Cherkizovo Group has published its financial results for the first quarter ended 31 March 2011. Among the highlights are that revenues increased 14 per cent on a rouble currency basis, and increased 16 per cent to US$308.2 million from $265.0 million for the first quarter of 2010.

Adjusted EBITDA decreased 31 per cent on a rouble currency basis, and 30 per cent to $34.9 million from $49.6 million for the first quarter of 2010, while adjusted EBITDA margin decreased to 11 per cent

Gross profit decreased 14 per cent on a rouble currency basis, and decreased 12 per cent to $64.6 million from $73.5 million for the first quarter of 2010. Group gross margin was 21 per cent. Net income decreased 44 per cent on a rouble currency basis, and decreased 42 per cent to $18.4 million from $31.9 million for the first quarter of 2010.

For the first quarter 2011, net debt increased three per cent on a rouble currency basis, and was $642.1 million. The effective cost of debt remained at two per cent.

Net income per share decreased 42 per cent.

Business developments

Cherkizovo Group has opened the poultry breeding facility, Komarovka, at its Penza cluster. The facility, which was built as part of Cherkizovo's ongoing poultry capacity increase project in Penza, consists of 34 bird houses, with a combined capacity of almost 1.1 million broilers.

Cherkizovo Group has opened a second line at the poultry breeding facility in its Bryansk cluster. It consists of 26 bird houses, with a combined capacity of almost 880,000 broilers. The bird houses will be populated using the Group's own hatcheries, and equipped with state-of-the-art technologies that reflect the latest innovations and best practices in poultry keeping.

Cherkizovo has reached an agreement to acquire 100 per cent of Mosselprom, the diversified vertically integrated agro-industrial group. Mosselprom's production activities include the following: poultry, pork, feed production and grain businesses. Subsequently, the strategic acquisition was completed on 16 May 2011.

CEO's comments

Sergey Mikhailov, Chief Executive Officer of Cherkizovo Group, said: "The first quarter of 2011 was a very challenging period for all domestic producers including ourselves. This was due to a combination of especially low prices for our products caused by an increased level of imports late last year, and sharply rising input costs, as the full effect of increased grain costs impacted our Poultry segment. However, while the majority of industry producers were operating at break-even levels, Cherkizovo did manage to report $308.2 million in Group revenue and an adjusted EBITDA of $34.9 million, while maintaining an 11 per cent adjusted EBITDA margin. Towards the end of the first quarter and going into the second quarter, poultry prices recovered, and this trend is continuing.

"We are making solid progress in our large-scale projects to increase poultry capacity. This is already reflected in our sales volumes for the Poultry division, and we are on track to provide significantly higher output from 2011, which is also supported by our recent launch of the poultry sites in Bryansk and Penza. The Pork division is delivering volume growth including operations at acquired farms, while demand for our meat processing products has also remained strong.

"Elsewhere, we have recently announced the start of a transformational project – the construction of a unique complex in the Lipetsk region, which will allow us to significantly increase production by 2016 and set industry trends in efficiency and product quality.

"We have also completed the strategic acquisition of Mosselprom, a large, diversified vertically-integrated agro-industrial holding company that comprises poultry production and feed production, as well as land cultivation and cropping, and we expect strong production volume growth in poultry and pork, with significant synergies that will further enhance our performance.

"We remain broadly positive on Russian consumption, and, as the pricing environment improves, we expect consumption to remain generally favourable. This trend will be supported by growing consumer confidence, reduced imports and increased costs from rising grain prices.

"We also welcome the Government's recent decision to offer producers direct subsidies to offset sharp cost increases, and to distribute grain from the intervention fund directly to regions that have suffered most. These measures combined will stabilise the market environment and allow domestic producers to continue developing quality local products, despite the difficult trading conditions. Moreover, the current grain harvest outlook is positive for Russia, which, we expect, will further stabilise input costs.

"Overall, we expect that in the second half of the year we will return to normalized profitability levels, as cost pressures decrease; this will offset the negative impact of the performance in the first quarter. Accordingly, management is optimistic that we are on track to meet expectations for the full year," said Mr Mikhailov.

Chief Executive's review

On a reported currency basis sales increased by 16 per cent to US$308.2 million (1Q2010: $265.0 million). Gross profit decreased 12 per cent to US$64.6 million (1Q2010: $73.5 million). Operating expenses as a percentage of sales were flat at 14 per cent. Net income decreased 42 per cent to $18.4 million (1Q2010: $31.9 million).

Adjusted EBITDA decreased 30 per cent to $34.9 million (1Q2010: $49.6 million) and adjusted EBITDA margin was at 11 per cent, reflecting satisfactory operating performance by the Group in an extremely tight environment.

Poultry division

Sales volumes in the Poultry division in the first quarter of 2011 increased by a robust 15 per cent to approximately 53,570 tonnes of sellable weight compared to approximately 46,570 tonnes for the first quarter of 2010, reflecting the contribution from the newly launched sites at Bryansk.

Prices for poultry sales in dollar terms increased by five per cent from $2.32 per kg in the first quarter of 2010 to $2.43 in the first quarter of 2011. (All prices are quoted excluding VAT.) Compared to the price in the fourth quarter of 2010 of $2.45, prices in the first quarter of 2011 were almost flat.

Prices in rouble terms increased by three per cent from 69.20 roubles (RUB) per kg in the first quarter of 2010 to RUB71.07 in the first quarter of 2011. However, compared to the price in the fourth quarter of 2010 of RUB75.15 roubles per kg, the price in the first quarter of 2011 decreased by five per cent, reflecting pressure from higher inventories caused by a larger share of imports entering Russia in the fourth quarter. Prices in the second quarter so far have been on an upward trend, and the Company anticipates this will continue through the second quarter of the year, given the considerable reduction in poultry import quotas, as well as meat price inflation resulting from rising input costs.

Total sales in the Poultry division increased 18 per cent to $139.4 million (1Q2010: $118.5 million). Gross Profit decreased 23 per cent to $26.2 million (1Q2010: $33.9 million), divisional Gross Margin decreased to 19 per cent (1Q2010: 29 per cent) due to lower selling prices in the first quarter of the year and rising input costs, as the full effect of the grain price increase was realised in this period.

Operating expenses as a percentage of sales remained flat at 13 per cent. Operating income of the division decreased by 58 per cent to $7.6 million (1Q2010: $18.3 million), and operating margin was six per cent as a result of the above-mentioned factors. Profit in the Poultry division decreased by 60 per cent to $6.3 million (1Q2010: $15.8 million).

Adjusted EBITDA decreased 40 per cent to $14.3 million (1Q2010: $23.9 million), while Adjusted EBITDA margin in the Poultry division was 10 per cent in the first quarter of 2011.

Pork division

Sales volumes in the Pork division in the first quarter of 2011 increased by five per cent to approximately 20,220 tonnes of live weight, compared to approximately 19,190 tonnes in the first quarter of 2010.

In dollar terms, prices for pork sales increased by 12 per cent from $2.29 per kg of live weight in the first quarter of 2010 to $2.57 in the first quarter of 2011. Compared to the price in the fourth quarter of 2010 of $2.33 per kg, the price in the first quarter of 2011 increased by 10 per cent.

Prices in rouble terms increased by 10 per cent from RUB68.59 per kg in the first quarter of 2010 to RUB75.27 in the first quarter of 2011. Compared to the price in the fourth quarter of 2010 of RUB71.61 per kg, the price in the first quarter of 2011 increased by five per cent. The pricing environment for pork products in Russia at the end of 2010 and beginning of 2011 was negatively affected by a larger than usual reduction of livestock by smaller and less efficient producers and households, and the Company expects it to recover in the second quarter as the summer season progresses.

Total sales in the Pork division increased 21 per cent to $58.0 million (1Q2010: $47.9 million). Gross profit decreased four per cent to $18.6 million (1Q2010: $19.4 million) while gross margin decreased to 32 per cent, resulting from pork prices coming under pressure in the first quarter of the year, as well as rising input costs, while the full effect of the grain price increase is yet to be realised in the second quarter due to a longer cycle in pork production.

Operating expenses as a percentage of sales decreased toseven per cent from eight per cent in the first quarter of 2010, reflecting increasing economies of scale. The division generated operating income of $14.6 million (1Q2010: $15.7 million), while operating margin was 25 per cent (1Q2010: 33 per cent). Profits in the Pork division were flat $14.1 million.

Adjusted EBITDA generated by the division decreased four per cent to $18.5 million (1Q2010: $19.2 million), and adjusted EBITDA margin decreased to 32 per cent (1Q2010: 40 per cent).

Meat Processing division

Sales volumes increased by eight per cent to approximately 33,200 tonnes from 30,790 tonnes for the first quarter of 2010.

Prices in dollar terms increased by 13 per cent from $3.80 per kg in the first quarter of 2010 to $4.30 in the first quarter of 2011. Compared to the price in the fourth quarter of 2010 of $4.08, the price in the first quarter of 2011 increased by five per cent.

Prices in rouble terms increased by 11 per cent from RUB113.71 in the first quarter of 2010 to RUB125.75 in the first quarter of 2011. Compared to the price in the fourth quarter of 2010 of RUB125.37 roubles per kg, the price in the first quarter of 2011 remained flat.

Sales in the Meat Processing division increased 23 per cent to $138.4 million (1Q2010: $112.8 million). Divisional gross profit decreased two per cent to $19.9 million (1Q2010: $20.3 million), while gross margin decreased from 18 per cent to 14 per cent. Operating expenses as a percentage of sales were flat at 13 per cent. Division profit was $0.4 million.

Adjusted EBITDA for the division decreased 35 per cent to $5.5 million (1Q2010: $8.4 million) and adjusted EBITDA margin decreased to four per cent (1Q2010: seven per cent).

Outlook

The first quarter of 2011 was an extremely challenging time for domestic producers, as performance was affected by lower than expected selling prices and at the same time by sharply rising input costs, as the Poultry segment experienced the full effect of the grain price increases. Despite this, Cherkizovo demonstrated solid operational and financial results.

Alongside the anticipated progress in our existing organic expansion projects, the Company hase recently announced the start of a transformational project – the construction of a unique complex in the Lipetsk region, which will allow a significant increase in production by 2016 and set new industry standards in efficiency and product quality.

The Company has also completed a strategic acquisition of Mosselprom, a large, diversified vertically-integrated agro-industrial holding company that comprises poultry production and feed production, as well as land cultivation and cropping; and it additionally expects strong production volume growth in poultry and pork, with significant synergies that will further enhance our performance.

Cherkizovo remains broadly positive on Russian consumption, and as the pricing environment improves, it expects it to remain broadly favorable thereafter, supported by growing consumer confidence, reduced imports and increased costs resulting from grain price increases.

The Company welcomes the Government's recent decision to offer producers direct subsidies to offset sharp cost increases and to distribute grain from the intervention fund directly to regions that have suffered most. These measures combined will stabilise the market environment and allow domestic producers to continue developing quality local produce, despite the difficult trading conditions. Moreover, the current grain harvest outlook is positive for Russia, which is expected to stabilise input costs further. Overall, management is confident that the Group will continue to enhance efficiency increases and delivering against its strategy.

Further Reading

-

You can view the full report by clicking here.