Cherkizovo Group, one of Russia’s leading integrated and diversified meat producers, has announced its full-year audited financial results for the period ended 31 December 2010.

Highlights

Strong organic volume growth is reported across all segments, delivering a solid financial performance. Revenues increased 17 per cent to US$1,188.2 million from $1,019.2 million for 2010, and increased 12 per cent on a rouble currency basis.

Adjusted EBITDA increased 20 per cent to $218.7 million from $182.3 million for 2010, and increased 15 per cent on a rouble currency basis. Adjusted EBITDA margin was at 18 per cent.

Gross profit increased 15 per cent to $323.9 million from $281.6 million for 2010, and increased 10 per cent on a rouble currency basis. Group gross margin was a healthy 27 per cent. Net income increased 21 per cent to $144.4 million from $119.4 million for 2010, and increased 16 per cent on a rouble currency basis.

As of 31 December 2010, net debt was $580.2 million. The effective cost of debt was less than three per cent.

Net income per share increased 21 per cent.

Business developments

Cherkizovo Group commenced construction of three new greenfield pork farms in the Tambov, Voronezh and Lipetsk regions with a combined capacity of 37,500 live-weight tonnes. The new multi-site complexes will become operational during 2011 and 2012 and full capacity is expected to be reached by the end of 2012. This will increase the Group’s overall capacity to an estimated 153,000 tonnes a year.

Cherkizovo Group acquired a meat processing plant, located in the Kaliningrad region for US$4.1 million. It will focus on delicacy products and serve as a resource base for the Group’s meat processing segment. The plant’s location entitles it to preferential customs status.

Cherkizovo Group acquired a 100 per cent controlling interest in the Zarechnaya poultry facility for a total consideration of US$5.2 million. The site, located in the Penza region, will be integrated into the existing Penza capacity increase project, thereby further increasing capacity at the cluster.

Subsequently, Cherkizovo Group completed the acquisition of a controlling interest in two greenfield pork production farms located in the Penza and Lipetsk regions of Central Russia. Since these acquisitions are transactions between entities under common control, their financial and operational results have been combined into Group operations in a manner similar to a pooling of interest for the full year 2010. Cherkizovo Group’s historical financial information has also been restated to include the acquired entities for all periods presented.

On 10 November 2010, Cherkizovo Group successfully placed three billion roubles (RUB) in three-year bonds with a coupon rate of 8.25 per cent. The funds will be allocated to refinance short-term loans, fund capital expenditure and other investment needs.

In December, the Group launched the new Rosha broiler breeding facility as part of the Bryansk poultry cluster expansion project In March 2011 Cherkizovo Group launched the Komarovka broiler site, part of the Penza cluster capacity increase project.

CEO's comment

Sergey Mikhailov, Chief Executive Officer of Cherkizovo Group, said: "During 2010, we have delivered a solid performance, with a 17 per cent increase in revenue and growth in Adjusted EBITDA of 20 per cent. This has resulted in a healthy 18 per cent Group Adjusted EBITDA margin. However, our results were affected by a soft pricing environment in the poultry and pork divisions, as well as rising input costs, particularly towards the end of the year.

"In the poultry division, profitability was at a robust level of 29 per cent gross margin, and a 21 per cent Adjusted EBITDA margin. We have made significant progress at our capacity-increase projects in Bryansk and Penza, and our acquisition of the Zarechnaya facility in the Penza region and recent launch of the Rosha and Komarovka broiler breeding sites will enable us to achieve significant production volume increases in 2011.

"The pork division has enjoyed significant growth and we anticipate this will be further supported in 2011 by the full integration of the two new farms. Already, for 2010 we have increased our market share and successfully positioned ourselves among the top three producers in the Russian market. Moreover, we are pleased to report that construction has commenced on three greenfield complexes in the Tambov, Voronezh and Lipetsk regions which are expected to become operational during 2011and 2012, adding some 37,500 tonnes of capacity. By the end of 2012 our production volumes will have grown to over 150,000 tonnes, further strengthening our market leadership in this high-margin business and positively affecting our overall performance.

"Meat processing continues to see rising demand as consumer confidence improves. We have seen some very positive results, with an increase in sales volumes and sustained profitability. Our products enjoy strong brand recognition and continue to win industry awards for quality.

"The outlook for 2011 is challenging. The operational impact of steep rises in grain and other feedstock input costs will largely be felt in the coming months, and we anticipate that these will only be partially offset by higher pricing. This reflects an unusually weak pricing environment in the last quarter of 2010, despite commodity inflation, partly as a result of short-term oversupply of meat in the market due to destocking by less efficient producers and individual households in response to rising feed costs. Combined with an increased share of poultry imports late in 2010, it has put downward pressure on selling prices, especially for poultry sales in the first quarter of 2011. In this respect, the recent decisions announced by the Government to introduce direct subsidies for agricultural producers to offset sharp cost increases, and the resolution to distribute feed grain from the intervention fund at below market prices to regions that have suffered most from the drought is encouraging.

"We also welcome the Government's decision to decrease import quotas for 2011, which were cut almost by half in poultry as compared to 2010. Aside from the reduction, the new quota allows only for imports of leg quarters, which considerably changes the market picture. As well, with the anticipated growth in domestic production, pioneered by Cherkizovo Group in early 2000 the market is expected to reach Government-set self-sufficiency levels in poultry towards the end of 2011, with imports taking around 10 to 12 per cent share on the market," concluded Mr Mikhailov.

Further Reading

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