DJ Cherkizovo Group Announces Financial Results for the Third Quarter and Nine Months of 2017
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Cherkizovo Group (CHE)
Cherkizovo Group Announces Financial Results for the Third Quarter and Nine
Months of 2017
15-Nov-2017 / 11:30 CET/CEST
Dissemination of a Regulatory Announcement, transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
Cherkizovo Group Announces Financial Results
for the Third Quarter and Nine Months of 2017
Moscow, Russia - 15 November 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 September 2017.
Third quarter financial highlights
- Revenue was RUB 22.8 billion
- Gross profit fell 32% to RUB 4.9 billion
- Gross profit margin of 21.6%
- Adjusted EBITDA* fell 15% to RUB 3.7 billion
- Adjusted EBITDA* margin of 16.0%
9M financial highlights
- Revenue increased by 12% year-on-year (y-o-y) to RUB 66.1 billion from
RUB 59.2 billion in 9M 2016
- Gross profit jumped 37% y-o-y to RUB 17.8 billion from RUB 13.0 billion
in 9M 2016
- Gross profit margin surged to 26.9%, compared to 22.0% in 9M 2016
- Operating expenses were flat and stood at RUB 9.5 billion y-o-y
- Adjusted EBITDA* more than doubled y-o-y to RUB 11.7 billion, compared
to
RUB 5.3 billion in 9M 2016
- Adjusted EBITDA* margin jumped to 17.7% compared to 9.0% in 9M 2016
- Net profit for the period grew 158% y-o-y to RUB 5.6 billion, versus
RUB 2.2 billion in 9M 2016
- Net operating cash flow was RUB 9.8 billion for 9M 2017
- Net debt** was RUB 47.2 billion as at September 30, 2017
- Earnings per share (EPS) reached RUB 130.4 (9M 2016: EPS was RUB 50.0)
Key corporate highlights for 3Q
- In July 2017, Cherkizovo Group announced plans to construct
turkey-fattening sites in Lipetsk region. Current plans envisage the
construction of three turkey-fattening sites, utilising 1,000 hectares of
land. Planned investment in the project amounts to RUB 1.7 billion.
- Also in July, the Group announced plans to extend production in Voronezh
at LISKO Broiler, the region's largest producer of poultry meat.
- In August, the Vasilyevskaya poultry production facility received
permission to export poultry products to Iraq. Obtaining the right to
export is a significant step in the development of the Group's export
potential.
- Also in August, the controlling shareholder of Cherkizovo Group,
together with affiliates of the Company, completed the acquisition of
21.05% of the Group's ordinary shares and global depositary receipts
(GDRs) from funds and portfolios under the management of Prosperity
Capital Management at a price of RUB 1,300 per ordinary share (or the
dollar equivalent for GDRs), for a total consideration of RUB 12.0
billion.
- In September, the Group announced the completion of a record winter
wheat harvest campaign. This year, Cherkizovo Group harvested almost
270,000 tonnes of winter wheat, nearly doubling the amount of last year's
harvest of 140,000 tonnes. This growth was achieved through the expansion
of winter wheat acreage.
Key corporate highlights after reporting period
- In October 2017, Cherkizovo Group announced the completion of the Share
Buyback Offer. An aggregate of 73,407 shares and 503,293 GDRs,
corresponding to 0.93% of the Group's share capital, were purchased for
the total amount of around RUB 532 million. Following the offer, the
controlling shareholder of Cherkizovo Group, together with its affiliates,
controlled 89.62% of the Group's equity.
Sergei Mikhailov, CEO of Cherkizovo, commented:
"The Group's performance this year to date has demonstrated the strength of
the recovery of our business and our domestic and export markets beginning
in late 2016. We saw stable financial and operational results in the third
quarter, and year-to-date, the Group delivered solid top-line and robust
bottom-line growth, despite increased competition from higher levels of
domestic production. For the first nine months of the year, net profit
jumped 158% reflecting continued internal operating improvements, the
ongoing recovery of the Russian consumer sector and currency gains.
We are very encouraged to have generated strong growth and profitability
across all business segments. The pork and poultry segments made sizable
contributions to EBITDA growth in the first nine months of the year.
Meanwhile, the Winter Harvest was a record one for the Group, following the
acquisition of NAPKO, which, as planned, has boosted our self-sufficiency in
grain.
During the last quarter, we advanced investment plans to increase the output
of pork products in Voronezh and Lipetsk regions. In addition, our Tambov
Turkey joint venture has now reached its target production capacity.
To sustain and augment our market leadership in a competitive environment,
we continue to increase our focus on higher value-added products, including
ready-to-eat and processed meat products. To enhance our strong market
share, we are currently building a state-of-the-art processed meat sausage
factory in Kashira, Moscow region, which will be the largest of its kind in
Europe.
In the third quarter, we started to observe some downward trends in the pork
and poultry markets. We expect weakening of prices will affect our
profitability in the short run; however, this trend is due primarily to
seasonal factors. Nevertheless, our overall outlook remains positive."
Financial summary
RUB mln 9M 2017 9M 2016 y-o-y, % 3Q 2017 2Q 2017 q-o-q, %
Revenue 66 129 59 226 12% 22 780 22 378 2%
Gross profit 17 807 13 034 37% 4 927 7 240 -32%
Operating (9 527) (9 455) 1% (3 428) (3 071) 12%
expenses
EBITDA, 11 698 5 346 119% 3 654 4 313 -15%
adjusted
EBITDA 17.7% 9.0% 16.0% 19.3%
margin,
adjusted
Operating 8 122 3 579 127% 1 499 4 169 -64%
profit
Income 5 711 2 273 151% 690 3 142 -78%
before tax
Profit 5 650 2 192 158% 543 3 172 -83%
Net 9 839 5 062 94% 3 372 4 353 -23%
operating
cash flow
Net debt 47 214 36 949* 28% 47 214 43 192 9%
* as of December 31, 2016
Revenue
Net sales increased by 12% y-o-y to RUB 66.1 billion, compared to RUB 59.2
billion in 9M 2016. Our pork, poultry and meat processing segments all
delivered significant growth, with respective y-o-y rises in revenue in the
first nine months of 21%, 3% and 7%. On a quarterly basis, sales growth was
-10%, -1% and 8%. Average prices grew modestly y-o-y and were flat to
negative q-o-q.
Gross profit
Gross profit increased by 37% y-o-y to RUB 17.8 billion from RUB 13.0
billion in 9M 2016. The strong year-on-year performance came on the back of
a recovery in the consumer sector and a stronger rouble, translating into
higher sales and lower feed costs, the latter being largely denominated in
foreign currency. For 9M 2017, the rouble maintained multi-year highs last
seen in 2015. The combination of lower costs and higher sales lifted gross
margin to 26.9% in 9M 2017. At the same time gross profit decreased on a
quarterly basis by 32%.
Operating expenses
Operating expenses were flat y-o-y and stood at RUB 9.5 billion but
increased in the third quarter by 12% q-o-q. Operating expenses as a
percentage of sales decreased to 14.4% in 9M 2017.
Adjusted EBITDA
In 9M 2017, adjusted EBITDA reached RUB 11.7 billion, which is almost double
the figure reported for 9M 2016. The adjusted EBITDA margin jumped to 17.7%
(9M 2016: 9.0%). The adjusted EBITDA margin for the third quarter of 2017
was 16.0%, versus 12.8% for the corresponding period of 2016.
Interest expense
Net interest expense for 9M 2017 was RUB 2.4 billion, up 23% from the 9M
2016 level of RUB 1.9 billion due to cuts in state subsidies and increase of
total debt.
Net profit
Net profit for the Group grew 158% y-o-y to RUB 5.6 billion in 9M 2017,
compared to RUB 2.2 billion in 9M 2016. The net profit margin in 9M 2017
strengthened to 8.5%, compared to 3.7% for the corresponding period of 2016.
Cash flow
Operating cash flow for 9M 2017 was RUB 9.8 billion compared to RUB 5.1
billion in 9M 2016. This was primarily the result of an increase in
operating income.
Business segments
Divisio Sales volume Change Revenue Change Share
ns y-o-y, of
% Group
reven
y-o-y, ue, %
%
9M 2017, 9M 2016, 9M 9M 2016,
k tonnes k tonnes 2017, RUB mln*
RUB
mln*
Poultry 385.4 372.1 4% 35 472 34 453 3% 49%
Pork 148.7 131.6 13% 13 532 11 171 21% 18%
Meat 167.3 158.6 5% 24 438 22 818 7% 33%
process
ing
* revenue for both years includes intersegment sales
Poultry Division
Sales volumes for 9M 2017 increased by 4% y-o-y to 385,373 tonnes of
sellable weight (9M 2016: 372,070 tonnes). The stable growth was mostly
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attributable to growth in production, translating into enhanced sales. In
the corresponding period in 2016, management had decided to sell excess
inventory due to market volatility, which boosted sales volumes but
depressed prices.
The average price during 9M 2017 rose by 1% y-o-y to 90.13 RUB/kg, as
branded products and HoReCa sales represented a larger share of sales in
line with the Group's strategy. On a quarterly basis, the average price
decreased by 2% to 88.14 RUB/kg during 3Q 2017, due to overall price
decreases on the market.
Year-on-year, revenue for the division grew by 3% y-o-y to RUB 35.5 billion
(9M 2016: RUB 34.5 billion). This growth was a result of the rise in the
average price as brand name and value-added products continued to account
for a higher share of sales.
Gross profit grew 65% y-o-y to RUB 8.1 billion, from RUB 4.9 billion in 9M
2016. Enhanced profitability was mainly attributable to the stronger rouble
and lower feed costs. The gross margin stood at 23.0%, compared to 14.3% in
9M 2016.
Operating expenses as a percentage of sales decreased to 10.8%, from 10.9%
in 9M 2016, due to lower repairs & maintenance, payroll and advertising &
marketing expenses.
Operating income for 9M 2017 grew y-o-y to RUB to 4.3 billion. The operating
margin for 9M 2017 stood at 12.2%. On a quarterly basis, operating margin
decreased to 8.8% in 3Q 2017 from 15.6% in 2Q 2017, as a result of the
decline in the average selling price.
Net profit for the division jumped to RUB 3.5 billion, compared to a profit
of RUB 0.3 billion in 9M 2016. This was mainly due to efficiency increases.
Adjusted EBITDA jumped 163% to RUB 5.7 billion (9M 2016: RUB 2.2 billion),
while the adjusted EBITDA margin stood at 16.2%. In quarterly terms, the
EBITDA margin decreased to 14.1% in 3Q 2017 from 17.3% in the prior quarter.
Pork Division
Production volumes in 9M 2017 increased by 13% y-o-y to 148,722 tonnes (9M
2016: 131,581 tonnes). The increase was attributable to higher production
levels following the launch of two new wean-to-finish sites in Voronezh in
2016, and three in Lipetsk in 2017, as well as the Group's ongoing genetics
improvement strategy launched in 2014.
The average price rose by 8% y-o-y to 93.74 RUB/kg (9M 2016: 86.59 RUB/kg).
This increase was driven by growing pork consumption in Russia, which has
been partly due to increased promotional activity by Russian retail chains,
along with the continued stability in the purchasing power of consumers.
Total sales in the pork division grew 21% y-o-y to RUB 13.5 billion (9M
2016: RUB 11.2 billion). Strong sales growth was expected as both volume and
average price increased y-o-y. On a quarterly basis, sales decreased by 10%
compared to 2Q 2017, accompanied by a price decline of 4% q-o-q.
Gross profit for 9M 2017 increased by 54% to RUB 5.1 billion, (9M 2016: RUB
3.3 billion), with the increase mainly attributable to lower costs for feed
and medications due to the strength of the rouble against the US dollar. The
pork segment's gross profit fell 58% between the second and third quarter of
this year.
Operating expenses as a percentage of sales decreased in 9M 2016 and stood
at 2.9% (9M 2016: 4.9%).
Operating income grew robustly y-o-y to RUB 4.8 billion from RUB 2.8 billion
in 9M 2016. The operating margin jumped to 35.1%, compared to 24.9% for the
first nine months of 2016.
Net profit grew 87% y-o-y to RUB 4.5 billion (9M 2016: RUB 2.4 billion).
Adjusted EBITDA more than doubled y-o-y and amounted to RUB 5.1 billion (9M
2016: RUB 2.5 billion). The adjusted EBITDA margin grew to 37.6% in 9M 2017
from 22.1% in 9M 2016. On a q-o-q basis, adjusted EBITDA fell by 14%.
Meat Processing Division
Sales volumes increased by 5% y-o-y to 167,346 tonnes from 158,647 tonnes in
9M 2016. This was due to sustained growth in the segment's product
assortment in the modern retail channel and geographical diversification
into the Urals and North-West regions since 2016.
During the reporting period, the average price grew 3% y-o-y to 150.19
RUB/kg in 9M 2017 due to raising sales of value added products. On a q-o-q
basis, the average price increased by 1% to 150.34RUB/kg (2Q 2017: 148.92
RUB/kg).
Total sales grew by 7% in 9M 2017 to RUB 24.4 billion (9M 2016: RUB 22.8
billion). The increase was a result of sales volume and average price
growth. In 3Q 2017, sales grew by 8% q-o-q.
Gross profit for 9M 2017 increased 8% y-o-y to RUB 4.2 billion, compared to
RUB 3.9 billion in 9M 2016. Gross margin reached 17.2% for 9M 2017 versus
17.1% in 9M 2016. Gross profit grew q-o-q by 9%.
Operating income increased by 14% y-o-y to RUB 1.3 billion from RUB 1.2
billion in 9M 2016. The operating margin increased to 5.5% from 5.1% in 9M
2016, resulting from an increase in the margins of sausage products, as well
as lower marketing and selling expenses.
During 9M 2017 the meat processing segment generated net profit of RUB 1.1
billion.
In 9M 2017, adjusted EBITDA stood at RUB 1.9 billion (9M 2016: RUB 1.6
billion). Adjusted EBITDA grew by 18% on a q-o-q basis. The adjusted EBITDA
margin of 7.6% in 9M 2017, exceeded the 9M 2016 figure of 7.2%.
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 yield rates in our budget and year
to date Cherkizovo Group harvested almost 264,000 tonnes of winter wheat,
nearly doubling the amount of last year's harvest of 140,000 tonnes.
Grain prices to date in 2017 have been lower than budgeted and lower than in
2016. Due to the seasonality of our business, the results of the Grain
segment are reported annually to better reflect business performance and
provide an appropriate basis for comparison.
Financial Position
The Group's capital expenditure on property, plant, equipment and
maintenance amounted to RUB 9.5 billion in 9M 2017, a y-o-y increase of 28%.
RUB 1.0 billion was invested in the poultry segment. RUB 3.6 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. The meat processing segment made RUB
4.1 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.
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.
As of 30 September 2017, net debt** amounted to RUB 47.2 billion, compared
to RUB 36.9 billion at the end of 2016. Total debt increased to RUB 50.4
billion as of 30 September 2017, compared to the level of total debt of 38.6
billion at the end of 2016. As of 30 September 2017, long-term debt
represented 67% of the debt portfolio and was RUB 34.0 billion. Short-term
debt stood at RUB 16.4 billion, or 33% of the portfolio. The effective cost
of debt was 8.3% in 9M 2017 (12M 2016: 9.7%). Subsidised loans and credit
lines made up 31% of the debt portfolio in 9M 2017 (12M 2016: 35%). Cash and
cash equivalents totalled RUB 2.5 billion as at 30 September 2017.
In August 2017, the controlling shareholder of Cherkizovo Group, together
with subsidiaries of the Company, completed the acquisition of 21.05% of its
ordinary shares and GDRs from the funds and portfolios under the management
of Prosperity Capital Management at a price of RUB 1,300 per ordinary share
(or the then dollar equivalent per GDR), for a total consideration of RUB
12.0 billion.
Subsequently, in October 2017, Cherkizovo Group announced the completion of
a Share Buyback Offer, a mandatory offer to all shareholders. An aggregate
of 73,407 shares and 503,293 GDRs, corresponding to 0.93% of the Group's
share capital, were purchased for the total amount of around RUB 532
million. Following the offer, the controlling shareholder of Cherkizovo
Group, together with its affiliates, controlled 89.62% of the Group's
equity.
Subsidies
In 9M 2017, the Group accrued subsidies for interest reimbursement of RUB
0.4 billion, which offset interest expense (9M 2016: RUB 1.5 billion). The
Group received RUB 0.6 billion of subsidies in 9M 2017, compared to RUB 1.1
billion in 9M 2016.
Outlook
The Group maintains a cautious outlook for the remainder of 2017, due to key
pricing elements. First, poultry and pork prices have weakened due, in part,
to seasonal factors. In addition, while grain yields and harvest have risen,
it appears this will not offset lower commodity prices. The latter factor is
linked in part to the relative strength of the rouble compared to the US
dollar.
Despite these real challenges, the Group maintains positive expectations for
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