OREANDA-NEWS. April 01, 2011. Cherkizovo Group (LSE: CHE), one of Russia’s leading integrated and diversified meat producers, announces full-year audited financial results for the period ended 31 December 2010, reported the press-centre of Cherkizovo Group.

Highlights
Strong organic volume growth across all segments, delivering a solid financial performance

Revenues increased 17% to USD 1,188.2 million from USD 1,019.2 million for 2010, and increased 12% on a rouble currency basis

Adjusted EBITDA* increased 20% to USD 218.7 million from USD 182.3 million for 2010, and increased 15% on a rouble currency basis 

Adjusted EBITDA* margin was at 18%

Gross profit increased 15% to USD 323.9 million from USD 281.6 million for 2010, and increased 10% on a rouble currency basis

Group gross margin was a healthy 27%

Net income increased 21% to USD 144.4 million from USD 119.4 million for 2010, and increased 16% on a rouble currency basis

As of 31 December 2010 Net debt** was USD 580.2 million.

The effective cost of debt was below 3%.

Net income per share increased 21%.

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 USD 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% controlling interest in the Zarechnaya poultry facility for a total consideration of USD 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 3 billion roubles in 3-year bonds with a coupon rate of 8.25%. 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.

Sergey Mikhailov, Chief Executive Officer of Cherkizovo Group, said: 
“During 2010 we have delivered a solid performance, with a 17% increase in revenue and growth in Adjusted EBITDA of 20%. This has resulted in a healthy 18% 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% Gross Margin, and a 21% 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 10-12% share on the market.”

On a reported currency basis sales increased by 17% to USD 1,188.2 million (2009: USD 1019.2 million) driven by organic growth across all segments. Gross profit increased 15% to USD 323.9 million (2009: USD 281.6 million). Operating expenses as a percentage of sales have decreased to 13% from 14% for 2009, reflecting operational improvements across segments. Net income increased 21% to USD 144.4 million (2009: USD 119.4 million).

Adjusted EBITDA* increased 20% to USD 218.7 million (2009: USD 182.3 million) and adjusted EBITDA* margin was flat at 18%, reflecting a robust operating performance by the Group. 

*Non-GAAP financial measures. This press release includes financial information prepared in accordance with accounting principles generally accepted in the United States of America, or US GAAP, as well as other financial measures referred to as non-GAAP. The non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with US GAAP.

 Adjusted Earnings before Interest, Income Tax, Depreciation and Amortization (“Adjusted EBITDA”). Adjusted EBITDA represents operating income plus depreciation and amortisation expense, loss on disposal of property, plant and equipment and other items, which are expenses primarily related to financing activities, adjusted for certain other items as shown in the reconciliation in Appendix 1. Adjusted EBITDA margin is defined as Adjusted EBITDA as a percentage of our net revenues. Our adjusted EBITDA  may not be similar to adjusted EBITDA measures of other companies; is not a measurement under accounting principles generally accepted in the United States and should be considered in addition to, but not as a substitute for, the information contained in our consolidated statement of operations. We believe that adjusted EBITDA provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations, including our ability to fund discretionary spending such as capital expenditures, acquisitions and other investments and our ability to incur and service debt. While depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent the non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods. Our adjusted EBITDA calculation is commonly used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies within our industry. Adjusted EBITDA is reconciled to our consolidated statements of operations in Appendix 1.

** Net debt is calculated as total debt minus cash and cash equivalents.

 *** During 2010 the Group completed the acquisition of entities previously owned by the Group’s majority shareholder. Since these acquisitions are transactions between entities under common control, they have been accounted for in a manner similar to a pooling of interest with assets and liabilities transferred at historical cost. Cherkizovo’s historical financial information has also been restated to include the acquired entities for all periods presented.

 Some of the information in this press release may contain projections or other forward-looking statements regarding future events or the future financial performance of the Group. You can identify forward looking statements by terms such as “expect,” “believe,” “anticipate,” “estimate,” “intend,” “will,” “could,” “may” or “might” the negative of such terms or other similar expressions. We wish to caution you that these statements are only predictions and that actual events or results may differ materially. We do not intend to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Many factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, general economic conditions, our competitive environment, risks associated with operating in Russia, rapid market change in our industry, as well as many other risks specifically related to the Group and its operations.

[1] For price calculation in dollar terms the Company used the average exchange rate for 2010 of 30.37 roubles per 1 US Dollar, for 2009 the average rate was 31.72 roubles per 1 US dollar.