Moscow, May 28, 2014 — Cherkizovo Group (LSE: CHE; MICEX: GCHE), Russia’s largest meat and fodder producer, announces its financial results for the First Quarter ending March 31, 2014.
Highlights
- Revenue decreased by 2% to $376.6 million from $383.0 million in 1Q13 due mostly to the weakening of Russian rouble (RUB) against USD. In RUB, revenue increased by 13%;
- Gross Profit increased by 48% to $95.1 million from $64.4 million in 1Q13. In RUB, Gross Profit up 70%;
- Gross Margin increased to 25% from 17% in 1Q13;
- Adjusted EBITDA* has doubled to $56.2 million from $28.4 million in 1Q13. In RUB, Adjusted EBITDA increased by an impressive 128%;
- Adjusted EBITDA margin increased more than two times to 15% from 7% in 1Q13;
- Net Profit in 1Q14 amounted to $25.0 million vs Net Loss of ($0.6 million) in 1Q13;
- Net Margin was at 7%;
- Net Debt** was $808.9 million as of the end of 1Q14;
- The effective cost of debt was 3.2% (1Q13: 2.6%);
- EPS was at $0.57 (1Q13: loss per share of ($0.01));
- CCR (Cash Conversion Ratio) was 131%;
Business Developments
- Cherkizovo Group acquired LISKO Broiler in the Voronezh region, one of the country’s largest poultry producers. The deal is based on the enterprise value of approximately RUR 5 billion. As a result of the acquisition, Cherkizovo increased its market share by 2 p.p. to 13%, making an important step to the poultry market leadership;
- Operational land bank of the Grain Division was increased to 58 000 hectares as compared with 40 000 hectares in 2013. The Group invested in modern high-tech agricultural equipment in order to promote the efficiency of the grain segment and expects a harvest of approximately 250 thousand tonnes of grain in 2014;
- Cherkizovo Group launched case-ready production line at Cherkizovsky Meat Processing Plant in Moscow. The line allows for 100 tonnes of ready-to-cook meat products to be produced per day;
Commenting on the results, Sergei Mikhailov, Cherkizovo CEO, said:
Cherkizovo demonstrated very strong results in the first quarter. The Company’s revenue increased by 13% in RUB, and Adjusted EBITDA more than doubled. We can definitely say that after a very challenging 2013, the Group returned to a strong profitability.
The market environment was quite favourable throughout the quarter. Grain prices were relatively stable, while poultry meat and pork prices started to increase. Due to a shortage on the pork market and stoppage of imports, growth of live hog prices was very rapid starting in March. As a result, Cherkizovo Group, which completed its long-term investment programme in the pork division last year, could gain a strong financial return from these investments.
Once again, we benefited from the Company’s diversified structure. The rapid growth of profit in the pork division compensated many times over for the inevitable pressure on margins in the meat processing division. While many meat processors are facing difficulties as a result of the shortage on the pork market, Cherkizovo Group is able to supply its meat processing division with high quality raw meat thanks to its high degree of the vertical integration.
The acquisition of Lisko Broiler that we announced in the first quarter was a milestone for our business. Cherkizovo Group continued to consolidate the Russian meat market and made a major step towards market leadership. The transaction was made at a very attractive multiple which is beneficial for our shareholders, and we expect to have a noticeable synergy effect starting this year.
***
About Cherkizovo Group
Cherkizovo Group (LSE:CHE) is the largest meat and fodder producer in Russia and one of the top three companies serving Russia’s poultry, pork and sausages markets. The Company’s brands include Cherkizovsky, Petelinka, Kurinoe Tsarstvo and Mosselprom. CEO Sergei Mikhailov and his family control 63% of Cherkizovo Group, and free float on LSE and MICEX amounts to 37%.
Due to its vertically integrated structure, which includes agricultural land, grain storage facilities, feed production, livestock breeding, growing and slaughtering as well as meat processing and distribution, Cherkizovo has consistently delivered sustainable revenue and profit growth. In 2013, Cherkizovo’s US GAAP consolidated revenue exceeded $1.6 billion, and the Group produced more than half a million tonnes of meat and processed meat products.
Cherkizovo’s strategy includes both organic growth and consolidation of the Russian meat market. Within the last five years alone, Cherkizovo has invested more than $1 billion into the development of Russia’s agriculture sector.
Financial Overview
On a reported currency basis (USD) sales for 1Q14 decreased by 2% to $376.6 million (1Q13: $383.0 million) due mostly to the weakening of RUB against USD. Gross profit increased by 48% to $95.1 million (1Q13: $64.4 million). Operating expenses as a percentage of sales slightly increased to 16% (1Q13: 15%). Net income amounted to $25.0 million in the first quarter of 2014 vs. net loss of ($0.6 million) in 1Q13.
Adjusted EBITDA has doubled to $56.2 million (1Q13: $28.4 million). Adjusted EBITDA margin has more than doubled to 15% for 1Q14 vs 7% in 1Q13.
| $m | 1Q14 | 1Q13 | Change |
|---|---|---|---|
| Sales | 376.6 | 383.0 | −2% |
| Gross Profit | 95.1 | 64.4 | 48% |
| Gross margin, % | 25% | 17% | |
| Operating expenses | (60.4) | (58.6) | 3% |
| Operating Income | 34.7 | 5.8 | 494% |
| Operating margin, % | 9% | 2% | |
| Net Income | 25.0 | (0.6) | — |
| Adjusted EBITDA | 56.2 | 28.4 | 98% |
| EBITDA margin, % | 15% | 7% |
The table below summarizes the Group’s performance in RUB:
| RUB m | 1Q14 | 1Q13 | Change y-o-y |
|---|---|---|---|
| Sales | 13 165.2 | 11 647.8 | 13% |
| Gross Profit | 3 324.1 | 1 958.6 | 70% |
| Gross margin, % | 25% | 17% | |
| Operating expenses | (2 110.4) | (1 780.9) | 19% |
| Operating Income | 1 213.7 | 177.7 | 583% |
| Operating margin, % | 9% | 2% | |
| Net Income | 873.7 | (17.1) | |
| Adjusted EBITDA | 1 965.7 | 863.8 | 128% |
| EBITDA margin, % | 15% | 7% |
Poultry Division
Sales volume increased by 13% to 90 506 tonnes of sellable weight (1Q13: 80 370 tonnes), including 1 651 tonnes produced by Lisko Broiler since the day of the acquisition of this company by Cherkizovo (March 24).
The average price increased by 1% to 77.90 RUB/kg from 76.92 RUB/kg in 1Q13 (all prices hereinafter are net of VAT)***. Compared to the price in 4Q13 of 78.05 RUB/kg, the price was almost flat.
In USD terms, the average price decreased by 12% to $2.23/kg from $2.53/kg in the 1Q13. Compared to the price in 4Q13 of $2.40/kg, the price in 1Q14 decreased by 7% due mostly to the weakening of RUR against USD.
Total sales in the Poultry division decreased by 3% to $201.7 million (1Q13: $208.2 million) due mostly to the weakening of RUB against USD, while in RUB terms sales increased by 11%. Gross Profit increased by 38% to $44.4 million (1Q 13: $32.3 million), Gross margin increased to 22% (1Q 13: 16%).
Operating expenses as a percentage of sales increased to 14% from 12% mainly due to higher personnel expenses. Operating Income of the division doubled to $16.4 million (1Q13: $8.1 million), and operating margin amounted to 8% (1Q13: 4%). Profit in the Poultry division increased by 108% to $17.5 million (1Q13: $8.4 million).
Adjusted EBITDA increased by 37% to $27.0 million (1Q13: $19.7 million), and Adjusted EBITDA margin rose to 13% in 1Q14 vs 10% in 1Q13.
Pork Division
Sales volume in the Pork division increased by 17% to 40 352 tonnes of live weight, compared to 34 429 tonnes in 1Q13.
The average price increased by 28% to 73.55 RUB/kg from 57.36 RUB/kg in 1Q13. Compared to the price in 4Q 13 of 71.32 RUB/kg, the price increased by 3%.
In USD terms, the average price increased by 12% to $2.10/kg from $1.89/kg in 1Q13. Compared to the price in 4Q13 of $2.19/kg, the price decreased by 4% due to RUB devaluation.
Total sales in the Pork division increased by 28% to $86.8 million (1Q13: $67.6 million). The segment reported Gross profit of $28.8 million in 1Q 14 vs. Gross loss of ($0.5 million) in 1Q 13. Gross margin in 1Q14 was at 33%.
Operating Expenses as a percentage of sales decreased to 7% compared to 13% in 1Q13 on the back of impressive sales growth. The division generated operating income of $22.6 million (1Q13: operating loss of ($9.0 million)).
Profit in the Pork division was $18.8 million (1Q13: loss of ($12.3 million)).
Adjusted EBITDA amounted to $30.2 million, and Adjusted EBITDA margin was 35%.
Meat Processing Division
Sales volume in the Meat Processing division was almost flat at 29 670 tonnes (1Q13: 29 442 tonnes).
The average price increased by 4% to 152.52 RUB/kg from 147.16 RUB/kg in 1Q13. Compared to the price in 4Q13 of 156.32 RUB/kg, the price decreased by 2%.
In USD terms, the average price decreased by 10% to $4.36/kg from $4.84/kg in 1Q13. Compared to the price in 4Q13 of $4.80/kg, the price decreased by 9% due mostly to RUB devaluation.
Total sales in the Meat Processing division decreased by 8% to $119.0 million (1Q13: $130.1 million), Gross Profit decreased by 29% to $22.6 million (1Q13: $31.9 million), and Gross margin went down to 19% (1Q13: 25%), due to high raw meat price and RUB devaluation. Operating Expenses as a percentage of sales were flat at 16%. The division generated Operating income of $4.1 million (1Q13: $11.4 million). Operating margin significantly decreased to 3% (1Q13: 9%). The Meat Processing division reported profit of $1.3 million (1Q13: $8.9 million).
Adjusted EBITDA decreased by 53% to $6.7 million (1Q13: $ 14.4 million), Adjusted EBITDA margin reported at 6% (1Q 13: 11%).
Grain Division
Sales volume in the Grain division increased by 136% to 20 453 tonnes from 8 668 tonnes for 1Q13.
The average price decreased by 28% to 6.10 RUB/kg from 8.46 RUB/kg in 1Q13. Compared to the price in 4Q 13 of 6.37 RUB/kg, the price decreased by 4%.
In USD terms, the average price in dollar terms decreased by 37% to $0.17/kg from $0.28/kg in 1Q 13. Compared to the price in 4Q13 of 0.20 $/kg, the price decreased by 11%.
Total sales in the Grain division increased by 47% to $3.8 million compared to $2.6 million in 1Q13. Gross Profit was flat at $0.7 million (1Q13: $0.8 million). Gross margin was at 18% (1Q13: 31%).
Operating Expenses as a percentage of sales increased to 42% in 1Q14 vs. 14% in 1Q13. The division generated operating loss of ($ 0.9 million) vs operating income of $0.5 million in 1Q13.
Adjusted EBITDA was negative at ($0.5 million) (1Q13: $0.8 million).
Financial Position
The Group’s Capital Expenditure on property, plant and equipment and maintenance amounted to $39.4 million (1Q13: $34.1 million). Of that, $21.6 million was invested into the Poultry division, mainly into the construction of the hatchery and the grain storage in the Lipetsk region (Eletsprom project) . In the Pork division, $9.9 million was invested into the construction of the grain storage facility in the Penza region as well as feed plant. The Meat Processing division received $6.0 million of investments.
Net Debt at the end of the first quarter of 2014 was $808.9 million or RUB 28 867.3 million compared to $756.1 million or RUB 24 746.5 million at the end of year 2013. Total debt stood at $843.4 million or RUB 30 098.4 million compared to $ 840.0 million or RUB 27 526.4 million in 2013. Of total debt long-term debt was approximately $497.6 million or 59% of the debt portfolio. Short-term debt was approximately $345.8 million, or 41% of the portfolio. Cost of debt increased to 3.2% in the first quarter of 2014 (2013: 2.6%). The portion of subsidised loans and credit lines in the portfolio was 92%. Cash and cash equivalents totalled $15.7 million as of 31 March 2014.
Subsidies
The Group accrued subsidies for interest reimbursement of $12.6 million which offset interest expense (1Q2013: $16.2 million).
Outlook
During the first quarter, the Russian Government implemented a number of meat import restrictions due to the spread of animal diseases in Europe. Since some Russian pork producers decreased output after the 2013 price shock, this caused a market shortage and led to a significant increase in live hog prices. On the one hand, this puts pressure on sausage producers (especially because of the shortage of pork fat needed for producing smoked sausage). On the other hand, this helps Russian pork producers to compensate for last year’s losses and also helps to protect the health of domestic livestock.
Grain prices were quite stable at the beginning of the year. However, a sizable increase in prices was seen in March due to the political instability in Ukraine, which is a major grain exporter, and devaluation of the rouble against the dollar. Nevertheless, the price for wheat from last year harvest’s remains below RUB 10 000 per tonne. Thanks to high meat prices, the higher cost of feed did not affect the Company’s profits significantly. We expect that grain prices will decrease once again as the new harvest comes to the market.
Cherkizovo Group management anticipates that if pork prices remain at today’s levels, the Company will show strong financial results in 2014 that will exceed market expectations.
| For further information: Alexander Kostikov | +7 495 788 3232 |
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.
$ symbol in this press-release stands for US Dollar. Some figures may be rounded.
*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 income tax and non-controlling interests adjusted for interest, depreciation and amortization and foreign exchange differences 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, short-term bank deposits and long-term bank deposits.
*** For price calculation in dollar terms the Company used the average exchange rate for 1Q14: 34.9591 RUB/USD, 1Q13:30.4142 RUB/USD; All prices are net of VAT
APPENDIX I: KEY DATA AND FIGURES
UNAUDITED 3 MONTHS ENDED MARCH 31, 2014 CONSOLIDATED SELECTED FINANCIAL DATA (US$000)
| (in thousands of US dollars) | Meat Processing | Poultry | Pork | Grain | Corporate assets/ expenditures | Inter-division | Combined |
|---|---|---|---|---|---|---|---|
| Total Sales | 119 037 | 201 718 | 86 787 | 3 808 | 109 | (34 871) | 376 588 |
| including other sales | 1 996 | 7 489 | 1 226 | 236 | 109 | (1 234) | 9 822 |
| including sales volume discount | (10 702) | (7 327) | — | — | — | — | (18 029) |
| Interdivision Sales | (74) | (2 826) | (29 846) | (2 125) | — | 34 871 | — |
| Sales to external customers (Sales) | 118 963 | 198 892 | 56 941 | 1 683 | 109 | 0 | 376 588 |
| % of Total sales | 31.7% | 52.8% | 15.1% | 0.4% | 0.0% | 0.0% | 100.0% |
| Cost of Sales | (96 441) | (157 276) | (57 939) | (3 114) | (1 021) | 34 288 | (281 503) |
| Gross profit | 22 596 | 44 442 | 28 848 | 694 | (912) | (583) | 95 085 |
| Gross margin | 19.0% | 22.0% | 33.2% | 18.2% | n/a | 1.7% | 25.2% |
| Operating expenses | (18 476) | (28 081) | (6 239) | (1 604) | (6 552) | 583 | (60 369) |
| Operating income / (loss) | 4 120 | 16 361 | 22 609 | (910) | (7 464) | (0) | 34 716 |
| Operating margin | 3.5% | 8.1% | 26.0% | −23.9% | n/a | 0.0% | 9.2% |
| Other income and expenses, net | (615) | 3 435 | (855) | 3 | 106 | (4 394) | (2 320) |
| Financial expenses, net | (2 162) | (2 280) | (2 997) | (860) | (2 911) | 4 394 | (6 816) |
| Division profit / (loss) | 1 343 | 17 516 | 18 757 | (1 767) | (10 269) | (0) | 25 580 |
| Division profit margin | 1.1% | 8.7% | 21.6% | −46.4% | n/a | 0.0% | 6.8% |
| Supplemental information: | — | ||||||
| Income Tax expense | (207) | 499 | 66 | 1 | — | — | 359 |
| Depreciation expense | 2 590 | 10 613 | 7 601 | 414 | 288 | — | 21 506 |
| — | |||||||
| Adjusted EBITDA reconciliation | — | ||||||
| Division profit / (loss) | 1 343 | 17 516 | 18 757 | (1 767) | (10 269) | — | 25 580 |
| Add: | 0 | ||||||
| Interest expense, net | 2 162 | 2 280 | 2 997 | 860 | 2 911 | (4 394) | 6 816 |
| Interest income | — | (1 897) | (115) | (3) | (4 282) | 4 394 | (1 903) |
| Foreign exchange loss/(gain) | 620 | (1 538) | 970 | — | 4 176 | — | 4 228 |
| Depreciation and amortisation | 2 590 | 10 613 | 7 601 | 414 | 288 | — | 21 506 |
| Adjusted EBITD
|