Cherkizovo Group Announces third quarter and nine months 2019 Financial Results

November 21, 2019

Moscow, Russia – November 21, 2019– PJSC Cherkizovo Group (MOEX: GCHE), the largest vertically integrated meat producer in Russia, today announces its unaudited consolidated IFRS results for the third quarter and nine months of 2019.

Third quarter financial highlights

· Revenue increased by 21.4% year-on-year (y-o-y) to RUB 30.0 billion.

· Gross profit of RUB 6.4 billion increased by 11.1% from 3Q18.

· Adjusted EBITDA* expanded by 15.4% y-o-y to RUB 7.6 billion. Adjusted EBITDA margin amounted to 25.3%, up from 26.6% in 3Q18.

· Net profit came to RUB 1.2 billion, a 25.5% decline from RUB 1.6 billion in 3Q18. Adjusted net profit** totalled RUB 4.0billion compared to RUB 3.7 billion a year ago.

Nine monthsfinancial highlights

· Revenue increased by 23.8% y-o-y to RUB 85.6 billion.

· Net change in fair value of biological assets changed to negative RUB 0.6billion, compared to RUB 4.0 billion in 9M18. Net revaluation of harvested crops in stock totalled RUB 0.7 billion, compared to RUB 2.4 billion in 9M18.

· Gross profit of RUB 21.0 billion declined by 5.9% compared to a year ago.

· Adjusted EBITDA* up by 14.8% y-o-y and amounted to RUB 15.7 billion. Adjusted EBITDA margin declined to 18.3%, from 19.7% in 9M18.

· Net profit fell to RUB 6.6 billion from RUB 10.4 billion in 9M18. Adjusted net profit** increased to RUB 7.2billion, up 13.0% y-o-y from RUB 6.4 billion a year ago.

· Net debt amounted to RUB 62.4 billion as of September 30, 2019.

Third quarter corporate highlights

· In September, the Group launched a comprehensive revamp of its flagship brand, Cherkizovo. The changes impacting both the product appearance and ingredients are designed to emphasize our focus on customers and quality.

Key corporate highlights after the reporting period

· In October, the Company announced an expansion of Tambov Turkey, a joint venture producer of Pava-Pava branded turkey. The project, estimated to cost RUB 4 billion, will increase turkey volumes by 50% to 82 thousand tons, with new volumes expected in early 2021.

· In October, Cherkizovo purchased 100% shares of Rovensky Broiler for RUB 1.7 billion. The acquired company is a hatching egg producer with production capacity of 80 million eggs/year, located in the Belgorod region, close to our existing operations. The deal makes the company self-sufficient in hatching eggs, closing the gap in hatching egg supply, that appeared after we’d acquired a few assets in 2018.

Sergei Mikhailov, CEO of Cherkizovo, commented:

“Our performance year to date was mixed. The chicken segment was bolstered by sales of Petelinka branded products, which increased by 20% y-o-y as we broadened distribution and fine-tuned sales mix. Foodservice and export offering of poultry products increased significantly with immediate effect on sales and profits. Results of the pork business deteriorated due to the softer pricing environment, driven by capacity additions domestically, while our cost leadership position remains. In the meat processing segment the profitability was challenged by market competitive dynamics, but we’ve taken necessary steps to rebuild our platform: started a comprehensive rebranding campaign, coupled with SKU optimization, and facilitated by promotions to aid our positions in the retail channel. We continue refining our customer proposition and anticipate further results’ improvements in this segment in the final months of the year and beyond. Lastly, we are in the final stage of the harvest campaign with encouraging initial estimates to increase volumes by c. 15%.”

Financial summary

RUB mln

3Q 2019

3Q 2018

y-o-y, %

9M 2019

9M 2018

y-o-y, %

Revenue

29 958

24 680

21.4%

85 619

69 187

23.8%

Net change in fair value of biological assets

(2 813)

(2 076)

35.5%

(565)

3 989

n.a.

Net revaluation of harvested crops in stock

1 324

1 463

-9.5%

664

2 408

-72.4%

Gross profit

6 374

5 736

11.1%

20 991

22 317

-5.9%

Gross margin

21.3%

23.2%

-2.0 p.p.

24.5%

32.3%

-7.7 p.p.

Operating expenses , net

(3 933)

(3 011)

30.6%

(11 880)

(8 887)

33.7%

Share of profit/loss of joint ventures and associates

(84)

102

n.a.

(220)

(128)

71.9%

Operating profit

2 357

2 827

-16.6%

8 891

13 302

-33.2%

Operating margin

7.9%

11.5%

-3.6 p.p.

10.4%

19.2%

-8.8 p.p.

Adjusted EBITDA 1

7 572

6 563

15.4%

15 662

13 647

14.8%

Adjusted EBITDA margin

25.3%

26.6%

-1.3 p.p.

18.3%

19.7%

-1.4 p.p.

Profit before income tax

1 441

1 782

-19.1%

6 639

10 490

-36.7%

Net profit

1 227

1 646

-25.5%

6 628

10 354

-36.0%

Adjusted Net profit 1

4 040

3 722

8.5%

7 193

6 365

13.0%

Net operating cash flow

5 327

2 581

106.4%

8 949

7 374

21.4%

Net debt

 

 

 

62 390

51 078

22.1%

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 nine months of 2019, revenue increased by 23.8% y-o-y to RUB 85.6 billion (9M18: RUB 69.2 billion). Revenue growth is attributed to higher volumes across business lines, primarily in the chicken segment, with volumes added in the late 2018 following a string of M&A, and better pricing environment for poultry products.

Gross profit

Gross profit declined by 5.9% y-o-y to RUB 21.0 billion, (9M18: RUB 22.3 billion). Revenue growth was offset by the negative net change in fair value of biological assets, lower effect from net revaluation of harvested crops in stock, and cost pressure from higher grains price. Gross profit margin declined to 24.5% (9M18: 32.3%).

Operating expenses

Operating expenses increased by 33.7% y-o-y to RUB 11.9 billion, from RUB 8.9 billion a year ago. Operating expenses as a percentage of sales increased to 13.9% (9M18: 12.8%). Selling, general, and administrative expenses of RUB 11.9 billion increased by 27.0%, and as a percentage of sales amounted to 13.9% compared to 13.5% a year ago.

Adjusted EBITDA

Adjusted EBITDA of RUB 15.7 billion, increased by 14.8% y-o-y. Adjusted EBITDA margin declined to 18.3% (9M18: 19.7%) driven by softer pricing in the pork segment, marginal decline in profitability in meat processing, and offset by better results in the chicken business.

Interest expense                                                                                                                           

Net interest expense in 9M19 increased by 24.2% y-o-y to RUB 3.1 billion.

Net profit

Net profit for the Group totaled RUB 6.6 billion in 9M19, down 36.0% compared to RUB 10.4 billion in 9M18. Net profit margin declined to 7.7% from 15.0% a year ago.

Adjusted net profit increased by 13.0% y-o-y to RUB 7.2 billion, from RUB 6.4 billion a year ago. Adjusted net profit margin amounted to 8.4%, compared to 9.2% a year ago.

Cash flow

Operating cash flow expanded by 21.4% to RUB 8.9 billion (9M18: RUB 7.4 billion), driven by working capital outflow.

Capital expenditure and debt

The Group’s capital expenditure on property, plant, equipment and maintenance amounted to RUB 6.2 billion during 9M19, a decline of 17.3% y-o-y as we curtail our major capital-intensive projects.

As of September 30, 2019, net debt*** was RUB 62.4 billion, compared to RUB 51.1 billion at the end of 9M18. Gross debt increased to RUB 65.5 billion as of September 30, 2019, compared to RUB 53.8 billion a year ago. At the end of 9M19 long-term debt accounted for 51% of the debt portfolio and amounted to RUB 33.4 billion. The effective cost of debt**** was 5.9% as of September 30, 2019. Subsidized loans and credit facilities made up 40% of the debt portfolio in 9M19 (9M18: 33%).

 

 

Subsidies

Total government grants for compensation of interest expense recognized in profit and loss amounted to RUB 1.3 billion RUB.

Net change in fair value of biological assets

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

 

Business segments

 

 Divisions

Sales volume

Change y-o-y, %

Revenue 2

Change y-o-y, %

9m19, k ton

9m18, k ton

9m19, RUB mln

9m18, RUB mln

Chicken

487.6

399.8

22.0%

51 192

36 500

40.3%

Turkey 3

28.2

29.6

-4.7%

4 722

4 002

18.0%

Pork

195.2

166.7

17.1%

18 118

16 198

11.9%

Meat processing

178.7

169.9

5.2%

29 315

28 058

4.5%

Samson 4

15.6

-

N/A

-

-

-

2 Revenue includes inter-segment sales

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

4 Volumes denote to sales volumes of associate company Samson – Food Products.

 

Poultry Division     

Sales volumes in 9M19increased by 22.0% to 487.6 thousand tonnes (9M18:399.8 thousand tonnes). The average selling price increased by 14.9% y-o-y to 104.9 RUB/kg. Sales of our key brand in the retail channel, Petelinka, expanded by 20.3% compared to 9M18, while sales in the foodservice channel more than doubled, and exports volumes picked up following removal of China exports restrictions for chicken products. As a result, the segment’s revenue increased by 40.3% and amounted to RUB 51.2 billion (9M18: RUB 36.5 billion).

Gross profit was up by 41.1% y-o-y and totaled RUB 11.7 billion, (9M18: RUB 8.3 billion) as sales mix improved, and we kept major cost items under control. Gross margin increased to 22.8%, from 22.6% in 9M18.

Operating expenses as a percentage of sales remained unchanged at 10.3% compared to 10.2% a year ago. Operating income increased by 40.8% y-o-y toRUB 6.4 billion (9M18: RUB 4.5 billion). Operating margin stepped up to 12.5% from 12.4% in 9M18.

The segment’s profit before income tax amounted to RUB 5.6 billion (9M18: RUB 4.1 billion).

Adjusted EBITDA of RUB 8.8 billion, increased by 72.4% y-o-y, while Adjusted EBITDA margin increased to 17.3% from 14.1% a year ago.

Pork Division

Sales volumes in 9M19 increased by 17.1% y-o-y, to 195.2 thousand tonnes (9M18: 166.7 thousand tonnes). The average selling price of 92.8 RUB/kg, declined by 4.4% y-o-y compared to 97.2 RUB/kg a year ago, as acceleration of domestic pork supply weighed on prices. The segment’s revenue increased by 11.9% y-o-y to RUB 18.1 billion (9M18: RUB 16.2 billion) with our recently build production facilities ramping up production.

Gross profit of RUB 5.2 billion declined by 45.7% compared to 9M18, on softer price environment and 12.0% cost inflation in per kg pork production. The segment’s gross margin declined to 28.9%, from 59.6% a year ago.

Operating income amounted to RUB 4.9 billion (9M18: RUB 9.6 billion). The segment’s operating margin declined to 26.9% from 59.0% a year ago.

The segment’s profit before income tax declined by 54.4% y-o-y to RUB 4.2 billion (9M18: RUB 9.2 billion).

Adjusted EBITDA compressed by 13.4% y-o-y to RUB 6.6 billion (9M18: RUB 7.6 billion). Adjusted EBITDA margin declined to 36.3% from 46.9% in 9M18.

Meat Processing Division

Sales volumes in 9M19 increased by 5.2% y-o-y to 178.7 thousand tonnes (9M18: 169.9 thousand tonnes). The average selling price declined by 1.0% y-o-y to 163.8 RUB/kg (9M18: 165.5 RUB/kg). The segment’s revenue increased by 4.5% and reached RUB 29.3 billion (9M18: RUB 28.1 billion). Revenue growth is attributed to higher volumes of the pork carcass in the sales mix, on the back of expanded live pork operations, coupled with better pricing for sausages and cuts.

Gross profit declined by 27.6% y-o-y to RUB 1.8 billion, (9M18: RUB 2.5 billion). The gross margin fell to 6.2% from 9.0% a year ago.

Operating expenses as a percentage of sales amounted to 10.7%, vs. 9.5% in 9M18.

Operating loss amounted to RUB 1.4 billion compared to RUB 0.1 billion in 9M18.

The segment’s loss before income tax was RUB 1.1 billion, compared to a loss of RUB 0.5 billion a year ago.

Adjusted EBITDA turned to negative RUB 0.3 billion from RUB 0.5 billion in 9M18 as we intensified marketing activities to support sales of the value-added products.

Outlook

Consumer confidence in the third quarter improved from low levels observed earlier this year on the back of declining inflation and absence of bad news, but is yet to return to the sustainable growth trajectory. Nevertheless, we remain optimistic with regards to the economic conditions as we enter final months of the year, seasonally strong festive season and into 2020.

We stay committed to the domestic market where we retain leadership positions and keep pushing our flagship brands in poultry and pork categories to grow further, simultaneously re-focusing to the fast growing new channels – foodservice and exports, the latter set to expand significantly in upcoming quarters.

 

 

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.

 

The Group’s operations are spread over the full production cycle from grain and feed production to animal breeding, meat processing and distribution. The operational facilities of the Group include eight meat processing plants (including meat processing plant operated by an equity associate Samson – Food Products), nineteen pork farms, nine poultry production complexes (including the Belaya Ptitsa production complex which is currently operate pursuant to a lease agreement), nine animal feed plants, twelve grain elevators and circa 300 thousand hectares of agricultural land, 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.