Cherkizovo Group, the largest vertically integrated meat and feed producer in Russia, announces its unaudited consolidated IFRS results for the period ending June 30, 2016.
Second quarter financial highlights
Revenue increased by 9% quarter-on-quarter to RUB 20.3 billion from RUB 18.5 billion in 1Q 2016;
Gross profit grew by 65% quarter-on-quarter to RUB 5.0 billion from RUB 3.1 billion in 1Q 2016;
Gross margin of 25.0% from 16.6% in 1Q 2016;
Adjusted EBITDA was almost three times higher and reached RUB 2.0 billion, compared to RUB 0.7 billion in 1Q 2016;
Adjusted EBITDA margin of 9.9% compared to 3.9% in 1Q 2016.
First half financial highlights
Revenue increased by 7% year-on-year to RUB 38.8 billion from RUB 36.2 billion in 1H 2015;
Gross profit decreased by 30% year-on-year to RUB 8.1 billion from RUB 11.6 billion in 1H 2015;
Gross margin fell to 21.0% from 32.0% in 1H 2015;
Operating expenses grew by 19% year-on-year to RUB 6.4 billion, compared to RUB 5.4 billion in 1H 2015;
Adjusted EBITDA of RUB 2.7 billion compared to RUB 6.5 billion in 1H 2015, a year-on-year drop of 58%;
Adjusted EBITDA margin at 7.0% compared to 17.8% in 1H 2015;
Net profit for the period was RUB 0.9 billion, down 83% year-on-year from RUB 5.7 billion in 1H 2015;
Net operating cash flow was RUB 1.1 billion for the first half of 2016;
Net debt was RUB 39.3 billion as of June 30, 2016;
The effective cost of debt was 5.1 % (1H 2015: 3.6%);
Earnings per share was RUB 21.6 (1H 2015: EPS was RUB 129.4).
Key corporate highlights
Cherkizovo Group started exporting poultry meat to Egypt. The first shipments begun in August and are expected to reach 10,000 tons by the year-end. The Company is currently pursuing ways to enter new markets in the Middle East, Southeast Asia and Africa.
The modernisation of the Mosselprom poultry production cluster has been completed. 24 new poultry houses have been launched, boosting annual production volume by 12,000 tons.
The Tambov Turkey project is being completed. Annual production capacity is 50,000 tons of live weight, which immediately places us in the top three turkey producers in Russia. The first shipments are due to start at the end of August.
The second phase of the pork cluster project in Voronezh was completed in June. The first phase in Lipetsk is currently under way and is scheduled to be completed by the end of 2016. The project will be fully completed in 2017 and will boost production capacity by 70,000 tons per year.
A new Board of Directors and Chairman of the Board were elected. A new structure is now in place to give an increased role to the independent directors to support them in further enhancing corporate governance and formulating Cherkizovo’s development strategy.
Our new research laboratory, the most advanced of its kind in Russia, has been put into operation. Its ultimate goal is to increase the quality and biosafety of our products.
Revenue
Sales increased by 7% year-on-year in 1H 2016 to RUB 38.8 billion, compared to RUB 36.2 billion in 1H 2015. The main drivers behind this growth were the poultry and meat processing segments. On a quarter- on-quarter basis, sales growth was 9%..
Gross profit
Gross profit fell by 30% year-on-year to RUB 8.1 billion from RUB 11.6 billion in 1H 2015. The majority of this decrease can be attributed to the poultry and pork segments, where a significant amount of expenses are pegged to foreign currency. Although the Russian ruble stabilised during the second quarter, it is still significantly lower year-on-year. The gross margin consequently fell to 21.0% in 1H 2016 from 32.0% in 1H 2015, resulting from higher costs. At the same time, on a quarter-on-quarter basis, gross profit demonstrated growth of 65% in the second quarter of 2016..
Operating expenses
Operating expenses increased by 19% year-on-year to RUB 6.4 billion, compared to RUB 5.4 billion in 1H 2015, as a result of higher payroll, transportation and other selling expenses. In the second quarter, operating expenses grew by only 5% quarter-on-quarter. Operating expenses as percentage of sales increased to 16.4% in 1H 2016 from 14.8% in 1H 2015..
Adjusted EBITDA
In the first half of 2016, adjusted EBITDA fell by 58% year-on-year to RUB 2.7 billion from RUB 6.5 billion in 1H 2015. The adjusted EBITDA margin fell to 7.0% (1H 2015: 17.8%). Nonetheless, in the second quarter of 2016, EBITDA almost tripled compared to the first quarter..
Interest expense
Interest expense was up 40% year-on-year to RUB 2.4 billion in the first half of 2016. The main drivers behind this growth were a 35% year-on-year increase in total borrowings to RUB 41.2 billion (1H 2015: RUB 30.4 billion), as well as a rise in interest rates. Net interest expense for 1H 2016 was RUB 1.3 billion, up 122% from the 2015 level of RUB 0.6 billion. The Group accrued RUB 1.1 billion of subsidies in 1H 2016 included in the net interest expense above, a year-on-year decrease of 5%..
Net profit
Net profit for the Group came in at RUB 0.9 billion, a decrease of 83% year-on-year from RUB 5.7 billion in 1H 2015. The net profit margin fell to 2.4% from 15.7% in 1H 2015.
Sergei Mikhailov, CEO of Cherkizovo, commented:
“Performance in the second quarter was in line with our expectations. Following a challenging first quarter, we saw strong operational performance across all segments in the second quarter, which fuelled double- digit growth in volumes. The uptick came as a result of higher production levels and improvements in efficiency. The meat processing segment in particular continues to deliver solid performance in a stagnating market and the value of our Petelinka brand is growing, despite the lower year-on-year performance of the poultry segment.
We are also starting to see signs of price recovery, particularly in poultry and pork. To sustain and leverage our key competitive advantages, we have been focusing on enhancing our business model to add even more emphasis on quality and value-added products, and we are already seeing the results of our efforts.
Although the Russian ruble has started to stabilise, the average real exchange rate is still lower year-on- year and Russian consumers continue to face downward pressure on their purchasing power. Despite the challenging macroeconomic environment, we believe our strong domestic market position, aided by our expansion into selected international markets, will deliver strong financial and operational results in the coming quarters and years.”
