Cherkizovo turns a profit on pork

March 14, 2013

Despite current difficulties in pork breeding, Cherkizovo Group managed a 66% profit increase in 2012, up to $225.2 million. The company explains such dynamic growth as being the result of two factors: an increase in sales of high-margin meat products as well as turning $20 million into clear profit, an amount previously earmarked as tax payment and freed up by the government’s decision to extend the zero tax rate on farmer income. 

According to the results of 2012, Cherkizovo Group, one of the leaders in the domestic meat market, in comparison with 2011 successfully grew its revenue by 7% to $1.581 billion, EBITDA by 29% to $314.6 million and net profit by 66% to $225.2 million. These numbers are supported by the group’s financial accounting, prepared according to US GAAP standards. The EBITDA margin for the year came to 20%. 

These figures were accrued against the background of a 30% fall in pork prices and doubled grain prices, two events that occurred simultaneously in the second half of 2012. 

By way of comparison, in 2011, a relatively successful year from the vantage point of high pork prices and low cost of grain, Cherkizovo grew its revenue by 24% and EBITDA by 12%, while its net profit actually fell by 1%. Its EBITDA margin amounted to 17%. 

According to Cherkizovo spokesman Alexander Kostikov, the 2012 growth in net profit occurred due to the zero tax rate for agricultural producers. It was presumed that in the beginning of 2012 the government would discontinue the preferential tax treatment for such producers, a policy that has been in place since 2004. However, at the end of the previous year the zero tax rate for farmers was indefinitely extended. “The company had reserved $20 million in order to cover the upcoming costs of the suspended tax burden, but extension of preferential tax treatment allowed for that sum to be turned into net profit,” explained Mr. Kostikov. 

The growth in net profit was also due to the increase in sales of high-margin meat products. The company gambled on falling pork prices in the final quarter of 2012, increasing its purchases of materials for the Meat processing division, reported Mr. Kostikov. 

Analysts warn that this year will be difficult for Cherkizovo due to high grain and low pork prices. However, thanks to business diversification, the stronger Poultry division and the company’s own agribusiness, there are excellent possibilities that will keep profits at the proper level.