Cherkizovo Group reported an 8 percent increase in revenue to RUB18.5 billion (US$278,000) for the first quarter of 2016. The company said the main drivers behind this growth were the poultry and meat processing segments.
The company’s gross profit decreased by 45 percent to RUB3.1 billion from RUB5.6 billion in the first quarter of 2015. Gross margin fell to 16.6 percent from 32.8 percent a year ago. Operating expenses increased by 16 percent to RUB3.1 billion, compared with RUB 2.7 billion in the first quarter of 2015. Loss for the period was RUB0.4 billion, down 115 percent year-on-year from a profit of RUB2.9 billion in the first quarter of 2015.
“Although market conditions were tough, the group’s total revenue increased by 8 percent year-on-year, with all segments demonstrating solid growth in production volumes,” said Sergei Mikhailov, CEO of Cherkizovo. “The typical post-holiday drop in consumer spending, along with seasonally lower meat consumption, mean that first quarter margins are generally the lowest of the year. On top of that, overproduction of poultry in Russia pushed the average price down and depreciation of the Russian ruble had a negative effect on production costs. As a result of both of these factors, poultry was our worst performing segment during the quarter. The meat processing segment, however, demonstrated impressive growth, although this was not sufficient to fully compensate for the performance of the poultry segment.”
Mikhailov said the company expects to see a rebound in the second quarter.
“Live hog prices, while remaining volatile, have started to show signs of recovery as the barbeque season gets underway. In poultry, prices have bottomed out and are beginning to turn around as inefficient producers exit the market and exports from Russia to new markets start to increase,” he said.
Poultry division
Sales volumes in the company’s poultry division grew by 19 percent year-on-year to 128.2 thousand tons. This growth was a result of higher production levels and a reduction of inventory.
The average price during the first quarter of 2016 dropped by 8 percent year-on-year to RUB88.62/kg due to oversupply in the market and consumers’ falling purchasing power.
Total sales for the division increased by 10 percent year-on-year to RUB11.4 billion.
Gross profit fell by 43 percent year-on-year to RUB1.0 billion from RUB1.7 billion in the first quarter of 2015 as feed components, hatching eggs and veterinary supplies are pegged to foreign currency. In the first quarter, the Russian ruble hit a yearly record low, falling below the level of 85 RUB/USD. The gross margin for the period decreased to 8.4 percent from 16.2 percent in the prior year’s first quarter.
Pork division
In the first quarter of 2016, production volumes in the pork division grew by 7 percent year-on-year to 40.1 thousand tons, compared with 37.4 thousand tons in the first quarter of 2015, as Cherkizovo launched a new initiative to improve efficiency by increasing weekly farrows.
The average price decreased by 16 percent year-on-year to RUB81.73/kg and by 4 percent compared to the previous quarter. The drop was the result of Russian consumers’ lowering purchasing power, combined with an overall continuous increase in pork production across the country, imports from Brazil and the beginning of Lent Season in March.
Total sales in the pork division fell 11 percent to RUB3.2 billion year-on-year. The dip in sales was expected as average price posted a double digit decline in the month of March. Gross profit for the quarter stood at RUB0.7 billion, a year-on-year drop of 74 percent, as feed components and medication costs are denominated in foreign currencies. The segment’s gross margin fell to 23.0 percent from 77.7 percent in the first quarter of 2015.
Meat processing division
Sales volume in the meat processing division increased by 28 percent year-on-year to 48.6 thousand tons from 37.8 thousand tons. This growth resulted from the launch of a pig slaughter plant at Dankov in the second half of 2015, which boosted volume and product assortment.
During the reporting period, the average price fell by 2 percent year-on-year to RUB165.11/kg due to consumers’ preference shifting to more affordable products given their lower purchasing power. On a quarter-on-quarter basis, the average price fell by 3 percent.
Total sales were 20 percent higher in the first quarter of 2016 and reached RUB6.9 billion volume driven.
Gross profit for the same period increased 48 percent year-on-year to RUB1.2 billion, compared with RUB0.8 billion in the year-ago period. The gross margin for the corresponding period reached 16.8 percent from 13.7 percent in the first quarter of the previous year.
Outlook
As anticipated, 2016 is proving to be challenging year for all meat producers in Russia. Although prices have been under pressure in the first quarter, the market has started to see some tentative signs of price recovery in the second quarter. The company said it anticipates consumption levels in Russia to pick up in the second quarter and beyond, as the decline in the population’s real income has slowed down and the service sector has continued to expand.
The company says it is on track to deliver on its target of increasing the company’s exports to 20 percent of total revenue over the next two years.
