Cherkizovo Group Announces fourth quarter and full year 2019 Financial Results

February 13, 2020

Moscow, Russia – February 13, 2020– 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 twelve months of 2019.

 

Fourth quarter financial highlights

·         Revenue increased by 10.4% year-on-year (y-o-y) to RUB 34.5 billion.

·         Gross profit of RUB 6.9 billion unchanged from 4Q18.

·         Adjusted EBITDA* declined by 26.8% y-o-y to RUB 5.0 billion. Adjusted EBITDA margin amounted to 14.4%, down from 21.7% in 4Q18.

·         The Group generated a net profit RUB of 0.1 billion, compared to RUB 1.7 billion in 4Q18. Adjusted net profit** totalled RUB 1.5 billion compared to RUB 3.7 billion a year ago.

2019 financial highlights

·         Revenue increased by 19.6% y-o-y to RUB 120.1 billion.

·         Net change in fair value of biological assets changed to negative RUB 1.4 billion, compared to positive RUB 1.8 billion in 2018. Net revaluation of harvested crops in stock was negligible in 2019, compared to RUB 2.2 billion in 2018.

·         Gross profit of RUB 27.9 billion declined by 4.5% from RUB 29.2 billion a year ago.

·         Adjusted EBITDA* amounted to RUB 20.6 billion, in line with previous year result and an Adjusted EBITDA margin of 17.2%.

·         Net profit fell to RUB 6.8 billion from RUB 12.0 billion in 2018. Adjusted net profit** declined to RUB 9.0 billion, from RUB 10.0 billion a year ago.

·         Net debt amounted to RUB 61.2 billion as of December 31, 2019.

2019 corporate highlights

·         In May, the Group became one of the winners of Russia's Best Social Projects 2019 Award, an annual event supporting public initiatives and facilitating sustainable development.

·         In September, the Group re-introduced 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.

·         In October, the Company announced an expansion of Tambov Turkey, 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 2021. Project will be financed by equity from Company and its partner Grupo Corporativo Fuertes, as well as third party non-recourse debt.

·         In October, Cherkizovo purchased 100% of the 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 our Сompany self-sufficient in hatching eggs, closing the gap in hatching egg supply, that appeared after we’d acquired a few production assets in 2018.

·         In November, the Group placed rouble denominated bonds in the amount of RUB 10 bln for 3.5 years at 7.5%, a first step in a leap towards extending maturity of the debt portfolio.

·         During the year, the Group launched five wean-to-finish facilities bringing pork capacity to the targeted level of 300 thousand tons of live weight per annum.

Key corporate highlights after the reporting period

On February 12th, Board of Directors recommended to the AGM to distribute profits of 2019 financial year and to pay dividends of RUB 60.92 per share, in addition to interim dividends of RUB 48.79 announced in August, 2019.

 

Sergei Mikhailov, CEO of Cherkizovo, commented:

“In 2019 our diversified vertically integrated business model demonstrated its competitiveness and resilience, in the face of price weakness in the pork market in the second half of last year, which adversely impacted profits in our pork and meat processing segments. Our poultry segment boosted EBITDA by a staggering 50%, fueled by the successful integration of key acquisitions from late 2018. Actual results for acquired assets in aggregate were better than our expectations and we see opportunities that can improve profitability even further. We further developed partnerships with leading federal retail chains, broadened distribution, and forged ahead with major foodservice and export clients. Our pork business, while pressured by increasing supply domestically, focused on maintaining cost leadership, quality, and adhering to strict biosecurity control measures. We relentlessly focused on the transformation of our meat processing segment to gain market share and win consumers. In product marketing, our major brand “Cherkizovo” was relaunched late 2019, new product launches accelerated, and distribution expanded. Our grain segment delivered improved harvest with better yields achieved across all cultivated crops, a remarkable performance given poor weather conditions in a few regions of our operations.”

 

 

 

 

 

 

 

 

 

 

 

Financial summary

RUB mln

4Q 2019

4Q 2018

y-o-y, %

12M 2019

12M 2018

y-o-y, %

Revenue

34 490

31 235

10.4%

120 109

100 422

19.6%

Net change in fair value of biological assets

(814)

(2 153)

-62.2%

(1 379)

1 836

n.a.

Net revaluation of harvested crops in stock

(635)

(166)

282.5%

29

2 242

-98.7%

Gross profit

6 872

6 865

0.1%

27 863

29 182

-4.5%

Gross margin

19.9%

22.0%

-2.1 p.p.

23.2%

29.1%

-5.9 p.p.

Operating expenses, net

(5 671)

(4 683)

21.1%

(17 551)

(13 570)

29.3%

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

97

71

36.6%

(123)

(57)

115.8%

Adjusted operating profit 1

2 647

4 347

-39.1%

12 397

13 509

-8.2%

Adjusted operating margin

7.7%

13.9%

-6.2 p.p.

10.3%

13.5%

-3.1 p.p.

Adjusted EBITDA 1

4 955

6 768

-26.8%

20 617

20 415

1.0%

Adjusted EBITDA margin

14.4%

21.7%

-7.3 p.p.

17.2%

20.3%

-3.2 p.p.

Profit before income tax

58

1 303

-95.6%

6 697

11 793

-43.2%

Net profit

123

1 650

-92.6%

6 751

12 004

-43.8%

Adjusted Net profit 1

1 471

3 743

-60.7%

8 958

9 958

-10.0%

Net operating cash flow

7 107

6 804

4.5%

16 056

14 178

13.3%

Net debt

 

 

 

61 206

58 559

4.5%

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 2019, revenue increased by 19.6% y-o-y to RUB 120.1 billion (2018: RUB 100.4 billion). Revenue growth is attributed to higher volumes across business segments on the back of organic growth and M&A, favourable pricing environment for poultry products, and offset by negative dynamics in pork prices domestically.

Gross profit

Gross profit declined by 4.5% y-o-y to RUB 27.9 billion, (2018: RUB 29.2 billion). Revenue growth was offset by the negative net change in fair value of biological assets, and lower effect from net revaluation of harvested crops in stock. Gross profit margin declined to 23.2% (2018: 29.1%).

Operating expenses

Operating expenses increased by 29.3% y-o-y to RUB 17.6 billion, from RUB 13.7 billion a year ago. Operating expenses as a percentage of sales increased to 14.6% (2018: 13.5%).

Adjusted operating profit

Adjusted operating profit of RUB 12.4 billion, declined by 8.2% y-o-y from RUB 13.5 billion a year ago. Our adjusted operating profit excludes non-recurring impairment loss recognized for non-operational items of property, plant and equipment in the amount of RUB 530 million (2018: nil), net change in fair value of biological assets of the Group’s segments in the amount of RUB 1.4 billion (2018: RUB 1.8 billion) and the effect of net change in fair value of biological assets of JVs and associates on the Group’s share of their results in the amount of RUB 298 million negative (2018: RUB 210 million).

Adjusted EBITDA

Adjusted EBITDA of RUB 20.6 billion, in line with previous year results. Adjusted EBITDA margin declined to 17.2% (2018: 20.3%) 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 2019 increased by 37.3% y-o-y to RUB 4.5 billion.

Net profit

Net profit for the Group totalled RUB 6.8 billion in 2019, down 43.8% compared to RUB 12.0 billion in 2018. Net profit margin declined to 5.6% from 12.0% a year ago.

Adjusted net profit declined by 10.0% y-o-y to RUB 9.0 billion, from RUB 10.0 billion a year ago. Adjusted net profit margin amounted to 7.5%, compared to 9.9% in 2018.

Cash flow

Operating cash flow expanded by 13.3% to RUB 16.1 billion (2018: RUB 14.2 billion), driven by reduction of net working capital.

Capital expenditure and debt

The Group’s capital expenditure on property, plant, equipment and maintenance amounted to RUB 8.6 billion during 2019, a decline of 12.3% y-o-y as we gradually wrap up current investment cycle.

As of December 31, 2019, net debt**** was RUB 61.2 billion, compared to RUB 58.6 billion at the end of 2018. Gross debt decreased to RUB 65.2 billion as of December 31, 2019, compared to RUB 68.8 billion a year ago. At the end of 2019 long-term debt accounted for 67.4% of the debt portfolio and amounted to RUB 43.9 billion. The effective cost of debt***** was 6.9% as of December 31, 2019. Subsidized loans and credit facilities made up 27% of the debt portfolio in 2019 (2018: 40%).

Subsidies

Total government grants received for compensation of interest expense 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 market hogs and chicken produce.

 

 

 

 

 

 

 

 

 

 

 

Business segments

 

 Divisions

Sales volume

Change y-o-y, %

Revenue 2

Change y-o-y, %

2019, k ton

2018, k ton

2019, RUB mln

2018, RUB mln

Chicken

663.0

544.2

21.8%

70 332

52 723

33.4%

Turkey 3

39.4

39.2

0.4%

6 716

5 815

15.5%

Pork

274.6

236.9

15.9%

24 478

23 262

5.2%

Meat processing

245.6

229.5

7.0%

40 056

38 780

3.3%

Samson 4

22.7

-

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 2019 increased by 22% to 663.0 thousand tonnes (2018:544.2 thousand tonnes). The average selling price increased by 9% y-o-y to 106.0 RUB/kg. We successfully integrated several companies that we had acquired at the end of 2018, and which significantly contributed to the growth of the volumes in 2019. Our sales from Petelinka branded products, the focus brand of the segment, added 13%, while exports and foodservice were the fastest-growing channels, adding 131% and 95% respectively. As a result, the segment’s revenue increased by 33.4% and amounted to RUB 70.3 billion (2018: RUB 52.7 billion).

Net change in fair value of biological assets was negative RUB 135 million, compared to positive RUB 1.3 billion in 2018.

Gross profit was up by 32.3% y-o-y and totaled RUB 16.9 billion, (2018: RUB 12.8 billion) driven by volumes growth, sales channel diversification and better pricing. Gross margin declined to 24.1%, from 24.2% in 2018.

Operating expenses as a percentage of sales increased to 10.8% compared to 10.2% a year ago. Operating income increased by 26.3% y-o-y to RUB 9.4 billion (2018: RUB 7.4 billion). Operating margin declined to 13.3% from 14.0% in 2018.

The segment’s profit before income tax amounted to RUB 8.1 billion (2018: RUB 6.9 billion).

Adjusted EBITDA of RUB 12.6 billion, increased by 49.8% y-o-y, while Adjusted EBITDA margin increased to 17.9% from 15.9% a year ago.

Pork Division

Sales volumes in 2019 increased by 16% y-o-y, to 274.6 thousand tonnes (2018: 236.9 thousand tonnes), as wean-to-finish facilities launched in 2019 boosted our production. The average selling price of 89.1 RUB/kg, declined by 9% y-o-y compared to 98.2 RUB/kg a year ago, as pork prices were under pressure from the supply push of domestic producers. The segment’s revenue increased by 5.2% y-o-y to RUB 24.5 billion (2018: RUB 23.3 billion).

Net change in fair value of biological assets was negative RUB 1.2 billion, compared to positive RUB 0.9 billion a year ago.

Gross profit of RUB 5.6 billion declined by 46.7% compared to RUB 10.6 billion in 2018, on softer price environment and 11.1% cost inflation in per kg pork production. The segment’s gross margin declined to 23.1%, from 45.5% a year ago.

Operating income amounted to RUB 5.2 billion (2018: RUB 10.4 billion). The segment’s operating margin declined to 21.3% from 44.8% a year ago.

The segment’s profit before income tax declined by 57.2% y-o-y to RUB 4.2 billion (2018: RUB 9.9 billion).

Adjusted EBITDA compressed by 23.3% y-o-y to RUB 8.4 billion (2018: RUB 10.9 billion). Adjusted EBITDA margin declined to 34.2% from 46.9% in 2018.

Meat Processing Division

Sales volumes in 2019 increased by 7% y-o-y to 245.6 thousand tonnes (2018: 229.5 thousand tonnes), as higher volumes of pork production led to higher pork carcass sales, while sausages volumes were stable. The average selling price declined by 4.0% y-o-y to 163.0 RUB/kg (2018: 169.6 RUB/kg), as price increase in sausages was offset by negative dynamics in pork carcass sales. As a result the segment’s revenue increased by 3.3% and reached RUB 40.1 billion (2018: RUB 38.8 billion).

Gross profit declined by 12.2% y-o-y to RUB 3.0 billion, (2018: RUB 3.4 billion). The gross margin fell to 7.5% from 8.9% a year ago.

Operating expenses increased by 28.5% y-o-y, and amounted to 12.6% as a percentage of sales, compare with 10.1% in 2018.

Operating loss amounted to RUB 2.0 billion compared to RUB 0.5 billion loss in 2018.

The segment’s loss before income tax was RUB 1.7 billion, compared to a loss of RUB 1.1 billion a year ago.

Adjusted EBITDA turned to negative RUB 0.6 billion from RUB 0.5 billion in 2018 as we invested in the prices of the value-added products to support our sales.

Grain segment

Sales volumes in 2019 declined by 25% y-o-y to 524.0 thousand tonnes (2018: 696.1 thousand tonnes), while overall harvest in the season increased by 24% y-o-y to 593.0 thousand tonnes (2018: 479.7 thousand tonnes) driven by better results of wheat and corn cultivation. The segment’s revenue declined by 16.5% and reached RUB 5.8 billion (2018: RUB 6.9 billion).

Net revaluation of harvested crops in stock declined to RUB 155 million from RUB 1.3 billion in 2018.

Gross profit declined by 7.2% to RUB 1.8 billion (2018: RUB 1.9 billion). Gross margin increased to 31.0% from 27.9% a year ago.

Operating expenses as a percentage of sales increased to 12.4% from 6.9% a year ago.

Operating income declined to RUB 1.5 billion from RUB 1.7 billion in 2018, with operating margin of 26.2% compared to 24.9% in 2018.

The segment’s profit before income tax was RUB 1.4 billion, compared to RUB 1.5 billion a year ago.

Adjusted EBITDA amounted to RUB 2.1 billion compared RUB 2.3 billion in 2018.

Results of joint ventures and associates

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

Total result in consolidated EBITDA of the Group from all JVs and associates amounted to RUB 736 million, up from RUB 165 million a year ago.

 

Outlook

Russian economy continues to be stable, although demands from consumers and retail are growing. Competitive dynamics favor modern vertically integrated companies like Cherkizovo.

We expect ongoing growth in volumes, sales and earnings from chicken business in 2020 and beyond, extending our market-leading position, including rapid growth in foodservice and selective export markets.

We anticipate steady growth of demand for turkey products domestically and will expand our Tambov Turkey operations in 2021, and grow further over time, consistent with our commitment to being one of the two leaders on the Russian turkey market.

We see risks that pork prices may remain weak through 2020, but believe our cost leadership and vertical integration into meat processing operations, will allow us to generate profits in pork and meat processing segments even in challenging conditions.

Our capital investments in Health, Safety, and Environmental, and new capacity are growing, albeit with discipline, to manage risks and support our strategic development reducing the commodity component of our business.

Pleased with the results of M&A in late 2018 we expect to continue to selectively explore compelling M&A when pricing is attractive and the target fits with our strategy.

 

 

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), thirteen full-cycle pork farms, twenty one wean-to-finish facilities and two sow 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 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 (Note 6 to the consolidated financial statements). 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 (Note 6 to the consolidated financial statements). 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.