Cherkizovo Group (LSE:CHE; MOEX:GCHE) Announces Financial Results for the 9 months of 2015

November 12, 2015

Moscow, November 12, 2015 - Cherkizovo Group (LSE:CHE; MOEX: GCHE), Russia’s largest meat and feed producer, announces its financial results for the period ending 30 September 2015.

Highlights

Business Developments

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

"In the past nine months we began the construction of a poultry complex, consisting of a parent flock site and a replacement flock site. The only one in Russia, it will allow us to reduce our dependency on parent eggs grown abroad.

We completed the first phase of the investment project in a pork cluster in the Voronezh region, having built a feed mill and a fattening facility, costing a total of 2.2 billion roubles. By using prefabricated timbering and the jointless placement of concrete, we not only optimised construction expenses by approximately 30%, but also put the facility into operation within one year. The construction will be fully completed in 2017 and will provide the Group with additional planned production capacity of 70,000 tonnes per year.

We also launched a grain storage facility (200,000 thousand tonnes) in Elets, which has become the largest in Europe and the most technically advanced in Russia.

Our Group revenue grew 15%, driven primarily by the processed meat and poultry segments. An increase in operating expenses was caused by continued expansion in all the segments and foreign-currency denominated feed components. We also launched a federal advertisement campaign for processed meats, which amounted to 0.7% of group revenue in the first nine months of 2015.

We believe that in today's Russia the agricultural segment is becoming a real driver of the country's economy. For a number of years we have been and remain at the forefront of this development as the largest vertically integrated agro-industrial holding in Russia."

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About Cherkizovo Group

Cherkizovo Group (LSE:CHE; MOEX:GCHE) is Russia's largest meat manufacturer in terms of total output of meat products and feed. Grain farming, the company's newest division, has been growing faster than the market as a whole for three years in a row.

Cherkizovo Group owns 8 poultry production complexes, 15 pork complexes, 4 meat processing plants, 4 feed mills, 4 grain growing complexes, and a swine nucleus centre. Chairman of the Board of Directors Igor Babaev and his family control 65% of the Group's equity. The remaining 35% is free float.

Due to its vertically integrated structure, which includes grain farming, grain storage facilities, own feed production, livestock breeding, growing, and slaughtering, as well as meat processing and its own distribution system, Cherkizovo Group is Russia's largest integrated agro-industrial holding. The company's 2014 consolidated revenue was 69 billion roubles; Cherkizovo produced more than 800,000 tonnes of meat products and 1.4 million tonnes of feed.

For further information

Marina Kagan Head of IR and Communications
тел. +7 495 660 2440, ext.. 15122
m.kagan@cherkizovo.com

 

Financial Overview

Sales for 9M15 increased by 15% to RUB 56.0 billion from RUB 48.7 billion in 9M14. Gross profit decreased by 2% to RUB 15.3billion (9M14: RUB 15.5 billion). Operating expenses as a percentage of sales increased to 15% from 13% in 9M14. Net income decreased by 24% to RUB 6.1 billion (9M14: underlying net income of RUB 8.0 billion**).

Adjusted EBITDA decreased by 13% to RUB 9.9 billion from RUB 11.5 billion in 9M14. Adjusted EBITDA margin decreased to 18% for 9M15 from 24% in 9M14.

RUB m 9M15 9M14 Change 3Q15 3Q14 Change
Sales 56 018,8 48 652,5 15% 19 807,6 18 139,0 9%
Gross Profit 15 278,4 15 544,8 -2% 5 270,7 6 661,2 -21%
Gross margin 27% 32% 27% 37%
Operating expenses (8 182,5) (6 556,8) 25% (2 819,1) (2 206,7) 28%
Operating Income 7 095,9 8 988,0 -21% 2 451,5 4 454,5 -41%
Operating margin 13% 18% 12% 25%
Net Income 6 072,9 8 042,2 -24% 1 977,5 4 055,4 -51%
Adjusted EBITDA* 9 910,3 11 452,6 -13% 3 452,1 5 307,6 -35%
EBITDA margin 18% 24% 17% 29%

Poultry Division

Sales volumes in the Poultry division for the nine months of 2015 increased by 10% y-o-y to 341 370 tonnes of sellable weight (9M 2014: 310 663 tonnes). Prices in ruble terms increased by 9% y-o-y from 87.23 RUB/kg for the nine months of 2014 to 94.93 RUB/kg for the nine months of 2015. Compared to the price of 94.36 RUB/kg in the second quarter of 2015, the price in the third quarter of 2015 decreased by 0.3% to 94.06 RUB/kg.

Total sales in the division increased by 19% to RUB 32.1billion (9M14: RUB 27.0 billion). Gross profit decreased by 18% to RUB 6.4billion (9M14: RUB 7.8 billion). Gross margin decreased to 20% (9M14: 29%).

Operating expenses as a percentage of sales was flat at 11% in 9M15. Operating income decreased by 41% to RUB 2.8 billion (9M14: RUB 4.7 billion), and operating margin amounted to 9% (9M14: 18%). Profit in the division decreased by 44% to RUB 2.8 billion (9M14: RUB 4.9 billion), primarily due to foreign currency denominated feed compoments costs.

Adjusted EBITDA decreased by 31% to RUB 4.2 billion (9M14: RUB 6.0 billion), adjusted EBITDA margin decreased to 13% in 9M15 from 22% in 9M14.

Pork Division

Sales volumes in the Pork division for the nine months of 2015 were almost flat at 119 028 tonnes of live weight, compared to 119 198 tonnes for the nine months of 2014.

Prices in ruble terms increased by 9% y-o-y from 95.97 RUB/kg for the nine months of 2014 to 104.89 RUB/kg for the nine months of 2015. Compared to the price of 108.16 RUB/kg in the second quarter of 2015, the price in the third quarter of 2015 decreased by 1% to 107.44 RUB/kg.

Total sales in the division increased by 9% to RUB 12.7 billion (9M14: RUB 11.6 billion). The segment reported gross profit of RUB 5.1 billion in 9M15 (9M14: RUB 5.2 billion). Gross margin in 9M15 was at 41%. (9M14: 45%).

Operating expenses as a percentage of sales increased to 3% from 2% in 9M14. The division generated operating income of RUB 4.7 billion (9M14: RUB 5.0 billion).

Profit in the division decreased by 4% to RUB 4.5 billion (9M14: RUB 4.6 billion).

Adjusted EBITDA amounted to RUB 5.4 billion (9M14: RUB 5.7 billion), and adjusted EBITDA margin was 42% (9M14: 49%).

Meat Processing Division

Sales volumes in the Meat Processing division increased by 32% y-o-y to 135 247 tonnes for the nine months of 2015 from 102 107 tonnes for the nine months of 2014 as a result of higher sales of case-ready products and meat on the bone, produced entirely on our own farms. .

Price in ruble terms increased by 5% y-o-y to 173.06 for the nine months of 2015 from 164.46 RUB/kg for the nine months of 2014. Compared to the price of 176.45 RUB/kg in the second quarter of 2015, the price in the third quarter of 2015 decreased 2% to 173.27 RUB/kg. .

Total sales in the division increased by 37% to RUB 20.8 billion (9M14: RUB 15.3 billion), gross profit increased by 38% to RUB 3.0 billion (9M14: RUB 2.2 billion), and gross margin was flat at 14%. .

Operating expenses as a percentage of sales decreased to 10% from 13%. Operating income increased by almost four times to RUB 845.6 million (9M14: RUB 215.7 million). Operating margin increased to 4% (9M14: 1%). The division generated profit of RUB 558.3 million (9M14: division loss of RUB 44.0 million)..

Adjusted EBITDA more than doubled to RUB 1.2 billion (9M14: RUB 511.4 million), and adjusted EBITDA margin was at 6% (9M14: 3%)..

Grain Division

Cherkizovo completed harvesting in the Voronezh, Lipetsk, Moscow, Tambov and Orel regions at the beginning of the November. The Company harvested approximately 330,000 tonnes of grain, which is 36% higher than the full year 2014 harvest numbers. (242,000 tonnes). .

Cherkizovo Group has fulfilled 100% of its winter wheat sowing plan. The sowing campaign was completed in the best agronomic time, with a total crop area of 29,000 ha. The winter crops are expected to enter the winter period in good condition..

A total of 7,500 ha were sown in the Voronezh Region, 8,900 ha in the Orel Region, 6,000 ha in the Lipetsk Region, 5,800 ha in the Tambov Region and 800 ha in the Moscow Region. .

Financial Position

The Group’s Capital Expenditure on property, plant and equipment and maintenance amounted to RUB 8.0 billion (9M14: RUB 4.4 billion). Of that, RUB 2.9 billion was invested into the Poultry division, mainly into the construction of the hatchery and the grain storage in the Lipetsk region (Eletsprom project) and into the renovation of the slaughter plants. In the Pork division, RUB 1.5 billion was mainly invested into purchase of the equipment for the finisher complexes in the Voronezh region and the construction of the new finisher complexes in the Lipetsck region. The Meat Processing division received RUB 1.1 billion of investments (renovation of Dankov MPP). In the Grain division, RUB 0.6 billion was invested into the purchase of the equipment. The Feed Processing division received RUB 1.3 billion of investments (construction of feed mills).

Net Debt*** at the end of the nine months of 2015 was RUB 30.5 billion compared to RUB 26.1 billion at the end of year 2014. Total debt stood at RUB 32.2 billion compared to RUB 27.8 billion at the end of year 2014. Of total debt long-term debt was RUB 10.6 billion or 33% of the debt portfolio. Short-term debt was RUB 21.6 billion, or 67% of the portfolio. Cost of debt was at 3.2 % in the nine months of 2015 (9M14: 3.8%). The portion of subsidised loans and credit lines in the portfolio was 86% (9M14: 91 %). Cash and cash equivalents totalled RUB 1.1 billion as of 30 September 2015.

Dividends

The Group paid out dividends for the fiscal year 2014, in the amount of RUB 2.4 billion (RUB 54.6 per ordinary share) in the second quarter of 2015. In the third quarter the Group accrued dividends of RUB 1.0 billion .

Subsidies

In nine months of 2015, the Group accrued subsidies for interest reimbursement of RUB

1.9 billion which offset interest expense (9M14: RUB 1.4 billion). The Group received RUB 1.4 billion of subsidies in 9M15 (9M14: RUB 1.5 billion).

Outlook

In 4Q 2015, we see a number of positive trends in all our business segments. Poultry volumes continue to be strong, although profitability might be impacted by higher operating costs in an unstable economic environment. Before the end of 2015, we will launch an incubator in the Elets region for 240 million eggs a year, which, combined with new slaughtering facilities, will significantly increase our poultry production volumes.

In pork we remain in the top three producers, focusing on achieving best-in-class cost price. We continue to add on capacity through extensive expansion.

Processed meat sales have been supported by a successful nation-wide advertisement campaign. We also expect an increase in the sales of case-ready products.

Grain harvest was very strong demonstrating a 36% increase year-on-year. By the end of 2015 we will launch an elevator complex in Elets which will allow us to cross a historic landmark of 1 million tonnes of grain. We remain the largest fodder manufacturer in Russia with a production volume of over 1.5 million tonnes a year.

Our turkey project in the Tambov region is fully on track. A number of facilities have already been completed. By the end of 2015, we will populate them with birds, which will allow us to have the first deliveries of Cherkizovo grown turkey in the shops in September 2016.

In 4Q 2015, Cherkizovo Group has placed bonds amounting to 5 billion roubles for a 5-year term at 12.5% per annum. The funds will be used to refinance three-year bonds worth 3 billion roubles approaching maturity, to refinance short-term debt, and to finance capital expenditures that do not fall within state subsidies.

Moving into the next year we remain confident that we will continue to show positive trends in all our business segments, although we are cautious about the pace of growth due to unstable marco-economic conditions.

 


Some figures in this press-release are rounded for a 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 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.

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 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, foreign exchange differences, other finance income and gains on bargain purchase 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.

**  Underlying Net income is net income adjusted for the Gain on bargain purchase of Lisko Broiler in the amount of 1.4 billion roubles

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

****  Underlying EPS is calculated as Underlying Net income divided by the total number of shares outstanding for the period

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