Cherkizovo Group Announces Financial Results for the fourth quarter and full year 2018.

February 14, 2019

Moscow, Russia – February 14, 2019– PJSC Cherkizovo Group (MOEX: GCHE), the largest vertically integrated meat producer in Russia, today announces its audited consolidated IFRS results for the fourth quarter and full year ending December 31, 2018


Fourth quarter financial highlights

2018 financial highlights



2018 corporate highlights

Key corporate highlights after reporting period

Sergei Mikhailov, CEO of Cherkizovo, commented:

“We are pleased to announce our exceptional 2018 results, and attribute them to investments we’ve made in recent years, and steps we’ve taken to focus our strategy to strengthen Company’s business model, against the backdrop of gradually improving consumer demand, volatile grain markets, weakening local currency and some market supply dislocations.

A few developments were particulary instrumental to our operating and financial results performance. A relentless focus on brand development for chicken meat products paid back via the significant increase of Petelinka and Chicken Kingdom sales, rising 35% and 24%, respectively, with growth achieved through the modern retail trade channel. We also broadened our portfolio of products catering to HoReCa clients, where the focus remains on quick service restaurants, which delivered 44% sales growth. By the end of 2018, our live pork production system achieved its targeted capacity of 300 thousand tons per annum, with the majority of planned wean-to-finish facilities now built and populated. Profitability of the pork segment remains well above plan as we focus on sustaining cost leadership in the industry, and our operational efficiency is underpinned by multi-year concentrated efforts at implementing best practices and our utilizing state-of-the-art asset base. Kashira-1, a dry sausage facility launched in summer near Moscow, and aims to be fully ramped up in 2019, thereby enhancing our ability to offer consumer dry sausages products, a niche where we remain the leader domestically. Grain segment contributed materially to overall company performance, as we optimized crop structure in favor of wheat growing, and grains prices gained with the arrival of 2017/18 harvest.

Our strong organic growth and increasing market share were bolstered by material acquisitions, completed at the end of 2018. Altaisky Broiler, a poultry producer with strong existing brand portfolio, will set the stage for the Company’s geographic expansion into the Siberian region, where our main clients, federal retail chains, have been expanding recently. This acquisition is coupled with the purchase of poultry breeder facility of Krasnoyaruzhsky broiler which supplies hatching eggs to Altaisky Broiler and other current assets of the Company. We also acquired the rights to claim debt from Belaya Ptitsa Kursk, which is expected to add significant modern broiler breeding operations and versatile processing plant, capable to produce value-added, HoReCa, and products aimed to export markets. Samson Food Products will augment our growing presence in Saint Petersburg and broader Northwestern region markets, adding premium well-known deli brands to our portfolio.“



Financial summary


RUB mln

4Q 2018

4Q 2017

y-o-y, %

2018

2017

y-o-y, %

Revenue

31 892

24 336

31.0%

102 639

90 465

13.5%

Net change in fair value of biological assets

(1 954)

858

n.a.

1 836

734

150.1%

Net revaluation of harvested crops in stock

(365)

(1 328)

-72.5%

2 242

(882)

n.a.

Gross profit

7 678

5 752

33.5%

31 923

23 559

35.5%

Gross margin

24.1%

23.6%

 0.5 p.p.

31.1%

26.0%

5.1 p.p. 

Operating expenses and income

(5 498)

(4 085)

34.6%

(16 311)

(13 612)

19.8%

Share of joint ventures and associates

71

(63)

n.a.

(57)

(221)

n.a.

Operating profit

2 251

1 603

40.4%

15 555

9 726

59.9%

Operating margin

7.1%

6.6%

 0.5 p.p.

15.2%

10.8%

 4.4 p.p.

Adjusted EBITDA 1

6 761

2 423

179.0%

20 416

14 643

39.4%

Adjusted EBITDA margin

21.2%

10.0%

 11.2 p.p.

19.9%

16.2%

3.7 p.p. 

Profit before tax

1 303

245

431.7%

11 793

5 956

98.0%

Net profit

1 649

151

994.3%

12 004

5 800

107.0%

Adjusted Net profit 1

3 602

(707)

n.a.

10 168

5 066

100.7%

Net operating cash flow

6 802

3 177

114.1%

14 177

13 016

8.9%

Net debt

 

 

 

58 559

48 669

20.3%


1 In line with the Group’s management accounting practices and described herein (*,**) in more detail, Adjusted EBITDA and Adjusted Net profit don’t include the net change in fair value of biological assets.

Revenue

In 2018 revenue increased by 13.5% y-o-y to RUB 102.6 billion (2017: RUB 90.5 billion). Revenue growth is attributed to higher volumes across all segments, sales mix shift towards branded and value added products, and favourable pricing environment for chicken and pork products in the second half of 2018.

Gross profit

Gross profit increased by 35.5% y-o-y to RUB 31.9 billion, (2017: RUB 23.6 billion). Gross profit was positively affected by revenue growth, operational efficiency gains in chicken and pork segments and associated costs savings, and increase of net change in fair value of biological assets in pork and poultry segments and net revaluation of harvested crops in stock in grain segment, offset by higher input prices for meat processing segment. Gross profit margin improved to 31.1% (2017: 26.0%)

Operating expenses

Operating expenses increased by 19.8% y-o-y to RUB 16.3 billion, (2017: RUB 13.6 billion), due to higher selling expenses, which in turn is mostly driven by broadening of our distribution network, and G&A expenses largely unchanged from previous year. Operating expenses as a percentage of sales increased to 15.9% (2017: 15.0%). Share of loss of joint ventures and associates decrease by 74.3% y-o-y to RUB 0.06 billion (2017: RUB 0.22 billion).

Adjusted EBITDA

Adjusted EBITDA of RUB 20.4 billion, increased by 39.4% y-o-y. Adjusted EBITDA margin improved to 19.9% (2017: 16.2%) due to higher revenue across segments, improved profitability of poultry, pork and grain segments, and strict cost control on the corporate level.

Interest expense

Net interest expense in 2018 declined by 10.8% y-o-y to RUB 3.3 billion.

Net profit

Net profit for the Group totalled RUB 12.0 billion in 2018, up 107.0% compared to RUB 5.8 billion in 2017. Net profit margin improved to 11.7% from 6.4% a year ago.

Adjusted net profit increased by 100.7% to RUB 10.2 billion, from RUB 5.1 billion a year ago. Adjusted net profit margin improved to 9.9% from 5.6% a year ago.

Cash flow

Operating cash flow of RUB 14.2 billion (2017: RUB 13.0 billion), an increase of 8.9% affected by working capital increase due to higher interest payments coupled with lower government grants for compensation of interest expense.

Capital expenditure and debt

The Group’s capital expenditure on property, plant, equipment and maintenance amounted to RUB 9.8 billion during 2018, a decline of 20.9% y-o-y. Kashira facility completion and construction of new wean-to-finish pork facilities were major projects of capital expenditures in the reported period.

As of December 31, 2018, net debt*** was RUB 58.6 billion, compared to RUB 48.7 billion at the end of 2017. Gross debt increased to RUB 68.8 billion as of December 31, 2018, compared to 50.0 billion a year ago. At the end of 4Q18 long-term debt accounted for 65% of the debt portfolio and amounted to RUB 44.6 billion. The effective cost of debt was 4.7% as of December 31, 2018 (December 31, 2017: 7.3%). Subsidised loans and credit facilities made up 40% of the debt portfolio in 2018 (2017: 35%). Cash and cash equivalents amounted to RUB 9.6 billion as of December 31, 2018.

Subsidies

Starting from 1 January 2017 the Group receives government grants through accredited banks, who provide loans to agricultural producers at reduced rates not exceeding 5% per annum on Rouble-denominated loans (“reduced rate lending subsidy”). The difference between market rate and the reduced rate equals the Refinancing Key rate of the Central Bank of Russia and is compensated by Ministry of Agriculture to the accredited banks. Total government grants for compensation of interest expense grossed of related interest expense amounted to RUB 1.3 billion RUB.

Net change in fair value of biological assets

A higher net change in fair value of biological assets is explained by a higher valuation of sows, market hogs, and by higher market prices of the products that the Group produces.

Business segments

 Divisions

Sales volume

Change y-o-y, %

Revenue2

Change y-o-y, %

2018, k tonnes

2017, k tonnes

2018, RUB mln

2017, RUB mln

Chicken

544.2

522.5

4.1%

53 797

47 401

13.5%

Turkey 3

39.2

26.3

49.1%

5 815

3 898

49.2%

Pork

236.9

200.3

18.3%

23 576

18 688

26.2%

Meat processing

229.5

204.2

12.4%

38 439

34 020

13.0%


2 Revenue includes inter-segment sales

3 Volume and revenue reported in turkey section represent turkey sales by Trading Company “Cherkizovo”



Poultry Division

Sales volumes in 2018 increased by 4.1% to 544.2 thousand tonnes (2017: 522.5 thousand tonnes). The average selling price increased by 9.1% y-o-y to 96.9 RUB/kg due to growth of Petelinka and Chicken Kingdom sales of 35% and 24% y-o-y respectively, shift in the sales mix towards cut-up products, coupled with distribution focused on modern retail trade and HoReCa products gain of 44% y-o-y. As a result, segment’s revenue was up 13.5% and amounted to RUB 53.8 billion (2017: RUB 47.4 billion).

Gross profit was up by 29.1% y-o-y and totalled RUB 13.5 billion, (2017: RUB 10.5 billion) on higher volumes and sales price, operational efficiency gains resulted in cost savings, the change in fair value of biological assets, offset by higher feed costs. Gross margin improved to 25.1%, from 22.1% in 2017.

Operating expenses as a percentage of sales amounted to 11.3%, unchanged from 2017 results. Operating income increased by 44.8% y-o-y to RUB 7.4 billion (2017: RUB 5.1 billion). Operating margin increased to 13.8% from 10.8% in 2017.

The segment’s profit before income tax amounted to RUB 6.9 billion (2017: RUB 4.0 billion).

Adjusted EBITDA increased by 17.8% y-o-y to RUB 8.4 billion (2017: RUB 7.1 billion), while Adjusted EBITDA margin increased to 15.6% from 15.0% a year ago.



Pork Division

Sales volumes in 2018 increased by 18.3% y-o-y, to 236.9 thousand tonnes (2017: 200.3 thousand tonnes). The average selling price of 98.2 RUB/kg, up by 6.6% y-o-y compared to 92.1 RUB/kg a year ago. The segment’s revenue increased by 26.2% y-o-y to RUB 23.6 billion (2017: RUB 18.7 billion), on the back of higher volumes and better pricing.

Gross profit increased by 61.2% y-o-y, to RUB 11.2 billion (2017: RUB 6.9 billion) due to higher sales volumes and prices, further improvement in operational KPI’s translated into cost savings and a non-cash change in the fair value of biological assets of RUB 0.9 billion. The segment’s gross margin improved to 47.4%, from 37.1% a year ago.

Operating expenses as a percentage of sales amounted to 3.3%, compared to 3.4% in 2017.

Operating income was up 65.0% y-o-y, to RUB 10.4 billion from RUB 6.3 billion in 2017. The segment’s operating margin increased to 44.2% from 33.8% a year ago.

The segment’s profit before income tax amounted to RUB 9.9 billion compared to the 2017 result of RUB 5.6 billion.

Adjusted EBITDA increased by 60.2% y-o-y to RUB 10.9 billion (2017: RUB 6.8 billion). Adjusted EBITDA margin improved to 46.2% from 36.4% in 2017.



Meat Processing Division

Sales volumes in 2018 increased by 12.4% y-o-y to 229.5 thousand tonnes (2017: 204.2 thousand tonnes). The average selling price was unchanged at 169.6 RUB/kg (2017: 170.1 RUB/kg). The segment’s revenue increased by 13.0% and reached RUB 38.4 billion (2017: RUB 34.0 billion). Revenue growth was driven by higher volumes of the carcass in the sales mix, on the back of higher volumes of market hogs production in the pork segment.

Gross profit declined by 28.9% y-o-y to RUB 4.2 billion, (2017: RUB 6.0 billion). The gross margin fell to 11.0% from 17.5 % a year ago on higher prices of input materials.

Operating expenses as a percentage of sales amounted to 12.3%, vs. 12.5% in 2017.

Operating income turned to negative RUB 0.5 billion from RUB 1.7 billion in 2017. Operating margin decreased to negative 1.2% from 5.0% in 2017.

The segment’s loss before income tax was RUB 1.0 billion, compared to a profit RUB 1.4 billion a year ago.

Adjusted EBITDA declined by 80.9% to RUB 0.5 billion from RUB 2.4 billion in 2017.



Grain Division

Sales volumes in 2018 increased by 53.6% y-o-y to 696.1 thousand tonnes (2017: 453.3 thousand tonnes) as we shifted crop acrage towards wheat growing. The segment’s revenue increased by 115.7% and reached RUB 7.0 billion (2017: RUB 3.2 billion).

Gross profit turned positive to RUB 2.1 billion (2017: negative RUB 1.3 billion). The gross margin increased to 30.8% from negative 40.8% a year ago on higher volumes and sale price and net revaluation of harvested crops in stock of RUB 1.3 billion.

Operating expenses as a percentage of sales declined to 6.2%, from 8.3% in 2017.

Operating income improved to RUB 1.7 billion from RUB a loss of 1.6 billion in 2017. Operating margin came to 24.6% from negative 49.2% in 2017.

The segment’s profit before income tax was RUB 1.5 billion, compared to a loss of RUB 1.8 billion a year ago.

Adjusted EBITDA amounted to RUB 2.3 billion compared to a loss of RUB 1.1 billion in 2017.

Outlook

Our strategy remains focused on Russian domestic consumer, supported by a sustained increase in branded value-added products in our sales portfolio. We intend to leverage our market-leading positions in poultry and pork segments while concentrating on our core brands Petelinka, Chicken Kingdom, Pava-Pava and Cherkizovo, as well as recently acquired Samson and Altaisky Broiler. We anticipate that our new acquisitions will deliver increased scale and significant operational synergies with existing operations, which will translate into further cost savings for the Сompany.

Federal retail chains will remain our key partners for distribution domestically, but we expect growth acceleration with our HoReCa clients, and will selectively pursue export opportunities of the poultry products. Going forward our organic growth will shift to the meat processing segment where we see significant upside with multiple products that will support our brand equity, and to selective M&A, aligned with our strategic goals.


For more information please visit www.cherkizovo.com or contact:

Investor Relations

Andrei Novikov

Phone: +7 495 6602440 ext. 15430

a.novikov@cherkizovo.com

PR and Media

Phone: +7 495 6602440

pr@cherkizovo.com



About Cherkizovo Group

Cherkizovo Group is the largest meat and feed producer in Russia. The Group is a top-3 producer in each of the Russian poultry, pork and processed meat markets.

Cherkizovo Group encompasses nine full cycle poultry production facilities, sixteen modern pork production facilities, eight meat processing plants, nine feed mills and 290 thousand hectares of agricultural land. The Group also includes Tambov Turkey facility, a joint Russian-Spanish venture. In 2018, Cherkizovo Group produced c. 1 mn tonnes of meat and meat products and generated revenue of RUB 102.6 billion.

Thanks to its vertically integrated structure, which includes grain growing and storage, feed production, livestock breeding, fattening and slaughtering, and meat processing, alongside a distribution system. We aim to offer to our consumers the highest quality products catered to their preferences. Our success is based on the well-known brands in our portfolio and the loyalty of our consumers.

Cherkizovo Group shares are traded on the Moscow Exchange (MOEX).










Some figures in this press-release are rounded for the reader’s convenience.

Some of the information in this press release may contain projections or other forward-looking statements regarding future events or the future financial performance of Cherkizovo Group. You can identify forward looking statements by terms such as “expect,” “believe,” “anticipate,” “estimate,” “intend,” “will,” “could,” “may” or “might” the negative of such terms or other similar expressions. We wish to caution you that these statements are only predictions and that actual events or results may differ materially. We do not intend to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Many factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, general economic conditions, our competitive environment, risks associated with operating in Russia, rapid technological and market change in our industry, as well as many other risks specifically related to Cherkizovo Group and its operations.

Non-IFRS financial measures. This press release includes financial information prepared in accordance with international financial reporting standards, or IFRS, as well as other financial measures referred to as non-IFRS. The non-IFRS financial measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with IFRS.

* Adjusted Earnings before Interest, Income Tax, Depreciation and Amortization (“Adjusted EBITDA”). Adjusted EBITDA is defined as profit for the period before income tax expense/benefit, interest income and interest expense, net, foreign exchange loss/gain, depreciation and amortisation expense, net change in fair value of biological assets, bonuses to employees under long-term incentive program and share of loss of joint ventures and associates plus share of adjusted EBITDA of joint ventures and associates and depreciation and amortisation accumulated in harvested crops in stock as shown in the reconciliation in Appendix 1. Adjusted EBITDA margin is defined as Adjusted EBITDA as a percentage of our net revenues. Our adjusted EBITDA may not be similar to adjusted EBITDA measures of other companies; is not a measurement under IFRS accounting principles and should be considered in addition to, but not as a substitute for, the information contained in our consolidated statement of operations. We believe that adjusted EBITDA provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations, including our ability to fund discretionary spending such as capital expenditures, acquisitions and other investments and our ability to incur and service debt. While depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent the non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods. Our adjusted EBITDA calculation is commonly used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies within our industry. Adjusted EBITDA is reconciled to our consolidated statements of operations in Appendix 1.

** Adjusted Net profit Adjusted Net profit is defined as profit for the period before net change in fair value of biological assets. Adjusted Net profit margin is defined as Adjusted Net profit as a percentage of our net revenues. Our Adjusted Net profit may not be similar to Adjusted Net profit measures of other companies; is not a measurement under IFRS accounting principles and should be considered in addition to, but not as a substitute for, the information contained in our consolidated statement of operations. We believe that Adjusted Net profit provides useful information to investors in order to estimate dividend payout.

*** Net debt is calculated as total debt minus cash and cash equivalents, short-term bank deposits and long-term bank deposits.