Good Year for Cherkizovo Despite Challenges

RUSSIA - Cherkizovo Group OJSC has published its preliminary results for the year ended 31 December 2008. Total revenue increased to $1.2 billion – 42 per cent up on 2007, whilst gross margin was down from 27 per cent to 24 per cent.
calendar icon 9 April 2009
clock icon 11 minute read


Financial Year 2008 Performance

  • Net income increased 27 per cent to $78.1 million compared to $61.6 mln in 2007
  • Adjusted EBITDA increased 31 per cent year-on-year to $152.8 million, compared to $116.4 million in 2007
  • Adjusted EBITDA margin of 13 per cent, compared to 14 per cent in 2007
  • Gross Profit increased 26 per cent to $279.4 million compared to $222.3 million in 2007
  • Gross margin at 24 per cent, compared to 27 per cent in 2007
  • Revenues increased 42 per cent to $1.2 billion, compared to $820.8 million in 2007

The reported numbers include $52.8 million of subsidies accrued for 2008. This consists of $31.0 million of Federal Budget direct subsidies provided for the first half of the year, $3.4 million of regional direct subsidies provided for 12 months that were offset against cost of sales for the full year 2008, and subsidies for interest reimbursement of $18.4 million which offset interest expense. Out of the accrued subsidies, the Group has not yet received $13.1 million as of 31 December 2008, and this amount is included in other receivables.

Business Developments

  • Completed and commissioned all greenfield farms in Lipetsk and Tambov, all six new state-of-the-art pork farms are operational
  • Maintained leadership positions and further realized synergies resulting from acquisition of Chicken Kingdom
  • Successfully completed secondary public offering
  • Began trade of ordinary shares on MICEX.

CEO's Comment

Sergey Mikhailov, Chief Executive Officer of Cherkizovo Group, said: "The Company continues to make solid progress against its strategic objectives, despite a challenging market environment. We increased our sales by 42 per cent, adjusted EBITDA by 31 per cent and net income by 27 per cent and continued to deliver real value for all our shareholders. However, the dramatic rise in grain prices in the first six months of the year exerted some pressure on margins for the whole year, despite substantial government support and operational efficiencies.

"Production volumes in the Company's Pork division increased 40 per cent in 2008, reflecting the scale benefits emerging from the greenfield modules at the Lipetsk and Tambov breeding facilities. The substantial investments that the Company has undertaken to increase capacity are now fully complete. The division also benefited from a significant increase in pork prices over the period.

"The Company's Poultry division was affected by lower than expected poultry price increases in the beginning of the year, primarily due to increased imports. Moreover, gross margins faced a marked impact from grain prices, although at the operating level this was mitigated to some extent by the economies of scale and synergy benefits from the OJSC Kurinoe Tsarstvo (Chicken Kingdom) acquisition.

"Rising raw meat prices and increasing pressure from retail chains had a significant impact on gross margins within the Meat Processing division. Nevertheless, the Company's continuing focus on innovation and improving our value-added products offering won several awards for product quality over the period.

"These results have clearly benefited from the support of $52.8 million in direct subsidies and interest reimbursement provided by the Russian government, largely in response to uniquely challenging conditions for our business. The difficult conditions remain in place, and further support is therefore necessary to ensure that the Company continues to deliver against its objectives. Moreover, the Company has current debt commitments in place, and the ability to service those commitments and complete advanced investment projects, to a large extent depends on the overall financial and economic situation, and continued support from Cherkizovo's banking partners.

"More broadly, the underlying operating dynamics remain supportive for the business, as food consumption per capita continues to increase in Russia. Consistent with activity elsewhere in the world, the Russian government has taken measures to support the domestic economy, and this timely involvement is welcomed. Despite the difficult environment, management remains encouraged by the Company's prospects for 2009. Some key commodity price pressures appear to be abating, while the Company's relentless focus on execution leaves it well positioned for growth."

Group Results

The Group performed strongly in 2008.

Overall sales increased by 42 per cent to US$1.2 billion in 2008 (2007: US$820.8 million). Meat processing accounted for 49 per cent (57 per cent in 2007), poultry for 42 per cent (35 per cent in 2007) and pork for 9 per cent (8 per cent in 2007) of the Group's sales. The pork and poultry divisions showed the strongest growth in the year with the pork division growing at 61 per cent and the poultry division at 70 per cent.

Gross profit increased by 26 per cent to US$279.4 million (2007: US$222.3 million), while gross margins decreased to 24 per cent (2007: 27 per cent). The company managed to increase profits in spite of the challenging inflationary pressures on grain primarily as a result of its efficient purchasing strategy, increased operational efficiency at its new pork facilities and product mix improvements in its poultry and meat processing businesses.

Net income increased 27 per cent to US$ 78.1 million (2007: US$61.6 million). Net income margin slightly decreased to 7 per cent (2007: 8 per cent).

Adjusted EBITDA increased 31 per cent year-on-year to US$ 152.8 million (2007: US$116.4 million) and adjusted EBITDA margin slightly decreased to 13 per cent (2007: 14 per cent).

Without the direct subsidies and interest rate reimbursement provided by the Russian Government, the numbers for 2008 would have been the following: gross profit, $245.0 million; gross margin, 21 per cent: net income, $25.2 million; and net income margin, 2 per cent.

Poultry Division

In 2008 total volume growth in the poultry division increased 12 per cent to approximately 187,000 tonnes, compared to 167,000 tonnes in 2007. rices for Cherkizovo poultry sales increased by 11 per cent from 57.71 roubles (RUB) per kg in 2007 to RUB 63.87 per kg in 2008 (excluding VAT). In dollar terms, prices increased by 14 per cent from $2.26 per kg in 2007 to $2.57 per kg in 2008 (excluding VAT).

As a result, total sales in the poultry division increased by 70 per cent from US$296.8 million to US$ 505.2 million.

The poultry division gross profit increased 49 per cent to US$ 138.9 million (2007: US$93.4 million). Gross margin decreased to 27 per cent (2007: 31 per cent), mostly due to high grain prices in the first part of the year. However, Federal subsidies of $23.2 million and regional subsidies of $1.3 million offset some of the increase in grain prices.

Divisional operating expenses decreased as a percentage of sales year-on-year from 16 per cent to 14 per cent. The improvement was mostly due to synergies achieved by selling products from the newly acquired OJSC Kurinoe Tsarstvo (Chicken Kingdom) through the Poultry Division's existing distribution network. As a result, operating income in the division increased by 45 per cent to $68.4 million (2007: $47.2 million), while divisional operating margin decreased from 16 per cent to 14 per cent in the corresponding period. Divisional interest expense increased to US $14.6 million (2007: US $10.7 million). Divisional profit increased 32 per cent to US $51.3 million (2007: US $38.8 million), as a result of the above mentioned factors.

Accordingly, Cherkizovo's adjusted EBITDA in the poultry division increased 58 per cent to US$93.2 million (2007: US$59.1 million), delivering a strong adjusted EBITDA margin of 18 per cent (2007: 20 per cent), despite a challenging environment for grain and poultry prices.

Pork Division

2008 was a landmark year in the development of the pork segment, as Cherkizovo completed construction and commenced production at its new greenfield farms in Lipetsk and Tambov. Sales volumes in the pork division were up 40 per cent to approximately 39,000 tonnes, compared to approximately 28,000 tonnes in 2007.

Prices in rouble terms increased by 11 per cent in 2008 from RUB 61.58 per kg in 2007 to RUB 68.36 per kg in 2008 (excluding VAT). In dollar terms, prices increased by 14 per cent in 2008 from $2.41 per kg of live weight in 2007 to $2.75 per kg of live weight in 2008 (excluding VAT).

As result total sales increased 61 per cent to US$ 112.5 (2007: US$69.9 million)

The new pork facilities at Lipetsk further improved our performance in 2008. This had an effect on our cost of sales and, as a result, despite both high wheat and barley prices in 2008, the Comany's gross profit increased 63 per cent to US$47.6 million (2007: US$29.2 million). Gross margin for this division remained strong at 42 per cent largely due to the increase in selling price, increased operational efficiencies from the new pork farms, and as a result of federal subsidies of $7.8 million and regional subsidies of $2.1 million offsetting the grain price increase. The division's operating expenses as a percentage of sales year-on-year remain at 7 per cent.

The division's operating income increased 60 per cent to US$39.3 million (2007: US$24.5 million). Operating margin remained constant at 35 per cent. Divisional interest expense increased slightly to US $1.7 million (2007: US $1.4 million). Divisional profit increased 62 per cent to US$ 37.5 million (2007: US$23.1 million). The division generated adjusted EBITDA of US$ 45.1 million, an increase of 56 per cent on the previous period (2007: US$29.0 million) and an adjusted EBITDA margin* of 40 per cent for the year (2007: 42 per cent).

The Company believes that the developments at Lipetsk and Tambov are expected to further improve the division's performance and sustain strong margins.

Meat Processing Division

Sales volumes in the meat processing segment remained largely flat, but were slightly lower year on year, down 3 per cent to approximately 145,000 tonnes.

As a result of raw meat price growth, average prices increased by 19 per cent from RUB 87.51 in 2007 to RUB 103.86 in 2008 (excluding VAT). Segment prices in dollar terms increased by 22 per cent from $3.42 per kg in 2007 to $4.18 per kg in 2008 (excluding VAT). The Company was delighted to receive several awards for the quality of our meat products during the period reflecting our focus on improving the Group's value-added product offering.

Total sales in our meat processing division increased by 24 per cent to US$ 577.9 million (2007: US$467.2 million), principally as a result of significantly higher selling prices.

Divisional gross profit decreased 6 per cent to US$93.3 million (2007: US $99.7 million), mostly due to raw meat price growth and significantly increasing pressure from retail chains. Gross margin in the Meat Processing Division decreased from 21 per cent to 16 per cent, mostly due to raw meat price increases. Operating expenses, as a percentage of sales, decreased to 15 per cent from 17 per cent in 2007 mostly due to the decreased marketing and advertising expenses. Resulting from these factors, operating income in 2008 was $7.4 million. Divisional interest expense increased 6 per cent to US $14.8 million (2007: US $13.9 million).

The division's loss was US $7.3 million in 2008. Adjusted EBITDA of the Meat Processing Division decreased to US $25.6 million (2007: US $36.6 million). Adjusted EBITDA margin decreased to 4 per cent from 8 per cent.


2008 was a difficult year in terms of the operating environment, and 2009 promises to be equally challenging. The various uncertainties that could have an impact on the Company's performance include grain prices, domestic consumption, government activity, devaluation of the Rouble against other currencies and other external factors. However the Company believes that it will benefit from increased production scale in its pork and poultry segments, and improved operating efficiency. That notwithstanding, further government support is necessary to ensure the Company continues to deliver against its objectives.

As a leading integrated and diversified meat producer, Cherkizovo occupies an important position within a sector of strategic significance to the government. The Company is focused on further growth through its vertically integrated business model, which offers inherent defensiveness in unpredictable conditions. However, the ability for further expansion and development of the business is greatly influenced by the current uncertainty within the overall financial and economic situation, and by the ability to access bank financing in the future.

In summary, it is a combination of the Company's strategic positioning, track record of operational execution, and a continued focus on growth that leaves management cautiously optimistic about the Company's prospects for 2009 and beyond.

Further Reading

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