Annual Report 2017 No.1 No.1 TOP-RANKING FIRST RUSSIAN MEAT AMONG RUSSIA'S PRODUCER FEED PRODUCERS
Cherkizovo Group No.1 is the largest meat producer in Russia LEADING POULTRY PRODUCER committed to quality and product excellence. The Group is IN 2017 among the top three leading manufacturers of poultry, pork and processed meat in Russia.
TAMBOV TURKEY IS ONE OF THE LARGEST RUSSIAN TURKEY PRODUCERS
No.2 SECOND LARGEST PORK PRODUCER IN RUSSIA IN 2017 CHERKIZOVO GROUP Annual Report 2017 01
STRONG CONTENTS
PERFORMANCE Highlights 03
Segment Overview 04 COMPANY ABOUT IN 2017 Geography 06 Key Brands 08 Core Strengths 10 History 11 CONSOLIDATED REVENUE Key Developments 12 Message from the Chairman 20 Message from the CEO 22 Market Overview 26
Our Strategy 30 REPORT STRATEGIC Business Model 36 Investment Programme 40 90.5 RUB bln Quality Assurance 44 Cherkizovo Lab 46 Operational Review: 48 —— Poultry 48 EBITDA —— Pork 50 —— Meat Processing 52 —— Grain 54 —— Turkey 56 Product Strategy 58
Financial Performance Overview 64 15.3 REVIEW FINANCIAL RUB bln
SALES* Corporate Governance 80
Shareholder and Investor Highlights 94 GOVERNANCE CORPORATE 997.7 th. tonnes Sustainable Development 96
Our Employees 98 DEVELOPMENT SUSTAINABLE For more information, Health, Safety and the Environment 104 please, visit our Community Relations and Сharity 106 corporate website:
http://cherkizovo.com/en/
* Sales include turkey, poultry, pork and meat processing products (excluding feed and grain). 02 Delicious Story www.cherkizovo.com Cherkizovo at a Glance
Food production is not only our business, it is our passion and mission. For us, every detail matters. This is why our business integrates all stages of the agricultural value chain from grain farming to the manufacturing of finished products.
Sustainable growth across all segments 522,500 211,750 236,638 TONNES TONNES (production) TONNES + 52% in five years + 30% in five years + 76% in five years
26,835 449,215 TONNES TONNES + 222% in five years
We control the entire production cycle – from farm to fork– for our consumers to enjoy the best offering.
The Group’s brands, including The Group’s vision is to deliver Cherkizovo Group's key focus is on Cherkizovo, Petelinka and Kurinoe sustainable organic growth, aided by product excellence and on meeting Tsarstvo, are very well known and targeted acquisitions, and to further consumer demands. Consistent well liked by the Russian consumers. develop the infrastructure as part of growth is supported by a strong The Group is comprised of Grain, Feed, a long-term investment programme. marketing function. The Group invests Poultry, Pork and Meat Processing Our key priorities include enhancing substantially in consumer surveys business segments. The vertically operational efficiency and customising and new global trends and marketing integrated business model, covering the product offering to ever evolving innovations analysis. Our consumers the entire production chain from crops consumer preferences and trends. and their needs are always at the heart to finished products, contributes to of what we do. the Group’s strategic sustainability and assures the highest quality standards.
The Group’s shares are quoted on A ++ B1 the Moscow Exchange (MOEX) EXPERT RA MOODY’S (MOEX ticker: GCHE). RATING RATING CHERKIZOVO GROUP Annual Report 2017 03 Highlights
Ludmila Mikhaylova COMPANY ABOUT Chief Financial Officer
We are pleased to report the Company’s solid sales growth and improved profitability for 2017, as our focus on implementing strategic initiatives delivered value to shareholders and positioned us for a favourable medium-term outlook. REPORT STRATEGIC
OPERATING HIGHLIGHTS, sales, tonnes
Segments 2017 2016 2015 Year-on-year, % Poultry 522,500 500,321 470,432 4% Pork (production) 211,750 184,766 169,563 15% Meat Processing 236,638 218,085 191,200 9% Turkey* 26,835 — — —
Grain 449,215 338,808 267,371 33% REVIEW FINANCIAL
Please see page 48 for details
FINANCIAL HIGHLIGHTS, RUB mln GOVERNANCE CORPORATE 2017 2016 2015 Year-on-year, % Revenue 90,465 82,417 77,033 10% Gross profit 23,559 17,855 19,149 32% Operating expenses (13,833) (12,798) (11,615) 8% Adjusted EBITDA 15,338 10,282 12,630 49% Adjusted EBITDA margin 17% 13% 16% 4 p.p. Operating profit 9,726 5,056 7,534 92% Profit before tax 5,956 1,960 5,872 204% DEVELOPMENT SUSTAINABLE Net profit 5,800 1,919 6,007 202% Net cash flow from operating activities 13,016 9,369 4,992 39% Net debt 48,669 36,949 35,010 32%
Please see page 64 for details
* Turkey data represents sales of turkey meat produced by Tambov Turkey JV through the Group’s distribution network. 04 Delicious Story www.cherkizovo.com Segment Overview
Revenue to external customers, % POULTRY PORK 1 1 0 2 0
90.465 0 7 RUB BN
Cherkizovo Group is Russia’s Cherkizovo Group is Russia’s major** poultry producer and second largest pork producer. the leader in branded poultry. Built from scratch, the Group’s Pork Over the past decade, the Company segment today has 16 pig farms has been actively purchasing, that grow over 2 million pigs a year. Poultry 50.3% upgrading and debottlenecking In 2017, the Group boosted its Pork 4.5% poultry factories in Russia’s output by launching new nursery- Meat Processing 37.6% central regions, working to roll out finisher sites and enhancing the most advanced technologies for performance by implementing Grain 2.0% production efficiency and veterinary genetics improvement and animal Feed 1.1% safety. In 2017, the Group health programmes. Other 0.3% continued to ramp up poultry Turkey* 4.3% production and improve operational efficiency while also increasing the share of value-added products.
Production volumes by segment, %
2 7 REVENUE REVENUE 2 7
997.7 47.4 18.7 TH. TONNES 2 RUB BLN RUB BLN - 1% y-o-y + 17% y-o-y
21 2 SALES PRODUCTION
Poultry 52.4% 522,500 211,750 Pork 21.2% TONNES TONNES Meat Processing 23.7% + 4% y-o-y + 15% y-o-y
Turkey* 2.7%
* Turkey represents operations related to purchase Please see page 48 for details Please see page 50 for details and subsequent resale of turkey meat produced by Tambov Turkey JV through the Group’s distribution network. Turkey is not an operating segment. ** – based on the Group's estimates. CHERKIZOVO GROUP Annual Report 2017 05
MEAT PROCESSING GRAIN TURKEY* COMPANY ABOUT
A top three producer in the Russian Cherkizovo Group has been The Group tapped into the turkey REPORT STRATEGIC market of processed meats, developing the Grain segment business in 2012, after announcing Cherkizovo Group offers a wide since 2011. The Group has a land plans to set up a joint venture with
range of high-quality meat bank of about 287,000 hectares. Spain’s Grupo Fuertes. The project products. In 2017, the Group added Today, the Company cultivates became operational in 2016, and new sales volumes, driven partly over 170,000 hectares various the new Pava-Pava turkey brand by stronger sales in federal retail crops in Central Russia and delivers hit the shelves of retail chains chains and higher share of branded high yields well above the national as early as February 2017. After products in the sausages and ready- average. In 2017, sales grew by reaching the project’s full capacity to-cook pork products. one third, mainly on the back of in October 2017, the joint venture
the acquisition of NAPKO, a leading emerged as a one of the top turkey REVIEW FINANCIAL Russian grain producer. producers in Russia. GOVERNANCE CORPORATE REVENUE REVENUE REVENUE 34.0 3.2 3.9 RUB BLN RUB BLN RUB BLN + 7% y-o-y + 6% y-o-y
SALES SALES SALES DEVELOPMENT SUSTAINABLE 236,638 449,215 26,835 TONNES TONNES TONNES + 9% y-o-y + 33% y-o-y
Please see page 52 for details Please see page 54 for details Please see page 56 for details
* Turkey is not an operating segment. 06 Delicious Story www.cherkizovo.com Geography
Cherkizovo Group’s operations are located in the European part of Russia, including Moscow and Moscow region, St. Petersburg and Leningrad region, Belgorod, Bryansk, Voronezh, Kursk, Lipetsk, Kaliningrad, Penza, Rostov, Tambov, Orel, Tula, Ulyanovsk and Krasnodar regions.
St Peter ur
Kal n n ra
Greater Mo o Area
Br an re on Orel re on
Tula re on Kur re on Pen a re on
Ro to on Don Ul ano re on
L pet re on Ta o re on
Vorone re on Sa ara CHERKIZOVO GROUP Annual Report 2017 07 COMPANY ABOUT The Group’s products are on offer in major national retail 9 chains and other stores. They are also used in HoReCa WAREHOUSES (primarily fast food restaurants) and exported abroad. Today, Cherkizovo products are available to over 80% of people in Russia and to an increasing number of consumers in other countries. 6
SLAUGHTER AND MEAT Key export markets REPORT STRATEGIC PROCESSING FACILITIES —— CIS
St Peter ur —— Middle East and Africa —— Southeast Asia
Kal n n ra 16 PIG Greater Mo o Area FARMS Top brands by awareness REVIEW FINANCIAL
Br an re on Orel re on 7 No.1 BRAND POULTRY IN RUSSIA’S SAUSAGE AND PORK FARMS PRODUCTS MARKET brand awareness – 59.6% Tula re on Kur re on Pen a re on 1 No.1 BRAND GOVERNANCE CORPORATE TURKEY PRODUCTION IN RUSSIA’S JOINT VENTURE POULTRY MARKET Ro to on Don Ul ano re on brand awareness – 35.3%*
8 12 No.3 BRAND FEED GRAIN IN THE POULTRY MARKET MILLS ELEVATORS IN RUSSIA
L pet re on Ta o re on DEVELOPMENT SUSTAINABLE brand awareness – 24.7%*
~287,000 HECTARES 2017 data, source: Rusindex Quarterly Survey. Vorone re on Sa ara TOTAL LAND BANK * among the largest poultry producers. 08 Delicious Story www.cherkizovo.com Key Brands
Cherkizovo Group is expanding its brand portfolio, which comprises some of the most popular brands in the meat products market, including Cherkizovo, Petelinka, and Kurinoe Tsarstvo. The Group is also committed to strengthening its brands that target international markets, with the Dajajti halal export brand as just one example. In 2017, the Tambov Turkey introduced Pava-Pava, a new brand for turkey products.
CHERKIZOVO
is one of the nation’s leading For over 40 years, Cherkizovsky Meat meat product brands. Processing Plant has been producing high-quality sausages and meat products. Its remarkably wide product range includes sausages and ready-to- cook pork products. CHERKIZOVO GROUP Annual Report 2017 09
PETELINKA KURINOE TSARSTVO COMPANY ABOUT
is the best known and most Petelinka product range includes is one of Russia’s leading chilled popular chilled poultry meat whole chicken, cuts, by-products, and frozen poultry brands. brand in the Russian poultry minced meat, and marinated kebabs. market. Natural and healthy, Petelinka The product range includes ready-to-cook solutions are made whole chicken, cuts, by-products, from 100% chicken fillet and and minced meat. To produce natural spices. chilled poultry meat, we use the best and latest equipment. REPORT STRATEGIC
REVIEW FINANCIAL
PAVA-PAVA GOVERNANCE CORPORATE is a new brand designed for It contains 50% less fat than turkey a variety of turkey that is unique offered by other producers. The Pava- to the Russian market. Pava range includes turkey thighs and wings, medallions, diced meat, thinly cut meat, steaks, by-products, and ready-to- cook products. Turkey is bred in the green Tambov region, where the joint venture with Grupo Fuertes is located. DEVELOPMENT SUSTAINABLE
10 Delicious Story www.cherkizovo.com Core Strengths
Sustainable vertically integrated business model Solid financial position A diversified, integrated business model underpins The Group is soon to complete its major investment projects Cherkizovo Group’s strong positions across all key segments of in a variety of segments. Over the next few years, investment the meat production and processing chain while also ensuring returns are expected to improve as new projects roll out. robust quality control across the board.
Please see page 36 for details Please see page 64 for details
Quality excellence Combination of organic growth and M&As The Group continues to put quality, safety and taste first, The Group pursues a strategy that combines organic growth, helping to make products ever more popular among consumers. driven by investments in new production capacities, and In developing its product line, Cherkizovo is always willing to acquisitions of operating businesses well suited for integration incorporate consumer feedback and preferences and to respond into the Group's business model. Since the 2017 acquisition of to market trends. In 2017, the Group's product strategy focused NAPKO, a leading Russian grain company, the Group has been on growing the share of value-added and convenience foods adding solid new volumes in the Grain segment. Other segments and expanding the healthy food line. have demonstrated strong performance on the back of organic growth, efficiency improvements, and new capacity additions.
Please see page 58 for details Please see page 30 for details
Strong brands Our team Cherkizovo Group continues to strengthen its brand portfolio, Our people are our key competitive advantage. which includes the highly recognisable and popular brands At Cherkizovo Group, we have a strong team led by outstanding of Cherkizovo, Petelinka, Kurinoe Tsarstvo. We are also professionals who have been trained in Russia and abroad launching new brands. In 2017, Pava-Pava was introduced and boast a track record with major businesses in Russia for turkey products. and internationally.
Please see page 58 for details Please see page 98 for details
Technology and innovation Distribution and logistics All of our production sites were designed to meet the latest We operate Group-owned logistics facilities and a fleet of some efficiency and veterinary safety requirements and are aligned 1,000 refrigerated vehicles to guarantee quick delivery of chilled with the highest global standards. products to our consumers. The Group continues to solidify Relying on our in-house R&D expertise, we make sure all its competitive edge in logistics, in particular by centralising Cherkizovo products are covered by comprehensive food its operations. quality and safety control. We also have a large-scale research programme in place.
Please see page 46 for details Please see page 37 for details CHERKIZOVO GROUP Annual Report 2017 11 History COMPANY ABOUT 1974 2005 2006
Cherkizovsky Meat Processing Plant Agroindustrial enterprises Cherkizovo Group raises opens in Moscow Cherkizovsky and Mikhailovsky are USD 228.5 million in a successful IPO merged into Cherkizovo Group on MOEX and LSE REPORT STRATEGIC
2007 2008 2009
Cherkizovo Group solidifies its position Cherkizovo Group launches Phase Consolidated revenue exceeds in the poultry market following 1 of a modern pig farm project in USD 1 billion takeover of Kurinoe Tsarstvo, the Central Black Earth region a major poultry producer REVIEW FINANCIAL
2011 2012 2013
The Grain division is set up Cherkizovo Group establishes a JV Cherkizovo Group acquires with Spain’s Grupo Fuertes Dankov Meat Processing Plant Cherkizovo Group acquires to make turkey products in the Lipetsk region Mosselprom GOVERNANCE CORPORATE
2014 2015 2016
The Group enhances its standing Cherkizovo sets up a state-of-the- Cherkizovo Group taps into in the poultry market by acquiring art R&D and laboratory centre, export markets Lisko Broiler unmatched in the Russian agricultural sector and designed in line with best European standards DEVELOPMENT SUSTAINABLE
2017 Cherkizovo Group acquires Tambov Turkey reaches NAPKO full production capacity 12 Delicious Story www.cherkizovo.com Key Developments
February March April
New parent stock unit goes Cherkizovo Group makes it Cherkizovo Group completes operational into top three best employers NAPKO acquisition
Cherkizovo Group launched the first Cherkizovo Group was named parent stock unit at the new poultry a top three employer in Russia's farm in the Lipetsk region. Parent stock Food Production, Manufacturing units are part of a large-scale poultry and Trading category, according to farm project in the region, with some HeadHunter's extensive and reputable RUB 3 billion already invested employer ranking. Cherkizovo Group completed in the initiative. the acquisition of 100% of NAPKO, Launch of Pava-Pava turkey brand a leading Russian grain producer. New sow farm opens The deal perimeter included in Lipetsk region 147,000 hectares of agricultural land in the Lipetsk, Tambov and Penza Cherkizovo Group launched a new sow regions and infrastructure facilities for farm in Dankov, the Lipetsk region. grain growing and storage. In 2016, The site will be delivering piglets NAPKO produced 250,000 tonnes of to the nursery and finisher sites of Pava-Pava is a brand specially designed grain on that land. The deal increased the Pork segment. The new sow farm to market Tambov Turkey's products, Cherkizovo Group's total land bank is designed to house 11,600 sows which are now available in retail chains to approximately 287,000 hectares. at a time and some 7,000 weaned across Russia. piglets a week. With this site in place, Cherkizovo Group will raise its pork capacity by 350,000 heads a year.
September October
Cherkizovo Group reaps Cherkizovo Group Third feed production line record-high winter wheat tops meat producer gets rolling harvest ranking in Voronezh region
The company gathered nearly For the second consecutive year, After launching the third 33-tonne- 270,000 tonnes of winter wheat, Сherkizovo Group is named the top per-hour production line, the company almost double of what was harvested meat producer, according to increased the capacity of its feed last year (140,000 tonnes), mainly the Agroinvestor journal. As per mill in Latnoe, Voronezh region, after expanding the winter-wheat Agroinvestor analysts, the top three to 85 tonnes per hour. A total area to 49,900 hectares from just players are unlikely to change over of RUB 115.8 million was invested 27,400 hectares in 2016. the next few years, with Cherkizovo in the project. Group expected to establish its foothold as No.1 by implementing the pork and poultry growth projects that were announced earlier. CHERKIZOVO GROUP Annual Report 2017 13
April – May June July COMPANY ABOUT Roskachestvo confirms Cherkizovo Group signs an investment Controlling shareholder buys out superior quality of Cherkizovo agreement to build a meat processing Cherkizovo Group's shares from products plant in Kashira Prosperity Capital Management
In an extensive contest arranged by Roskachestvo, a non-profit quality control group in Russia, Kurinoe Tsarstvo broiler chicken was awarded a certificate of conformity and praised
as a product of superior quality that At the SPIEF and as part of its The controlling shareholder of REPORT STRATEGIC surpasses Roskachestvo’s standards. business agenda, Cherkizovo Group PJSC Cherkizovo Group jointly with and the Moscow region signed affiliates signed an agreement with
Cherkizovo Group takes the lead an investment agreement to build Prosperity Capital Management's funds in feed production a fully automated plant in the town and portfolios to buy out about 21% of of Kashira. With a capacity to make Cherkizovo's ordinary shares and GDRs 80 tonnes of smoked sausages at RUB 1,300 per share for a total of per day, the plant will be operating ca. RUB 12 billion. The buyout will on a scale unprecedented in Russia enable the company to improve market and even Europe. It will feature liquidity, including through an SPO,
state-of-the-art equipment to ensure or use the shares for M&A purposes. REVIEW FINANCIAL For the second year running, Cherkizovo product quality and biosafety, and Group ranks the first among Russia's will be relying on resource-saving top 20 feed producers, according to technologies. The project will receive the Agroinvestor Magazine. over RUB 6 billion in investment.
November December GOVERNANCE CORPORATE
Tambov Turkey reaches Cherkizovo Group Cherkizovo Group partners up full capacity intends to delist GDRs with KFC
Cherkizovo Group announced its intention to delist GDRs from the LSE, citing limited liquidity. The decision is in line with the company's new equity strategy, which is focused on
Tambov Turkey, a JV between consolidating free float on the MOEX Cherkizovo Group became a strategic DEVELOPMENT SUSTAINABLE Cherkizovo Group and Grupo Fuertes, to cut administrative and listing costs. partner of KFC Russia and was has reached its design capacity and awarded a prestigious prize
became one of the a major turkey for suppliers from Yum!, the owner producers in the Russian market. of KFC. 14 Delicious Story www.cherkizovo.com Leveraging innovation for product excellence
It is our belief that advanced and innovative solutions are one of the pillars for an agricultural business to thrive.
Relying on the very best innovative approaches is what ultimately enables us to continue improving the product range. By doing that, we are well-positioned to offer delicious meat products catering to the ever evolving needs of our consumers.
Please see page 46 for details CHERKIZOVO GROUP Annual Report 2017 15
We have always pioneered new Cherkizovo Lab – meat production technologies. unique innovations at our R&D centre Today, we continue to push forward our cooperation with some of
OVER COMPANY ABOUT the best researchers and experts in the industry while growing our in-house research and innovation capabilities. 40 companies, REPORT STRATEGIC BUSINESSES AND FARMS WERE ENGAGED IN 2017
OVER REVIEW FINANCIAL
1,000 complex laboratory tests FOR AGRICULTURE AND MEDICINE GOVERNANCE CORPORATE
1,500 DEVELOPMENT SUSTAINABLE 2
m
TOTAL AREA OF THE UNIQUE R&D CENTRE 16 Delicious Story www.cherkizovo.com New brands and product lines
In 2017, PAVA-PAVA, a new brand of turkey products was launched, including medallions, diced meat, thinly cut meat, steaks, thighs, wings, by-products, and ready-to- cook products, for a quick and easy cooking experience.
Turkey is bred in the Tambov region, known for its green spaces
Twice as small as those available in the market, each turkey can be easily put into an oven uncut
It contains 50% less fat than the breeds used by other Russian producers
Please see page 56 for details CHERKIZOVO GROUP Annual Report 2017 17 COMPANY ABOUT
The growing consumer demand REPORT STRATEGIC for healthy organic products led us to launch
CLEAN LABEL, a new Petelinka range distinguished by: REVIEW FINANCIAL
No food additives or preservatives GOVERNANCE CORPORATE Wide product range, including cutlets, barbecue sausages, kebabs, and products for roasting
Use of the latest equipment DEVELOPMENT SUSTAINABLE alongside compliance with all sanitary requirements
Please see page 48 for details 18 Delicious Story www.cherkizovo.com Advanced production technologies for product excellence
Advanced technologies used by Cherkizovo Group across its production facilities comply with the latest standards in biosecurity. The Group is a renowned innovation leader among the Russian agricultural companies.
We use We control cutting-edge equipment the entire production cycle – and technology from farm to fork – for our customers to enjoy the very best offering
Please see page 44 for details Please see page 44 for details CHERKIZOVO GROUP Annual Report 2017 19 COMPANY ABOUT REPORT STRATEGIC
REVIEW FINANCIAL GOVERNANCE CORPORATE DEVELOPMENT SUSTAINABLE
20 Delicious Story www.cherkizovo.com Message from the Chairman
I am pleased to report that 2017 Russia’s meat market is the 4th largest Equally, we take pride in the responsible, witnessed continued stability and globally in terms of volumes produced, positive role our Company plays recovery in Russia’s economy and with solid outlook and growth potential. in the development of the Russia’s agricultural sector, conditions which In 2017 Russia’s economy returned to agriculture industry, in the communities enabled Cherkizovo Group to deliver growth, achieved record low inflation, where we operate and in the well- very strong financial and operational experienced lower rouble volatility being of our customers, suppliers and results. and saw modest growth in consumer employees. demand. We believe the Russian meat industry offers attractive opportunities Since 2006 we invested approximately and material upside potential driven by 80 billion Rubles to expand and modernize the market size, forecast growth rate, our state of the art asset base, monitor shifting consumer preferences and and control quality and costs, develop new industry consolidation opportunities. value-added products, introduce modern management information systems, and Cherkizovo is the leading, vertically market, sell and distribute our products to integrated, diversified branded meat customers. As we approach completion producer in Russia with top 1 and 2 of our current investment cycle, we positions, respectively, in poultry and believe Cherkizovo is well prepared to pork segments in Russia, and a top 5 capitalize on its significant investment to position in the Russian processed meat deliver strong operating results and cash segment. We are well-positioned to flow in the years ahead. capitalize on the meat market’s forecast growth in the coming years. The long term recovery in Russian consumer spending coupled with For over fifteen years, Cherkizovo significant Government support have and the Russian meat industry led to a sustained increase in Russia’s generally have been well supported domestic meat production, with poultry by Government interest rate and pork production now meeting subsidies and income tax holidays. Government goals of self-sufficiency. The favourable regulatory and tax With domestic meat supply and demand regime benefited the industry overall approaching a new equilibrium, coupled and market leaders such as Cherkizovo. with growing demands from major retailers and end customers, local competition is rising, and foreshadowing market consolidation where smaller and weaker producers will be acquired or exit. These trends and conditions mostly benefit larger, more efficient producers, with popular, quality, value-added products. Cherkizovo is poised to lead the next stage of Russia’s meat industry development.
As Russia’s largest producer of branded meat products, Cherkizovo has earned an enduring reputation for its wide variety of pork and poultry products which have won popularity with consumers thanks to their superior quality, convenience and overall value proposition. CHERKIZOVO GROUP Annual Report 2017 21
Our development strategy is centred In 2017, the Company delivered on experience in Russian and international
around our consumers. We are this commitment, through a material business, world-class expertise COMPANY ABOUT focused on optimizing our brands increase in Sales and EBITDA, by paying ranging from agriculture and consumer and aligning them with evolving a RUB 78 dividend per ordinary share, industries, as well as strategy, finance consumer preferences, growing volumes and through a 50% rise in our share and general management experience. and the assortment of our value- price on the Moscow Stock Exchange. The Board’s key committees – added products to provide a more In the near future Company Dividend the Audit Committee and Personnel comprehensive offering, consolidating policy is expected to be amended to and Remuneration Committee – are our positions in modern retail chains, target an annual dividend of at least currently made up of only independent and other high-value added channels, 50% of net income in accordance with Directors. I would like to thank and expanding geographically alongside IFRS for the immediately preceding our directors for their significant
federal retailers and major food service fiscal year and adjusted for any net contributions and guidance throughout REPORT STRATEGIC companies to better serve existing and change in the fair value of biological 2017 and am confident their experience new regions and customers. assets and agricultural produce. This will and commitment will continue to bring
be subject to the Company maintaining meaningful value to the Group during Federal retail chains remain our biggest a net debt/adjusted EBITDA ratio our next stage of development. customers and we intend to grow in below 2.5x over the medium-term, and tandem as modern retail continues to being able to finance future spending I would also like to express our sincere gain share over traditional retail and on operations, organic growth, and/or appreciation to our Group’s senior wholesale. Our retail customers are strategic acquisitions. executives, middle management and looking for long term partners that line employees for their dedication and can support their growth and meet Over the next few years, our financial hard work. They are the life blood of our REVIEW FINANCIAL their complicated logistical service objectives are to achieve organic business, contributing day in and day requirements for perishable goods revenue growth above the market out to making our Company successful, across expanding regions with multiple and to deliver high operating margins sustaining our market leadership, distribution locations. We continuously and cash flow. To achieve these and serving our customers and other modernize and tailor our distribution objectives, our strategy is to continue to constituents. operations and information systems emphasize and expand our value-added to make our interaction reliable and product offering, maintain modern With a proud legacy of success, and efficient for our customers and suppliers. and efficient operations, selectively a strong business platform, we look add new production capacity, and forward to continuing to serve our
Equally, we focus on achieving ongoing opportunistically participate in customers and other constituents, GOVERNANCE CORPORATE improvement in operations, from the consolidation of the currently to maintaining our leadership in supply chain and farming, through to fragmented Russian meat industry. the Russian meat industry and to production, distribution and customer We will selectively target modern assets realizing our ambitious vision and goals. service to improve efficiency and that can be acquired at attractive prices reduce risks at each stage of our value and which support our value-added chain. Our long term strategy is to product and marketing strategy. In 2017 become a cost leader in the domestic we adopted a capital expenditure and meat industry, reaping benefits of our M&A policy that screens all potential vertically integrated business model investments based on their return and constantly striving for excellence on invested capital, with increased DEVELOPMENT SUSTAINABLE in operations. focus on project implementation and accountability to plan.
Our overriding commitment is to delivering value to our shareholders, In 2017, we continued our long- namely through strong operating standing commitment to best practices performance, sustained growth in corporate governance. I would like in free cash flow and steady to acknowledge the valuable role of Evgeny Mikhaylov dividends to shareholders. our directors who bring extensive Chairman of the Board of Directors 22 Delicious Story www.cherkizovo.com Message from the CEO
In 2017 Cherkizovo Group achieved Organic growth, operating Cherkizovo enjoys a unique position in strong progress in implementation of improvements and a strategic Russia’s meat and agricultural industry its business strategy, and delivered acquisition were key drivers behind our as the largest vertically integrated excellent operating and financial improved performance in the reporting producer. We offer consumers the performance. During the year, we period. Performance was aided by widest range of quality meats across maintained our leadership in Russia’s a recovery in the domestic meat segments, a product offering and value meat market, as total meat sales market and a more favourable pricing proposition which holds significant approached 1 million tonnes, up 10% environment. With the unfavourable appeal for major retail chains and year-on-year. 2016 market environment and HoReCas. performance behind us, we believe our recovery demonstrates the recession Our sales and marketing strategy resistant nature of our industry, appeal is designed to sharpen the Group's of our products and overall strength of competitive edge through a robust our business model. consumer-focused, value-added product portfolio, and to optimise and align our product and brand portfolio with evolving consumer preferences. The Group keeps a close eye on food market trends, consumer preferences, product innovations and best international practices. Priorities are to offer tasty, fresh, quality value-added products at competitive prices in Russia and in selected export markets and to increase the share of production sold as value-added products which generate meaningfully greater revenue and cash flow per kilo, unlocking incremental value from our extensive farming, production and distribution operations.
Operationally, we strive to continuously improve efficiency throughout our value-chain, with investment in modernization and expansion projects, quality, cutting-edge processes, business automation, as well as in personnel training and management development.
Finally, as the Russian economy returns to growth and the meat industry appears poised to enter a new stage of competition and consolidation, we believe Cherkizovo is well positioned to selectively participate and benefit from the anticipated meat industry consolidation. CHERKIZOVO GROUP Annual Report 2017 23
Regulatory environment and agriculture producers in Russia, Meat Processing segment increased
In 2017 the Russian government which we believe, are overall neutral sales by 9% to 236,638 tonnes, driven COMPANY ABOUT continued its general support for to positive for the Company given by stronger branded product sales domestic agricultural producers the nature of our products, affording through retail chains and incorporation although it amended its policy for us an opportunity to strengthen our of the Ural and North-Western interest rate subsidies in respect of market leading position in the absence regions into the distribution network. new investment projects in the sector. of competition from global players. During the year, we also kept working Interest rate subsidies for capital In our opinion a relaxation or removal of on strengthening our position across investment in pork production and sanctions and counter sanctions would niche markets (smoked sausage, ham, the zero corporate income tax rate for impact smaller, weaker players more and semi-smoked sausage). agricultural produce remain the only than market leaders like Cherkizovo.
Federal support for meat manufacturers Grain segment harvest volumes surged REPORT STRATEGIC as domestic production has grown Our performance by 60% to nearly 750,000 tonnes to close to equilibrium with current In 2017, the Group’s revenue versus 468,000 tonnes in 2016, and domestic demand. rose by 10% to RUB 90.5 billion. sales growth was not far behind with The combination of market recovery and a 33% increase to 449,215 tonnes vs During the year Russia’s new Law on more favourable pricing environment, 338,808 tonnes in 2016. These results Trade came into effect, requiring greater operational improvements, cost controls, are mainly attributable to the Q2 2017 transparency in relations between efficiencies and benefits from our vertical acquisition of NAPKO, a leading agricultural producers and retailers, integration, led to a surge in EBITDA Russian grain producer, which added thereby allowing producers to improve of 49% to RUB 15.3 billion, with our 147,000 hectares of land and more management of working capital and EBITDA margin jumping to 17% from than doubled our operational land bank, REVIEW FINANCIAL increase free cash flow generation. 13% in 2016. enabling the Group to maintain grain self-sufficiency of up to 60% going The reporting period also saw changes Poultry segment sales of finished forward. in Russian pork and beef import products increased to 522,500 tonnes, regulations. In December 2017, up 4% year-on-year, due to a steadily complying with demands of the World rising share of branded (primarily Trade Organisation (WTO), Russia Petelinka, which increased 25% lifted its ban on pork imports from compared to 2016) and value-added the European Union that had been products in the segment's total sales – introduced in 2014 after reported the target was achieved with modest GOVERNANCE CORPORATE cases of African swine fever in incremental investment in operations Our rankings in Russia: EU countries. Also, in December, and better focus on product marketing. the Federal Service for Veterinary Growth was further supported by and Phytosanitary Surveillance of an overall increase in output. Russia (Rosselkhoznadzor) imposed No.1 a temporary ban on supplies of pork Pork segment delivered the strongest MEAT PRODUCER and beef from Brazil, as ractopamine performance among the Group’s fed to Brazil’s livestock to increase businesses. Its production volumes muscle fibre size is prohibited in Russia. increased by 15% to a record
If this ban remains in force, we expect 211,750 tonnes, while sales grew by DEVELOPMENT SUSTAINABLE a decline in imports and an upward 13% to 200,308 tonnes. The Group was No.1 trend in domestic prices. able to achieve these figures thanks to POULTRY PRODUCER
the launch of a sow farm in the Lipetsk In recent years geopolitical tensions region, seven nursery and finisher sites between Russia and both the US and in the Lipetsk and Voronezh regions, European countries have resulted and implementation of a programme in sanctions and counter sanctions, to improve animal genetics and overall No.2 reducing the role of international meat health of animals. PORK PRODUCER 24 Delicious Story www.cherkizovo.com
Landmark projects Third, in line with our strategy to In 2017, three landmark capital projects develop Russia’s state-of-the-art meat were high priorities. Following their processing facilities and to grow our completion in 2018, the Group will share in this segment, in 2018 we will largely complete its latest investment complete and launch a sausage factory cycle. Going forward, we expect to in the Kashira district with annual focus on development capex which are capacity of c. 30,000 tonnes. It will be central to our strategic priorities and the largest fully automated processing forecast a high return on capital. facility in Russia and Europe, boasting the most advanced technologies First, in the Pork segment – a new sow available in the industry. Going forward, farm began operations in the Lipetsk we plan to rely more heavily on region in early 2017, reaching its full automation to ramp up production of production capacity by the end of the other processed meat products. year. We also constructed and launched seven nursery and finisher sites in Quality assurance the Lipetsk and Voronezh regions. Maintaining high product quality is With the new facilities commissioned, an absolute priority for us. Last year, Cherkizovo boosted its pork capacity we upgraded our quality assurance by 350,000 heads per year. In 2018, system, bolstering our centralised quality we plan to complete seven more assurance function, supported by teams nursery and finisher sites in the Lipetsk, across business units, to enforce Group- Voronezh and Penza regions, making wide biosafety standards. To ensure sure that our Pork segment reaches its best-in-class quality and taste, we seek full production capacity of 300,000 tons to introduce cutting-edge solutions at ~30,000 per annum in the next couple years. all production sites, with our world class Cherkizovo Lab the driving force behind TONNES SAUSAGE PER YEAR Second, Tambov Turkey, the Group's our efforts to set new industry standards annual capacity joint venture with the Spanish Grupo for quality and reliability. of plant in Kashira district Fuertes, reached its full slaughter- weight production capacity of In 2017 the Group implemented a series 45,000 tonnes per year in 2017. of other initiatives to improve food spending and rationalization of sku’s Its annual sales totalled 27,000 quality and safety. For example, Poultry based on product line profitability, tonnes, quickly placing Tambov Turkey segment focused on extending shelf life with the goal to bolster our overall among Russia's top turkey producers. by launching new cooling and grading competitiveness, value proposition Additional marketing efforts are planned systems (the latter gives an opportunity to retail and Horeca and operational to develop customer awareness of to evaluate finished products, while effectiveness. the benefits of turkey meat, to drive also identifying stages with potential sales and earnings. As market conditions flaws). In 2018, we plan to roll out similar Cherkizovo remains one of our top three develop, we anticipate making initiatives in Meat Processing and Pork brands. It is associated with superior incremental investment to expand segments. quality and is great for both meat turkey production to 75,000 tonnes lovers who stick to healthy diets and per year, capitalizing on our significant Brands and products those who prefer to indulge their taste initial investment in turkey operations. In 2017 the Group undertook a detailed buds. Petelinka is our best selling and Specifically, we are considering review of its brand portfolio, with most well-known brand of high-quality construction of new turkey nursery and the result being a recommitment to three natural poultry products. Our second finisher sites in the Lipetsk and Tambov core brands, supported by a group of most important poultry brand is regions in the near term. smaller brands. In the coming years we Chicken Kingdom catered towards will continue to sharpen our focus on convenient trend in meat consumption. product positioning, utility of marketing The launch of the Pava-Pava brand CHERKIZOVO GROUP Annual Report 2017 25
from Tambov Turkey JV represented non-branded products. For example, In late 2017 we took a decision to delist
an important step in our bid to enter Cherkizovo is working to enhance from the London Stock Exchange, which COMPANY ABOUT the turkey market, which we believe relationships with customers in became effective in February 2018, offers significant potential as it targets the HoReCa segment, including KFC and with a view to consolidate trading in growing demands from more health- Burger King, and intends to partner with our shares on the Russian exchange. conscious consumers. other leading Russian and international We remain committed to our standing food service chains. as a public company, recognizing We continue to invest to enhance the benefits this affords. We re-energized our portfolio of brands, which enjoy To ensure efficient distribution and service our investor relations effort, and as strong awareness and demand in to retail chains and Horeca, the Group is market conditions permit, we intend to their respective market segments. working to set up a single trading company take steps to increase the free float and
Cherkizovo and Petelinka are leading tasked with supporting sales across liquidity of our shares to enable trading REPORT STRATEGIC the charge in the sausage, pork and segments. In 2017, as part of this project, in our shares to reach valuations which poultry product categories. In Moscow we transformed Trading Company Petelino reflect the true value of our Company. and St Petersburg, Petelinka is into Trading Company Cherkizovo, while the undisputed leader among the largest also synchronising processes across With a strong balance sheet, diverse poultry producers boasting a recognition the main logistics chain. The single trading product range, modern, vertically level of 72.9% and 79.7%, respectively. company will use SAP ERP to improve integrated operation, strong management sales management and efficiency. and dedicated staff, we target We are committed to serve our an unusual and compelling opportunity. consumers with a comprehensive Outlook Despite periodic volatility in the Russian offering of delicious branded value- Looking into 2018, we aim to further economy and uncertainty related to REVIEW FINANCIAL added products of invariably high quality. develop high-quality product lines, geo-politics, our path for strategic Currently branded value-added products strengthen brands and enhance development is clear, and our future account for 58% of our total sales, and operational efficiency. We will also focus remains largely in our control. For over we are keen to increase that percentage, on promoting a single trading company twenty-five years Cherkizovo has since sales and profit contribution per and completing our major capital projects. overcome volatility and uncertainty and kilogramare materially higher. In the medium term, we will continue succeeded. I remain confident in the to evolve our portfolio of value-added wisdom of our focused strategy and A growing share of Russia’s consumers products in line with consumer demand, excited about our future. now demand high-quality, healthy meats. solidifying our market position in
Equally, they seek convenience, value high-margin segments and high growth In conclusion, I would like to thank our GOVERNANCE CORPORATE and quality, driving growth in demand sales channels. We will strive to sustain employees, management and Board for for ready-to-cook and ready-to-serve our position as the main supplier for their contributions and accomplishments products. In light of evolving market nationwide retail chains and HoReCa in 2017 and for their confidence in trends and consumer preferences, we customers, through product quality, and commitment to our shared vision continue to expand our ready-to-cook shelf life, service and competitive terms, and future. and ready-to-eat products. In addition, leveraging these relationships to gradually growing popularity of healthy natural expand our regional coverage into Urals products prompted us to launch Clean and parts of Siberia. Label, a new Petelinka range with no food additives or preservatives. Our long-term vision is to preserve DEVELOPMENT SUSTAINABLE and extend our leadership position We are deepening our strong ties in the Russian meat market, through
with retail chains and expanding our a combination of organic growth and sales network, with a focus on broader M&A, to penetrate selected export distribution in the North-Western, markets and to rank among the most Volga and Central Federal Districts. efficient and profitable agricultural The Group also pays close attention to businesses globally. Sergey Mikhaylov promising distribution channels for our CEO 26 Delicious Story www.cherkizovo.com Market Overview
STABLE ROUBLE National currency exchange rate in 2014–2018F*, In 2017, the moderately volatile RUB/USD RUB/USD exchange rate moved slightly down from 62 to 58 roubles 57 per US dollar. While relatively strong national currency represents 58 a headwind for meat exports, it also 62 helps curb inflation and support 73 real disposable income. In 2017, 58 rouble movements did not have a decisive effect on the costs of animal Source: Bloomberg, * Bloomberg forecast farming businesses.
85 MLN TONNES WHEAT PRODUCTION IN RUSSIA
RECORD HARVEST Wheat production and export volumes in 2013/2014–2017/2018* In the 2017–2018 agricultural season, wheat production in Russia 85,000 42% skyrocketed and is about to reach 36,000 72,529 38% 85 million tonnes, as estimated by 27,809 the US Department of Agriculture. 61,044 42% Thanks to a series of high yields, 25,543 59,080 39% the year saw a record inventory 22,800 52,091 36% build-up and lower feed grain prices, 18,609 which enabled Russian animal farming businesses to stabilise their Production, th. tonnes costs. At the same time, there was Export, th. tonnes a significant increase in the probability Export share, % of adverse weather conditions. Source: USDA,* USDA forecast CHERKIZOVO GROUP Annual Report 2017 27
INCREASED MEAT CONSUMPTION IN RUSSIA COMPANY ABOUT In 2017, the uptrend in meat The wide spread between per consumption persisted. The total capita consumption in Russia and in capacity of Russia’s meat market during economies with a developed meat the year was about 11 million tonnes, market indicates a significant potential up 5% year-on-year. Average per capita for growth in the Russian market. consumption increased to 74 kg per Normally, meat consumption grows capita. The market is being shaped by alongside real disposable income. growing pork and poultry production. REPORT STRATEGIC
Global meat consumption Meat consumption per capita in 2017, in Russia in 2014-2017, kg/year mln tonnes REVIEW FINANCIAL Ru a 74 17 47% 35% 18% 10.8 EU 2 85 1 10.3 46% 35% 19% Bra l 100 1 10.1 47% 33% 20% Au tral a 113 1 10.3 44% 32% 23% USA 122
Source: USDA Source: Rosstat, Belstat, Federal Customs Service, Eurasian Economic Commission, Cherkizovo Group’s estimates
IMPORT SHARE STABILISATION Change in import share in 2014-2017, GOVERNANCE CORPORATE % In 2017, the share of imports in meat consumption regained its footing Poultr 17 5% after a major slump in recent years. 1 5% Belarus and Brazil remained the core 1 6% 1 10% suppliers, although late 2017 saw bans on the Brazil pork and beef: Por ractopamine, which is fed to Brazil’s 17 7% 1 7% livestock to increase the muscle fibre 1 9% 1 13% size, is prohibited in Russia. Beef and DEVELOPMENT SUSTAINABLE pork imports are expected to decline Beef 17 19% should the ban continue into 2018. 1 18% 1 22% 1 32%
Source: Cherkizovo Group
Source: Rosstat, Federal Customs Service, Cherkizovo Group. 28 Delicious Story www.cherkizovo.com
CONSUMER CHOICE DRIVERS Exports in 2014–2017, In 2017, Russians opted for affordable ‘000 tonnes* substitutes (canned meat, pork, poultry) instead of expensive foods, ** such as sausages and cheese. This is 17 119 likely to change once real disposable 1 90 income starts to move upwards. 1 62