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All news / Cherkizovo Group Announces Financial Results for the third quarter and 9 months of 2018

  • 16 Nov 2018, 08:42

PJSC Cherkizovo Group (MOEX: GCHE), the largest vertically integrated meat producer in Russia, today announces its unaudited consolidated IFRS results for the period ending September 30, 2018.

cherkizovo group, meat, beef, Business, chicken

Third quarter financial highlights

  • Revenue increased by 10.7% year-on-year (y-o-y) to RUB 25.2 billion.
  • Net change in fair value of biological assets amounted to negative RUB 1.4 billion in 3Q18, compared to negative RUB 1.0 billion in 3Q17. Revaluation of harvested crops in stock totalled RUB 0.8 billion from RUB 0.1 billion in 3Q17.
  • Gross profit improved by 29.9% y-o-y to RUB 6.4 billion.
  • Adjusted EBITDA* up by 65.4% y-o-y to RUB 6.0 billion. Adjusted EBITDA margin amounted to 24.0%.
  • Net profit tripled y-o-y to RUB 1.6 billion. Adjusted net profit** doubled to RUB 3.4 billion, from RUB 1.6 billion a year ago.
  • Net operating cash flow decreased by 23.4% to RUB 2.6 billion.

9 months financial highlights

  • Revenue increased by 7.0% y-o-y to RUB 70.7 billion from RUB 66.1 billion in 9M 2017.
  • Net change in fair value of biological assets amounted to RUB 4.6 billion in 9M18, compared to RUB 0.1 billion in 9M17. Revaluation of harvested crops in stock totalled RUB 1.8 billion from RUB 0.2 billion in 9M17.
  • Gross profit was up by 36.5% y-o-y to 24.3 billion from RUB 17.8 billion in 9M17.
  • Adjusted EBITDA increased by 9.2% and amounted to RUB 13.0 billion. Adjusted EBITDA margin was 18.4%.
  • Net profit reached RUB 10.4 billion, up 83.3% from 9M17. Adjusted net profit increased by 4.4% to RUB 5.9 billion, from RUB 5.7 billion a year ago.
  • Net operating cash flow decreased by 25.0% to RUB 7.4 billion.
  • Net debt*** amounted to RUB 51.1 billion as of September 30, 2018.

Third quarter key corporate highlights

  • During the quarter the Company launched two wean-to-finish facilities which will add c. 10 thousand tonnes of annual live-weight pork production capacity.
  • On July 16th Cherkizovo signed a letter of intent to acquire Altaisky Broiler, a poultry producer located in the Siberian Federal District. The acquisition when/if completed, will allow us to establish a footprint in the new region, grow alongside modern retail trade expansion, and further develop own brands in poultry and meat processing.
  • On July 17th the Company launched a fully automated robotic meat processing plant in Kashira, in the Moscow Region. The facility further strengthened the Group’s presence in the meat processing business.
  • On September 27th shareholders approved a distribution of profits for the 1H2018 in the form of dividends in the amount of RUB 900 million.

Key corporate highlights after reporting period

  • On October 1st, Cherkizovo announced its intention to acquire 75% of Samson – Food Products, a group of companies based in St Petersburg and offering meat products under such brands as Samson, Fileya and others, to strengthen Group’s position in the North-Western Federal District.

Sergei Mikhailov, CEO of Cherkizovo, commented:

“Our strong performance in the third quarter and year-to-date has demonstrated the Groups’ ability to leverage market-leading positions and deliver strong operational and financial results. The focus on the domestic market, where prices hit bottom at the beginning of the year and gradually moved up as we progressed into the second half, was well rewarded with all segments recording significant profitability growth. Moreover, our vertical integration contributed to steady earnings growth, with strong increases in our pork segment driven by high market prices for pork, partially offset by lower earnings in meat processing. Simultaneously, we keep pushing our major brands, Petelinka, Chicken Kingdom, Cherkizovo and Pava-Pava, to gain market share in the key regions of our presence. We are also optimizing sales portfolio by adding more cut-up/RTE products that we offer through modern retail trade while diversifying our sales with more HoReCa clients. A consumer remains at a center stage of all our business processes – we relentlessly improve the quality of our product, broaden our marketing initiatives, and invest in new product development to cater to ever-evolving customer preferences.

The majority of our production assets now work at or close to capacity, with recently launched Kashira plant being one of the exceptions, as ramp-up of the facility continues, and we expect that it will be fully utilized during 2019. We also see a number of M&A opportunities that can fuel our growth and market share, however, we remain disciplined towards potential targets, paying close attention to the return profile and fit with our strategy.

Our vertically integrated business model proves its efficacy, as our recently completed harvesting campaign boosted self-sufficiency in grains to almost 30%, partially hedging against grain price volatility.”

Financial summary

RUB mln

3Q 2018

3Q 2017

y-o-y, %

9M 2018

9M 2017

y-o-y, %

Revenue

25 208

22 780

10.7%

70 748

66 129

7.0%

Net change in fair value of biological assets 2

(1 442)

(977)

47.6%

4 623

104

4339.2%

Revaluation of harvested crops in stock

829

142

485.3%

1 774

218

712.6%

Gross profit

6 401

4 927

29.9%

24 307

17 807

36.5%

Gross margin

25.4%

21.6%

 

34.4%

26.9%

 

Operating expenses and share of JV results

(3 573)

(3 428)

4.2%

(11 004)

(9 685)

13.6%

Operating profit

2 829

1 499

88.7%

13 304

8 122

63.8%

Operating margin

11.2%

6.6%

 

18.8%

12.3%

 

Adjusted EBITDA 1

6 045

3 654

65.4%

13 000

11 889

9.4%

Adjusted EBITDA margin

24.0%

16.0%

 

18.4%

18.0%

 

Profit before tax

1 782

690

158.1%

10 490

5 711

83.7%

Net profit

1 646

543

203.0%

10 355

5 650

83.3%

Adjusted Net profit 1

3 396

1 569

116.5%

5 910

5 663

4.4%

Net operating cash flow

2 582

3 372

-23.4%

7 375

9 839

-25.0%

Net debt

 

 

 

51 078

47 214

8.2%

1 In line with the Group’s management accounting practices and described herein (*,**) in more detail, Adjusted EBITDA and Adjusted Net profit don’t include the net change in fair value of biological assets.

2 Net change in fair value of biological assets for 9m and Q3 periods includes also revaluation of crops harvested in Q3, but not yet sold to the Feed segment or external customers.

Revenue

In the 9M18 revenue increased by 7.0% y-o-y to RUB 70.7 billion (9M17: RUB 66.1 billion). Revenue growth is attributed to higher volumes, favourable pricing environment for chicken and pork products in the second half of 2018, as well as better sales mix, the latter driven by the higher share of the branded value-added products.

Gross profit

Gross profit increased by 36.5% y-o-y to RUB 24.3 billion, (9M17: RUB 17.8 billion). Gross profit was positively affected by higher revenue, operational efficiency gains, lower feed costs in the first half of the year, and by the net change in fair value of biological assets in pork, poultry and grain segments, offset by higher input prices for meat processing segment. Gross profit margin went up to 34.4% (9M17: 26.9%). Net of RUB 6.4 billion change in fair value of biological assets and revaluation of harvested crops in stock, gross profit remained unchanged at RUB 17.9 billion.

Operating expenses

Operating expenses and share of JV results increased by 13.6% y-o-y to RUB 11.0 billion, (9M17: RUB 9.7 billion), due to higher selling expenses, which in turn is mostly driven by broadening of our distribution network. Operating expenses and share of JV results as a percentage of sales increased to 15.6% in 9M18 (9M17: 14.6%).

Adjusted EBITDA

Adjusted EBITDA of RUB 13.0 billion, increased by 9.4% y-o-y. Adjusted EBITDA margin improved to 18.4% (9M17: 18.0%) due to higher revenue across segments, improved performance of the grain segment, and a number of operational improvements.

Interest expense                                                                                                                           

Net interest expense in 9M18 increased by 5.3% y-o-y to RUB 2.5 billion.

Net profit

Net profit for the Group totalled RUB 10.4 billion in 9M18, up 83.3% compared to RUB 5.6 billion in 9M17. Net profit margin improved to 14.6% from 8.5% a year ago.

Adjusted net profit increased by 2.3% to RUB 5.6 billion, from RUB 5.5 billion a year ago. Adjusted net profit margin declined to 7.9% from 8.2% a year ago.

Cash flow

Operating cash flow was RUB 7.4 billion (9M17: RUB 9.8 billion), a decline of 25.0% primarily due to the increase in operating expenses.

Capital expenditure and debt

The Group’s capital expenditure on property, plant, equipment and maintenance amounted to RUB 7.4 billion during 9M18, a decline of 21.3% y-o-y. Kashira facility completion and construction of new wean-to-finish pork facilities were major targets of capital expenditures in the reported period.

As of September 30, 2018, net debt*** was RUB 51.1 billion, compared to RUB 47.2 billion at the end of 9M17. Gross debt increased to RUB 53.8 billion as of September 30, 2018, compared to 50.4 billion a year ago. At the end of 3Q18 long-term debt accounted for 63% of the debt portfolio and amounted to RUB 34.1 billion. The effective cost of debt was 7.0% as of September 30, 2018 (September 30, 2017: 8.3%). Subsidised loans and credit facilities made up 33% of the debt portfolio in 9m18 (9M17: 31%). Cash and cash equivalents were RUB 2.1 billion as of September 30, 2018.

Subsidies

The Group accrued direct subsidies of RUB 263.0 million in 9M18 (9M17: RUB 169.9 million). The Group accrued subsidies for interest reimbursement of RUB 608.6 million in 9m18.

Net change in fair value of biological assets

A higher net change in fair value of biological assets is explained by a higher valuation of sows, market hogs, accounting for the upcoming harvest, and by higher market prices of the products that the Group produces.

Business segments

 Divisions

Sales volume

Change y-o-y, %

Revenue 3

Change y-o-y, %

9M18, k tonnes

9M17, k tonnes

9M18, RUB mln

9M17, RUB mln

Chicken

399.8

385.4

3.7%

37 216

35 472

4.9%

Turkey 4

29.6

16.7

78.0%

4 002

2 607

53.5%

Pork

166.7

140.3

18.8%

16 421

13 532

21.4%

Meat processing

169.9

144.7

17.4%

27 794

24 438

13.7%

 3 Revenue includes inter-segment sales

4 Volume and revenue reported in turkey section represent turkey sales by Trading Company “Cherkizovo”

Poultry Division      

Sales volumes in 9M18 increased by 3.7% to 399.8 thousand tonnes (9M17: 385.4 thousand tonnes). The average selling price increased by 1.3% y-o-y to 91.3 RUB/kg due to better pricing environment in the second half of the year, Petelinka and Chicken Kingdom, our key brands, performing well, and a higher share of deboned, RTC/RTE products in the sales mix. As a result segment’s revenue was up 4.9% and amounted to RUB 37.2 billion (9M17: RUB 35.5 billion).

Gross profit was up by 7.3% y-o-y and totalled RUB 8.7 billion, (9M17: RUB 8.1 billion) due to change in fair value of biological assets, higher volumes and sales price offset by higher processing costs. Gross margin remained unchanged at 23.5%, vs. 23.0% in 9M17.

Operating expenses as a percentage of sales amounted to 11.3%, an increase from 10.8% in 9M17. Operating income increased by 4.9% y-o-y to RUB 4.5 billion (9M17: RUB 4.3 billion). Operating margin was unchanged at 12.2% in 9M18.

The segment’s profit before income tax amounted to RUB 4.1 billion (9M17: RUB 3.5 billion).

Adjusted EBITDA declined by 10.5% y-o-y to RUB 5.1 billion (9M17: RUB 5.7 billion), while Adjusted EBITDA margin decreased to 13.8% from 16.2% a year ago.

 

Pork Division

Sales volumes in 9M18 increased by 18.8% y-o-y, to 166.7 thousand tonnes (9M17: 140.3 thousand tonnes). The average selling price of 97.2 RUB/kg, up by 2.0% y-o-y compared to 95.3 RUB/kg a year ago. The segment’s revenue increased by 21.4% y-o-y to RUB 16.4 billion (9M17: RUB 13.5 billion), on the back of higher volumes and better pricing.

Gross profit doubled y-o-y, to RUB 10.1 billion (9M17: RUB 5.1 billion) due to higher sales volumes and prices, further improvement in operational KPI’s and a non-cash change in the fair value of biological assets of RUB 2.9 billion (net of the revaluation, gross profit increased by 53.7% to RUB 7.2 billion). The segment’s gross margin stands at 61.3%, up from 38.0% a year ago.

Operating expenses as a percentage of sales amounted to 3.1%, compared to 2.9% in 9M17.

Operating income was up 101.1% y-o-y, to RUB 9.6 billion from RUB 4.8 billion in 9M17. The segment’s operating margin increased to 58.2% from 35.1% a year ago.

The segment’s profit before income tax amounted to RUB 9.2 billion compared to the 9M17 result of RUB 4.5 billion.

Adjusted EBITDA increased by 49.1% y-o-y to RUB 7.6 billion (9M17: RUB 5.1 billion). Adjusted EBITDA margin improved to 46.2% from 37.6% in 9M17.

 

Meat Processing Division

Sales volumes in 9M18 were up 17.4% y-o-y to 169.9 thousand tonnes (9M17 144.7 thousand tonnes). The average selling price declined to 165.7 RUB/kg, from 172.7 Rub/kg in 9M17. The segment’s revenue increased by 13.7% and reached RUB 27.8 billion (9M17: RUB 24.4 billion). Revenue growth was driven by higher volumes of the carcass in the sales mix, on the back of higher volumes of market hogs production in the pork segment.

Gross profit declined by 26.4% y-o-y to RUB 3.1 billion, (9M17: RUB 4.2 billion). The gross margin fell to 11.1% from 17.2% a year ago.

Operating expenses as a percentage of sales amounted to 11.6%, vs. 11.7% in 9M17.

Operating income turned to negative RUB 146.6 million from RUB 1.3 billion in 9M17.

The segment’s loss before income tax was RUB 515.7 million, compared to a profit RUB 1.1 billion a year ago.

Adjusted EBITDA declined by 75.4% to RUB 455.8 million from RUB 1.9 billion in 9M17.

 

Grain Division

Due to the seasonality of the business, the results of this segment are reported annually to better reflect business performance and provide an appropriate basis for comparison.

 

Outlook

Macroeconomic conditions slightly deteriorated during the third quarter of this year, with FX volatility remaining a major headwind for our business. At the same time inflation and consumers’ real disposable income remained stable.

While market meat prices remain supported by steady consumption and dislocated supply, we see limited risk from easing of imports restrictions for Chinese poultry producers and Brazilian pork makers. We are optimistic looking forward into the year end and beyond, as we use favourable market conditions as an opportunity to gain market share in high value-added niches of the market for the branded product, while simultaneously exercising a rigorous cost control at all stages of production.

To maintain and extend our overall market leadership, we focus on growing our business both organically and via selective M&A, aligned with our strategic goals. Organic growth will mostly come from ongoing green-field development in pork and meat processing segments, and our recently announced intentions to acquire attractive meat producers, when completed, will unlock new domestic regional markets, solidify our brands’ equity, and increase the share of further processed high-margin products.