)

10.  Share capital

As of 31 March 2019 and 31 December 2018 the authorized, issued and fully paid share capital of MHP SE comprised the following number of shares:

	31 March 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 31 March 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.

11.  Bank borrowings

The following table summarizes bank borrowings and credit lines outstanding as of 31 March 2019 and 31 December 2018:

				31 March 2019			31 December 2018
Bank		Currency		WAIR 1)	USD' 000		WAIR 1)	USD' 000
Non-current
Foreign banks		USD		7.78%	18,066		7.99%	56,718
Foreign banks		EUR		4.57%	134,820		4.72%	49,065
					152,886			105,783
Current
Ukrainian banks		EUR		3.65%	12,788		3.76%	12,943
Ukrainian banks		USD		4.62%	89,650		4.50%	48,000
Foreign banks		USD		4.21%	68,522		-	-
Current portion of long-term bank borrowings		USD, EUR			89,533			71,772
					260,493			132,715
Total bank borrowings					413,379			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 principal amounts of bank borrowings vary from monthly repayment to repayment on maturity depending on the agreement reached with each bank. The interest on the borrowings drawn with the Ukrainian banks is payable on a monthly basis. Interest on borrowings drawn with foreign banks is payable semi-annually and annually.

As of 31 March 2019 and 31 December 2018, all of the Group's bank term loans and credit lines bear floating and fixed interest rates.

Bank borrowings and credit lines outstanding as of 31 March 2019 and 31 December 2018 were repayable as follows:

	31 March 2019		31 December 2018
Within one year	260,493		36,917
In the second year	50,741		72,950
In the third to fifth year inclusive	98,522		58,719
After five years	3,623		7,148
	413,379		175,734

As of 31 March 2019, the Group had available undrawn facilities of USD 144,094 thousand (31 December 2018: USD 316,429 thousand). These undrawn facilities expire during the period from October 2019 until October 2020.

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 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. As of 31 March 2019 and 31 December 2018, the Group has complied with all covenants imposed by banks providing the borrowings.

Notes to the INTERIM CONDENSED Consolidated financial statements

for the three-month period  ended 31 March 2019

(in thousands of US dollars, unless otherwise indicated)

11. Bank borrowings (continued)

As of 31 March 2019, the Group had borrowings of USD 96,007 that were secured. These borrowings were secured by inventories and property, plant and equipment with a carrying amount of USD 140,957 thousand.

As of 31 March 2019, the Group had borrowings of USD 112,180 that were secured by the pledge of 100% of the share capital of Hemiak Investments Limited holding circa 90.69% of Shares of Perutnina Ptuj D.D (Note 3).

As of 31 March 2019, the deposit with carrying amount of USD 3,317 thousand (31 December 2018:
USD 3,387 thousand) was restricted as collateral to secure bank borrowings

As of 31 March 2019 and 31 December 2018, accrued interest on bank borrowings was USD 2,306 thousand and USD 3,150 thousand, respectively.

12.  Bonds issued

Bonds issued and outstanding as of 31 March 2019 and 31 December 2018 were as follows:

	31 March 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	(36,767)		(38,482)
Total long-term portion of bonds issued	1,092,650		1,090,935

As of 31 March 2019 and 31 December 2018 amount of accrued interest on bonds issued was USD 37,204 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 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.

Notes to the INTERIM CONDENSED Consolidated financial statements

for the three-month period  ended 31 March 2019

(in thousands of US dollars, unless otherwise indicated)

12. Bonds issued (continued)

7.75% Senior Notes

On 10 May 2017, MHP SE issued USD 500,000 thousand 7.75% Senior Notes due in 2024 at par value. Out of the total issue amount USD 245,200 thousand were designated for redemption and exchange of existing 8.25% Senior Notes due in 2020.

Early redemption of 8.25% Senior Notes due in 2020 out of issue of 7.75% Senior Notes due in 2024, which were placed with the same holders and where the change in the net present value of the future cash flows discounted using the original effective interest rate was less than 10% was accounted as an exchange and thus, all the related expenses, including part of consent fees, were capitalized and will be amortised over the maturity period of the 7.75% Senior Notes due in 2024.

The part of expenses, connected with placement of 7.75% Senior Notes amounted to USD 9,830 thousand were capitalized, 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 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 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 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

Notes to the INTERIM CONDENSED Consolidated financial statements

for the three-month period  ended 31 March 2019

(in thousands of US dollars, unless otherwise indicated)

12. Bonds issued (continued)

8.25% Senior Notes (continued)

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 Company has, on the Consent Settlement Date, paid to those Holders from whom valid Consents were delivered and not revoked on or prior to the Consent Expiration Date and which Consents were accepted by the Company the Consent Payment of USD 10.00 for each USD 1 thousand in principal amount of the Notes that were subject of the relevant Electronic Instructions.

During the reporting periods ended 31 March 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 three-month ended 31 March 2019 and year ended 31 December 2018, respectively.

13.  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 three-month period s ended 31 March 2019 and 31 March 2018 were as follows:

	2019		2018
Loans and finance aid provided	27		-
Loans provided to key management personnel	1,178		185
Purchases from related parties	6		13

 

Notes to the INTERIM CONDENSED Consolidated financial statements

for the three-month period  ended 31 March 2019

(in thousands of US dollars, unless otherwise indicated)

13. Related party balances and transactions (continued)

The balances owed to and due from related parties were as follows as of 31 March 2019 and 31 December 2018:

	31 March 2019		31 December 2018
Payables for dividends declared, included in Other current liabilities	47,759		-
Loans and finance aid receivable	6,033		5,950
Loans to key management personnel	2,080		971
Trade accounts receivable	111		111
Payables due to related parties	-		19

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 2,335 thousand and USD 2,848 thousand for the three-month period  ended 31 March 2019 and 31 March 2018, respectively.

14.  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 3.5% year on year for the three-month periods ended 31 March 2019 (2018: 2.8%), modest annual inflation of 8.6% (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 Russian's export and import 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 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, cooperation with the International Monetary Fund ("IMF"), and smooth transition through parliamentary elections, due in October 2019.

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.

 

Notes to the INTERIM CONDENSED Consolidated financial statements

for the three-month period  ended 31 March 2019

(in thousands of US dollars, unless otherwise indicated)

14.  Contingencies and contractual commitments (continued)

Taxation and legal issues (continued)

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 years ended 31 December 2018 as required by legislation and plans to submit reports.

As of 31 March 2019, the Group's management assessed its possible exposure to tax risks for a total amount of USD 4,463 thousand related to corporate income tax (31 December 2018: USD 4,452 thousand). No provision was charged of such possible tax exposure.

As of 31 March 2019, companies of the Group were engaged in ongoing litigation with tax authorities for the amount of USD 3,054 (31 December 2018: USD 2,831 thousand), including USD 2,216  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 1,248 thousand as of 31 March 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 three-month period  ended 31 March 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 31 March 2019, purchase commitments on such contracts were primarily related to expansion of the Vinnytsya poultry complex and amounted to USD 11,982 thousand (31 December 2018: USD 16,826 thousand).

15.  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 appropriate valuation methodologies, but are not necessarily indicative of the amounts that 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
	31 March 2019	31 December 2018		31 March 2019	31 December 2018
Financial liabilities
Bank borrowings (Note 11)	415,685	241,648		397,579	233,898
Senior Notes due in 2020, 2024, 2026 (Note 12)	1,129,854	1,107,257		1,100,083	1,027,226
Lease liability	200,010	13,442		200,059	13,726

The carrying amount of Bank borrowings and Senior Notes issued includes interest accrued at each of the respective dates. The carrying amount of Finance lease obligations as at 31 March 2019 includes USD 185,270 thousand of finance land lease obligations recognised in accordance with the adoption of IAS 16 (Note 2).

Notes to the INTERIM CONDENSED Consolidated financial statements

for the three-month period  ended 31 March 2019

(in thousands of US dollars, unless otherwise indicated)

15.  Fair value of financial instruments (continued)

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 7.8% (31 December 2018: 8.0%) and for finance lease obligations 19.1% (31 December 2018: 8.2%), and is within Level 2 of the fair value hierarchy. The market rate applied to the finance land lease obligations is 20%.

The fair value of Senior Notes was estimated based on market quotations and is within Level 1 of the fair value hierarchy.

16.  Risk management policy

During the three-month period  ended 31 March 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.

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
31 March 2019 and 31 December 2018 were as follows:

	31 March 2019			31 December 2018
	USD	EUR		USD	EUR
Total assets	295,339	11,505		133,197	10,504
Total liabilities	1,395,052	246,775		1,132,935	44,411

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		Effect on profit before tax
2019
Increase in USD exchange rate	10%		(109,971)
Increase in EUR exchange rate	10%		(18,508)
Decrease in USD exchange rate	5%		54,986
Decrease in EUR exchange rate	5%		9,254
2018
Increase in USD exchange rate	10%		(99,974)
Increase in EUR exchange rate	10%		(3,391)
Decrease in USD exchange rate	5%		49,987
Decrease in EUR exchange rate	5%		1,695

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 three-month period  ended 31 March 2019, the Ukrainian Hryvnia appreciated against the EUR by 3.8% and against the USD by 1.6% (three-month period  ended 31 March 2018: appreciated against the EUR and USD by 2.4% and 5.7% respectively). As a result, during the three-month period  ended 31 March 2019 the Group recognized net foreign exchange gain in the amount of USD 20,593 thousand (three-month period  ended 31 March 2018: foreign exchange gain in the amount of USD 54,633 thousand ) in the consolidated statement of profit or loss and other comprehensive income.

 

 

Notes to the INTERIM CONDENSED Consolidated financial statements

for the three-month period  ended 31 March 2019

(in thousands of US dollars, unless otherwise indicated)

17.  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, on 4 April 2019 to shareholders on the register as of 29 March 2019. The Board of Directors approved that no dividend will be paid on the Company's shares held in treasury.

The Board of Directors of MHP SE also acknowledged the consent of WTI Trading Limited (the Company's major shareholder) to be paid later than on the declared dividend payment date (but not later than
1 November 2019), with no interest accrued on the amount of dividend paid later (Note 13).

18.  Subsequent events

There are no subsequent events to mention.

19.  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 11 June 2019.