DJ Cherkizovo Group: Announces Financial Results for the First Half of 2017
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Cherkizovo Group / Half-yearly Results
Cherkizovo Group: Announces Financial Results for the First Half of 2017
23-Aug-2017 / 13:01 CET/CEST
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Cherkizovo Group Announces Financial Results
for the First Half of 2017
Moscow, Russia - 23 August 2017 - PJSC Cherkizovo Group (LSE: CHE; MOEX: GCHE), the largest
vertically integrated meat and feed producer in Russia, today announces its unaudited consolidated
IFRS results for the period ending 30 June 2017.
Second quarter financial highlights
- Revenue increased by 7% quarter-on-quarter (q-o-q) to RUB 22.4 billion from RUB 21.0 billion in
1Q 2017
- Gross profit grew by 28% q-o-q to RUB 7.2 billion from RUB 5.6 billion in 1Q 2017
- Gross profit margin stood at 32.4% compared to 26.9% in 1Q 2017
- Adjusted EBITDA* rose by 16% to RUB 4.3 billion, compared to RUB 3.7 billion in 1Q 2017
- Adjusted EBITDA* margin of 19.3% compared to 17.8% in 1Q 2017
First half financial highlights
- Revenue increased by 12% year-on-year (y-o-y) to RUB 43.3 billion from
RUB 38.8 billion in 1H 2016
- Gross profit jumped 58% y-o-y to RUB 12.9 billion from RUB 8.1 billion in 1H 2016
- Gross profit margin surged to 29.7%, compared to 21.0% in 1H 2016
- Operating expenses decreased 2% y-o-y to RUB 6.3 billion, compared to RUB 6.4 billion in 1H 2016
- Adjusted EBITDA* tripled y-o-y and reached RUB 8.0 billion, compared to
RUB 2.7 billion in 1H 2016
- Adjusted EBITDA* margin reached 18.6% compared to 7.0% in 1H 2016
- Net profit for the period grew five-fold y-o-y, reaching
RUB 5.1 billion, versus RUB 0.9 billion in 1H 2016
- Net operating cash flow was RUB 6.5 billion for 1H 2017
- Net debt** was RUB 43.2 billion as at June 30, 2017
- Effective cost of debt stood at 8.6% (2016: 9.7%)
- Earnings per share (EPS) reached RUB 116.4 (1H 2016: EPS was RUB 21.6).
Key corporate highlights for the reporting period
- Cherkizovo Group acquired NAPKO from a related party. NAPKO is one of Russia's leading grain
producers with 147,000 hectares of land located in Lipetsk, Tambov and Penza regions, which are
strategically important areas for Cherkizovo Group. In 2016, NAPKO produced 250,000 tonnes of
grain. Following the acquisition, Cherkizovo Group's total operating land bank reached 287,000
hectares. As part of the transaction, the Group also acquired the supporting production
infrastructure to cultivate the land and store the grain.
- The Tambov Turkey project, a joint venture between Cherkizovo Group and Grupo Fuertes, Spain's
leading agricultural producer, is well on the way towards reaching its total installed capacity of
50,000 tonnes of live weight per annum. Favourable market conditions have placed us in the top
three turkey producers in Russia, with the new Pava-Pava brand already on the shelves of the large
retail chains. Certification with international food safety management standards will allow Tambov
Turkey to export top-quality meat to European markets. European certification will be a further
testament to the highest quality of meat being produced at this new, state-of-the-art plant.
- The Group launched three new pork fattening sites in Lipetsk and Voronezh regions, with total
production capacity of more than 126,000 live market hogs annually.
Key corporate highlights after reporting period
- On 2 August 2017, the controlling shareholder of Cherkizovo Group, together with its affiliates,
completed the acquisition of 21.05% of the Group's ordinary shares and GDRs from funds and
portfolios under the management of Prosperity Capital Management, for a total consideration of RUB
12.0 billion.
- Cherkizovo Group announced its intention to expand in Voronezh region, with construction begun on
two pork-fattening plants and plans under consideration to build a number of poultry houses.
Voronezh region is expected to be one of the key geographic regions for Cherkizovo Group over the
next decade. The Group also outlined expansion plans for Lipetsk and Penza regions.
Sergei Mikhailov, CEO of Cherkizovo, commented:
"We continued to see a stronger financial performance during the second quarter, following an
excellent set of results in the previous quarter, buoyed by a stronger ruble. The Group's gross
profit experienced a double-digit increase, while EBITDA growth was nearly three times that of the
same period last year and exceeding expectations.
We were very pleased to see progress broadly across the whole business. The pork segment made a
significant contribution to growth, delivering year-on-year EBITDA growth of 148%, driven by an
increase in volumes and average price. We also made major progress in the poultry segment during
the first half adding capacity and improving margins. In the meat-processing segment, we continued
to gain share, despite a shrinking market. In grain, the acquisition of NAPKO will allow us to
boost self-sufficiency in grain to over 60% in the coming years, compared to 30% at the end of
2016, which should reduce volatility of grain and feed prices and ensure stable supply.
Tambov Turkey plans to add an additional 50,000 tonnes of live weight production, providing major
opportunities in the local and export markets. We are in the process of acquiring a license to
export to the EU, which we believe will be a step-change for our business.
On the corporate governance front, we made important strides during the first half, with a new
board and chairman elected. We boosted the power of our independent directors to improve oversight
and transparency. In addition, we believe the acquisition of Prosperity Capital's stake provides us
valuable flexibility and more options in our capital markets strategy and supports our commitment
to deliver value for shareholders."
Financial summary
RUB mln 1H 2017 1H 2016 y-o-y, % 2Q 2017 1Q 2017 q-o-q, %
Revenue 43,349 38,835 12% 22,378 20,971 7%
Gross profit 12,881 8,144 58% 7,240 5,640 28%
Operating (6,257) (6,371) (2%) (3,071) (3,186) (4%)
expenses
EBITDA, 8,043 2,728 195% 4,313 3,730 16%
adjusted
EBITDA 19% 7% 19% 18%
margin,
adjusted
Operating 6,624 1,773 274% 4,169 2,455 70%
profit
Profit 5,020 946 430% 3,142 1,878 67%
before tax
Profit 5,106 949 438% 3,172 1,934 64%
Net 6,467 1,074 502% 4,353 2,114 106%
operating
cash flow
Net debt 43,192 36,949* 17% 43,192 40,417 7%
* As of December 31, 2016
Revenue
Net sales increased by 12% y-o-y to RUB 43.3 billion, compared to RUB 38.8 billion in 1H 2016. The
pork and meat processing segments were the most significant growth drivers, with a y-o-y rise in
production volumes in the first half of 13% and 4%, respectively. On a quarterly basis, sales
growth was 29% and 10%. The pork segment's performance was also boosted by a 13% y-o-y rise in
prices.
Gross profit
Gross profit increased by 58% y-o-y to RUB 12.9 billion from RUB 8.1 billion in 1H 2016. The strong
performance came on the back of higher sales and lower feed costs, which are largely denominated in
foreign currency. During 1H 2017, the ruble reached its highest level compared to global currencies
since July 2015. The combination of lower costs and higher sales lifted the gross margin to 29.7%
in 1H 2017, from 21.0% in the same period in 2016. At the same time, on a quarterly basis, gross
profit demonstrated q-o-q growth of 28%.
Operating expenses
Operating expenses decreased by 2% y-o-y to RUB 6.3 billion, compared to RUB 6.4 billion in 1H
2016, as a result of lower payroll and other selling expenses. In the second quarter, operating
expenses decreased by 4% q-o-q. Operating expenses as percentage of sales decreased to 14.4% in 1H
2017 from 16.4% in 1H 2016.
Adjusted EBITDA
In 1H 2017, adjusted EBITDA reached RUB 8.0 billion, which is nearly three times the figure
reported in 1H 2016. The adjusted EBITDA margin jumped to 18.6% (1H 2016: 7.0%). The adjusted
EBITDA margin for the second quarter of 2017 came in at 19.3%, compared to 17.8% in 1Q 2017.
Interest expense
Interest expense was 25% lower y-o-y, reaching RUB 1.8 billion in 1H of 2017. The main drivers
behind this decrease included a change from short term to longer term loans and a decrease in
interest rates, although total borrowings increased by 18% y-o-y to RUB 45.4 billion (2016: RUB
38.6 billion). Net interest expense for 1H 2017 was RUB 1.5 billion, up 14% from the 1H2016 level
of RUB 1.3 billion. The Group accrued RUB 0.3 billion of subsidies in 1H 2017 which is included in
the net interest expense above, a y-o-y decrease of 76%.
Net profit
Net profit for the Group grew five-fold to RUB 5.1 billion in 1H 2017, compared to RUB 0.9 billion
in 1H 2016. Net profit margin in 1H 2017 strengthened to 11.8%, compared to 2.4% in the
corresponding period of 2016, maintaining higher level from the first quarter of 2017.
Cash flow
Operating cash flow for 1H 2017 was RUB 6.5 billion compared to RUB 1.1 billion in 1H 2016. This
was primarily the result of the increase in operating income.
Business segments
Divisio Sales volume Change Revenue Change Share
ns y-o-y, y-o-y, of
% % Group
reven
ue, %
1H 2017, 1H 2016, 1H 1H 2016,
k tonnes k tonnes 2017, RUB mln*
RUB
mln*
Poultry 254.9 252.4 1% 23,721 22,857 4% 49%
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Pork 98.4 86.9 13% 8,992 7,109 26% 19% Meat 107.3 102.9 4% 15,617 14,653 7% 32% process ing * Revenue for both years includes intersegment sales Poultry Division First half sales volumes increased 1% y-o-y to 254,911 tonnes of sellable weight (1H 2016: 252,351 tonnes). This modest uptick was due to growth in production, leading to increased output volumes. In the same period in 2016, management decided to sell excess inventory due to market volatility, which boosted sales volumes. The average price during 1H 2017 increased by 1% y-o-y to 91.15 RUB/kg as branded products and HoReCa sales represented a larger share of sales. On a q-o-q basis, the average price decreased by 3% to 89.93 RUB/kg during 2Q 2017, due to buyers' market during the season. Revenue for the division increased 4% y-o-y to RUB 23.7 billion (1H 2016: RUB 22.9 billion). This growth was a result of the rise in the average price as brand name and value- added products took a higher share of sales. However, the decrease in prices during 2Q 2017 led to a slight decrease in revenue of less than 1% q-o-q. Gross profit grew more than two-fold y-o-y to RUB 5.7 billion, from RUB 2.7 billion in 1H 2016. This was as a result of lower feed costs due to the appreciation of the ruble. The corresponding period of 2016 saw the ruble weaken to a record low relative to the US dollar and Euro, leading to a significant increase in our feed costs. The gross margin for 1H 2017 consequently increased to 24.2%, compared to 11.9% in the same period of 2016. Between the first and second quarters of 2017, the segment's gross profit grew by 19%, with gross profit margin increasing to 26.3% from 22.2% in 1Q 2017. Operating expenses as a percentage of sales decreased to 10.4%, from 11.2% in 1H 2016, due to lower repairs & maintenance, payroll and advertising & marketing expenses. Operating income for 1H 2017 jumped to RUB 3.3 billion, compared to RUB 0.2 billion in 1H 2016, with a quarterly increase of around 29%. The operating margin for 1H 2017 increased to 13.9% from 0.7% in the corresponding period of last year, supported by a 2Q 2017 margin increase to 15.6% from 12.1% during 1Q 2017 as a result of lower feed costs. Net profit for the division came in at RUB 2.7 billion, compared to a loss of RUB 0.6 billion in 1H 2016. This was mainly a result of the link of the costs of feed components to foreign currencies. Adjusted EBITDA grew more than four-fold, and amounted to RUB 4.1 billion (1H 2016: RUB 0.9 billion), while the adjusted EBITDA margin grew to 17.2% from 4.1% in 1H 2016. Quarterly EBITDA margin increased to 17.3% in 2Q 2016 from 17.1% in the last quarter. Pork Division Production volumes in the first half of the year increased by 13% y-o-y to 98,369 tonnes (1H 2016: 86,902 tonnes). This was due to higher production levels following the launch of two new wean-to-finish sites in Voronezh in 2016, as well as the on-going genetics improvement programme launched in 2014. The average price rose by 13% y-o-y to 94.02 RUB/kg (1H 2016: 83.20 RUB/kg). This increase was driven by growing consumption in Russia, which has been fuelled by increased promotional activity by Russian retail chains, along with a stabilisation in purchasing power. Total sales in the pork division grew 26% y-o-y to RUB 9.0 billion (1H 2016: RUB 7.1 billion). This sales growth was expected as both volume and average price increased y-o-y. On a quarterly basis, sales increased by 29%. Gross profit for 1H 2017 almost doubled to RUB 4.0 billion, (1H 2016: RUB 2.2 billion), because of higher sales volumes and average live hogs price growth, along with the lower cost of feed components and veterinary supplies due to stronger ruble. The segment's gross margin jumped to 44.2% in the first half of the year from 30.8% in the same period of 2016. The pork segment's gross profit grew 121% between the first and second quarter of the year. Operating expenses as a percentage of sales decreased compared to the same period of 2016 and stood at 1.3% (1H 2016: 5.7%). Operating income doubled y-o-y to RUB 3.9 billion from RUB 1.8 billion in 1H 2016. The operating margin increased to 42.9% from 25.2% in the previous year. Net profit doubled y-o-y to RUB 3.7 billion (1H 2016: RUB 1.5 billion). Adjusted EBITDA doubled as well y-o-y and amounted to RUB 3.4 billion (1H 2016: RUB 1.4 billion). The adjusted EBITDA margin grew to 37.6% in 1H 2017 from 19.1% in 1H 2016. On a q-o-q basis, adjusted EBITDA demonstrated robust growth of 43%. Meat Processing Division Sales volumes increased by 4% y-o-y to 107,314 tonnes from 102,898 tonnes in 1H 2016. This was due to the growth in the product assortment in modern retail channels and geographical diversification into the Ural and North West regions. During the reporting period, the average price increase by 5% y-o-y to 150.11 RUB/kg. On a q-o-q basis, the average price decreased by 2% to 148.92 RUB/kg (1Q 2017: 151.46 RUB/kg). Total sales were 7% higher in 1H 2017 and reached RUB 15.6 billion (1H 2016: RUB 14.7 billion). This sales growth was expected as both volume and average price increased y-o-y. In the second quarter, sales grew by 10% q-o-q. Gross profit for the first half of the year increased 8% y-o-y to RUB 2.7 billion, compared to RUB 2.5 billion in 1H 2016. The gross margin was up to 17.5% from 17.3% in 1H 2016. Gross profit growth weakened on a q-o-q basis to 4%. In 1H 2017, operating expenses as a percentage of sales were in line with the last year and amounted to 12.0%, as a result of lower marketing and selling expenses. Operating income increased by 12% y-o-y to RUB 0.9 billion from RUB 0.8 billion in 1H 2016. The operating margin increased to 5.6% from 5.3% in 1H 2016, resulting from an increase in the profitability of sausages and lower marketing and selling expenses. During the reporting period, the meat processing segment generated net profit of RUB 0.7 billion, a decrease of 3% y-o-y. In 1H 2017, adjusted EBITDA increased by 11% to RUB 1.2 billion (1H 2016: RUB 1.1 billion). Adjusted EBITDA decreased by 15% on a q-o-q basis. The adjusted EBITDA margin of 7.7% in 1H 2017 exceeded the last year (1H 2016: 7.4%). Grain Division During the reporting period, Cherkizovo started its 2017 harvesting campaign and expects to harvest a total of around 750,000 tonnes of crops this year. Year to date, wheat yields have exceeded the rates built into our budget. We are still in an early stage of the harvest period, and weather and other factors could intervene to affect total yields for the season. Due to the seasonality of our business, the results of this segment are reported annually to better reflect the business performance and provide the appropriate basis for comparison. Financial Position The Group's capital expenditure on property, plant, equipment and maintenance amounted to RUB 4.6 billion in 1H 2017, a y-o-y increase of 4%. RUB 2.0 billion was invested in the construction of new pork finisher complexes in Lipetsk region, the development of sites in Voronezh region and the building of two wean-to-finish sites in Penza region. RUB 0.7 billion was invested into the poultry division. The meat processing division received RUB 1.4 billion of investments for the construction of the Kashira meat processing plant in Moscow region. In the grain division, RUB 0.3 billion was invested into the construction of a new grain drying facility. As of 30 June 2017, net debt** amounted to RUB 43.2 billion, compared to RUB 36.9 billion at the end of 2016. Total debt increased to RUB 45.4 billion as of 30 June 2017 compared to the level of total debt of 38.6 billion at the end of 2016. As of 30 June 2017, long-term debt represented 73% of the debt portfolio and was RUB 33.0 billion. Short-term debt stood at RUB 12.4 billion, or 27% of the portfolio. The effective cost of debt was 8.6% in 1H 2017 (2016: 9.7%). Subsidised loans and credit lines made up 33% of the debt portfolio in 1H 2017 (1H 2016: 79%). Cash and cash equivalents totalled RUB 1.6 billion as of 30 June 2017. Subsidies In 1H 2017, the Group accrued subsidies for interest reimbursement of RUB 0.3 billion, which offset interest expense (1H 2016: RUB 1.1 billion). The Group received RUB 0.1 billion of subsidies in 1H 2017, compared to RUB 1.0 billion in 1H 2016. Outlook The Group maintains a positive outlook for the remainder of 2017, based on progress across all segments of the business and the strong ruble in the year to date. At the same time, the Group maintains a robust risk forecasting and mitigation function. The acquisition of NAPKO, a long-standing trusted supplier and related party, has expanded the Group's land bank and self-sufficiency in grain over the long term, strengthening the Group's business as a whole and reducing exposure to grain market volatility and shortages. Russian wheat harvests are forecasted to reach record levels this year, supported by Cherkizovo Group's wheat yields exceeding the budget so far. Despite significant external risks, the Group remains optimistic about the second half of 2017 and prospects for 2018. The macroeconomic outlook is positive. The stronger ruble compared to major foreign currencies continues to drive lower feed prices, keeping meat prices lower. These factors, coupled with an on-going recovery in Russian consumer spending power should support continued solid Group profitability. For more information please visit http://www.cherkizovo.com [1] or contact Cherkizovo Group Dmitry Mironov Head of Investor Relations +7 (495) 660 24 40 ext. 15962 d.mironov@cherkizovo.com About Cherkizovo Group Cherkizovo Group is the largest meat and feed producer in Russia. The Group is a top-3 producer in each of the Russian poultry, pork and processed meat markets and is the largest feed manufacturer in the country. Cherkizovo Group encompasses eight full cycle poultry production facilities, 15 modern pork
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