ANNUAL REPORT 2017 1 202 A LEADING INTERNATIONAL AGRO-INDUSTRIAL COMPANY ANNUAL REPORT AND ACCOUNTS 2017 03 Strategic Report 24 Business Review 61 Governance 82 Independent Auditor’s Report 04 Performance Highlights 25 Poultry and Related 62 Corporate Governance 89 Financial Statements 06 Company Overview Operations Segment Overview 97 Notes 10 Our Strengths 30 Grain Growing Segment 69 Board: Composition 15 Chairman’s Statement 33 Other Agricultural Segment & Performance 154 Shareholder Information 18 CEO’s Statement 35 Key Performance Indicators 71 Nominations and Remuneration 154 Financial Calendar 21 Business Model 37 Financial Policies Committee Report 154 Key Contacts & Advisors 40 Financial Review 73 Audit Committee Report 155 Glossary of Terms 49 Risk Management 78 Management Report 57 Corporate Responsibility 81 Stakeholder Engagement CONTENTS ANNUAL REPORT 2017 3 STRATEGIC REPORT 04 Performance Highlights 06 Company Overview 10 Our Strengths 15 Chairman’s Statement 18 CEO’s Statement 21 Business Model ANNUAL REPORT 2017 4 PERFORMANCE HIGHLIGHTS MHP MADE PROGRESS ON A NUMBER OF FINANCIAL AND OPERATIONAL PRIORITIES FINANCIAL HIGHLIGHTS US$ US$ US$ 1,288 732 57% 365 million million of revenue million Revenue Export revenue in US$ Adjusted operating (+13% y/y; (+15% y/y; profit 2016: US$ 1,135 million) 2016: US$ 635 million) (2016: 56%) (+15% y/y; 2016: US$ 317 million) US$ US$ US$ US$ US$ 459 230 2.14 0.7492 500 million million Earnings per share Dividend per share million Adjusted EBITDA Net profit (+257% y/y; (2016: US$ 0.7529) Successful (+11% y/y; (+233% y/y; 2016: US$ 0.60) 7-year Eurobond 2016: US$ 415 million) 2016: US$ 69 million) with a coupon of 7.75% ANNUAL REPORT 2017 PERFORMANCE HIGHLIGHTS 5 /CONTINUED OPERATIONAL AND STRATEGIC HIGHLIGHTS MIGRATION OF NEW CUTTING VINNYTSIA THE COMPANY FACILITY POULTRY COMPLEX from Luxembourg to Cyprus in Slovakia in line with export – significant progress in the strategy construction of Phase 2 of the complex BIOGAS CRIMEAN COMPLEX ASSETS – start of the construction DISPOSAL of second biogas complex at the Vinnytsia poultry complex – 12 MW capacity ANNUAL REPORT 2017 6 COMPANY OVERVIEW AN INTERNATIONAL COMPANY HEADQUARTERED IN UKRAINE, MHP1 IS A VERTICALLY-INTEGRATED, LEADING AGRO-INDUSTRIAL GROUP MHP is a long-term growth story Export revenue now constitutes 57% It is the leading domestic producer of poultry products of total revenue with the greatest market share2 and highest brand rec- MHP exports chicken meat, vegetable oils and ognition3 for its poultry products. grains. Serving large, attractive and growing inter- national poultry markets, the Company’s expansion Its vertically-integrated business model strategy is focussed on increasing export volumes, marks MHP out from its peers leading to additional hard currency revenue. Export It delivers a low cost base leadership position and revenue provides MHP with a natural hedge against sustainably higher earnings. MHP owns and operates local currency volatility. MHP now exports to 63 facilities at each of the key stages of chicken produc- countries and demonstrates steadily increasing ex- tion processes: grain and fodder production; egg incu- port traction. Building out from this platform, MHP bation and grow-out; processing; marketing; and sales is expanding its international operations in Europe and distribution. MHP leases agricultural land locat- (the Netherlands and Slovakia) and the Gulf Coop- ed in the highly fertile black soil regions of Ukraine. eration Council (GCC). In addition to organic growth, With modern production assets, which are amongst the Company’s expansion may be supplemented by the most technologically advanced in Ukraine and the targeted acquisitions. EU, and the high biosecurity standards inherent in the 1 MHP SE, a société européenne, registered Company’s activities, there are also clear responsible Stable and sustainable profitability under the laws of Cyprus, was established on May 30, 2006. The Company is the ultimate business benefits in both animal welfare and full con- Since 2013 MHP generates positive cash flow and pays holding company of PJSC Myronivsky trol of food safety. an annual dividend. Company’s profit margins (EBIT- Hliboproduct (MHP) and its subsidiaries. DA) are sustainably higher compared to international In this Annual Report & Accounts, A key growth driver is the expansion peers – in the 28% to 42% range over the past 15 years. MHP SE and its subsidiaries are referred of the Vinnytsia complex to as “MHP”, “The Company” or “the Phase 2 of the development commenced in 2016 and pro- Strong credit history Group”. gressed substantially during 2017 to create new capacity. MHP has an established and strong track record in inter- 2 Source: SSCU. When fully operational, it is expected to position the Compa- national capital markets and has been a responsible issu- 3 Source: Research conducted by InMind. ny to offer high-return expansion and export share growth. er of debt for over 10 years. ANNUAL REPORT 2017 COMPANY OVERVIEW 7 /CONTINUED REVENUE SPLIT BY BUSINESS SEGMENTS OUR BUSINESS SEGMENTS 9% Other Agricultural THE COMPANY IS ORGANISED INTO THREE SEGMENTS WHICH FORM 9% THE CORNERSTONES OF THE VERTICALLY-INTEGRATED BUSINESS MODEL: Grain Growing POULTRY AND RELATED OPERATIONS SEGMENT; GRAIN GROWING SEGMENT; AND OTHER AGRICULTURAL SEGMENT 82% Poultry and Related Operations POULTRY AND RELATED OPERATIONS SEGMENT MHP is the leading poultry producer in Ukraine, ac- MHP commands high brand recognition domestically counting for approximately 30% of all industrially pro- with its poultry products sold at premium prices. Poultry and Related Operations, Grain duced chicken meat consumed in the country in 2017 1. Growing and Other Agricultural Segments’ sales accounted for 82%, 9% and 9%, re- MHP’S POULTRY BRANDS spectively, of MHP’s revenues in 2017. Brand Name Geography Chilled / Frozen Product Nasha Riaba Ukraine Chilled Whole, parts Ukrainian Chicken Ukraine Frozen Whole, parts Qualiko Export Chilled / Frozen Whole, parts Ukrainian Chicken Export (except the EU and Asia) Frozen Whole, parts Аssilah Export (MENA) Frozen Whole Sultanah Export (MENA) Frozen Whole Al Hassanat Export (Iraq) Frozen Whole, parts Bibilo Export (Georgia) Frozen Whole MHP supplies chicken and other meat products to a num- MHP also produces and sells vegetable oils (sunflower ber of nationwide supermarket chains, including Fozzy, and soybean oils) as a by-product of its fodder produc- 1 Source: SSCU ATB-Market, Metro Cash & Carry, ECO, Novus, Auchan. tion, mainly to international traders. ANNUAL REPORT 2017 COMPANY OVERVIEW 8 /CONTINUED GRAIN GROWING SEGMENT OUR GLOBAL FOOTPRINT MHP is one of the leading grain cultivation business- rape are grown for sale to third parties. In 2017, MHP’s es in Ukraine growing corn, sunflower and soybean landbank constituted around 370,000 hectares of MHP is steadily gaining traction in export mar- to support the vertical integration of its chicken pro- land, one of the largest land portfolios in Ukraine. Crop kets, driven by sustained growth in a number of duction. Increasingly, other grains such as wheat and yields are well above the Ukrainian average. key regions such as the EU, MENA and Africa. The Company has expanded in the EU with two European cutting (deboning) facilities. These establishments have been operated in the Netherlands since 2016 and in Slovakia since OTHER AGRICULTURAL SEGMENT 2017. In 2016, the Company also established a sales and distribution office in the UAE as part of its export strategy. MHP’s meat-processing business is a main driver of the en, and chilled and frozen cooked convenience food Segment’s profitability as it gives the Company addi- predominantly from chicken meat. MHP is one of the tional value-add in its products that its customers are leaders in a highly fragmented meat-processing mar- willing to pay a premium for. Processing includes the ket in Ukraine, accounting for approximately 14%1 of 2017 GROUP EXPORT AND DOMESTIC REVENUE production of a wide variety of sausages, smoked chick- meat-processing products in Ukraine in 2017. MHP’S PROCESSED MEAT BRANDS 43% 57% Domestic Export Brand Name Geography Product Sausages, convenience food (chilled), Bashchinskiy Ukraine smoked chicken Lehko! Ukraine Convenience food (frozen) Sytni Ukraine Convenience food (frozen) Convenience food (frozen), Qualiko Export raw marinated chicken (frozen) Non-branded Ukraine Convenience food (frozen), bulk 1Source: SSCU ANNUAL REPORT 2017 COMPANY OVERVIEW Europe export 9 Estonia /CONTINUED Lithuania Ireland United Kingdom The Netherlands Poland Belgium Kyiv POULTRY Germany Czech Republic Slovakiya France Switzerland Hungary EXPORT Slovenia Romania Italy Montenegro Bulgaria Macedonia MARKETS Spain IN 2017 MHP’S STRATERY OF DIVERSIFICATION AND MARKET TARGETING DROVE A 16% YEAR-ON-YEAR INCREASE IN POULTRY EXPORTS 5% 3 Other international 17% offices CIS 29% EU 23% Middle East 63 220,983 19% export tonnes 7% Northern Africa Africa countries of chicken meat in 2017 EXPORT VOLUMES (TONNES) OF CHICKEN MEAT BY REGION IN 2017 ANNUAL REPORT 2017 10 OUR STRENGTHS VERTICALLY-INTEGRATED THE LEADING PRODUCER BUSINESS MODEL OF POULTRY PRODUCTS IN UKRAINE Business Impact Business Impact • Reduces costs by creating synergies in a number of areas • Reputation for quality and thereby reducing per unit costs • Enables realisation of production and marketing economies of scale • Reduces dependence on suppliers and farmers • Competitive advantage over existing competition and