Cherkizovo Group Announces first quarter 2020 Financial Results

May 21, 2020

Moscow, Russia – May 21, 2020– PJSC Cherkizovo Group (MOEX: GCHE), the largest vertically integrated meat producer in Russia, today announces its unaudited consolidated IFRS results for the first quarter of 2020.

 

First quarter financial highlights

·        Revenue increased by 13.1% year-on-year (y-o-y) to RUB 30.2 billion.

·        Gross profit of RUB 8.8 billion, was 22.5% higher than year ago result.

·       Adjusted EBITDA* increased by 23.9% y-o-y to RUB 5.0 billion. Adjusted EBITDA margin improved to 16.6%, from 15.1% in 1Q19.

·       The Group’s a net profit RUB of 3.0 billion, declined by 6.1% compared to 1Q19. Adjusted net profit** totalled RUB 1.3 billion, down 36.6% from 1Q19.

First quarter corporate highlights

·                 During the quarter our export sales increased by 3.5 times compared to 1Q19 results and reached USD 35 million. We boosted chicken sales sixfold, primarily to Chinese customers, launched poultry shipments to the United Arab Emirates, and successfully passed audit from Saudi Food and Drug Authority to expand our export footprint in the Middle East going forward.

·                 In February, Cherkizovo decided to proceed with construction of an oil extraction plant, an oil crushing project located in the Lipetsk region, with capex of RUB 7 billion, and a preliminary launch date expected in 2022.

·                 On March 27th, the AGM approved a dividend distribution of RUB 60.92 per share, in line with our dividend policy to pay out 50% of 2019 net income, in addition to interim dividends of RUB 48.79 announced in August, 2019.

·                 On March 27th, the AGM elected seven Directors, with the following notable changes: Elliot Jones stepped down from the Board for personal reasons and Emin Mammadov stepped down to transition to a management role as Deputy CEO. Michael Balay, formerly with Cargill, and Christopher Warmoth, currently with Carlsberg, were elected as two new independent directors.

Key corporate highlights after the reporting period

·                 As the COVID-19 pandemic outbreak continued to expand in Russia, the Russian Government declared a period of non-working days from March 30th to May 11th, 2020. Cherkizovo facilities remained operational, as we are a major food producer in Russia; however, the Company introduced a number of measures already in March to safeguard continuity and security of its operations and employees. These measures among others included elevated hygiene and disinfection measures, adjustment of access to the production sites, re-allocation of some production among plants and hiring of additional personnel to minimize risks of possible disruption. The Company also transferred administrative staff to remote work, and banned international business travel and participation in public events.

Sergei Mikhailov, CEO of Cherkizovo, commented:

“In the first quarter of the year our business delivered higher revenues and profits as volumes rose and we continued to execute tight cost control. In our chicken business, we expanded sales of one of our core brands Chicken Kingdom by 10%, and significantly boosted our export sales, predominantly to China. Pork overproduction domestically continued, and prices for this protein remained under pressure in the absence of available export markets. However, our meat processing operations benefited from the lower cost of pork. Overall, we increased our EBITDA by 24% over Q1 2019 to RUB 5 billion.

In March, we had to readjust our sales between retail and foodservice, as orders from the latter started to decline and became almost extinct in April. We managed to grow export volumes, although international market remains challenging as Brazilian companies benefited from Real devaluation and US producers faced with demand drop in food service offered more volumes to exports. Domestically, we hope that various support mechanisms introduced by the Russian government will mitigate the decline in disposable income for our consumers.

The sharp depreciation of the Ruble that occurred in March is a net negative development for our business, as a proportion of our costs are linked to the dollar or Euro. We countered this through the growth of our export sales, aiming to double export volumes of chicken this year and increase turkey exports, holding multi-month physical grain inventory, and through our focus on achieving self-sufficiency in grain. While our major capital expenditure projects remain on track at this time, we continue to carefully evaluate the timing and safety of construction. We also closely monitor our supply chains for potential disruptions and maintain strong liquidity buffers.

As a major food producer and the largest vertically integrated meat producer in Russia, we are fully aware of our role to maintain food security domestically and ensure steady supply of quality meat products to our customers. We are taking all necessary steps to safeguard the security of our employees across our supply chain from farm to retail.”

Financial summary

RUB mln

1Q 2020

1Q 2019

y-o-y, %

Revenue

30 164

26 681

13.1%

Net change in fair value of biological assets

1 441

1 361

5.9%

Net revaluation of harvested crops in stock

(369)

(455)

-18.9%

Gross profit

8 791

7 179

22.5%

Gross margin

29.1%

26.9%

2.2 p.p.

Operating expenses, net

(4 374)

(3 681)

18.8%

Share of profit/(loss) of joint ventures and associates

232

(51)

n.a.

Adjusted operating profit 1

2 909

2 239

29.9%

Adjusted operating margin

9.6%

8.4%

1.2 p.p.

Adjusted EBITDA 1

4 994

4 032

23.9%

Adjusted EBITDA margin

16.6%

15.1%

1.4 p.p.

Profit before income tax

3 118

2 899

7.6%

Net profit

3 005

3 201

-6.1%

Adjusted Net profit 1

1 265

1 994

-36.6%

Net operating cash flow

1 363

(61)

n.a.

Net debt

62 185

62 084

0.2%

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

Revenue

In 1Q20, revenue increased by 13.1% y-o-y to RUB 30.2 billion (1Q19: RUB 26.7 billion). Revenue growth is attributed to higher volumes across business segments on the back of organic growth and M&A, coupled with better pricing for chicken and turkey, whereas prices for pork and meat processing products were lower compared to 1Q19.

Gross profit

Gross profit increased by 22.5% y-o-y to RUB 8.8 billion, (1Q19: RUB 7.2 billion). Gross profit growth was driven by higher revenue and realized cost efficiencies in feed components, overheads, while realizing a number of productivity gains. Gross profit margin improved to 29.1% (1Q19: 26.9%).

Operating expenses

Operating expenses increased by 18.8% y-o-y, to RUB 4.4 billion on the back of higher production volumes, from RUB 3.7 billion a year ago. Operating expenses as a percentage of sales increased to 14.5% (1Q19: 13.8%).

Adjusted operating profit

Adjusted operating profit of RUB 2.9 billion, increased by 29.9% y-o-y from RUB 2.2 billion a year ago. Our adjusted operating profit excludes net change in fair value of biological assets of the Group’s segments in the amount of RUB 1.4 billion and JV in the amount of RUB 299 million.

Adjusted EBITDA

Adjusted EBITDA of RUB 5.0 billion, up by 23.9% from a year ago (1Q19: RUB 4.0 billion). Adjusted EBITDA margin increased to 16.6% (1Q19: 15.1%) driven by better profitability in the chicken and meat processing business, and marginal decline in profitability in pork segments.

Interest expense                                                                                                 

Net interest expense in 1Q20 remained unchanged from a year ago and amounted to RUB 1.1 billion.

Net profit

Net profit for the Group totalled RUB 3.0 billion in 1Q20, down 6.1% compared to RUB 3.2 billion in 1Q19. Net profit margin declined to 10.0% from 12.0% a year ago.

Adjusted net profit declined by 36.6% y-o-y to RUB 1.3 billion, from RUB 2.0 billion a year ago. Adjusted net profit margin amounted to 4.2%, compared to 7.5% in 1Q19.

Cash flow

Operating cash flow expanded by to RUB 1.4 billion (1Q19: negative RUB 61 million), driven by higher operating profit, and improvement in working capital management.

Capital expenditure and debt

The Group’s capital expenditure on property, plant, equipment and maintenance amounted to RUB 1.9 billion during first quarter, almost in line with the results of the previous year.

As of March 31, 2020, net debt**** was RUB 62.2 billion, compared to RUB 62.1 billion at the end of 1Q19. Gross debt increased to RUB 73.6 billion as of March 31, 2020, compared to RUB 70.1 billion a year ago. At the end of the first quarter of 2020 long-term debt accounted for 59% of the debt portfolio and amounted to RUB 43.5 billion. The effective cost of debt***** was 6.1% as of March 31, 2020. Subsidized loans and credit facilities made up 25% of the debt portfolio in 1Q20 (1Q19: 36%).

Subsidies

Total government grants received for compensation of interest expense amounted to RUB 0.1 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 chicken produce, grains and market hogs.

Business segments

 Divisions

Sales volume

Change y-o-y, %

Revenue 2

Change y-o-y, %

1Q20, k ton

1Q19, k ton

1Q20, RUB mln

1Q19, RUB mln

Chicken

174.7

151.6

15.2%

18 071

15 740

14.8%

Turkey 3

9.9

8.2

20.1%

1 711

1 463

17.0%

Pork

74.3

65.9

12.7%

5 940

5 880

1.0%

Meat processing

61.4

53.6

14.6%

9 532

8 766

8.7%

Samson4

5.9

5.0

18.1%

-

-

-

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 1Q20 increased by 15.2% to 174.7 thousand tonnes (1Q19:151.6 thousand tonnes) as we benefited from a production boost provided by assets acquired at the end of 2018. The average selling price remained unchanged compared to a year ago at 103.6 RUB/kg. Sales of our Petelinka branded products were flat compared to 1Q19, but we increased sales of products under Chicken Kingdom brand by 10%. Sales to federal retail chains increased by 5% y-o-y, and we boosted our export sales sixfold compared to 1Q19. As a result, the segment’s revenue increased by 14.8% and amounted to RUB 18.1 billion (1Q19: RUB 15.7 billion).

Net change in fair value of biological assets amounted to RUB 0.8 billion, compared to a negative result of RUB 0.9 in 1Q19.

Gross profit doubled y-o-y and totalled RUB 5.2 billion, (1Q19: RUB 2.5 billion) driven by volumes growth, sales channel diversification, and productivity gains. Gross margin improved to 28.8%, from 15.9% in 1Q19.

Operating expenses as a percentage of sales increased to 11.3% compared to 10.3% a year ago. Operating income increased to RUB 3.3 billion (1Q19: RUB 1.0 billion). Operating margin increased to 18.3% from 6.2% in 1Q19.

The segment’s profit before income tax amounted to RUB 3.6 billion (1Q19: RUB 0.7 billion).

Adjusted EBITDA of RUB 3.1 billion, increased by 26.0% y-o-y, while Adjusted EBITDA margin increased to 17.0% from 15.5% a year ago.

Pork Division

Sales volumes in 1Q20 increased by 12.7% y-o-y, to 74.3 thousand tonnes (1Q19: 65.9 thousand tonnes), as we ramped up production facilities completed and populated in 2019. The average selling price of 80.0 RUB/kg, declined by 10.3% y-o-y compared to 89.2 RUB/kg a year ago, due to additional supply of pork meat from domestic producers, while export opportunities remained limited. The segment’s revenue increased by 1.0% y-o-y to RUB 5.9 billion (1Q19: RUB 5.9 billion).

Net change in fair value of biological assets was RUB 0.2 billion, compared to RUB 1.7 billion a year ago.

Gross profit of RUB 1.8 billion declined by 47.7% compared to RUB 3.5 billion in 1Q19, on a combination of lower pork prices and smaller net change in fair value of biological produce, partially offset by lower cost of production. The segment’s gross margin declined to 30.6%, from 59.0% a year ago.

Operating income amounted to RUB 1.7 billion (1Q19: RUB 3.3 billion). The segment’s operating margin declined to 28.3% from 56.6% a year ago.

The segment’s profit before income tax declined by 51.1% y-o-y to RUB 1.5 billion (1Q19: RUB 3.1 billion).

Adjusted EBITDA compressed by 7.1% y-o-y to RUB 1.9 billion (1Q19: RUB 2.0 billion). Adjusted EBITDA margin declined to 31.9% from 34.6% in 1Q19.

Meat Processing Division

Sales volumes in 1Q20 increased by 14.6% y-o-y to 61.4 thousand tonnes (1Q19: 53.6 thousand tonnes), as higher volumes of pork production led to higher pork carcass coupled with the growth of sausages sales, the latter was particularly strong as we managed to grow sales across all our major product categories. The average selling price declined by 4.7% y-o-y to 155.3 RUB/kg (1Q19: 162.9 RUB/kg), due to the negative trend in pork carcass price, as sausage price remained largely stable. As a result, the segment’s revenue increased by 8.7% and reached RUB 9.5 billion (1Q19: RUB 8.8 billion).

Gross profit increased by 141.1% y-o-y to RUB 1.2 billion, (1Q19: RUB 0.5 billion) due to the lower cost of ingredients for the produce. The gross margin amounted to 13.0%, compared to 5.9% a year ago.

Operating expenses increased by 19.2% y-o-y, and amounted to 11.8% as a percentage of sales (1Q19: 10.7%).

Operating profit amounted to RUB 0.1 billion compared to a loss of RUB 0.5 billion in 1Q19.

The segment’s loss before income tax widened to RUB 0.5 billion, compared to a loss of RUB 0.2 billion a year ago, driven by FX loss of RUB 0.6 billion.

Adjusted EBITDA turned to positive RUB 0.5 billion from RUB 0.1 billion loss in 1Q19. EBITDA margin was 5.0% in 1Q20.

Results of joint ventures and associates

The Group’s significant joint ventures and associates include our 50% share in Tambov Turkey, a turkey producer established by the Company and its partner and shareholder Grupo Corporativo Fuertes, our 75% share in Samson – Food products, a meat processor in St-Petersburg, and our 50% share in Cobb-Russia.

Total contribution to the consolidated EBITDA of the Group from all JVs and associates amounted to RUB 232 million during the period, versus a 51 mln RUB loss a year ago, mostly due to sharply improved results at both JV Tambov Turkey and at Samson – Food products.

Outlook

The macro-economic situation in Russia quickly and significantly changed since the beginning of the year, due to the COVID-19 and the drop in oil prices. The two main concerns for our Company are the Ruble depreciating by nearly 20%, and declining consumer disposable income.

Our focus on foodservice and exports, two rapidly growing channels, is currently adjusting for the short term. We are shifting sales volumes towards domestic retail and exports, focusing on our branded value-added products. While we still believe that in the medium term major QSR chains will demand a significant share of our sales portfolio, the near term path to recovery of sales volumes to QSR chains is uncertain.

Expansion of our Tambov Turkey JV is on track and we anticipate first marketable product already in 2021, keeping plans to add more volumes over time.

Pork price weakness is expected to continue in 2020 due to steady growth in supply and a period of overproduction. We are strategically positioned to profit from lower pork raw material prices through our low cash costs, vertical integration and meaningful share in meat processing.

In closing, we approach the ongoing public health and economic crisis with seriousness and caution, aware of the heightened economic uncertainty, the important role we play in domestic food security, reflected by our inclusion in the Russian Government's list of Strategically Important Companies, maintaining our commitment to our employee safety and to our customers. With a strong balance sheet, we plan to continue to pursue opportunities to grow our market share through investment in capacity expansion and modernization and from selected acquisitions when they are compelling and in line with our strategic priorities.

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 amortization 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 amortization 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 is defined as profit for the period before net change in fair value of biological assets recognized by the Group as well as by the Group’s joint ventures and associates and non-recurring impairment loss recognized for non-operational items of property, plant and equipment. 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 financial statements. We believe that Adjusted Net profit provides useful information to investors in order to estimate dividend payout.

*** Adjusted Operating profit is defined as operating profit for the period before net change in fair value of biological assets recognized by the Group as well as by the Group’s joint ventures and associates and non-recurring impairment loss recognized for non-operational items of property, plant and equipment. Adjusted Operating profit margin is defined as Adjusted Operating profit as a percentage of our net revenues. Our Adjusted Operating profit may not be similar to Adjusted Operating 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 Operating profit provides useful information to investors in order to better gauge underlying operating performance of the business.

**** 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.