Financial results for the Nine Months Ending September 30, 2014

November 19, 2014

Moscow, 19 November 2014 - Cherkizovo Group (LSE: CHE, MOEX: GCHE), Russia’s leading integrated and diversified meat producer, announces financial results for the period ending 30 September 2014.

Highlights

Business Developments

Commenting on the results, Sergei Mikhailov, Cherkizovo CEO, stated:

Despite the increasing volatility on both meat/grain and currency markets, Cherkizovo Group demonstrated strong 9 months and 3Q results. The Company continues to develop through the combination of organic growth, investing into new projects and improving the efficiency of existing ones, and strategic acquisitions, such as acquisition of Lisko-Broiler in 1Q. Meat prices in the period were quite strong, which made it possible to achieve high profitability in the poultry and pork segments, but at the same time meat processing division was under pressure and its profitability decreased significantly. Now pork prices returned to the level seen at the beginning of the year after reaching historical highs.

Looking forward, macro situation looks difficult in general. Sharp devaluation of the local currency that influences direct and indirect costs, predicted consumption slowdown and growth of interest rates for loans will be limitation factors for the future growth. However, we are confident that a well-balanced, vertically integrated business model of our Company will allow us to cope with negative trends and achieve maximum benefits out of positive trends.

***

About Cherkizovo Group

Cherkizovo Group (LSE:CHE; MOEX:GCHE) is the largest meat and feed 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. Chairman Igor Babaev and his family control 65% of Cherkizovo Group, and free float on LSE and MICEX amounts to 35%.

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 decade, Cherkizovo has invested more than $1.5 billion into the development of Russia’s agriculture sector.

CONTACTS:

Alexander Kostikov, Head of IR/Communications
+7 495 788 3232 ext 15019
a.kostikov@cherkizovo.com
www.cherkizovo.com

Financial Overview

On a reported currency basis sales for 9M14 increased by 15% to $1 373.5 million (9M13: $1 195.0 million). Gross profit increased by 83% to $440.0 million (9M13: $240.2 million). Operating expenses as a percentage of sales decreased to 14% compared to 16% in 9M13. Net income grew by 10 times to $228.1 million in 9M14 compared to $23.1 million in 9M13.

Adjusted EBITDA* increased by 178 % to $ 322.9 million (9M13: $116.1 million) due mostly to strong pork prices and low grain prices in the first half of 2014 vs. the same period of 2013. Adjusted EBITDA margin* significantly increased to 24% for 9M14 vs 10% in 9M13.

$m

9M14

9M13

Change

3Q14

3Q13

Change

Sales

1 373.5

1 195.0

15%

501.2

415.4

21%

Gross Profit

440.0

240.2

83%

184.8

89.6

106%

Gross margin

32%

20%

 

37%

22%

 

Operating expenses

(185.2)

(191.9)

-3%

(61.0)

(66.4)

-8%

Operating Income

254.7

48.4

426%

123.9

23.3

432%

Operating margin

19%

4%

 

25%

6%

 

Net Income

228.1

23.1

887%

112.8

14.1

692%

Adjusted EBITDA*

322.9

116.1

178%

146.6

46.8

214%

EBITDA margin

24%

10%

 

29%

11%

 

The table below summarizes the Group’s performance on a rouble currency basis in 9M14 and in the third quarter of 2014:


RUB m

9M14

9M13

Change

3Q14

3Q13

Change

Sales

48 652.5

37 803.6

29%

18 145.6

13 624.0

33%

Gross Profit

15 614.5

7 611.1

105%

6 696.1

2 939.7

128%

Gross margin

32%

20%

 

37%

22%

 

Operating expenses

(6 553.3)

(6 068.8)

8%

(2 213.7)

(2 176.6)

2%

Operating Income

9 061.1

1 542.2

488%

4 482.4

763.0

487%

Operating margin

19%

4%

 

25%

6%

 

Net Income

8 115.3

740.9

995%

4 083.0

460.9

786%

Adjusted EBITDA*

11 475.3

3 684.3

211%

5 306.7

1 534.0

246%

EBITDA margin

24%

10%

 

29%

11%

 

Poultry Division

Sales volume in the Poultry division for the nine months of 2014 increased by 24% y-o-y to 310 663 tonnes of sellable weight (9M 2013: 251 429 tonnes) including 40 735 tonnes of sellable weight produced by LISCO Broiler since the day of the acquisition of this company by Cherkizovo (March 24).

Prices in ruble terms increased by 14% y-o-y from 76.78 RUB/kg*** for the nine months of 2013 to 87.23 RUB/kg for the nine months of 2014. Compared to the price of 84.34 RUB/kg in the second quarter of 2014, the price in the third quarter of 2014 increased by 17% to 98.43 RUB/kg.

Prices for poultry in dollar terms increased by 2% y-o-y from $2.43/kg for the nine months of 2013 to $2.46/kg for the nine months of 2014. Compared to the price of $ 2.41/kg in the second quarter of 2014, the price in the third quarter of 2014 increased by 13% to $ 2.72/kg.

Total sales in the Poultry division increased by 23% to $765.4 million (9M13: $622.7 million). Gross Profit increased by 117% to $225.0 million (9M13: $103.5 million), Gross margin increased to 29% (9M13: 17%).

Operating expenses as a percentage of sales decreased to 12% from 13% in 9M13. Operating Income increased to $136.5 million (9M13: $23.5 million), and Operating margin was 18% (9M13: 4%). Profit in the division increased by 489% to $140.2 million (9M13: $23.8 million).

Adjusted EBITDA* increased by 208% to $172.9 million (9M13: $56.1 million), and Adjusted EBITDA* margin increased to 23% in 9M14 vs 9% in 9M13.

Pork Division

Sales volume in the Pork division for the nine months of 2014 increased by 7% y-o-y to 119 198 tonnes of live weight, compared to 111 689 tonnes for the nine months of 2013.

Prices in ruble terms increased by 51% y-o-y from 63.36 RUB/kg for the nine months of 2013 to 95.97 RUB/kg for the nine months of 2014. Compared to the price of 103.67 RUB/kg in the second quarter of 2014, the price in the third quarter of 2014 increased by 8% to 111.52 RUB/kg.

In dollar terms, price for pork increased by 35% y-o-y from $2.00/kg for the nine months of 2013 to $2.71/kg for the nine months of 2014 (live weight). Compared to the price of $2.96/kg in the second quarter of 2014, the price in the third quarter of 2014 increased by 4% to $3.08/kg. 

Total sales in the Pork division increased by 44% to $330.5 million (9M13: $230.1 million). Gross profit increased by 491% to $154.5 million in 9M14 from $26.1 million in 9M13. Gross margin was at 47% (9M13: 11%)

Operating Expenses as a percentage of sales decreased to 4% in 9M14 compared to 10% in 9M13. Operating Income increased to $141.2 million (9M13: $2.8 million), and Operating margin was 43% (9M13: 1%).

Profit in the division was at $130.3 million (9M13: division loss ($6.7) million).

Adjusted EBITDA* increased to $162.1 million vs. $28.4 million in 9M13. Adjusted EBITDA* margin was 49% (9M13: 12%).

Meat Processing Division

Sales volume in the Meat Processing division increased by 3% y-o-y to 102 107 tonnes for the nine months of 2014 from 99 431 tonnes for the nine months of 2013.

Price in ruble terms increased by 13% y-o-y to 164.47 for the nine months of 2014 from 146.12 RUB/kg for the nine months of 2013. Compared to the price of 167.95 RUB/kg in the second quarter of 2014, the price in the third quarter of 2014 increased by 2% to 170.64 RUB/kg.

Prices in dollar terms increased by 1% y-o-y to $4.65/kg for the nine months of 2014 compared to $4.62/kg for the nine months of 2013. Compared to the price of $4.80/kg in the second quarter of 2014, the price in the third quarter of 2014 decreased by 2% to $4.72/kg.

Total sales in the Meat Processing division increased by 3% to $430.7 million in 9M14 (9M13 $417.1 million), while Gross Profit decreased by 41% to $61.7 million (9M13: $104.9 million), and Gross margin was 14% (9M13: 25%).

Operating Expenses as a percentage of sales decreased to 13% from 15% in 9M13. The division generated Operating Income of $ 6.0 million (9M13: $40.6 million). Operating margin decreased to 1.4% (9M13: 10%). Loss in the Meat Processing division was ($1.3) million in 9M14 (9M13: profit $32.5 million).

Adjusted EBITDA* decreased by 70% to $14.4 million (9M13: $48.3 million), and Adjusted EBITDA* margin was at 3% for 9M14 (9M13: 12%).

Grain Division

In November Cherkizovo had completed harvesting in the Voronezh, Lipetsk, Moscow and Orel regions. The Company harvested approximately 242 263 tonnes of grain, which is 38% higher that FY 2013 harvest (175 000 tonnes). In this agricultural season the Company sowed approximately 28.6 thousand hectares of winter crops.

Due to seasonality of this business the Company decided to report the financial results of this segment annually to better reflect the business performance and provide the appropriate comparison basis.

Financial Position

The Group’s Capital Expenditure on property, plant and equipment and maintenance amounted to $124.0 million in 9M14 (9M13: $115.2 million). Of that, $61.0 million was invested into the Poultry division, mainly into the Eletsprom project development. The Pork division received $48.1 million of investments, mainly for the purchase of new feeders, Meat Processing division received $12.7 million of investments, mainly spent on maintenance and the Grain division received $0.4 million of investments, mainly for the purchase of new equipment.

Net Debt** at September 30, 2014 was $615.1 million or RUB 24 228.3 million vs $756.1 million or RUB 24 746.5 million at the end of 2013. Total debt stood at $719.2 million or RUB 28 326.7 million compared with $841.0 million or RUB 27 526.4 million at the end of 2013. Of total debt long-term debt was approximately $391.2 million or 54% of the debt portfolio. Short-term debt was approximately $328.0 million, or 46% of the portfolio. Cost of debt as of September 30 was 3.8% (September 30, 2013: 2.7%). The portion of subsidised loans and credit lines in the portfolio was 91%. Cash and cash equivalents totalled $87 million as of 30 September 2014.

Subsidies

In the nine month of 2014 The Group accrued subsidies for interest reimbursement of $38.4 million or RUB 1 358.3 million which offset interest expense (9M13: $52.3 million or RUB 1 652.2 million). The Group also accrued direct subsidies in the amount of $1.7 million or RUB 61.7 million (9M13: $25.8 million or RUB 800.3 million).

Outlook

In 4Q 2014, we see a number of trends that may exert  pressure on the country’s meat market and Cherkizovo’s financial performance. Significant RUB devaluation caused a notable increase of costs denominated in USD/EUR (for example, feed components) and also triggered grain prices growth, since the increase of export prices in roubles leads to a price increase on domestic grain market. Growing inflation and predicted decrease in households’ disposable income will most likely lead to the decrease of meat consumption. In these challenging circumstances, capability to cut and control costs, as well as strong marketing and distribution, will be key success factors. Cherkizovo management is confident that the Company has all the resources and capabilities to operate on stagnating market as successfully as on growing one, and plans to increase production output in key segments in 2015.

***

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.

Cash Conversion rate (CCR) is calculated as Total net cash from operating activities divided by Net income attributable to Group Cherkizovo

** Net debt is calculated as total debt minus cash and cash equivalents, short-term bank deposits and long-term bank deposits.

*** All prices are given excluded VAT

For price calculation in dollar terms the Company used the average exchange rate for 9M14:35.39 RUB/USD; 9M13: 31.62 RUB/USD; 3Q14: 36.19 RUB/USD; 3Q13: 32.80 RUB/USD.