ORGANIZATION OF FULL-CYCLED ENTERPRISE OF MEAT DIRECTION SWINE BREEDING PROJECTS INITIATED BY BUSINESS

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1 ORGANIZATION OF FULL-CYCLED ENTERPRISE OF MEAT DIRECTION SWINE BREEDING PROJECTS INITIATED BY BUSINESS

2 Company s profile Small private enterprise LARGO The main activity is pig breeding in live weight for further realization to processing industries. Also oil products retailing through its own system of gas stations. The main customers are provision companies and entrepreneurs of Kryvyi Rih, who sell meat in the city s markets. The company has in its assets: number of pigs: 600 head; pig complex in area of 8 hectares (5 industrial buildings and office building for staff needs). The complex is located in Raipole village of the Sofiivskyi district, and is the biggest producer of pork in the district; fuel station. Date of enterprise foundation December 13 th, Since the establishment in 2000 sales of oil products, paints, flour. Between 2000 and 2004 the main activity is grain and oil cultures with their further processing into flour and cooking oil. Between 2004 and 2009: sale of light oil, rolled metal products, machine tools, mining equipment, cables and wires products, valves, pigs breeding. Since 2009 to present: pigs breeding and sale of light oil and oil through its gas stations. Number of employees 10 people. Wage fund in 2010 was 178, 3 thousand UAH. Fixed assets worth $ 5 081, 9 thousand UAH. Gross income of the enterprise in 2010 was thousand UAH. 56,9 thousand UAH were transferred to budgets of all levels in In 2009 the company has opened a credit line of $ 4.7 million to replenish current assets that were repaid in the end of Today the company has a credit portfolio at PJSC Ukreximbank in the amount of 700 thousand UAH, with payback period the end of Banking details: settlement account in PJSC Ukreximbank in Kryvyi Rih city MFO , OKPO code 20,193,053 The head of the company: Andrii Papucha. Contact telephone:

3 Summary About project The project plans growing of number of pigs with full production cycle to implement pork meat at a rate of head (live weight of 105 kg) monthly. The stated above requires: to buy additional biological assets (140 sows); to build housing for farrowing on 40 head (sows), to reconstruct housing for fattening of livestock 1420 m 2 ; to purchase equipment for combined feed production. Procurement of tractors is required to implement the nearby farm enterprises, that will provide additional profits and will reduce costs for waste disposal. The main sales markets: Provision companies, Kryvyi Rih. Meat-packing plant Yuvileinyi. Trade network METRO Cash & Carry Ukraine. Expected launch date of the project Project is at the investor searching stage. Business plan is available. Indicators of project efficiency Index Unit Value Payback period (PB) month 23,5 Net present value, NPV thousand Euro 2 964,1 Internal Rate of Return, IRR % 66,1 Profitable index, PI 2,5 Budget, including thousand Euro 1 229,7 own funds thousand Euro 98,4 borrowed current assets thousand Euro 1 131,3 Mutual partnership Credit. United business creation. 2

4 Essence of the project Current situation Proposed solution According to global forecasts, demand for pork in the world will continue to grow due to: nutritive value of meat (large protein content, essential amino acids and high caloric content); high yield of meat after slaughtering (the amount of meat on bones 70%, in cattle 55%, sheep 50%) At the same time, the Ministry of Economy of Ukraine at the beginning of 2011 had offered licensing of pork import. This will improve the competitiveness of the domestic product and at the same time will raise the price on pork in live weight. Pig breeding is a key and backbone in agricultural sector of the Dnipropetrovsk region. The total number of pigs in the area in amounts 545,6 thousand head and is equal to 6.7% of pigs in Ukraine (the 1 st place in Ukraine). But Kryvyi Rih still has unsatisfied demand for pork. To provide domestic consumption of the city it is necessary to produce annually about 17.6 tonnes of pork meat (with given population of 665 thousand people and international health standards of pork meat consumption 26 kg per person). There are 4 registered companies in nearby areas (of Kryvyi Rih city and Sofiivskyi district) which have 6.3 thousand head and are able to produce annually only 0.31 thousand tonnes. Growing of pigs population with complete production cycle for sale in the amount of head (live weight of 105 kg) monthly. Sale of manure to private farms (with manure amount during the year of one pig close to 1 tonne) that will provide additional income and reduce costs for waste disposal. Result Economic benefit is based on: additional profits through the sale of pork meat in live weight to processing plants of Kryvyi Rih; more profit by selling manure to private farms. Social benefits are based on: creation of additional 47 jobs with average gain of UAH which is 18% more than the average for agricultural sector in the region (as of ); increase of average monthly salary in company on 47%; increase of receipts in budgets of all levels. 3

5 Production competiveness Pork in live weight Main competitors: Sygma Demis-Agro Corporation Agro-Soiuz The main competitive advantages are: low transport costs due to favorable locations of the main supplier and manufacturer of legumes for feed production on their own production facilities; close location of potential wholesalers, consumers of products (meat) notably, Kryvyi Rih Meat-Packing Plant Yuvileinyi, Mahrok, major retail chains (Metro, Silpo, Auchan), harvested plants and entrepreneurs of Kryvyi Rih; additional revenue through the full cycle of waste treatment in order to use it as fertilizer; long and successful industry experience. The cost structure, UAH / kg 7,9 21,9 56% 28% 3,9 8% 1,2 8% 1,2 100% 14,0 +56%* 7,8 Feeds Wage found Material expenditures Others First cost Added value Sale price * Planned profitability after running at full project s capacity (2014) 4

6 Retail market analysis Outlets Consumers 28% Companies Brief characteristics Volumes on existing contracts in 2010, tonnes Marketing strategy Perspective contracts on the project, tonnes % 20% 5% Meat-Packing Plant Yuvileinyi It occupies one of leading positions in production of sausages and meat delicacies in the Dnipropetrovsk region. 0,0 Increasing market share 0,0 100,0 120,0 Unsatisfied demand SPE Largo Private small farming Large companies (Demis-Agro, Sygma, Agro-Soiuz, etc.) Metro Cash & Carry Ukraine Trading network of wholesale stores of food and nonfood products intended for meeting the demand of business customers 0,0 The conquest of new market segment 0,0 245,0 368,0 Private companies 58,0 Retention of positions 56,9 32,0 37,0 Total 58,0 56,9 377,0 525,0 9% Comments 40% 32% Key sales channels today are private companies. The main reason today SPE Largo does not have enough capacity to meet the demand of such consumers as Meat-Packing Plant Yuvileinyi and company METRO Cash & Carry Ukraine. 19% Increase in production capacity will enable to conclude long-term contracts that will provide stable and permanent outlets: company METRO Cash & Carry Ukraine; Meat-Packing Plant Yuvileinyi. Preliminary agreement on supplies is available. 5

7 Project s description The project in the value chain Added value Base 50% +10% +30% +10% Elements of chain Inseminated sows Farrow Rearing Fattening After insemination sows are kept during 32 days in individual sections, and only after determining of the gestation they are transferred to group sections. Key factors are: qualitative and balanced feeding; constant veterinary control of the sows. To run this redivision: Purchase of 140 inseminated sows Sows are being transferred to special building for farrowing. Key factors are: technical equipment of the building; no mechanical traumas in sows. To run this redivision: construction of farrowing building for 40 animals. Piglets at the age of 28 days are being weaned from the sow and converted into separate facilities. Key factor of providing the high average daily gain is balanced feeding. To run this redivision: purchase of feed production equipment (Zuptor); hire and train of additional personnel. Piglets at the age of 77 days are being transferred to other, more spacious facilities, which are different from rearing sites not only in size but also the feeding system. There is a change in the diet of animals. Fattening pigs rapidly reach the required condition with a high content of lean meat. To run this redivision: reconstruction of building for livestock fattening. Will create a platform for increasing the number of pigs Will eliminate the risk of death of newly born piglets after farrowing Will reduce an expenditure "feed" in production costs by 10% due to manufacturing of their own feed Will: keep the number of pigs in sanitation; receive fertilizer in two fractions (liquid as urea and solid) for further distribution to farmers CAPACITY EXPANSION CAPACITY EXPANSION CAPACITY EXPANSION CAPACITY EXPANSION 6

8 Budget of key technical elements* Biological assets (140 inseminated sows) thousand EURO 75,8 Construction of building for 40 head farrowing 121,2 Reconstruction of building for fattening livestock 379,8 Feed production equipment (Zuptor) 72,7 Mechanical machines: Trailer for pigs transportingtc-3, board MAZtrailer, tractor Buhler, car Gazel, car for company needs Renault Duster, tractor MTZ ,7 Others 316,5 *Detailed budget is in Annexes TOTAL 1 229,7 7

9 Investment plant Indexes Measure September October November December TOTAL Budget, including Thousand EURO 304,6 222,7 414,1 288,3 1229,7 own funds Thousand EURO 59,1 1,4 37,9 98,4 borrowed current assets Thousand EURO 245,5 221,3 376,2 288,3 1131,3 Schedule of the project Arrangement Design documentation Providing all necessary approvals of the project Construction of building for 40 head farrowing Purchase of biological assets (70 inseminated sows) Construction of supporting infrastructure Reconstruction of building for fattening livestock 1420 m 2 Cars purchase Budget, thousand Euro Purchase of biological assets (70 inseminated sows) 37,9 Purchase of equipment for animal feed production Purchase of equipment, staff training 74,7 9,1 12,1 121,2 72,7 37,9 221,9 379,8 269,7 TOTAL, thousand EURO 304,6 227,1 414,1 288, ,7 8

10 Key indicators EBITDA Net income FCF DCF (cumulative) Indexes EBITDA -67,8 886,4 940,1 1124,0 1124,0 1124,0 1124,0 1124,0 1124,0 1124,0 Net income -17,4 742,8 805,9 9,0 954,6 952,8 951,4 950,4 949,6 948,9 FCF -1247,1 742,8 805,9 9,0 954,6 952,8 951,4 950,4 949,6 948,9 DCF (cumulative) -1190,3-3,8 7,8 608,4 1129,4 1581,5 1974, ,4 2868,9 Indexes Unit Value Discount rate % 15% Discounted payback period, DPP Months 27,8 Net present value, NPV Thousand EURO 2964,1 Internal Rate of Return, IRR % 66,1% Profitable index, PI 2,53 9

11 Dynamics of key indicators of financial and economic activities GROSS INCOME, thousand EURO NUMBER OF STAFF 1 990, , , , , , , , ,8 68, GROSS COSTS, thousand EURO AVERAGE SALARY, EURO 656,5 779,6 866,3 866,3 866,3 866,3 866,3 866,3 866,3 247,6 135,9 94, NET INCOME thousand EURO 886,4 940, , , , , , , ,0-67,

12 Terms of mutual cooperation INVESTOR Expert knowledge and technologies. Investments in construction. INITIATOR OF THE PROJECT Providing the investor with all information required for optimal decision making. Carrying out the business analysis and risks management Competence in business management of the sector. Benefits from successfully functioning business. Strong positioning of a company for subsequent business expansion in Ukraine. Creation of advanced experience and image raising. INTEREST Benefits from successfully functioning business. Providing image of a social-responsible company. 11

13 weak strong Influence 100 Project s risks analysis and steps for their minimization Comments low high Key risk failure of the project implementation schedule because of the delay of all necessary approval processes while concluding of contracts of lease and approval of the project of constructuin of building for farrowing and sanitary inspection room. To minimize this risk it s necessary for regional authorities to provide effective assistance to the process of all necessary approvals of the project. Probability Name of risk Probability/ Influence, % Risk profile Steps for risk s minimization 1 Failure of the project implementation schedule 80 / 40 Result: increase of investments and of payback period. Cause: failure of the project implementation schedule because of the delay of the process of all approvals required for the project. Active cooperation with regional authorities 2 Demand decrease 20/ 15 3 Sale price decrease 10 / 5 Result: decrease of incomes and profits. Cause: closest competitors strengthening; insolvency of potential customers. Result: decrease of incomes and profits. Cause: the flow of illegal low-quality but cheap pork from abroad. Low price with excellent quality a key criterion for the products competitiveness Concluding of long-term contracts with key customers with fixed price 4 Production costs increase 50 / 40 Result: profits decrease due to increasing of prices and loss of a part of marketing outlet. Cause: increase of price for materials and raw materials; bad weather conditions for growing crops for animal feed pigs; lack of skilled labor. decrease of energy and material intensity by using the latest technologies and materials in the manufacturing process; improvements in technology and product s quality; increase of the efficiency of productive capacities utilization. 12

14 Budget. Borrowed funds Borrowed funds 2011 Title Amount Price per unit, thousand UAH Sum, thousand EURO 1 Reconstruction of building for fattening livestock 3760,0 379,8 slotted floors (materials and labor) 1700,0 171,7 fencing tools 320,0 32,3 feed distribution system (2-line 63 meters long, one-hopper 7.5t) 390,0 39,4 microclimate system 750,0 75,8 construction of holes for storing liquid manure (4 holes on 80 m 3) 450,0 45,5 hydraulic system flushing 150,0 15,2 2 Construction of building for farrowing of 40 animals ,0 121,2 3 Feed production equipment (Zuptor) 1 720,0 72,7 4 Board MAZ-trailer 1 740,0 74,7 5 Tractor Buhler ,0 146,5 6 Centrifugal barrel for liquid organic fertilizers and ammonia 1 370,0 37,4 7 Car Gazel 1 120,0 12,1 8 Car for company needs Renault Duster 1 131,0 13,2 9 Trailer for transporting pigstc ,0 3,0 10 Tractor МТЗ ,0 14,1 11 Equipment for heating existing and new structures (mounting hardware) 1 270,0 27,3 12 Construction of a boiler room, storage for solid fuel 1 120,0 12,1 13 Building of sanitary inspection rooms 1 480,0 48,5 14 MSXH mixer for mixing livestock waste 1 70,0 7,1 15 Storage space for storing feed, raw materials and equipment for their production 1 849,0 85,8 16 Analytical equipment 1 110,0 11,1 17 Scales for trucks 1 170,0 17,2 18 Water well with equipment 1 470,0 47,5 TOTAL 1131,3 13

15 Budget. Own resources Own resources 2011 Title Amount Price per unit, thousand UAH Sum, thousand EURO 1 Biological assets (inseminated sows) 140 5,4 75,8 2 Staff Training 14,0 1,4 3 Approvals of the project 120,0 12,1 4 Design documentation 90,0 9,1 TOTAL 98,4 14

16 Contact information DNIPROPETROVSK INVESTMENT AGENCY Ukraine, Dnіpropetrovsk, 2 Kirova prospect, office 538 Tel: , Fax: info@dia.dp.ua Website: Dnipropetrovsk 15