Cherkizovo Group Announces Financial Results for the first quarter 2019

May 17, 2019

Moscow, Russia – May 17, 2019– PJSC Cherkizovo Group (MOEX: GCHE), the largest vertically integrated meat producer in Russia, today announces its unaudited consolidated IFRS results for the first quarter 2019.

First quarter financial highlights

- Revenue increased by 24.6% year-on-year (y-o-y) to RUB 26.7 billion.

- Net change in fair value of biological assets amounted to RUB 1.4 billion, compared to RUB 2.5 billion in 1Q18. Net revaluation of harvested crops in stock changed to negative RUB 0.5 billion from RUB 0.5 billion in 1Q18.

- Gross profit of RUB 7.2 billion up by 5.2% compared to 1Q18.

- Adjusted EBITDA* up by 48.9% y-o-y to RUB 4.0 billion. Adjusted EBITDA margin expanded to 15.1% from 12.6% in 1Q18.

- Net profit increased to RUB 3.2 billion from RUB 3.0 billion in 1Q18. Adjusted net profit** amounted to RUB 1.8billion, compared to RUB 0.5 billion a year ago.

- Net debt amounted to RUB 62.1 billion as of March 31, 2019.

First quarter corporate highlights

- During the quarter the company launched two new wean-to-finish facilities.

- Annual General Meeting approved dividends of RUB 101.63 per share, on top of the interim dividends announced in the third quarter of 2018. Total dividends for 2018 amounted to RUB 122.11 per share.

- Our brands were further recognized by winning several awards during the quarter: Petelinka was named a winner of “The Best Brand” category at the Healthy Nutrition award ceremony, and Pava-Pava won the German Design Award for “Excellent Communications Design Packaging.”

Key corporate highlights after reporting period

- In April, we strengthened our management team across various business units, promoting five internal candidates to the Management Board of the Group. We congratulate Sergei Buylov, Ray Cheeks, Roger Jones, Alexei Kletsko and Evgeny Subbotin with their new roles.

Sergei Mikhailov, CEO of Cherkizovo, commented:

“We had yet another quarter in terms of the record volumes produced in the chicken and pork segments, which allowed us to maintain an undisputable leadership position on the domestic meat market. While the first quarter remains a seasonally slow quarter for our business, the company managed to earn RUB 4.0 billion of EBITDA and RUB 1.8 billion of profits, well above the results of the previous year.

The integration and relaunch of some of the recently acquired facilities already become visible in our performance and expected to fuel the growth in the upcoming quarters. At the same time, our core business remains strong. The focus on value-added products, where sales of our major brands Petelinka, Chicken Kingdom and Cherkizovo added 37%, 19%, and 9% respectively, compared to last year results, is intact. Pava-Pava branded products and HoReCa where among other drivers of growth, both almost doubling sales in the reported quarter.”

Financial summary

RUB mln

1Q 2019

1Q 2018

y-o-y, %

Revenue

26 681

21 421

24.6%

Net change in fair value of biological assets

1 361

2 469

-44.9%

Net revaluation of harvested crops in stock

(455)

468

n.a.

Gross profit

7 179

6 825

5.2%

Gross margin

26.9%

31.9%

-5.0 p.p.

Operating expenses and income

(3 681)

(2 858)

28.8%

Share of joint ventures and associates

(51)

(373)

n.a.

Operating profit

3 447

3 594

-4.1%

Operating margin

12.9%

16.8%

-3.9 p.p.

Adjusted EBITDA 1

4 032

2 708

48.9%

Adjusted EBITDA margin

15.1%

12.6%

2.5 p.p.

Profit before income tax

2 899

2 938

-1.3%

Net profit

3 201

2 954

8.4%

Adjusted Net profit 1

1 840

485

279.4%

Net operating cash flow

(61)

1 024

n.a.

Net debt

62 084

49 727

24.8%

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 the first quarter of 2019 revenue increased by 24.6% y-o-y to RUB 26.7 billion (1Q18: RUB 21.4 billion). Revenue growth is attributed to higher volumes and prices in chicken and pork segments, and further growth of branded and value-added products in the sales mix.

Gross profit

Gross profit increased by 5.2% y-o-y to RUB 7.2 billion, (1Q18: RUB 6.8 billion). Gross profit was positively affected by revenue growth, the net change in fair value of biological assets in pork segment, offset by net revaluation of harvested crops in stock in grain segment and higher input prices for meat processing segment that weighed on profitability. Gross profit margin declined by five percentage points to 26.9% (1Q18: 31.9%).

Operating expenses

Operating expenses increased by 28.8% y-o-y to RUB 3.7 billion, (1Q18: RUB 2.9 billion), due to higher selling expenses, as we expand our presence to new regions domestically, and G&A expenses. Operating expenses as a percentage of sales increased to 13.8% (1Q18: 13.3%).

Adjusted EBITDA

Adjusted EBITDA of RUB 4.0 billion, increased by 48.9% y-o-y. Adjusted EBITDA margin improved to 15.1% (1Q18: 12.6%) due to higher revenue across segments, and better profitability of poultry and pork segments.

Interest expense                                                                                                                           

Net interest expense in 1Q19 increased by 47.4% y-o-y to RUB 1.1 billion.

Net profit

Net profit for the Group totalled RUB 3.2 billion in 1Q19, up 8.4% compared to RUB 3.0 billion in 1Q18. Net profit margin declined to 12.0% from 13.8% a year ago.

Adjusted net profit almost quadrupled to RUB 1.8 billion, from RUB 0.5 billion a year ago. Adjusted net profit margin improved to 6.9% from 2.3% a year ago.

Cash flow

Operating cash flow turned negative to RUB 0.1 billion (1Q18: RUB 1.0 billion), affected by higher interest payments and working capital increase, on the back of higher grain and biological assets inventory.

Capital expenditure and debt

The Group’s capital expenditure on property, plant, equipment and maintenance amounted to RUB 1.7 billion during 1Q19, a decline of 13.7% y-o-y. Investments in the grain segment and new wean-to-finish pork facilities were significantprojects of capital expenditures in the reported period.

As of March 31, 2019, net debt*** was RUB 62.1 billion, compared to RUB 49.7 billion at the end of 1Q18. Gross debt increased to RUB 70.1 billion as of March 31, 2019, compared to 52.5 billion a year ago. At the end of 1Q19 long-term debt accounted for 45% of the debt portfolio and amounted to RUB 31.7 billion. The effective cost of debt**** was 5.2% as of March 31, 2019 (March 31, 2018: 7.0%). Subsidised loans and credit facilities made up 36% of the debt portfolio in 1Q19 (1Q18: 29%). Cash and cash equivalents amounted to RUB 7.4 billion as of March 31, 2019.

Subsidies

Total government grants for compensation of interest expense amounted to RUB 0.4 billion RUB.

Net change in fair value of biological assets

Net change in fair value of biological assets is explained by a higher valuation of market hogs, accounting for the upcoming harvest, and lower market prices for the poultry products.


Business segments

 Divisions

Sales volume

Change y-o-y, %

Revenue 2

Change y-o-y, %

1Q19, k ton

1Q18, k ton

1Q19, RUB mln

1Q18, RUB mln

Chicken

151.6

137.5

10.2%

15 740

11 289

39.4%

Turkey 3

8.2

9.7

-15.6%

1 463

1 130

29.5%

Pork

65.9

54.8

20.3%

5 880

4 474

31.4%

Meat processing

53.6

53.1

0.9%

8 766

8 204

6.9%

Samson

5.0

-

N/A

-

-

-

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 1Q19increased by 10.2% to 151.6 thousand tonnes (1Q18:137.5 thousand tonnes). The average selling price increased by 26.2% y-o-y to 103.56 RUB/kg due to the ongoing shift of the portfolio towards branded products as sales of our two major brands Petelinka and Chicken Kingdom increased by 37% and 19% y-o-y respectively, growth of sales in the HoReCa channel – up 98% y-o-y, and positive effect of recently acquired facilities. As a result, the segment’s revenue increased by 39.4% and amounted to RUB 15.7 billion (1Q18: RUB 11.3 billion).

Gross profit was up by 26.0% y-o-y and totalled RUB 2.5 billion, (1Q18: RUB 2.0 billion) on higher volumes and sales price, operational efficiency gains resulted in cost savings, the offset by change in fair value of biological assets and higher feed costs. Gross margin declined to 15.9%, from 17.6% in 1Q18.

Operating expenses as a percentage of sales improved to 10.3% from 11.1% a year ago. Operating income increased by 33.8% y-o-y toRUB 1.0 billion (1Q18: RUB 0.7 billion). Operating margin declined to 6.2% from 6.4% in 1Q18.

The segment’s profit before income tax amounted to RUB 0.7 billion (1Q18: RUB 0.6 billion).

Adjusted EBITDA more than doubled and amounted to RUB 2.4 billion, an increase of 135.9% y-o-y, while Adjusted EBITDA margin increased to 15.5% from 9.2% a year ago.

Pork Division

Sales volumes in 1Q19 increased by 20.3% y-o-y, to 65.9 thousand tonnes (1Q18: 54.8 thousand tonnes). The average selling price of 89.17 RUB/kg, up by 9.3% y-o-y compared to 81.59 RUB/kg a year ago. The segment’s revenue increased by 31.4% y-o-y to RUB 5.9 billion (1Q18: RUB 4.5 billion), on the back of higher volumes and better pricing.

Gross profit of RUB 3.5 billion remained unchanged compared to 1Q18, due to higher sales volumes and prices, further improvement in operational KPI’s translated into cost efficiencies on a per kg basis despite the growth of feed ingredients, and change in the fair value of biological assets of RUB 1.7 billion. The segment’s gross margin declined to 59.0%, from 77.3% a year ago.

Operating expenses as a percentage of sales amounted to 2.4%, compared to 1.9% in 1Q18.

Operating income amounted to RUB 3.3 billion (1Q18: RUB 3.4 billion). The segment’s operating margin declined to 56.6% from 75.4% a year ago.

The segment’s profit before income tax declined by 7.7% y-o-y to RUB 3.1 billion (1Q18: RUB 3.3 billion) due to higher interest expense.

Adjusted EBITDA increased by 26.1% y-o-y to RUB 2.0 billion (1Q18: RUB 1.6 billion). Adjusted EBITDA margin declined to 34.6% from 36.1% in 1Q18.

Meat Processing Division

Sales volumes in 1Q19 increased by 0.9% y-o-y to 53.6 thousand tonnes (1Q18: 53.1 thousand tonnes). The average selling price increased by 4.9% y-o-y to 162.85 RUB/kg (1Q18: 155.29 RUB/kg). The segment’s revenue increased by 6.9% and reached RUB 8.8 billion (1Q18: RUB 8.2 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 52.1% y-o-y to RUB 0.5 billion, (1Q18: RUB 1.1 billion). The gross margin fell to 5.9% from 13.1% a year ago on higher prices of input materials.

Operating expenses as a percentage of sales amounted to 10.7%, vs. 10.2% in 1Q18.

Operating profit turned to negative RUB 0.5 billion from RUB 0.2 billion in 1Q18.

The segment’s loss before income tax was RUB 0.2 billion, compared to a profit RUB 0.2 billion a year ago, on lower results from operations partially offset by RUB 0.3 billion FX gain, related to EUR denominated loan.

Adjusted EBITDA turned to negative RUB 0.1 billion from RUB 0.4 billion in 1Q18.

Significant changes in classification and segment presentation

Starting from 1 January 2019 the Group changed the method of classification of:

a)    General and administrative expenses incurred on production sites and related to production (property tax, payroll costs of site managers and other), which are now classified within Cost of sales. The effect of the change in classification for 1Q18 resulted in an increase of Cost of sales by RUB 0.6 billion and relevant decrease in Selling, general and administrative expenses.

b)    Other sales and related cost of sales. The Group now shows other sales related to non-core activities of the Group (rent income, grain elevator services, sales of by-products and others) netted with related cost of sales within Other operating income. The effect of the reclassification for 1Q18 resulted in a decrease of Sales by RUB 0.5 billion, decrease in Cost of sales by RUB 0.4 billion and decrease in Other operating expenses by RUB 0.1 billion.

Consolidated statement of profit or loss and other comprehensive income for 1Q18 has been retrospectively adjusted to reflect the changes.

The Group changed the presentation of revenue from sales of products from sows’ meat and related cost of sales. Previously, sales of sows from Pork Segment to Meat-Processing Segment were shown as net amount with related costs in other operating expenses of Pork Segment, additional income on products produced from this meat and furtherly sold by Meat-Processing was shown in net-amount from related cost of sows’ meat purchased in Sales of Meat-Processing.

After the change the Group continues to show sales of sows from Pork Segment to Meat-Processing Segment with related costs as net amount in other operating expenses of Pork Segment but the presentation of revenue from the sales of products produced from sows’ meat was changed: now the Group shows such sales and related cost of sales (meat purchased from Pork Segment plus additional costs) separately in Sales and Cost of Sales of Meat-Processing Segment, wherein this gross-up is eliminated in Intersegment column. Comparative information for 1Q18 was also re-presented.

Outlook

We are optimistic as we look into the year-end. We see stronger demand for our products, evidenced by the growth of our value-added portfolio, coupled with better pricing environment compared to the last year. The integration of the acquisitions that we’ve made in late 2018 is on track. A chicken processing plant in Kursk became operational in March, and Altai chicken facility performing in line with our expectations. These facilities will allow us to further strengthen our footprint in the North-Western, Central, South, and Siberian regions.

We remain committed to our long-term strategy to focus on the domestic consumer, whom we serve via various channels, and diversifying our presence across the regions. We will opportunistically explore export opportunities predominantly in the neighbour countries, Middle East, and Asia.

While the company decided not to proceed with a share offering in April due to market conditions, as it was not in the best interests of the shareholders to complete transaction at low levels, our robust growth prospects translating into significant operating and free cash flowswill allow us to pay dividends to shareholders, without excessive leverage of the Group.

     

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

Cherkizovo encompasses eight chicken manufacturing complexes (as well as the Belaya Ptitsa production complex which we currently operate pursuant to a lease agreement), sixteen pork farms, five meat processing plants (and an additional meat processing plant operated by an equity associate Samson – Food Products) and two slaughter facilities, nine animal feed plants, twelve grain elevators, a land bank of c. 290 thousand ha. and a full-cycle turkey production plant in Tambov, owned and operated as a joint venture with Grupo Fuertes, a leading Spanish agriculture and food company.

Due to its vertically-integrated structure, which includes grain growing and storage, feed production, livestock breeding, fattening and slaughtering, and meat processing, alongside a distribution network across Russia, the Group has delivered long-term sales growth and profitability.

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.

**** Effective cost of debt is calculated as LTM interest expense divided over the end of the period gross debt.