CONSOLIDATED ANNUAL REPORT AB LINAS AGRO GROUP OF FOR THE FINANCIAL YEAR 2014/15 ENDED 30 JUNE 2015 AB „LINAS AGRO GROUP“ JURIDINIO ASMENS KODAS 148030011 SMĖLYNĖS G. 2C, PANEVĖŽYS LIETUVA CONTENT 1 Letter to the shareholders 1 2 Reporting period of the Consolidated Annual Report 4 3 References and additional explanatory notes on the information disclosed in the Annual 4 Report 4 The main information about the Company and the Group 5 5 Activity and financial results of the Group 17 6 The publicly disclosed information and other events of the reporting period 30 7 Scope of risk and management thereof 33 8 Employees 35 9 Structure of the authorized capital and shares of the Company 36 10 Shareholders 37 11 The Company’s bodies and their competence 38 12 The Company’s administration 47 13 Information about trade in the Company’s securities in regulated markets 48 14 Procedure for amending the Company’s articles of association 51 15 Essential agreement to which the Company is a party and which may be important in 51 case of change in the control of the Company 16 Major transactions with related parties 51 17 Information about the compliance with the corporate governance code 51 18 Social and environmental responsibility 52 AB LINAS AGRO GROUP CODE OF LEGAL ENTITY 148030011 SMĖLYNĖS ST. 2C, PANEVĖŽYS LITHUANIA 1. LETTER TO THE SHAREHOLDERS DEAR SHAREHOLDERS, Perhaps it would be fair for us to be called an export-oriented Group, as 75 percent of our income was received from the trade with foreign countries. Our company AB Linas Agro was the fifth largest exporter in Lithuania in 2014. Two Group companies - AB Linas Agro and Linas Agro AS - have been issued the GTP (European Good Trading Practice) certificates. We have a good reputation in the market. However, it is not always sufficient for achieving good financial performance. There have been quiet periods, favorable for the activity, such as year 2012/13. This was not the case with the ended financial year, however, as it has brought a great number of challenges to our Group. Political disagreements over distribution of the EU funds, wars and unrest in our sourcing regions, embargoes as well as other politically driven bans, all of these have been faced in the course of the reporting year. Although this has not resulted in suspension of all our activities, yet it had a significant impact on our financial results and resulted in adjustments to the expansion plans. For example, the elimination of milk quotas in the EU and the Russian embargo on EU foodstuffs resulted in raw milk price drop to the detriment of the performance of the Group's agricultural companies; furthermore, the Russian embargo resulted in a surplus of poultry products in the European marked which subsequently led to reduced prices. There have been dramatic delays in the support from the EU structural funds to farmers and they had a huge impact on the results of trade in agricultural machinery in all the three Baltic States. Ultimately, we were unable to expand the area of own agricultural land as a law imposing restrictions on expansion of the holdings of legal and natural persons came into effect in Lithuania just before the start of the reporting period. Some of the decisions had to be revised as well as future investments, manufacturing structures had to be improved and costs optimized. For example, we have revised and reduced the investments of “Dotnuvos Projektai” in Latvia, although the situation in Latvia regarding the EU support to farmers was by far the most optimistic: the sales of agricultural machinery started "moving forward" as early as in April. However, we remain optimistic and hope that the trade in agricultural machinery will recover in October in Lithuania, and in December or in the spring of 2016 in Estonia. Upon the closing of the Russian market, the supply of poultry meat and competition increased in the Baltic region. Therefore, this year we started the restructuring of Latvian poultry farms managed by us, in order to improve the range of products and optimize the costs. This will allow our poultry companies to be efficient and competitive producers as well as to expand the range of products. We are planning upgrades to the production lines aimed at production of more poultry products and a wider variety thereof. Furthermore, we are merging the sales and also other departments of the poultry companies that perform similar functions. These processes are to continue in the financial year of 2015/16. The brands of poultry products, managed by us, are among the most popular in Latvia. In March 2015, the list of most popular brands of foodstuffs in Latvia, published by Forbes, the brand "Kekava" owned by AS Putnu Fabrika Kekava took the 3rd place for the third year in a row, whereas SIA Lielzeltini’s brand "Bauska" took the 6th place. 1 CONSOLIDATED ANNUAL REPORT OF AB LINAS AGRO GROUP FOR THE FINANCIAL YEAR 2014/15 ENDED 30 JUNE 2015 We remain the market leaders in Latvia, although much remains to be done to achieve the same level of popularity in Lithuania and other countries. One of the most proven of our strategic decisions was the expansion of the services offered to farmers. This year saw an increase of amount of grains accepted to our own silos by 16 percent. The crop yield is consistently increasing in Lithuania and it is not without our contribution. We contribute by providing agronomical advice to farmers, developing and testing new technologies of production, which in turn leads to higher yields and improved crop rotation. The demand for high-quality grain preparation services in Lithuania and Latvia in particular is not yet satisfied and therefore we will continue to expand our network of grain elevators. We have invested over EUR 5 million into it in the reporting period. We have built new grain storage facilities in Jungėnai, Kalvarija municipality, in Lithuania and in Jekabpils municipality in Latvia, which will open their doors in the financial year 2015/16. By investing into technology, we are looking for unique and effective solutions. In Dotnuva (Lithuania), we have one of the largest seed processing factories in the Baltic States. During this financial year, we completed the first phase of its modernization. We have not only increased the seed cleaning performance from 8 to 16 tons per hour, but also we were the first in the Baltic region to install low speed bucket elevators, which cause absolutely no damage to seeds. Two more phases of the modernization of the factory are impending, which are scheduled for completion in the 2016/17 financial year. The total value of the modernization works amounts to EUR 700 thousand. Our agricultural companies are able to work rather efficiently and productively. The yields of the majority of our cultivated crop were higher this year compared to the previous year and were well above the average in Lithuania. For example, wheat yields reached 7.0 t/ha (compared to the Lithuanian average of 4.3 t/ha), 3.3 t/ha of rapeseed (compared to the Lithuanian average of 2.3 t/ha), and 6.4 tons/ha of malting barley (compared to the Lithuanian average of 3.8 t/ha). During the reporting period, an average of 8.62 tons of milk per cow were milked, which is 27 percent more than average in Lithuania. The agricultural company Šakiai District Lukšių ŽŪB was especially successful, becoming the most efficient milk supplier in the year 2014, having achieved average annual milk yield of 9.5 tons per cow. In addition, Šakiai District Lukšių ŽŪB was announced the most advanced livestock farm in Lithuania in 2015. Our cooperation with farmers was not limited to the trainings offered to them, practical field days or daily counselling. This year, we completed one large-scale work: working in cooperation with our long-time partner, emeritus professor Albinas Algirdas Šiuliauskas, we published a practical large-scale publication in the field of agricultural science, in the Lithuanian language. In is the first and so far the only book of its kind in the entire history of farming of independent Lithuania. We are pleased to know that our growth is also reflected in Deloitte's annual list of 500 largest companies in Central Europe, in which AB Linas Agro Group rose by 18 positions to the 378th position in 2015. The financial year of 2014/15 was, in fact, not the most profitable in the history of our business, but we believe that there will be less political challenges in the future or we will be ready for them. Sincerely yours, Managing Director Darius Zubas 2 AB LINAS AGRO GROUP CODE OF LEGAL ENTITY 148030011 SMĖLYNĖS ST. 2C, PANEVĖŽYS LITHUANIA 3 CONSOLIDATED ANNUAL REPORT OF AB LINAS AGRO GROUP FOR THE FINANCIAL YEAR 2014/15 ENDED 30 JUNE 2015 2. REPORTING PERIOD OF THE ANNUAL REPORT Financial year of AB Linas Agro Group starts on 1 July of each year and ends on 30 June of the next year; therefore, this Consolidated Annual Report has been prepared for 2014/15 financial year, and all the figures are stated as at 30 June 2015 unless it is indicated otherwise. 3. REFERENCES AND ADDITIONAL EXPLANATORY NOTES ON THE INFORMATION DISCLOSED IN THE ANNUAL FINANCIAL STATEMENTS All the financial data disclosed in this Annual Report have been calculated in accordance with the International Financial Reporting Standards as adopted by EU according to audited financial statements. The auditor of the Company is UAB Ernst & Young Baltic. In this Report AB Linas Agro Group is referred to as the Company whereas the Company with the controlled entities referred to as the Group. On 1 January 2015 the currency of Lithuanian Republic litas was replaced by the euro at the rate of 3.4528 to 1, therefore all data in this report was recalculated and presented in euros. CONTACT PERSONS: Tomas Tumėnas Finance Director +370 45 507 393 [email protected] Agnė Barauskaitė Investor Relations Specialist +370 45 507 346 [email protected] 4 AB LINAS AGRO GROUP CODE OF LEGAL ENTITY 148030011 SMĖLYNĖS ST. 2C, PANEVĖŽYS LITHUANIA 4. THE MAIN INFORMATION ABOUT THE COMPANY AND THE GROUP Company name AB Linas Agro Group Legal form Public company Date and place of registration 27/11/1995 in Panevezys Code of legal entity 148030011 VAT identification number LT480300113 Company register State Enterprise Centre of Registers (Valstybės įmonė Registrų centras) Address Smėlynės St. 2C, LT-35143 Panevėžys, Lithuania Phone +370 45 50 73 03 Fax +370 45 50 73 04 E-mail [email protected] Website www.linasagro.lt Bank account LT07 7044 0600 0263 7111, AB SEB bank, bank code 70440 ISIN code LT0000128092 Ticker in AB NASDAQ OMX Vilnius LNA1L AB Linas Agro Group together with its directly and indirectly controlled companies (hereinafter – subsidiaries) makes the Group, which was founded in 1991 and had 39 companies at the end of the reporting period, and operates in four countries – Lithuania, Latvia, Estonia and Denmark. As at 30 June, 2015 the total headcount of the Group amounted to 2,334 employees. The financial year of the Group begins on 1 July. The Company does not have any branches and representative offices. 5 CONSOLIDATED ANNUAL REPORT OF AB LINAS AGRO GROUP FOR THE FINANCIAL YEAR 2014/15 ENDED 30 JUNE 2015 4. 1. ACTIVITIES The subsidiaries controlled by the Company produce, handle and merchandise agricultural and food products, also provide products and services for farming. The Company performs only the management function and is not involved in any trading or production activities. The Group is the leading exporter of grains and has own network of grain storage facilities. Also is one of the leaders in supplies of agricultural inputs (such as certified seeds, fertilizers and agricultural machinery) in Lithuania, has seed preparation plant. Also the Group is a major milk producer in Lithuania and poultry producer in Latvia. The Group’s activities are subdivided into five operating Segments: Grain and Feedstuff Handling and Merchandising, Products and Services for Farming, Agricultural Production, Food products and Other. Division into separate Segments is dictated by different types of products and character of related activities; however, activities of the Segments are often interconnected. Business Segment Other is very small as includes activities, not attributable to other Segments. Food products – quite a new activity Segment that appeared in 2013/14 financial year after the Company acquired a group of Latvian poultry companies. 6 AB LINAS AGRO GROUP CODE OF LEGAL ENTITY 148030011 SMĖLYNĖS ST. 2C, PANEVĖŽYS LITHUANIA 4. 2. INFORMATION ABOUT SUBSIDIARIES OF THE COMPANY As at 30 June, 2015 the Company controlled 38 companies in Lithuania, Latvia, Estonia and Denmark. Structural chart of the effective stock held by AB Linas Agro Group (as at 30 June 2015)*: *Dormant companies UAB Gerera (100% shares), UAB Dotnuvos Technika (100% shares), UAB Žemės Ūkio Investicijos (100% shares, in liquidation) and SIA Erfolg Group (96.47% shares) not included. 7