CHERKIZOVO GROUP OJSC ANNOUNCES FINANCIAL RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2010

September 14, 2010

Moscow, 14 September 2010 - Cherkizovo Group (LSE: CHE), one of Russia’s leading integrated and diversified meat producers, today announces first half financial results for the period ended 30 June 2010.   

Highlights 

·         Strong organic volume growth across all segments, delivering a solid financial performance 

·         Revenues increased 26% to $579.9 million from $459.3 million for the first half of 2009, and increased 15% on a rouble currency basis 

·         Adjusted EBITDA* increased 36% to $109.0 million from $80.4 million for the first half of 2009, and increased 23% on a rouble currency basis  

·         Adjusted EBITDA* margin was 19%, increasing from 18% for the first half of 2009 

·         Gross profit increased 24% to $159.5 million from $128.3 million for the first half of 2009, and increased 13% on a rouble currency basis 

·         Group gross margin was a robust 28% 

·         Net income increased 42% to $71.4 million from $50.3 million for the first half of 2009, and increased 29% on a rouble currency basis 

·         As of 30 June 2010 Net debt** decreased 13%, to $386.7 million. 

·         The effective cost of debt remained at 4%. 

Business Developments 

 

Sergey Mikhailov, Chief Executive Officer of Cherkizovo Group, said:  

“In the first half of 2010 we were able to deliver a strong performance, with a 26% increase in revenue and growth in Adjusted EBITDA of 36%, resulting in a healthy 19% Adjusted EBITDA margin. While our results were somewhat affected by the tighter pricing environment with poultry and pork prices coming off from the unusually high levels of last year, prices are now recovering and we expect a positive pricing environment throughout the remainder of the year.  

In the poultry division, we are seeing the benefits from our ongoing projects to increase capacity, and we expect to launch new production sites in the Bryansk cluster at the beginning of the fourth quarter of this year. 2009 was characterized by unusually high pricing trends in this division, and profitability is returning to historical trend levels. Accordingly, we have achieved a 30% Gross Margin, and a 22% Adjusted EBITDA margin.  

As expected, the Pork division has enjoyed significant growth which should be further supported by the upcoming integration of the two new farms. Moreover, we are pleased to announce that construction has commenced on two state-of-the-art greenfield complexes in the Tambov and Voronezh regions which are expected to become operational during 2011 and which will add 25,000 tonnes of capacity. This will take our production volumes to 140,000 tonnes by the end of 2012, further strengthening our market leadership in this high-margin business and positively affecting our overall performance. 

Meat processing continues to see rising demand as consumer confidence improves. We have seen some very positive results, with an increase in sales volumes and sustained profitability. 

While the unusual weather conditions in Central Russia have produced a worse than expected grain harvest and we anticipate a rather challenging year in terms of grain supplies globally, we welcome the measures taken by the Government to mitigate the impact. In particular, the ban on grain exports, the expected sale of grain from the intervention fund and the potential decrease in railway tariffs to help transfer grain to regions that have suffered most, should lead to a stabilization of prices in the domestic market, where there has been considerable speculative activity. At the Group level, we intend to secure grain stock for 2011 in the course of this year, and are currently implementing this strategy. At the same time, grain price increases from an operations perspective will predominantly affect the fourth quarter of this year and may lead to domestic meat price inflation.  

*** 

Cherkizovo Group OJSC is one of the largest Russian meat producers. Its business is organized in three segments: poultry production (four full-cycle poultry production clusters), pork production (five pork production complexes), and meat processing (six meat processing plants). Also, the Group produces its own fodder (2 fodder mills), and sells its products through its own three trading houses. Cherkizovo Group enjoys dominant market positions, and its brand portfolio includes leading brands, such as Petelinka, Chicken Kingdom, Cherkizovsky, and Five Stars.  

Chief Executive’s Review 

Financial Overview 

The table below summarizes the Group’s strong performance on a rouble currency basis in the first half of 2010:  

 

RUR, mln (unaudited) 

1H2010 

1H2009 

Change 

Sales 

17,438.2 

15,188.0 

15% 

Gross Profit 

4,796.7 

4,242.8 

13% 

Gross margin, % 

28% 

28% 

 

Operating expenses 

2,245.1 

2,161.7 

4% 

Operating Income 

2,551.6 

2,081.1 

23% 

Operating Income margin, % 

15% 

14% 

 

Net Income 

2,146.3 

1,662.5 

29% 

Adjusted EBITDA 

3,276.1 

2,658.5 

23% 

EBITDA margin, % 

19% 

18% 

 

 

 

 

 

On a reported currency basis sales increased by 26% to US$579.9 million (1H2009: US$459.3 million) due to healthy organic growth across all segments. Gross profit increased 24% to US$159.5 million (1H2009: US$128.3 million). Operating expenses as a percentage of sales have decreased to 13% from 14% in the first half of 2009. Net income increased 42% to $71.4 million (1H2009: US$50.3 million). 

Adjusted EBITDA* increased 36% to US$109.0 million (1H2009: US$80.4 million) and adjusted EBITDA* margin increased to 19%, reflecting a robust operating performance by the Group.  

Poultry Division 

Sales volumes in the poultry division in the first half of 2010 increased by 8% to approximately 99,860 tonnes of slaughter weight compared to approximately 92,840 tonnes in the first half of 2009.  

Prices for Cherkizovo poultry sales increased by 5% in dollar terms from $2.19 per kg in the first half of 2009 to $2.30 per kg in the first half of 2010 (excluding VAT)***. Prices in rouble terms decreased by 4% from 72.32 roubles per kg in the first half of 2009 to 69.11 roubles per kg in the first half of 2010 (excluding VAT), this reflected normalization of prices from unusually high levels in 2009.  

Total sales in the Poultry division increased 14% to US$253.3 million (1H2009: US$221.3 million). Gross Profit was flat at US$76.6 million (1H2009: US$77.3 million), divisional Gross Margin decreased to 30% (1H2009: 35%) mostly due to lower selling prices in the first half of the year, as well as rising Utilities, Transportation and Labor costs associated with the aggressive investment program executed by the division. 

Operating expenses as a percentage of sales remained flat at 13%. Operating income of the division decreased by 10% to US$44.9 million (1H2009: US$49.7 million), and operating margin was 18%. Profit in the Poultry division decreased by 5% to US$40.4 million (1H2009: US$42.6 million).  

Adjusted EBITDA* decreased 4% to US$56.6 million (1H2009: US$59.1 million), while Adjusted EBITDA* margin in the Poultry division was 22% in the first half of 2010. 

Pork Division 

Sales volumes in the Pork division continue to be the driver of the Group’s growth as they increased by an impressive 75% to approximately 37,160 tonnes of live weight, this compared favorably to approximately 21,250 tonnes in the first half of 2009. This growth reflected increased production as Cherkizovo’s new farms start to reach their forecasted target levels.  

Prices increased by 5% in dollar terms from $2.28 per kg of live weight in the first half of 2009 to $2.40 per kg of live weight in the first half of 2010 (excluding VAT)***.[1]In rouble terms prices decreased by 4% from an exceptionally high level of 75.41 roubles per kg in the first half of 2009 to 72.07 roubles per kg in the first half of 2010 (excluding VAT). 

Total sales in the Pork division increased by 116% to US$109.4 million (1H2009: US$50.8 million). Gross Profit increased 90% to US$40.8 million (1H2009: US$21.5 million) while Gross Margin was 37%, due in part to pork prices coming under pressure in the first half of the year. This combined with an increased share of the division’s sales coming from trading activity with related-party pork farms. These are accounted for under ‘Other Sales’ in the key data and figures disclosure in Appendix 1, and reflect activity in anticipation of the acquisition of the farms by Cherkizovo Group. Production enjoys significantly higher gross margins than trading operations, and this mix effect is expected to be short-term until production operations will be integrated into the Group under the contemplated acquisition. Excluding Other Sales, the division’s Gross Margin was 44%. 

Operating Expenses as a percentage of sales decreased to 6% from 8% in the first half of 2009, reflecting increasing economies of scale. The division generated Operating Income of US$34.3 million (1H2009: US$17.7 million), while Operating Margin was 31% (1H2009: 35%). Profit in the Pork division increased by 87% to US$31.6 million (1H2009: US$16.9 million). 

Adjusted EBITDA* generated by the division increased 99% to US$40.8 million (1H2009: US$20.6 million), and Adjusted EBITDA* Margin was 37% (1H2009: 41%). Without the sales of related-party pork farms Adjusted EBITDA* Margin would have been 44%.  

Meat Processing Division 

In the first half of 2010, the Company witnessed a recovery in demand for the division’s products, as sales volumes in the meat processing segment increased by 8% to approximately 66,200 tonnes from approximately 61,550 tonnes in the first half of 2009.  

Division prices in dollar terms increased by 13% from $3.37 in the first half of 2009 per kg to $3.81 per kg in the first half of 2010 (excluding VAT)***. Average prices in roubles increased by 3% from 111.42 roubles in the first half of 2009 to 114.66 roubles in the first half of 2010 (excluding VAT). 

Total sales in the Meat Processing division increased 18% to US$243.4 million (1H2009: US$206.6 million). Divisional Gross Profit increased 43% to US$42.4 million (1H2009: US$29.7 million), while Gross Margin increased from 14% to 17%. Operating expenses as a percentage of sales decreased to 12% from 14% in the first half of 2009. Division profit was US$9.1 million as opposed to a division loss of $6.4 million in the first half of 2009. 

Adjusted EBITDA* for the division increased 181% to US$18.2 million (1H2009: US$6.5 million), and Adjusted EBITDA* margin increased to 8% (1H2009: 3%). 

Financial Position 

The Group’s Capital Expenditure on property, plant and equipment and maintenance amounted to US$60.0 million in the first half of 2010. Of that, US$36.6 million was invested into the Poultry division, mainly into the capacity increase projects at the Bryansk and Penza clusters; US$20.6 was invested into the Pork division, and US$1.0 million was invested into Meat Processing division. 

Net Debt** at the end of the first half of 2010 was US$386.7 million or RUR12,063.1 million. Total Debt was at US$446.2 million or RUR13,920.1 million. Of Total Debt, long-term debt was approximately US$351.2 million or 79% of the debt portfolio. Short-term debt was US$95.0 million, or 21% of the portfolio. Cost of Debt for the first half of 2010 remained at 4%. The portion of subsidized debt in the portfolio was 89%, improving from 86% as of 31 December 2009. Cash and cash equivalents totalled US$59.5 million at 30 June 2010. 

Subsidies 

The Group received interest reimbursement of US$18.5 million which offset interest expense. 

Outlook 

Cherkizovo made solid progress in the first half of 2010 in its operational and financial results, though performance was affected by a softer pricing environment compared to unusually high levels witnessed last year. 

We are on track to meet our production targets for this year, as the Group’s Poultry division will start gaining scale from the capacity increases at the Bryansk and Penza clusters; further significant production volume increases are expected in the pork division, also enhanced by volume coming from the contemplated acquisition of the two new farms announced in March 2010, and in the Meat Processing division we expect to return to pre-crisis production levels as consumer demand improves. 

Overall, in 2010, we reiterate our positive view on Russian consumption, and we expect the pricing environment to improve and remain favorable for Cherkizovo’s products in the remaining months of the year. Moreover, we may expect further meat price inflation in the event of dramatic grain price increase. However, Russia remains the largest importer of meat in the world and the Russian government has reiterated its intention to reduce imports by 2014, which presents significant opportunities for Cherkizovo as the leading domestic producer. The Company will continue to benefit from investments already made to increase capacity, particularly in our higher margin Pork and Poultry businesses, and from recovery trends in Meat Processing. Overall, we remain confident that we will continue to enhance value and deliver against our strategy in the course of the financial year. 

 

*Non-GAAP financial measures. This press release includes financial information prepared in accordance with accounting principles generally accepted in the United States of America, or US GAAP, as well as other financial measures referred to as non-GAAP. The non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with US GAAP. 

Adjusted Earnings before Interest, Income Tax, Depreciation and Amortization (“Adjusted EBITDA”). Adjusted EBITDA represents income before interest, income tax and non-controlling interest, adjusted for certain other items 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 accounting principles generally accepted in the United States 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. 

** Net debt is calculated as total debt minus cash and cash equivalents 

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 the 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 market change in our industry, as well as many other risks specifically related to the Group and its operations. 



 

*** For price calculation in dollar terms the Company used the average exchange rate for the first half of 2009 of 33.0679 roubles per 1 US dollar, for the first half of 2010 the average rate was 30.0676  roubles per 1 US dollar.