Our
advantage
is...
Annual report 2008
iii
cherkizovo-group.com annual report 2008
... owning
the land
that will secure the
feed supply...
Wheat prices
Monthly average $ per Kg
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
05 06 07 08 09
0.30
0.40
0.35
Wheat prices
Since 2007, Cherkizovo has been building up a
Monthly average $ per Kg
substantial landbank to provide future protection
against fluctuations in the cost and availability of
feed, such as those we witnessed in 2008. This is
directly in line with the Group’s vertical integration
strategy, and we will continue to invest in land
where cost-effective opportunities present
themselves. In addition, we have made substantial
investments in our ability to produce fodder, a clear
source of advantage over many of our competitors.
0.20
0.25
0.05
0.15
0.10
0.00
05 06 07 08 09
Wheat prices US$ per Kg
Annual average
Monthly average
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
05 06 07 08
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
... owning
the land
that will secure the
feed supply...
cherkizovo-group.com annual report 2008
Competitive advantage
1 Our land
2 Pork & Poultry
4 Meat Processing
6 Sales & Distribution network
Overview
8 Cherkizovo at a glance
10 Chairman’s statement
12 Our markets
Performance
14 Chief Executive’s statement
16 Poultry
20 Pork
24 Meat Processing
28 Distribution
30 Financial review
Governance
40 Board of Directors and
Executive management
42 Corporate social responsibility
43 Corporate governance
44 Directors’ report
We produce 80%
of poultry feed and
75% of pork feed
at our own plants
Financial statements
46 Statement of management’s responsibilities
for the preparation and approval of the
consolidated financial statements
Independent auditors’ report
47
48 Consolidated balance sheets
50
51
53
Consolidated income statements
Consolidated cash flow statements
Consolidated statements of changes
in shareholders’ equity and
comprehensive income
54 Notes to accounts
Shareholder information
77 Advisers and corporate information
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cherkizovo-group.com annual report 2008
... for
our pork
and poultry...
We are one of
Russia’s most
efficient quality
pork producers
... for
our pork
and poultry...
cherkizovo-group.com annual report 2008
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Pork
We completed an intensive five-year cycle of investment
that has significantly increased the capacity and efficiency
of our Pork business to ensure a highly profitable year.
Today, Cherkizovo is Russia’s largest greenfield pork
producer, gaining from the efficiencies that also make it
the one of the country’s lowest-cost producers. This is a
business that will only grow in profitability as it approaches
full capacity.
Poultry
Cherkizovo is Russia’s leading producer of both chilled
and frozen poultry. During 2008, alongside important
investments in capacity, we successfully integrated
our major 2007 acquisition, Kurinoe Tsarstvo
(Chicken Kingdom), into our existing operations to
gain from new synergies in production, distribution
and sales. Our vertically integrated organisation
helped to protect us from the most damaging
impact of rising grain prices, enabling us to post
a profitable year on which we are excellently
placed to build further.
Cherkizovo’s poultry
volumes have grown
by 267% since 2005
cherkizovo-group.com annual report 2008
... that complement
our
leading
branded
meats...
We are
Russia’s
No1 meat
processor
We have led
the way in eco
and healthy
products
cherkizovo-group.com annual report 2008
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During 2008, we focused on implementing the key
investments in automation and quality that will
enable us to maintain and build on our position as
Russia’s leading and most innovative meat-processing
business. With important achievements in product
and process innovation – including a state-of-the-art
slicing line at our Cherkizovsky plant and the launch
of new product ranges, particularly the healthy meats
range – we continued the journey that has already
established so many of our brands as Russia’s most
admired and best loved.
cherkizovo-group.com annual report 2008
... that are
delivered by
our
network
Our storage facilities and 900-strong fleet of refrigerated
vehicles are one of Russia’s leading storage and distribution
networks. During the year, we invested in advanced
logistics software to gain further advantage
through streamlined operations.
Latvia
Estonia
St Petersburg
Our fleet of
over 900
delivery
vehicles
and network
of specialist
chilled storage
units cover 80%
of Russia’s 142m
population
Lipetsk
cherkizovo-group.com annual report 2008
RUSSIA
Vologda
Tver
Moscow
Kazan
Ul’yanovsk
Perm
Ufa
Ekaterinburg
Chelyabinsk
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Tambov
Penza
Voronezh
Saratov
Samara
Rostov-na-Donu
Krasnodar
Caspian
Sea
Georgia
Armenia
Azerbaijan
Kazakhstan
Uzbekistan
Turkmenistan
Greece
Turkey
Mediterranean Sea
Syria
Iraq
Iran
Khabarovsk
Kyrgystan
Sinkiang
8
cherkizovo-group.com annual report 2008
At a glance
Strong
growth in
challenging conditions
Despite exceptionally challenging operating conditions, we made strong progress in
2008 towards achieving our stated strategic goal of becoming Russia’s leading vertically
integrated producer of quality meat and meat products. We achieved this through our
determined focus on driving new efficiencies and opportunities throughout our entire value
chain, from securing feed supplies to streamlining distribution, via a targeted programme
of investment, modernisation and rationalisation.
Poultry
Contribution to Group Total Sales
Contribution to Group Total Sales
Contribution to Group Total Sales
Contribution to adjusted EBITDA*
Contribution to adjusted EBITDA*
Contribution to adjusted EBITDA*
US$505.2m
US$505.2m
US$505.2m
42%
42%
42%
US$93.2m
US$93.2m
US$93.2m
57%
57%
57%
Pork
Contribution to Group Total Sales
Contribution to Group Total Sales
Contribution to Group Total Sales
Contribution to adjusted EBITDA*
Contribution to adjusted EBITDA*
Contribution to adjusted EBITDA*
US$112.5m
US$112.5m
US$112.5m
9%
9%
9%
US$45.1m
US$45.1m
US$45.1m
28%
28%
28%
Meat
Processing
Contribution to Group Total Sales
Contribution to Group Total Sales
Contribution to Group Total Sales
Contribution to adjusted EBITDA*
Contribution to adjusted EBITDA*
Contribution to adjusted EBITDA*
US$577.9m
US$577.9m
US$577.9m
49%
49%
49%
US$25.6m
US$25.6m
US$25.6m
15%
15%
15%
Strong
growth in
challenging conditions
cherkizovo-group.com annual report 2008
Vertical integration
Financial highlights
C
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Distribution
Branded m eats
Pigs and Poultry
Land use
Net income, US$m
2006-2008 +166%
Adjusted EBITDA*,
US$m
2006-2008 +106%
Adjusted EBITDA*
margin, %
*
78.1
61.6
29.4
116.4
74.2
152.8
14
13
12
Adjusted Earnings
before Interest,
Income Tax, Depreciation
and Amortisation
(“Adjusted EBITDA”).
Adjusted EBITDA
represents income before
interest, income tax and
minority interest, adjusted
for certain other items.
Adjusted EBITDA margin
is defined as Adjusted
EBITDA as a percentage
of our net revenues.
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2006
2007
2008
2006
2007
2008
2006
2007
2008
Gross profit, US$m
2006-2008 +89%
Gross margin, %
Sales, US$m
2006-2008 +85%
279.4
27
24
23
222.3
1,166
820.8
631.6
147.8
2006
2007
2008
2006
2007
2008
2006
2007
2008
Adjusted Earnings before Interest, Income Tax,
Depreciation and Amortization (“Adjusted EBITDA”)
Adjusted EBITDA represents income before interest, income
tax and minority interest, adjusted for certain other items.
Adjusted EBITDA margin is defined as Adjusted EBITDA as
a percentage of our net revenues.
Key products
• Chilled poultry, whole and in portions
• Frozen poultry, whole and in portions
Strategy
• Continue long-term organic expansion
• Integrate merged operations to take
advantage of scale opportunities
• Drive efficiency gains through targeted
investment
Key facts
• Federal number 1 brands in chilled and
frozen poultry
• 7,245 employees
• Four production clusters
Key products
• Live pigs
• Pork carcasses
Strategy
• Maximise efficiencies enabled by
greenfield operations
• Develop market position in processed
pork products
• Differentiate through quality and
marketing
Key facts
• Largest greenfield producer
• 1,277 employees
• Five production complexes
Key products
Strategy
• Raw-smoked, semi-smoked and cooked-
• Innovate through brand development and
smoked salamis and sausages
marketing
• Chilled meat for retail sale
• Ready-to-cook dishes
• Special range for health-conscious consumers
• Sliced, ready-to-eat delicatessen products
• Improve efficiency through modernisation
• Compete on quality, taste and value
• Increase market share
Key facts
• Number 1 in Russian Federation
• 5,299 employees
• Six meat processing plants
10 cherkizovo-group.com annual report 2008
Chairman’s statement
The Company’s
investment for
steady growth
and development
continues to
deliver progress
against our
strategic objectives
In 2008 a 42% rise in revenues took us past the US$1 billion milestone
for the first time, and represented delivery against our primary goal to
become the No1 company in Russia’s agricultural sector. The importance of
Cherkizovo to the country’s economy was demonstrated by the company’s
inclusion in the official list of 300 Russian enterprises that form the basis
of the Russian Federation’s GDP.
Last year’s financial and economic crisis gave a powerful impetus to the
development of the agricultural sector in Russia. The extent to which the
country is dependant on food imports, meat in particular, became evident,
as Russia was again the largest meat importer in the world, despite the
substantial resource potential and competitive production advantages
available to the country. Accordingly, the issue of import substitution
became one of the highest priorities for the Government, which announced a
programme of food supply security, setting a goal to achieve self-sufficiency
in pork and poultry meat by 2012.
In the face of the challenging conditions of 2008 the Russian Government
announced practical support to agricultural producers, and Cherkizovo
Group, one of the most prominent enterprises in the production sector of
the economy, was able to fully benefit from the one-off direct subsidies.
The revival of Russian agriculture is directly linked to the producers’ ability
to secure Government subsidized loans for major investment projects. In
2004, when I spoke at the session of the State Council of Russia, I raised
the need for Russia to address this issue – the development of the Russian
agricultural production – and the pursuit of this aim has led to a fresh start
for agro producers as they started to receive subsidised lending. At this time
Cherkizovo began to implement its large-scale investment projects in poultry
and pork, and over the next three years we have significantly increased
our debt levels, which was necessary to ensure the construction and
development of our production.
At the time of taking on debt to increase production some investors
questioned when this would translate in to increased volumes. However, it
is essential to understand that in the agricultural sector results are seldom
visible across a short-term horizon. Despite this, in 2008 we have already
started to see returns on our capital investments as production volumes in
pork and poultry increased substantially, and pleasingly – this growth has
cherkizovo-group.com annual report 2008 11
The financial
crisis has brought new
opportunities
for Cherkizovo Group,
Russia’s leading
agri business
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translated into our strong financial results that show further strengthening
in our market positions.
Pork and poultry businesses in Russia have enormous opportunities for
growth and development and accordingly, we have a pool of new projects
in those segments to further enhance our capacities and scale of operations.
At the same time we are progressing our existing projects without material
delay or disruption, enabling the company to benefit from more subsidised
lending in the future.
2008 was a successful year across all segments of the Group, which
delivered a strong set of financial results due to our commitment to
relentless execution and increased operational efficiencies, while benefitting
from essential Government support.
Today Cherkizovo is the leader of the Russian agriculture sector; our
business is in the real production sector of the Russian economy and the
nature of our business provides us with a defensive strategy in the most
challenging of market conditions.
While current stock market valuations remain depressed, we believe
Cherkizovo continues to offer investors good value in a defensive sector that
is of strategic importance to the Russian government. In 2008 Cherkizovo
continued all of its investment projects and increased production efficiencies
and volumes. Accordingly, the board remains confident of the Group’s future
prospects, underpinned by our diversification and the advantages of a
vertically integrated group.
Our business and outlook
Cherkizovo is the largest producer of poultry and pork meat in Russia and
our fully integrated structure runs across the entire agricultural production
cycle. We are currently developing our own land bank, and considering crop
production, as well as a silo storage base with the aim of fully satisfying our
fodder needs and providing our livestock with the highest quality fodder available.
Igor Babaev
Chairman
On a separate note, I should say that in all the regions where we operate we
are grateful for the continued support of the local administrations. We share
trust and confidence and are mutually committed to a single goal which is
to revive and further develop Russian agriculture, and the broader economy
of the country.
Our people
The commitment and skills of our professional team remain key to the
overall success of the Company and its ability to deliver against its strategic
objectives. I would like to thank them all for all their hard work and trust,
which has contributed enormously to our performance.
Dividend policy
We remain focused on the steady development of the Company and
accordingly, we continue to reinvest net profits in the business. On an
ongoing basis we review this policy to ensure the best strategy for the
Company and all shareholders is being pursued.
Finland
Estonia
Latvia
Bulgeria
Greece
St Petersburg
RUSSIA
Vologda
Cherepovets
Tver
Dmitrov
Moscow
Narofofominsk
Lipetsk
Voronezh
Kazan
Ul’yanovsk
Tambov
Samara
Penza
Saratov
Belarus
Bryansk
Perm
Ufa
Ekaterinburg
Chelyabinsk
Krasnoyarsk
Irkutsk
Slovakia
Ukraine
Moldova
Romania
Rostov-na-Donu
Krasnodar
Labinsk
Georgia
Caspian
Sea
Kazakhstan
Uzbekistan
Tukmenistan
Turkey
Armenia
Azerbaijan
Tajikistan
Sinkiang
Kyrgystan
Mediterranean Sea
Syria
Iraq
Iran
Khabarovsk
Vladivostok
Vladivostok
2 cherkizovo-group.com annual report 2008
Finland
Our markets
St Petersburg
RUSSIA
Estonia
Latvia
Vologda
Cherepovets
Tver
Dmitrov
Moscow
Narofofominsk
Belarus
Bryansk
Perm
Ufa
Ekaterinburg
Chelyabinsk
Kazan
Ul’yanovsk
Lipetsk
Tambov
Voronezh
Penza
Saratov
Samara
Krasnoyarsk
Irkutsk
Slovakia
Ukraine
Moldova
Romania
Mediterranean Sea
Bulgeria
Distribution and storage network
Turkey
Greece
Domestic production and quotas
2005-2009E (000 tonnes)
Domestic production (left scale)
Poultry quotas
Pork quotas
6000
5000
1,090
1,132
1,171
1,210
4000
3000
2000
1000
0
Kazakhstan
Caspian
Sea
Uzbekistan
Rostov-na-Donu
Krasnodar
Labinsk
Georgia
Kyrgystan
Khabarovsk
Vladivostok
Vladivostok
Meat processing production facility
Armenia
Azerbaijan
Poultry production facility
Tukmenistan
Pork production facility
Tajikistan
Sinkiang
Syria
921
Iraq
Iran
Imported meat consumption, %
2004-2010E
Poultry
Pork
Beef
47
21
18
37
32
29
29
23
16
Annual per capita meat consumption, kg
Biological norm 75kg
117
94
92
79
78
62
467
476
485
494
502
2005
2006
2007
2008
2009E
2004
2008
2010E
USA
Australia
Canada
EU
Russia
USSR
(1988)
Poultry
Pork
Domestic production
Source: Meat Union of Russia, official statistics
Distribution and storage network
Meat processing production facility
Poultry production facility
Pork production facility
cherkizovo-group.com annual report 2008
We are uniquely
placed to
benefıt from
Russia’s growing
US$36bn
meat market
Processed meat, value %
2008
Poultry, slaughter weight, volume %
2008
Pork, live weight, volume %
2008
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Cherkizovo Group 7.5
OMPK 6.2
Prodo 5.8
Other 69.9
Mikoms 4.8
Tsaritsyno 4.0
Kampomos 1.3
TAMP 0.5
Other 50.2
Cherkizovo Group 10.1
Prioskolie 10.0
Prodo 7.5
Belgrankorm 4.5
Resurs 3.7
Belaya Ptitsa 3.2
Mosselprom 3.2
Sibirskaya Guberniya 2.8
Agros 2.3 Ural Broiler 2.5
Prodo 5.8
Agro-Belogorie 5.4
Miratorg 4.4
Cherkizovo Group 3.5
Siberian Agrarian Group 2.3
Povolzhskoe 2.1
Ariant 1.9
Agrokholding 1.7
Eksima 1.6
Aleiskzernoprodukt 1.3
Other 70.0
Source: Meat Union of Russia
Others
TAMP
Kampomos
Tsaritsyno
Source: Company estimates
Source: Institute of Agricultural Marketing
Russian meat market dynamics, tonnes m
2006-2010
Mikoms
Russian meat market, growth
2002-2010E
Prodo
Poultry
Pork
Beef
OMPK
Tonnes m
US$bn
8.3
27%
34%
39%
Cherkizovo Group
9.1
39%
32%
29%
8.5
45%
32%
23%
35.8
35.8
31.0
23.6
24.4
26.1
18.2
10.1
6.9
12.8
7.5
8.0
8.5
8.3
8.8
9.1
7.9
8.5
10
8
6
4
2
0
2006
2008
2010E
2002 2003 2004 2005 2006 2007 2008 2009E 2010E
USA
Australia
Canada
EU
Russia
USSR
(1988)
Source: Meat Union of Russia, official statistics
Poultry
Source: Meat Union of Russia, official statistics
Pork
Beef
US$bn
Tonnes m
Annual per capita meat consumption, kg
Biological norm 75kg
117
94
92
79
78
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cherkizovo-group.com annual report 2008
Chief Executive’s statement
We expect
domestic meat
production to
increasingly grow
at the expense
of costly imports,
highlighting
the status of
Cherkizovo as
a prominent
defensive stock
2008 was the year when the strength of our consolidation and
diversification strategy was proven in the most unpredictable and difficult
of market conditions. During the year our balanced portfolio of business
segments and commitment to targeted investment started to provide the
stable development and margin growth we are looking for. Even in an
environment where it has been difficult to make forecasts, this ongoing
focus on our strategy has helped keep us on track to deliver against it.
The results of our strategy
During the year, our Pork division emerged as a highly profitable business,
driving higher margins based on our investments in state-of-the-art
greenfield facilities. This combined strongly with the steady forward
momentum of our Poultry operation to highlight the value of the protection
against risk enabled by diversification.
We also saw strong evidence of the increasing opportunities for margin
improvement, both within and between our divisions, that will be enabled by
further growth and vertical integration. Our ability to spread overheads more
efficiently across maturing operations, combined with our growing potential
for self-sufficiency at every point of the value chain, are successfully driving
down our operating costs. This trend is set to accelerate further as more of
our recently completed facilities and new investments achieve full capacity
over the next one to three years.
Investing in our business
An important driver of success, which is set to deliver greater returns
in the near and long-term future, was our commitment to continued
investment during the global financial crisis that gathered pace in the
second half of 2008.
There were three primary reasons for this. First, we believe strongly in the
market opportunity that the efficient production of scarce but essential
resources such as pork and poultry represents in Russia. Second, in
addition to the subsidised long-term loan finance that is substantially cutting
the cost of investment and facilitating repayment, we are reducing the value
of our debt by keeping it in Roubles. And third, we are approaching the end
of a major investment cycle in our pork business that is already driving new
sources of profitability ahead of full capacity being achieved.
cherkizovo-group.com annual report 2008 15
During 2008 our continued commitment to our strategy
ensured that Cherkizovo Group delivered against its
modernisation, development and vertical integration
plans, despite extremely challenging economic and
market conditions
Responding to world market conditions
2008 was also a year in which new opportunities arose as a direct result
of the crisis. Costs in areas such as construction and land values have
fallen, enabling us to moderate our projected capital expenditure. It means
we can also consider additional investments in our land bank, enabling us
to explore further the potential this will provide for reducing the risk of feed-
price fluctuations.
At the same time, the Rouble’s performance against the US Dollar and
the Euro have driven up the price of imported meats, beef in particular, to
enhance the competitiveness of home-produced pork and poultry. Russia
remains the world’s largest net importer of meat, and the global crisis and
challenging financial situation will lead to an import substitution policy that
favours Russian producers by replacing imports with domestically produced
goods. Due to the importance of our sector to the national economy, the
government has also allocated specific funds within the 2009 Budget to
agricultural producers. As one of Russia’s largest integrated producers,
Cherkizovo is excellently positioned to benefit from this commitment.
We believe that the medium and long-term indications for our business are
positive. Levels of meat consumption in Russia have historically been low and
are not expected to significantly decline in the future. In addition, we expect
domestic meat production to increasingly grow at the expense of costly
imports, highlighting the status of Cherkizovo as a prominent defensive stock.
Satisfying our domestic market
Turning briefly to the performance of our three business segments during
2008, our vertically integrated structure helped our Poultry division to
overcome major challenges created by a drastic increase in the price
of feedstock to deliver a profitable year. The support of the Russian
government also made an important contribution – recognising the sector’s
importance, the government introduced as a one-off measure a direct
subsidy of 5 Roubles-per-kilo for the first half of the year.
e
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of the largest hatching sites in Europe with an annual capacity of up to
60 million eggs.
We significantly increased the volumes of our Pork business, which is
set to achieve full capacity at end of 2010 and successfully gained from
major upward price movements. Critically, by completing construction
and commissioning at the final four of our six new greenfield pig farms,
we brought to an end the large-scale construction programme that
started in 2005. The business is already highly profitable, gaining from
a substantial decrease in per-kilo production costs enabled by the efficiency
of our new farms.
2008 presented a particularly tough operating environment for our Meat
Processing division, where the purely domestic focus of the business
and high fragmentation of the market carried the risk of weakened future
growth in premium products as the economic situation reduced household
spending. We responded by improving automation of our production
processes for enhanced efficiency, while our continued concentration on
product innovation and quality resulted in several top awards for our market-
leading brands at the 2008 Meat Industry International Forum. We believe
these activities have strengthened our ability to build on economic recovery
and position us well for the potential consolidation of the market.
Looking ahead
We believe the future for Cherkizovo is encouraging. We foresee no
significant reduction in demand or consumption in the near future,
and are confident that recovery will bring even greater opportunities for
market growth.
Above all, we are certain that we have the right strategy to deliver long-term
success for our business, our staff, our customers and our shareholders.
Other major achievements included the successful continuation of work
to integrate our 2007 acquisition, Kurinoe Tsarstvo (Chicken Kingdom), into
our established operations, achieving synergies in production, distribution
and sales. We also completed the reconstruction and commissioning of the
first zone within the Vertunovka parent stock facility, which will become one
Sergei Mikhailov
Chief Executive Officer
cherkizovo-group.com annual report 2008
Poultry
poultry marketNo1
in the Russian
in the Russian
poultry market
cherkizovo-group.com annual report 2008
We made substantial progress in 2008 on realising the
synergies delivered by fully integrating the operations of
Kurinoe Tsarstvo (Chicken Kingdom), Russia’s fourth-largest
poultry producer which we acquired in 2007. Alongside
further investments in capacity and efficiency, this enabled
us to keep our promise of ensuring the stable development
of our Poultry business.
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Our Petelinka chilled poultry brand and Kurinoe Tsarstvo
frozen poultry brands are the absolute No1 brands in their
categories*. Petelinka is the No1 selling brand in Moscow
and Moscow region in volume and value terms, being priced
at a premium to the market.
* Source: TNS Gallup Media, 2009 research.
Sales by volume,
000 tonnes
187.1
167.4
69.2
Sales by volume,
000 tonnes
38.8
27.7
11.9
Sales by volume,
000 tonnes
155.5
149.0
144.6
2006 2007 2008
2006 2007 2008
2006 2007 2008
Poultry volumes
Slaughter weight
Tonnes 000
187.1
167.4
69.2
51.0
Pork volumes
Slaughter weight
Tonnes 000
11.2
13.0
38.8
27.7
Meat Processing volumes
Slaughter weight
Tonnes 000
161.4
155.5
149.0
144.6
2005 2006 2007 2008
2005 2006 2007 2008
2005 2006 2007 2008
8 cherkizovo-group.com annual report 2008
Poultry continued
No1 in both chilled and
frozen poultry brands
The new Vertunovka
facility has a capacity of
60m
eggs per year and is part
of the Vasilyevskaya facility
in the Penza region
Despite the high cost of feed making 2008 a testing year for our Poultry
division, it realised highly profitable growth and achieved the key strategic
goals that will support its future development.
creating hatching facilities that meet the demand created by the 60 million
eggs this will produce each year. We also commenced reconstruction of a
slaughtering facility, with an hourly capacity of up to 8,000 heads.
Integration for improved efficiency
We successfully realised synergies across the division in completing the
integration of our major 2007 acquisition Kurinoe Tsarstvo with our
established operations, improving efficiency and developing new market
opportunities.
This included streamlining the route to market by the incorporation of products
into our existing sales channels. Additionally we started to sell chilled Kurinoe
Tsarstvo products under our premium Petelinka brand, enabling a better
margin for higher profits. Our vertical integration enabled us to commence
supplying the Lipetsk facilities of Kurinoe Tsarstvo with eggs from our
Penza cluster. This allowed us to remove the need to buy from third parties,
mitigating price and quality risks. We also expect further synergies from
integrating Kurinoe Tsarstvo will improve our ability to meet divisional targets.
Maximising capacity
At other clusters, we focused on developing facilities to ensure a fully
integrated, state-of-the-art division.
In our Penza cluster, this saw us complete work at the Vertunovka site, one
of Europe’s largest parent stock facilities – the most time and cost-intensive
element of the poultry industry’s investment cycle. Our focus is now on
At our Moscow cluster, we significantly improved the hatching facilities
efficiency, closing one and upgrading the other to meet the cluster’s annual
demand for 36 million eggs.
In our Lipetsk cluster, our primary focus was the maintenance of existing
sites and equipment, while at Bryansk we began work on a large-scale
programme of construction of broiler houses and processing facilities.
Competitive advantage
Vertical integration enables us to control product quality throughout the
production chain. This starts with our own feed production capacity ensuring
quality feed and supply stability; thus we ensure the health and well-being of
our chickens to yield maximum returns.
This also enabled us to realise the full value of the government’s 5 Roubles-
a-kilo subsidy in 2008, to offset any damage caused by fluctuations in the
grain price.
In 2008 our Poultry division made significant progress towards achieving the
integration and efficiency gains that are the primary goals of our strategy.
This will allow us to strengthen our influential role in the consolidation of the
fragmented Russian poultry industry.
Operational KPI’s
Average liveweight, g
Annual flock turnover, times
Hatch, %
Liveability
Average growing period, days
Meat yield, %
Adjusted fodder conversion rate
(2,000 g liveweight)
Average daily gain, g
including
including
Kurinoe Tsarstvo Kurinoe Tsarstvo* change
%
-0.3
2.8
1.4
0.9
-2.5
–
-7.0
2008
20
.
8.
.
8.
.
.8
2007
2019
7.10
77.0
92.5
39.7
–
2.02
.
50.0
2.2
*proforma as if Kurinoe Tsarstvo is included for the full year 2007
Poultry performance
Total Sales,
US$m
Adjusted EBITDA*,
US$m
Division profit,
US$m
.
2
5
0
5
8
.
6
9
2
7
.
5
5
1
Adjusted EBITDA*
margin % (right scale)
2
.
3
9
1
.
9
5
4
.
5
3
50
25
0
3
.
1
5
8
.
8
3
1
.
0
2
Gross profit,
US$m
Gross margin
% (right scale)
.
9
8
3
1
4
.
3
9
0
.
6
5
6
0
0
2
7
0
0
2
8
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
50
50
25
0
100
Adjusted
EBITDA
margin %
7
.
2
2
9
.
9
1
4
.
8
1
6
0
0
2
7
0
0
2
8
0
0
2
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Gaining from our strategy
In realising valuable synergies through
integration with Kurinoe Tsarstvo, we
have successfully started to gain from
new efficiencies in production, distribution
and sales.
Leading capacity
The reconstructed parent stock facility
at Vasylyevskaya will be one of Europe’s
largest egg-production sites, with an annual
capacity of up to 60 million.
Competitive advantage
Vertical integration enables us to
control product quality throughout
the production chain.
20 cherkizovo-group.com annual report 2008
Pork
Cherkizovo
produced
38, 847
Sales by volume,
000 tonnes
Sales by volume,
000 tonnes
149.0
144.6
155.5
38.8
27.7
11.9
Sales by volume,
000 tonnes
187.1
167.4
69.2
2006 2007 2008
2006 2007 2008
2006 2007 2008
Poultry volumes
Slaughter weight
Tonnes 000
187.1
167.4
69.2
51.0
Pork volumes
Slaughter weight
Tonnes 000
11.2
13.0
38.8
27.7
Meat Processing volumes
Slaughter weight
Tonnes 000
161.4
155.5
149.0
144.6
2005 2006 2007 2008
2005 2006 2007 2008
2005 2006 2007 2008
cherkizovo-group.com annual report 2008 2
With substantial increases in capacity and efficiency during
2008, enabled by the completion of our long-term investment
programme, our Pork business recorded a highly profitable
year. This profitability is set to grow substantially in the years
to come, as our state-of-the-art new facilities reach full
capacity and production costs are further reduced by the
increasingly efficient sharing of overheads.
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38, 847
tonnes of pork in 2008,
representıng a 2460/0
increase in volumes
since 2005
22 cherkizovo-group.com annual report 2008
Pork continued
Pork production
will reach
90,000
tonnes per annum
at full capacity
EBITDA margin
400/0
In a landmark achievement during 2008, we successfully completed the
construction and commissioning of the final four of Cherkizovo’s six new
pig farms, making the Company Russia’s largest greenfield pork producer.
These were the third and fourth modules at our Lipetskmyasoprom breeding
facility in the Lipetsk region, and the two modules that make up our new
farm in the Tambov region.
The much improved efficiency of these state-of-the-art facilities provides
us with a defensive strategy that enables us to sustain high margins even
in difficult years. This was proven amid 2008’s dramatic increases in grain
prices, showing that the significantly reduced cost of production will support
our competitiveness and profitability in turbulent conditions.
A completed investment programme
These activities brought to a successful conclusion a capital-intensive five-
year investment programme, meaning that our exposure to investment risk
is now significantly reduced. These farms are already delivering the volume
growth and efficiency gains we targeted, enabling us to improve our KPI’s in
the division. As they move towards operating at full capacity we expect even
greater cost benefits to progressively emerge.
Vertical integration is a key element of our strategy, and we are seeking
ever-improving ways of using our own resources to make further efficiency
gains. To this end, we installed new equipment and capacity at our feed
mills to enable the production and storage of high-quality pellets.
Optimising growth rates and yields
We have completed the second experimental cycle which uses manure
from our pigs to complete the circle. The results have been remarkably
positive, and represent an important element of our commitment to
optimising growth rates and yields.
We also created a stand-alone Trading House, which allows us to increase
efficiency in selling live pigs by providing a single efficient channel to
market. In anticipation of the development of our chilled and processed
pork business, we also began project-scoping the future build of our own
slaughterhouse.
Ensuring best practice
As each site reaches full capacity, its costs continue to fall as the expense
of staff recruitment and training reduces. To build on this and to ensure best
practice, we started work on our Standard Operations Manual as the first
step of our journey towards certification.
Operational KPI’s
Average marketable pig weight, kg
Average fattening period, days
Number of farrows per year
Number of pigs per farrow
Liveability, %
Annual pork (live weight)
yield per sow, kg
Average fodder conversion rate,
kg per kg of weight gain
Adjusted
2008
EBITDA
.
margin %
8
2.2
.
.
28
6
.
2
3
5
.
1
4
2007
110.0
185
2.27
11.4
80.3
2273
1
.
0
4
change
%
1.4
-1
0
2.6
-1.5
2.9
.2
3.28
-0.3
Pork performance
Total Sales,
US$m
Adjusted EBITDA*,
US$m
Division profit,
US$m
Adjusted EBITDA*
margin % (right scale)
Gross profit,
US$m
Gross margin
% (right scale)
6
.
7
4
.
5
2
1
1
1
.
5
4
9
.
9
6
8
.
7
2
0
.
9
2
1
.
9
50
25
0
5
.
7
3
1
.
3
2
8
.
6
2
.
9
3 2
.
0
1
50
25
0
50
25
0
6
0
0
2
7
0
0
2
8
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
100
75
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Reducing the risk of investment
The successful completion of our five-
year investment cycle has substantially
reduced the risk we face across our
entire Pork business.
Achieving productivity growth
With full commissioning achieved at our
final four new pig farms, we significantly
grew productivity across the business, with
full capacity targeted for the end of 2010.
Efficiency drives enhanced
profitability
As capacity approaches its full potential,
profitability will continue to rise through
the increasingly efficient spread of our
overheads.
2 cherkizovo-group.com annual report 2008
Meat processing
In 2008 we
invested
US$12 million
increasing automation,
in Meat Processing,
improving efficiency
and raising quality
Sales by volume,
000 tonnes
187.1
167.4
69.2
Sales by volume,
000 tonnes
38.8
27.7
11.9
Sales by volume,
000 tonnes
155.5
149.0
144.6
2006 2007 2008
2006 2007 2008
2006 2007 2008
Poultry volumes
Slaughter weight
Tonnes 000
187.1
167.4
69.2
51.0
Pork volumes
Slaughter weight
Tonnes 000
11.2
13.0
38.8
27.7
Meat Processing volumes
Slaughter weight
Tonnes 000
161.4
155.5
149.0
144.6
2005 2006 2007 2008
2005 2006 2007 2008
2005 2006 2007 2008
Investments in automation
and productivity
Investments in new and enhanced production
facilities in 2008 included the commissioning
of a new slicing section at our Cherkizovsky
plant, as well as the reconstruction of our
main production facility there – this drove an
immediate 21% increase in productivity for our
hot dog-style sausages.
These investments are already paying
significant dividends in quality, with our new
slicing and packaging resources, for example,
enabling major gains in the storage times,
freshness and taste qualities of our products.
cherkizovo-group.com annual report 2008 2
In 2008 we
invested
Innovation was the central theme in 2008 for our Meat
Processing business – both in our most important production
facilities and in the creation of new brands to meet emerging
consumer demands. By investing in automation, we improved
the quality, productivity and efficiency of several production
lines. And with the launch of our new Akti Meat range for the
health-conscious consumer, we extended our market reach
to satisfy the requirements of a fast-emerging segment of the
Russian population.
US$12 million
in Meat Processing,
increasing automation,
improving efficiency
and raising quality
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Chilled retail-packed meat
Our retail products are sourced from the
highest quality meats, and are packaged in a
protective atmosphere to preserve natural
freshness. In 2008 we started using our own
pork from the Lipetsk farms. Our chilled
meats once again achieved ecological
certification in 2008.
Salami-type sausages
Our dry salami-type sausages continue
to win numerous awards – and more
importantly – the appreciation of our
consumers.
In 2008 we expanded the range of our
offering.
Sliced cooked products
We completed the modernization of our
slicing facility at Cherkizovsky Plant in 2008.
We have also launched a new line of sliced
hams and cooked sausages that are made to
traditional Russian recipes.
2 cherkizovo-group.com annual report 2008
Meat processing continued
We received
13major awards
at the prestigious Meat
Industry International
Forum, including several
Grands Prix
Cherkizovo produces
350
products under its
market-leading meat
brands
Product and process innovation were the major features of a year when we
concentrated on the vital management priorities necessary to maintain and
enhance our leading position in the Russian processed meats market.
The skills of our people are also fundamental to success, and the year’s
investments in continuous staff training included visits from our Italian
and Austrian partners to help us gain the most from our new production
technologies.
Investments in automation are an important element of our strategy.
These totalled some US$12 million during 2008, generating significant
improvements in the efficiency and productivity of our major production
facilities, as well as our ability to create high-quality premium products
with the absolute minimum of human contact.
Driving productivity through innovation
One example among many includes the new slicing section at our
Cherkizovsky plant. This advanced production line is now enabling a
monthly capacity of up to 400 tonnes of products, including our famous
salami-type and dried sausages – all professionally sliced and secured
under sterile conditions, in ecologically sound packaging for prolonged
freshness and guaranteed ecological security. We also standardise the
size of all packaging for added retailer and consumer convenience.
This is just one way in which we are developing a new production culture
that matches one of Russia’s most advanced meat processing facilities.
Others include our efforts to guarantee the integrity of our products through
investments in advanced sanitation techniques and technologies, including
zoning, air-filtering and anti-bacterial lamps.
Achieving the highest meat industry standards
Cherkizovo Group has one of the best complete sets of national and
international certification for quality and product safety in the Russian
meat industry.
Adjusted
EBITDA
margin %
This includes quality management certification at our meat-processing
plants, under ISO 9001-2001 (ISO 9001 – 2000).
8
.
3 7
.
7
All our chilled meats are covered by ecological safety
certification, which contributed to our successful
recertification under McDonald’s standards certification.
4
.
4
Our products are certified as free of genetically
modified additives.
Targeting the health-conscious consumer
The year also saw the launch of a range of health-oriented products under
the new Akti Meat brand, including premium semi-smoked and smoked
products, as well as more traditional ready-to-eat sausages, Akti Meat is
now meeting a growing demand for high-protein, low-fat products among
consumers switching to healthier, more active life-styles.
Continuous improvements in quality
Our overriding commitment to product quality was recognised in 2008 by
our best-ever performance at the Meat Industry International Forum (MIIF),
Russia’s premier award scheme for our sector, with three Grand Prix and
10 Gold and Silver Awards.
Meat Processing Performance
Total Sales,
US$m
Adjusted EBITDA*,
US$m
Division profit,
US$m
Adjusted EBITDA*
margin % (right scale)
.
9
7
7
2 5
.
7
6
4
9
.
4
5
4
6
.
6
3
4
.
3
3
6
.
5
2
2
.
9
2
.
8
)
3
.
7
(
15
10
5
0
Gross profit,
US$m
Gross margin
% (right scale)
7
.
9
9
3
.
3
9
5
.
1
8
6
0
0
2
7
0
0
2
8
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
6
0
0
2
7
0
0
2
8
0
0
2
20
15
50
25
0
50
25
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High quality products recognised at
meat industry forum
Cherkizovo received a number of awards
at the Meat Industry International Forum
(MIIF), recognising the high quality
products offered within the Group’s meat
processing division.
The Group was presented with several
Grand Prix awards, the highest accolade
awarded by the MIIF, for its ‘Kazachia’
brand of semi-smoked salami, its
‘Palmira’ brand of pork roll and its
‘Doktorskaya’ brand of cooked salami.
Launching the Akti range of healthy
meat products
Following a highly successful trial, we
launched Akti Meat in 2008 – a
delicatessen-style product range that meets
the growing demands of Russian consumers
for health-orientated meat products.
This is a powerful example of our
investment in product innovation, helping
to develop a new sector that we expect to
grow as more Russians switch to healthier,
more active lifestyles.
28 cherkizovo-group.com annual report 2008
Distribution
As a leading Russian agriculture and food
processing company, we strive to ensure
that our consumers have access to our
entire product range, and that our products
are of the highest possible quality at point
of sale. For this reason, the large-scale
distribution network that we have created
covers most Russian regions, including
over 80% of the country’s population
(approximately 115 million people).
In 2008 we fully integrated sales of Kurinoe Tsarstvo (Chicken Kingdom),
which we acquired in 2007, into our structure. As a result, our distribution
network for chilled and frozen poultry meat has considerably increased.
Our distribution reach has also broadened in the Tambov, Voronezh,
Yaroslavl, Orel, Vladimir, Kaluga, Bryansk, Tver, Lipetsk, Smolensk and
Tula regions. We have increased the sales volume of the Petelinka brand,
and have continued to grow the volume of product sold under the Kurinoe
Tsarstvo brand. This performance allows us to maintain our leading
position in the regions.
Ensuring product freshness
Cherkizovo Group owns a dedicated fleet of transport vehicles, including
over 900 refrigerated trucks. By using only specialised transport to reach
our consumers, we are able to ensure that the freshness and quality of
our products are not compromised in transit.
Our transport management is successfully optimised via an automated
routing and management system based on GPS navigation. The system
allows us to minimise delays from traffic congestion, communicate with
our drivers en route, reduce delivery costs and improve client service.
To increase efficiency further, in addition to using our own fleet we source
transport services from specialist logistics companies.
distribution network115m
people are covered by our
Leading through technology
We are an industry leader in our use of innovative technologies in our
storage and transport logistics. In 2008 we installed a WMS ‘Logistics’
system to provide a centrally-supported, integrated product catalogue for
all our divisions. This allows us to increase the speed and quality of labeling
and storage operations, as well as reducing product loss. We supply
products to all leading retailers, and the new system is ensuring that we
can respond promptly to their requests.
We also have our own trading houses network and distribution centres. We
maintain strong relationships with the independent distributors who sell our
products to smaller retailers in the more remote areas of the country.
cherkizovo-group.com annual report 2008 2
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Product quality comes first
Cherkizovo’s fleet of 900 specialist vehicles
ensures the freshness and quality of our
products between the group’s facilities and
into our customers’ premises.
Large-scale operations
Our strategically sited distribution centres
enable us to forge close relationships with
the wholesalers who sell on our behalf to
retailers throughout Russia.
Rapid response to retailers’ needs
The advanced WMS logistics system,
installed in 2008, enables us quickly and
easily to respond to the requirements of
our retail customers.
0 cherkizovo-group.com annual report 2008
Financial review
During 2008, Cherkizovo group continued
to make solid progress against its
strategic objectives, despite a challenging
market environment. The Company’s
sales increased by 42%, adjusted EBITDA*
by 31% and net income by 27%, and
we 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.
Cherkizovo is one of the leading integrated diversified meat producers in the
Russian Federation. According to 2008 statistics from Russia’s Meat Union,
we have the largest market share of processed meat products in Russia;
and according to TNS Gallup Media research and our own estimates, we
have the largest sales of poultry in Moscow and the Moscow region and
are the leader nationally. We are also one of the leaders in the highly-
fragmented Russian pork industry. In 2008, we sold approximately 144,500
tonnes of meat products, 187,000 slaughter-weight tonnes of poultry
products and 39,000 live-weight tonnes of pork.
Our principal operations consist of the production and sale of processed
meat products, primarily in the European part of Russia; the breeding and
rearing of chickens, and the processing and sale of chilled and frozen
poultry products produced at facilities in the Moscow, Lipetsk, Bryansk
and Penza regions; and the breeding and rearing of pigs, at facilities in
the Moscow, Lipetsk, Vologda and Tambov regions, and the sale of live
pigs. We also carry out trading and distribution operations and produce
feed consumed in our Poultry and Pork operations. In February 2006 we
began operations at a purpose-built pig breeding and rearing complex in
Lipetsk, and during 2008 completed construction and commissioning of all
greenfield farms in Lipetsk and Tambov. All six new state-of-the-art pork
farms are operational.
Our operations are structured into three operating divisions: Meat
Processing, Poultry and Pork. We operate six meat processing plants where
we process raw meat into fresh and ready-to-cook products, and process
it further into processed meat, sausages, hams and other products. The
division also carries out associated sales and trading operations. Our Poultry
division consists of four production clusters, two processing facilities, a
feed production plant and associated sales and trading operations. Our
Pork operations consist of five pig breeding and rearing complexes and feed
production facilities.
All three operating divisions are also involved in other non-core activities,
including dairy, crop cultivation and associated services. Expenses for our
corporate headquarters are recorded under “corporate expenditures”.
In 2008, our Meat Processing segment was responsible for 49% (57% in
2007), Poultry for 42% (35% in 2007) and Pork for 9% (8% in 2007) of
the Group’s sales. Virtually all our sales are in the Russian Federation with a
large proportion being in Moscow and the Moscow region.
Looking ahead, 2009 is likely to be a challenging year in terms of the
operating environment. The various uncertainties that could have an
impact on our performance include grain prices, domestic consumption,
government activity, devaluation of the Rouble against other currencies
and other external factors. However we believe that we will benefit from
increased production scale in our pork and poultry segments, and improved
operating efficiency.
Our results for the first quarter of 2009 were broadly in line with our
expectations, and so despite the challenging economic conditions, we
remain cautiously optimistic about consumption patterns and pricing trends
for our products.
cherkizovo-group.com annual report 2008
Sales up 42%
despite a challenging
market environment
Consolidated Selected Financial Data
Year ended December 31, 2008
Total Sales
including other sales
including sales volume discount
Intersegment Sales
Sales to external customers
Cost of Sales
Gross profit
Gross margin
Operating expenses
Operating income
Operating margin
Other income and expenses, net
Interest expenses
Segment profit
Income Tax expense
Depreciation and amortisation expense
Loss on disposal of property, plant & equipment
Adjusted EBITDA* reconciliation
Segment profit
Add:
Interest expense
Interest income
Gain from expiration of payables
Foreign exchange loss (gain)
Other financial income & expenses
Depreciation and amortisation expense
Loss on disposal of property, plant & equipment
Impairment of non-current assets
Adjusted EBITDA*
Adjusted EBITDA* Margin
The reconciliation between net segment profit and
net income per the consolidated income statements
Total net segment profit
Minority interest
Income taxes
Loss from discontinued operations
Net gain on disposal of discontinued operations
Consolidated net income
Intersegment
Combined
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Meat
Processing
577,919
4,581
(26,363)
(271)
577,648
(484,571)
93,348
Poultry
505,204
39,773
(15,380)
(19,859)
485,345
(366,330)
138,874
16%
27%
(85,935)
7,413
1%
71
(14,763)
(7,279)
1,398
17,217
509
(70,498)
68,376
14%
(2,477)
(14,611)
51,288
(264)
22,248
779
Pork
112,507
6,148
-
(9,223)
103,284
(64,939)
47,568
42%
(8,292)
39,276
35%
(102)
(1,724)
37,450
(59)
6,271
(437)
Corporate
assets/
expenditures
1,028
-
-
(1,024)
4
(40)
988
(12,125)
(11,137)
-
29,041
(1,336)
1,336
26,536
(14,460)
(22,833)
22,833
939
334
12
-
-
(7,279)
51,288
37,450
939
,,8
0,02
(,)
(0,)
,,28
(88,8)
2,2
2%
(,)
0,28
%
,
(22,2)
82,8
,0
,8
8
82,8
22,2
,8
,0
,
20
,8
8
2,28
1,724
(0)
-
102
-
6,271
(437)
-
14,460
(23,178)
-
(3,565)
206
12
-
(22,833)
22,833
-
-
-
-
45,110
(11,126)
-
2,8
40%
%
14,611
(144)
(140)
2,761
0
22,248
779
1,777
93,180
18%
14,763
(1,494)
(871)
2,298
(3)
17,217
509
481
25,621
4%
82,398
(3,994)
(1,409)
(3,489)
4,599
8,0
2 cherkizovo-group.com annual report 2008
Financial review continued
State support for agricultural production in
Russian Enterprises
Favourable profit tax
Enterprises engaged in agricultural production in Russia, including our
poultry and pork production facilities, benefit from a favourable profit tax
rate. In 2008 the zero percent corporate tax rate, which had originally been
applicable only for 2008, was extended to the end of 2012. This rate is
scheduled to increase to 18% for 2013-2015, and to 20% thereafter. Our
non-production agricultural operations, such as processing of chilled and
frozen poultry, trading operations and feed production, do not benefit from
this reduced tax rate.
Largely as a result of these reduced tax rates, our overall effective tax rate
in 2008 was 1.7% (2007: 9.8%), as compared to the general corporate
profit tax rate in Russia of 24%.
Reimbursement of interest payments
Agricultural enterprises are also eligible for reimbursements of up to two-
thirds of the official Central Bank of Russia (“CBR”) refinancing rate from
the Russian federal authorities for interest payable on loans, and of up to
one-third of the official CBR refinancing rate from regional authorities. The
CBR’s refinancing rate increased during 2008 from 10.25% in February up
to 13% in December.
We account for interest on these loans on a net basis, after taking the
subsidies into account. As of 31 December 2008, approximately 74% of
the aggregate principal amount of our loans was eligible for, and received,
the subsidies, which reduced interest for the year by US$18.4 million
(2007: US$9.7 million). As of 31 December 2008 our effective interest
rate applicable to the loans on which the interest subsidies applied ranged
from 4.4% to 4.7%, compared with the weighted average interest rate on
outstanding amounts under the loans, which ranged from 11.7% to 13.1%.
As of December 2008 our effective interest rate was 4% (2007: 3%).
Such subsidies were netted against interest expense. The favourable
interest rate subsidies are not available to non-production agriculture-
related operations, such as our trading, mergers and acquisitions and
Meat Processing operations.
Direct Subsidies
In accordance with Russian legislation, enterprises engaged in agricultural
activities receive targeted subsidies based on the amount of meat produced.
Such subsidies were netted against cost of sales.
In the first six months of 2008, the Federal Budget of the Russian
Federation was amended to increase the total assignment of funds for
subsidies to agricultural producers, by introducing subsidies designed
to compensate producers for the high cost of mixed fodder used in the
production of poultry and pork.
In September 2008, the government of the Russian Federation issued a
decree providing formulas for calculating subsidies to agricultural producers.
The decree was based on the change to the law on the Federal Budget
of the Russian Federation that was approved by the Duma of the Russian
Federation on 30 June 2008.
Based on the decree, subsidies were provided of 5 Roubles and 10 Roubles
respectively per kilogram of live weight poultry and pork produced for
slaughter. The reported numbers include US$31.0 million of direct Federal
Budget subsidies provided for the first half of the year. These subsidies
reduced cost of sales in our Poultry and Pork segments. Of the total amount
of subsidies, US$23.2 million and US$7.8 million relate to our Poultry and
Pork segments respectively.
In addition to federal subsidies, based on agreements with regional
governments, our pork facilities (OJSC Lipetskmyasoprom in Lipetsk and
CJSC Botovo in Vologda) and our poultry facilities (CJSC Petelinskaya in
Moscow and JSC Vasiljevskaya in Penza) received direct subsidies from the
regional administrations, based on the amount of pork or poultry they sold
and to purchase veterinary products and fuel. In 2008 the Group received
regional administration subsidies amounting to US$3.4 million. These
subsidies were also netted against the cost of sales in our Pork and
Poultry divisions.
Seasonality
Each year the volume of sales and average selling prices in each of our
divisions are generally most favourable in the second quarter, at the start
of the summer season, and in the fourth quarter, at the beginning of the
pre-New Year holiday sales. Post-holiday economising, combined with
the period of Lent before Russian Orthodox Easter, makes the year’s first
quarter generally the least favourable.
Seasonality also affects average selling prices as retail consumers
generally buy more (and more expensive) high-quality products in the
fourth quarter. In addition, because feed costs are lower when crops are
harvested, the second half of the year is notably more profitable for pork
and poultry production.
Changes to the 200 financial statements
The Group made certain adjustments to the previous year’s financial
statements to reflect the effects of discontinued operations. In November
2008, management of the Group made a decision to dispose of a subsidiary
in the Meat Processing division, JSC Belmyaso, to optimise the divisional
cost structure. The sale was completed in December 2008, with the Group
selling 75% of JSC Belmyaso shares for US$68,000. We have therefore
separately disclosed the financial position and results of JSC Belmyaso’s
operations as of and for the year ended 31 December 2007 (see Note 23 to
the Financial Statements for more details).
cherkizovo-group.com annual report 2008
Gross profit increased by 26% to US$279.4 million (2007: US$222.3
million), while gross margins decreased to 24% (2007: 27%). The Group
managed to increase profits in spite of the challenging inflationary
pressures on grain, primarily as a result of our efficient purchasing strategy,
increased operational efficiency at our new pork facilities and product mix
improvements in our Poultry and Meat Processing businesses.
Net income increased by 27% to US$78.1 million (2007: US$61.6 million).
Net income margin slightly decreased to 7% (2007: 8%).
Adjusted EBITDA* increased by 31% year-on-year to US$152.8 million
(2007: US$116.4 million) and adjusted EBITDA* margin decreased slightly
to 13% (2007: 14%).
Consolidated Selected Financial Data
Sales
Cost of sales
Gross profit
Gross margin
Operating expenses
Operating Income
Operating margin
Income from continuing operations before
income tax and minority interest
Net Income
Weighted average number of shares outstanding
Earnings per share (basic and deluted):
Income from continuing operations
Loss from discontinued operations
Gain on disposal of discontinued operations
Extraordinary gain
Net Income
Consolidated adjusted EBITDA* reconciliation
Income from continuing operations before income tax
and minority interest
Add:
Interest expense
Interest income
Gain from expiration of payables
Foreign exchange loss (gain)
Other financial income & expenses
Depreciation and amortisation expense
Loss on disposal of property, plant & equipment
Impairment of non-current assets
Year ended
December
2008
Year ended
December 31
2007
,,28
(88,8)
2,2
2%
(,)
0,28
%
82,8
820,763
(598,490)
222,273
27%
(137,387)
84,886
10%
73,941
8,0
61,582
,2,8
39,564,300
e
c
n
a
m
r
o
f
r
e
P
.8
-0.08
0.
0.00
.8
1.62
-0.06
0.00
0.00
1.56
82,8
73,941
22,2
(,8)
(,0)
,
20
,8
8
2,28
18,396
(3,899)
(467)
(3,205)
120
31,466
40
-
Combined and consolidated adjusted EBITDA*
2,8
116,392
Adjusted EBITDA* Margin
%
14%
Impairment of non-current assets
In accordance with applicable standards, the Group conducted an analysis
of impairment of non-current assets at 31 December 2008, including
property, plant and equipment, goodwill and trademarks. Evidence of
impairment was found only for trademarks, mainly due to an increase in the
Group’s weighted average cost of capital. The amount of impairment was
determined to be US$2.3 million which was included in operating expenses.
Interest rates and currency exchange
Our reporting currency is the US Dollar; our subsidiaries’ functional
currency is the Rouble. The Rouble is not fully convertible outside the
Russian Federation.
Within the Russian Federation, official exchange rates are determined
daily by the CBR. Market rates and official rates may differ, although this
is generally within narrow parameters monitored by the CBR.
Our products are typically priced in Roubles, and our direct costs, including
raw materials (other than imported meat products and some fodder
components), labour and transportation, are also largely incurred in Roubles.
Other costs, such as interest, are incurred in Roubles, US Dollars and Euros.
According to the CBR, the Rouble appreciated in real terms against the US
Dollar by 13.3% in 2008 (2007: 12.8%), and the average exchange rate
of the Rouble against the US Dollar appreciated by 3.1% (2007: 6.3%) in
nominal terms.
Approximately 2.8% of the aggregate principal amount of our long-term
debt outstanding at 31 December 2008 consisted of foreign-currency
denominated loans (4.7% in 2007), of which approximately 95% was
US Dollar-denominated and 5% Euro-denominated). Our short-term debt
balance (excluding the current portion of long-term loans) at 31 December
2007 contained 39% of foreign-currency denominated loans (all US Dollar-
denominated). In 2008 our short-term debt is entirely Rouble-denominated.
Of our outstanding debt, as of 31 December 2008, 97% bore interest
at fixed rates, and 3% bore interest at floating rates linked to MosPrime
and LIBOR. We have not entered into transactions to hedge against interest
rate risk.
Results of operations
Group Results
The Group performed strongly in 2008.
Overall sales increased by 42% to US$1.2 billion during the year (2007:
US$820.8 million). Meat Processing accounted for 49% (57% in 2007),
Poultry for 42% (35% in 2007) and Pork for 9% (8% in 2007) of the
Group’s sales. Our Pork and Poultry divisions showed the strongest growth
in the year, with the Pork division growing by 61% and the Poultry division
by 70%.
cherkizovo-group.com annual report 2008
Financial review continued
We will benefit
from increased
production scale
in our pork and
poultry segments
Meat Processing sales, %
2008
Wholesale 61
Retail 22
2007
Wholesale 61
Retail 22
Poultry Division
In 2008, total volume in our Poultry division increased by 12% to
approximately 187,100 tonnes, compared to 167,400 tonnes in 2007. Prices
for Cherkizovo poultry sales increased by 11% from 57.71 Roubles per kg
in 2007 to 63.87 Roubles per kg in 2008 (excluding VAT). In Dollar terms,
prices increased by 14% from US$2.26 per kg in 2007 to US$2.57 per kg
in 2008 (excluding VAT).
As a result, total sales in the Poultry division increased by 70% from
US$296.8 million to US$505.2 million.
The Poultry division’s gross profit increased by 49% to US$138.9 million
(2007: US$93.4 million). Gross margin decreased to 27% (2007: 31%),
mostly due to high grain prices in the first half of the year. However, federal
subsidies of US$23.2 million and regional subsidies of US$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% to 14%. This improvement was mostly due to the synergies
achieved by selling products from the newly acquired Kurinoe Tsarstvo
(Chicken Kingdom) through the Poultry division’s existing distribution
network. As a result, operating income in the division increased by 45%
to US$68.4 million (2007: US$47.2 million), while the divisional operating
margin decreased from 16% to 14% in the corresponding period. Divisional
interest expenses increased to US$14.6 million (2007: US$10.7 million).
As a result of these factors, divisional profit increased 32% to US$51.3
million (2007: US$38.8 million).
Overall, Cherkizovo’s adjusted EBITDA* in the Poultry division increased
by 58% to US$93.2 million (2007: US$59.1 million), delivering a strong
adjusted EBITDA* margin of 18% (2007: 20%) despite a challenging
environment for grain and poultry prices.
Poultry sales, %
2008
Wholesale 54
Retail 22
2007
Wholesale 32
Modern retail/
retail chains 17
Modern retail/
retail chains 17
Modern retail/
retail chains 24
Retail 34
Modern retail/
retail chains 33
cherkizovo-group.com annual report 2008
Poultry processing segment
income statement data
Total Sales
Intersegment Sales
Sales to external customers
Cost of sales
Gross profit
Gross margin
Operating expenses
Operating Income
Operating margin
Other income and expenses, net
Interest expenses
Segment profit
Poultry segment adjusted EBITDA* reconciliation
Segment profit
Add:
Interest expense
Interest income
Gain from expiration of payables
Foreign exchange loss (gain)
Other financial income & expenses
Depreciation and amortisation expense
Loss on disposal of property, plant & equipment
Impairment of non-current assets
Poultry segment adjusted EBITDA*
Adjusted EBITDA* Margin
Year ended
December
2008
Year ended
December 31
2007
0,20
(,8)
8,
(,0)
8,8
2%
(0,8)
8,
%
(2,)
(,)
,288
0%
296,803
(5,165)
291,638
(203,381)
93,422
31%
(46,256)
47,166
16%
2,248
(10,659)
38,755
13%
,288
38,755
,
()
(0)
2,
22,28
,
,80
8%
10,659
(9)
(131)
(2,107)
11,267
627
-
59,061
20%
Volumes, 000 (slaughter weight)
Price / kg
8,00
US$2.2
167,400
US$2.57
Pork Division
2008 was a landmark year in the development of the Pork segment, as
Cherkizovo completed construction and commenced production at our new
greenfield farms in Lipetsk and Tambov. Sales volumes in the Pork division
were up 40% to approximately 39,000 tonnes, compared to approximately
28,000 tonnes in 2007.
Prices in Rouble terms increased by 11% in 2008 from 61.58 Roubles per
kg in 2007 to 68.36 Roubles per kg in 2008 (excluding VAT). In Dollar
terms, prices increased by 14% in 2008 from US$2.41 per kg of live weight
in 2007 to US$2.75 per kg of live weight in 2008 (excluding VAT).
As result total sales increased by 61% to US$112.5 million (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
high wheat and barley prices in 2008, our gross profit increased by 63%
to US$47.6 million (2007: US$29.2 million). Gross margin for this division
remained strong at 42%, largely due to the increase in selling price,
increased operational efficiencies from the new pork farms, and as a
result of the federal subsidies of US$7.8 million and regional subsidies of
US$2.1 million that offset increases in grain prices. The division’s operating
expenses as a percentage of sales remained flat at 7%.
Divisional interest expenses increased slightly to US$1.7 million (2007:
US$1.4 million). The division’s profit increased by 62% to US$37.5
million (2007: US$23.1 million). The division generated adjusted EBITDA*
of US$45.1 million, an increase of 56% on the previous period (2007:
US$29.0 million) and an adjusted EBITDA* margin of 40% for the year
(2007: 42%).
We believe that the developments at Lipetsk and Tambov will further
improve the division’s performance and help to sustain strong margins.
Pork processing segment
income statement data
Total Sales
Intersegment Sales
Sales to external customers
Cost of sales
Gross profit
Gross margin
Operating expenses
Operating Income
Operating margin
Other income and expenses, net
Interest expenses
Segment profit
Pork segment adjusted EBITDA* reconciliation
Segment profit
Add:
Interest expense
Interest income
Gain from expiration of payables
Foreign exchange loss (gain)
Other financial income & expenses
Depreciation and amortisation expense
Loss on disposal of property, plant & equipment
Pork segment adjusted EBITDA*
Adjusted EBITDA* Margin
Sales Volumes, 000 (live weight)
Price / kg
e
c
n
a
m
r
o
f
r
e
P
Year ended
December
2008
Year ended
December 31
2007
2,0
(,22)
0,28
(,)
,8
2%
(8,22)
,2
%
(02)
(,2)
,0
%
69,869
(5,186)
64,683
(40,684)
29,185
42%
(4,680)
24,505
35%
(64)
(1,390)
23,051
33%
,0
23,051
,2
()
-
02
()
,2
()
,0
0%
8,800
US$2.
1,390
()
(54)
(2)
121
4,502
1
29,009
42%
27,700
US$2.41
Meat Processing Division
Sales volumes in the Meat Processing segment remained largely flat,
but were slightly lower year-on-year, down by 3% to approximately
145,000 tonnes.
As a result of growth in the price of raw meat, average prices increased
by 19% from 87.51 Roubles in 2007 to 103.86 Roubles in 2008
(excluding VAT). Segment prices in Dollar terms increased by 22% from
US$3.42 per kg in 2007 to US$4.18 per kg in 2008 (excluding VAT).
We were 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.
The division’s operating income increased by 60% to US$39.3 million
(2007: US$24.5 million). Operating margin remained constant at 35%.
Total sales in our Meat Processing division increased by 24% to US$577.9
million (2007: US$467.2 million), principally as a result of significantly higher
selling prices.
cherkizovo-group.com annual report 2008
Financial review continued
Our targeted
capital expenditure
program has
enhanced
operational
efficiency across
our segments
Divisional gross profit decreased by 6% to US$93.3 million (2007: US$99.7
million), mostly due to raw meat price growth and significantly increased
pressure from retail chains. Gross margin in the Meat Processing division
decreased from 21% to 16%, mostly due to raw meat price increases.
Operating expenses, as a percentage of sales, decreased to 15% from
17% in 2007 mostly due to decreased marketing and advertising expenses.
As a result of the above factors, the operating income in 2008 was US$7.4
million. Divisional interest expenses increased by 6% to US$14.8 million
(2007: US$13.9 million).
The division lost US$7.3 million in 2008. Adjusted EBITDA* decreased
to US$25.6 million (2007: US$36.6 million), while the adjusted EBITDA*
margin decreased to 4% from 8%.
Meat Processing sales, %
2008
Wholesale 61
Retail 22
2007
Wholesale 61
Retail 22
Poultry sales, %
2008
Wholesale 54
Retail 22
2007
Wholesale 32
Modern retail/
retail chains 17
Modern retail/
retail chains 17
Modern retail/
retail chains 24
Retail 34
Modern retail/
retail chains 33
Meat processing segment
income statement data
Total Sales
Intersegment Sales
Sales to external customers
Cost of sales
Gross profit
Gross margin
Operating expenses
Operating Income
Operating margin
Other income and expenses, net
Interest expenses
Segment (Loss)/Profit
Meat processing segment
Adjusted EBITDA* reconciliation
Segment profit
Add:
Interest expense
Interest income
Gain from expiration of payables
Foreign exchange loss (gain)
Other financial income & expenses
Depreciation and amortisation expense
Loss on disposal of property, plant & equipment
Impairment of non-current assets
Meat processing segment adjusted EBITDA*
Adjusted EBITDA* Margin
Sales Volumes, 000
Price / kg
Year ended
December
2008
Year ended
December 31
2007
,
(2)
,8
(8,)
,8
%
(8,)
,
%
(,)
(,2)
-%
467,216
(2,776)
464,440
(367,539)
99,677
21%
(78,149)
21,528
5%
1,583
(13,890)
9,221
2%
(,2)
9,221
,
(,)
(8)
2,28
()
,2
0
8
2,2
%
13,890
(1,318)
(282)
17
-
15,695
(588)
-
36,635
8%
,00
US$.8
149,100
US$3.42
cherkizovo-group.com annual report 2008
Liquidity and capital resources
Capital expenditure, US$000*
Capital requirements
In addition to our working capital requirements, we need capital to finance
the following:
200000
150000
• capital expenditure, particularly in connection with further development
of our Pork and Poultry segments
• potential acquisitions
• repayment of debt.
100000
We anticipate that capital expenditure, potential acquisitions and repayment
50000
of long-term debt will represent the most significant use of funds for the
next several years.
We generally rely on operating cash flows and bank loans to finance capital
0
expenditure. In 2008, the major sources of our funds were our operating
cash flows, proceeds from a secondary public offering and short and long-
term borrowings. We financed our capital expenditure primarily with short
and long-term borrowings.
Capital expenditure
Our total capital expenditure in 2008, excluding acquisitions, amounted to
US$158 million. This included cash and other payments for property, plant
and equipment acquired under leases, as well as property acquired but not
yet paid for.
In 2008, capital expenditure in our Poultry segment totalled US$75
million and related mainly to the expansion of our facilities and operational
efficiency in Moscow and Penza regions.
800000
700000
600000
In 2008, capital expenditure in our Pork segment amounted to US$65
million, covering the completion of construction of our new pork facilities
in Lipetsk (modules 3 and 4) and Tambov (modules 1 and 2).
400000
500000
300000
In 2008, capital expenditures in our Meat Processing segment totalled
US$12 million and covered improvements at our existing meat processing
facilities as well as automation and cost optimisation in our three biggest
production facilities – at our Cherkizovsky, Ulyanovsky and Penzensky meat
processing plants.
100000
0
200000
Land
Poultry
Pork
Meat Processing
101,138
29,398
57,275
85,892
37,205
40,157
186,342
47,911
124,616
158,324
5,624
74,994
65,473
8,530
2005 2006 2007 2008
12,233
13,815
14,465
*note: includes capital expenditure accounted for under corporate assets and expenditures
which represented less than 1% of the capital expenditures each year.
Debt, $000
Cash flow
The table below represents movements in our cash flows from various
activities during the two years ended 31 December 2008 and 2007:
Long-term
Short-term
Cost of debt
47,911
e
c
n
a
m
r
o
f
r
e
P
4.8%
For the year ended 31 December
2.8%
Net cash from operating activities
Net cash used in investing activities
Net cash from financing activities
654,282
2008
US$000
28,22
(2,)
8,0
5
2007
US$000
4
3
2
19,925
(309,555)
195,743
2,28
(90,049)
4.0%
124,616
562,017
Net increase (decrease) in cash and cash equivalents1
425,222
1 Includes cash flow movements associated with discontinued operations.
325,666
364,799
Net cash from operating activities in 2008 increased to US$128.2 million
(2007: US$19.9 million).
262,466
236,351
229,060
102,333
This significant increase in net cash from operating activities in 2008
compared to 2007 (up by US$108.3 million) is mostly related to factors
including: a slight decrease in inventories in 2008, compared to the large
increase in 2007; a decrease in advances paid; accrued subsidies; and
a decrease in receivable VAT for property, plant and equipment, mostly
related to the refund of VAT by the Government.
2006 2007 2008
In 2008, we also purchased approximately 15,000 ha of agricultural
land in the Saratov region, which is currently undergoing registration into our
ownership.
The following bar chart sets out our capital expenditure by segment,
excluding acquisition of Kurinoe Tsarstvo in 2007 (US$143 million), for the
four years ended 31 December 2008.
A slight decrease in inventories of US$3.0 million is made up of a decrease
in raw materials, which is offset by an increase in livestock. The decrease
in raw materials mostly relates to the fact that due to the falling prices
for grain at the end of 2008, it was appropriate to wait for lower prices in
2009. This is the reverse of the situation in 2007, when the prices at the
end of the year were rising and it was more prudent to buy larger quantities
at lower prices.
The increase in livestock mostly relates to the growing operations at our
new pork facilities in Lipetsk and Tambov, and also to the commissioning
of our new poultry site at Vertunovka (part of JSC Vasiljevskaya) in Penza.
The large increase in inventories during 2007 is primarily the result of the
commencement of operations at our state-of-the-art pork facility in Lipetsk.
8 cherkizovo-group.com annual report 2008
Financial review continued
The increase in trade receivables that we experience mainly resulted from
an increase in general sales and in those of mixed fodder to related parties.
In 2008 there was a slight decrease (of US$1.3 million) in advances paid,
mostly due to the decreasing price of oils for mixed fodder production,
which we pay for in advance. A significant increase in advances in 2007
was due to the change in terms of purchase contracts in our Meat
Processing segment.
The increase in other current assets mostly relates to an increase in
accrued subsidies for both interest reimbursement and mixed fodder
costs, and this increase was partially offset by the reduction in current
VAT receivable. In 2008 several Group companies received payments for
VAT receivable, which led to a decrease in the amount of VAT receivable
totalling US$7.2 million.
In 2007, VAT receivable increased mainly due to major construction
projects in our Pork and Poultry segments.
200000
150000
100000
50000
0
Our investment activities in 2008 showed a significant decrease in the
Capital expenditure, US$000*
use of cash, which totalled US$172.3 million (2007: US$309.6 million).
186,342
47,911
Land
Poultry
Pork
Meat Processing
Net cash used in investment activities in 2007 included US$139.8 million,
158,324
which was mostly attributable to the acquisition of Kurinoe Tsarstvo.
5,624
In addition, in 2008 the Company decreased capital expenditure within
74,994
the Pork segment, as most investments into our new pork farms were
completed in previous years. We increased capital expenditure in our Poultry
segment, mostly in the Penza region, which led to total capital expenditure
in US Dollars staying relatively constant. The company also increased the
amount of short-term loans given to related parties.
101,138
29,398
85,892
37,205
124,616
65,473
57,275
40,157
Our net cash flow from financing activities decreased to US$89.4 million in
2008 (2007: US$195.7 million). A decrease in net cash flow from financing
activities in 2008 resulted primarily from the increased use of cash for
12,233
8,530
repaying both long- and short-term loans. This was partially offset by the
2005 2006 2007 2008
proceeds of the secondary public offering of US$82.3 million that was used
*note: includes capital expenditure accounted for under corporate assets and expenditures
to refinance short-term debt, and additional financing raised for capital
which represented less than 1% of the capital expenditures each year.
expenditure purposes in the Pork and Poultry segments.
13,815
14,465
Debt, $000
Long-term
Short-term
Cost of debt
47,911
4.8%
2.8%
4.0%
800000
700000
600000
500000
400000
300000
200000
100000
0
364,799
262,466
102,333
654,282
425,222
124,616
562,017
325,666
229,060
236,351
2006 2007 2008
Liquidity
As of 31 December 2008, we had total cash and cash equivalents of
US$49.7 million, of which around 69% were denominated in US Dollars,
with the remainder in Roubles. We also had working capital of US$23.4
million (2007: US$17.1 million). Following this date, we continued to
meet our obligations to trade creditors from operating cash flow and debt
financing. Our trade working capital, which we define as current assets less
current liabilities excluding short-term loans and the current portion
of long-term loans, was US$259.8 million (2007: US$246.1 million) as of
31 December 2008. Our future plans for improving liquidity and our working
capital position include refinancing short-term debt on a long-term basis.
One factor which brought about changes in the components of our
working capital was the depreciation of the Russian Rouble, the end-of-
year exchange rate being 20% higher than at the beginning of the year.
This led to a reduction in Dollar amounts that was much greater than the
corresponding amounts in Roubles.
As we maintained the share of sales made to modern retail chains, our
trade receivables from third parties (net of allowances for doubtful accounts)
increased by 19% in Roubles. This was partly compensated for by the
depreciation of the Rouble against the US Dollar. Trade receivables from
related parties at 31 December 2008 increased to US$15.3 million (2007:
US$10.0 million). Trade receivables’ turnover averaged 28 days as of
31 December 2008 (2007: 40 days). The allowance for doubtful accounts,
which we create on a case-by-case basis, was US$3.1 million (2007:
US$2.6 million).
Trade accounts payable to third parties increased in Roubles but decreased
in US Dollars, due to the depreciation of the Rouble, to US$66.3 million
at 31 December 2008 (2007: US$74.7 million). This was mostly due to
rising meat prices. Trade payables to related parties decreased slightly
to US$2.4 million as of 31 December 2008 (2007: US$3.0 million).
As of 31 December 2008, trade payables’ turnover averaged 27 days
(2007: 46 days).
We also make advances on a case-by-case basis to our raw meat and grain
suppliers, in accordance with the terms of the supply agreements we have
with them. As of 31 December 2008, advances paid amounted to US$29.7
million, net of allowances for doubtful accounts (2007: US$37.6 million).
The decrease was mainly due to depreciation of the Rouble. In Roubles
this decrease is only 4% from the 2007 figure. Of our total net advances,
US$7.3 million (2007: US$7.8 million) was to related parties. The allowance
for doubtful accounts at 31 December 2008 was US$1.3 million (2007:
US$834,000).
Inventory consists primarily of raw materials and goods for resale, work-
in-progress, livestock and finished goods. As of 31 December 2008, our
inventories were US$133.6 million (2007: US$154.5 million). This decrease
was mostly due to depreciation of the Rouble – there was an increase of
3.5% in Rouble terms. This comprises the decrease in raw materials offset
by the increase in livestock.
5
4
3
2
Decreases in raw materials are mostly because of the falling prices for grain
at the end of 2008, which made it more feasible not to buy large amounts of
grain but to wait for lower prices in 2009. This is the reverse of the situation
in 2007 when the prices at the end of the year were rising and it was more
prudent to buy larger quantities at lower prices.
cherkizovo-group.com annual report 2008 39
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The value of our livestock at 31 December 2008 was US$55.3 million
(2007: US$52.9 million). A 25% increase in Rouble terms is due to the
increased operations at our new pork facilities in Lipetsk and Tambov, and
to the commissioning of our new poultry site at Vertunovka (part of JSC
Vasiljevskaya) in Penza.
Other receivables mainly comprise subsidies due from the government,
which increased to US$20.5 million in 2008 (2007: US$12.0 million).
Other current assets include other taxes receivable, prepaid expenses, spare
parts and notes receivable. The decrease here is mainly because of the
depreciation of the Rouble and the decrease in VAT receivable, due to the
repayment of input VAT by the government.
Ludmila I Mikhailova
Chief Financial Officer
*Non-GAAP financial measures. This financial review 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 EBITDA. We define EBITDA as net income before interest expense,
income taxes, depreciation and amortisation. Adjusted EBITDA is defined
as EBITDA adjusted for other operating expenses, other income (expense)
on a net basis, minority interest, loss from discontinued operations (net of
income tax), loss on disposal of discontinued operations (net of income tax)
and extraordinary gain on purchase of interests in consolidating entities (net
of income tax). We believe that EBITDA and adjusted EBITDA are measures
commonly used by investors. Our calculation of EBITDA and adjusted
EBITDA may be different from the calculation used by other companies and
therefore comparability may be limited.
Some of the information in this financial review may contain projections
or other forward-looking statements regarding future events or the future
financial performance of the Group. Forward looking statements can be
identified 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 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.
0 cherkizovo-group.com annual report 2008
Board of Directors and Executive management
Igor Babaev Chairman, 59
Mr Babaev has served as Chief Executive Officer of most
Group companies since 1998. He joined Cherkizovsky
MPP in 1988 as chief engineer, becoming President
and a member of the Board of Directors in 1993. Before
joining Cherkizovsky MPP, he was an engineer and
senior engineer at Essentuki Canning Plant. He was
also head of the Production Division of Nalchik Meat
Processing Plant, engineer-in-chief of Stavropol Meat
Canning Plant, chief engineer-technologist of Simferopol
Poultry Processing Plant and engineer-in-chief of NPO
Komplex of the Gosagroprom of the USSR. He graduated
from Krasnodar Polytechnic Institute in 1971 and
received a PhD from the Moscow Technological Institute
of Meat and Milk Processing Industry in 1981. He holds
an honorary distinction of the “Honoured Worker of the
Food Industry of the Russian Federation” and has been
an acting member of the Russian Engineering Academy
since 1994.
Sergei Mikhailov Chief Executive Officer, 30
Mr Mikhailov is also President and a member of the
Board of Directors of AIC Cherkizovsky. He was Deputy
President and Chief Operating Officer of Cherkizovsky
MPP from 2000 and joined AIC Cherkizovsky as Deputy
President of the Marketing and Sales Department in
2004. In the same year, he was appointed General
Director of Cherkizovsky Trade House. From 1998
to 2001, he served as a director and founder of the
telecommunications company aTelo, Inc. in the United
States. In 1997, he worked as an intern at Goldman
Sachs and in 1999 was a financial analyst at Morgan
Stanley. He received a BSc in Finance from Georgetown
University (Washington DC) in 2000.
Evgeny Mikhailov Executive Director, 27
Mr Mikhailov also serves as Vice-President and a
member of the Board of Directors of AIC Cherkizovsky.
He has also been a member of the Board of Directors of
AIC Mikhailovsky since 2004. He joined AIC Mikhailovsky
as Deputy General Director in 2004. In 2002, he worked
as a financial analyst at Morgan Stanley and in 2001
was an assistant to the Vice-President at aTelo, Inc. in
Washington DC. He received a BSc in Economics from
the University of California at Los Angeles in 2004.
Yury Dyachuk Head of Legal Department, 41
Mr Dyachuk has been head of our Legal Department
since 2006. A practicing lawyer for 14 years, he
was head of the Legal sub-divisions in the Group for
12 years. In 2005, he was our senior counsel and
led the restructuring of the Cherkizovo Group, having
previously been head of the Legal Department of AIC
Cherkizovsky since 2001. He was head of the Legal
Department of Cherkizovsky MPP from 1996 to 2000
and a member of the legal department at Cherkizovsky
MPP from 1995 to 1996. He graduated from the
Moscow State Law Academy with a degree in Civil Law
in 1995.
Samuel Lipman Non-executive Director, 64
Mr Lipman joined the Board of Directors in April 2006.
He also currently serves as President of The Lipman
Company, which he founded in 1997, which provides
consulting services in relation to the management of
the broiler industry. He was Chief Executive Officer of
Limited Liability Company Broiler Buduschego, a Russian
subsidiary of US enterprise Stromyn Breeders, Ltd, from
2004 to 2006. From 2003 to 2006 he was President of
Stromyn Breeders, LLC. Mr Lipman founded and was
President and Chief Executive Officer of Golden Rooster in
Lipetsk, Russia, from 1996 to 2000. He graduated from
Colby College, Maine, USA, with a BA in English in 1972.
Musheg Mamikonian Non-executive
Director, 49
Mr Mamikonian has also served as Chief Executive
Officer of OJSC Lianozovsky Sausage Plant, Chairman
of the Board of Directors of OJSC Dmitrovsky Meat Plant
and Chief Executive Officer of CJSC Myasnoy Alliance
since 2003, and has been President of the Russian
Meat Union since 1998. From 2001 to 2003, he was
Chairman of the Board of Directors of OJSC Lianozovsky
Sausage Plant. In 1998, he was Chief Executive Officer
of CJSC Eko-Torg and between 1997 and 1998 was
Deputy President at CMPP. He graduated from Yerevan K.
Marx Polytechnic Institute with a degree in Engineering
in 1981 and received a PhD from Moscow Technological
Institute of Meat and Milk Industry in 1986. He holds
over 100 patents for technical and technological
inventions, and in 1999 received a Russian Federation
State award for achievements in Science
and Technology.
cherkizovo-group.com annual report 2008
The Board’s broad range of sector,
Russian and international experience,
best positions Cherkizovo to
deliver against
strategy
its stated
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Artur Minosyants Chief Operating Officer, 44
Mr Minsoyants was previously First Deputy President for
Finance and Economics of Cherkizovsky MPP, and from
1996 to 2000 was Finance and Economics Director
of Birulevsky MPP. Before joining, he was Head of
Finance of Armavir City Administration. Mr Minosyants
is a graduate of the Moscow Plekhanov Institute for the
National Economy and holds a PhD in Economics.
Ludmila Mikhailova Chief Financial Officer, 33
Ms Mikhailova was Deputy Chief Executive Officer of
the Company from September 2005 to February 2006.
From January 2005 to March 2005 she was First Deputy
President of AIC Cherkizovsky, and Deputy Chief Executive
Officer of LLC Group Cherkizovo from March 2005 to
September 2005. From July to December 2004 she
was Deputy President of Cherkizovsky MPP. From 2002
to 2004, she was a financial analyst at General Mills
Corporation Canada (Toronto). In 2002, she worked at ING
Barings in London, and from 2000 to 2001 she worked
for McFarlane Gordon Inc. (Toronto). She was previously
a financial analyst at Cherkizovsky MPP (1996 to 1998).
She graduated from the Financial Academy of the
Government of the Russian Federation in 1998.
In 1999, she completed a Canadian Securities Course
at the Canadian Securities Institute, and in 2003 she
received an MBA from Schulich School of Business,
York University (Canada).
Esben Juhl was a Non-executive Director and
resigned from the Board in June 2008
Paul James Ostling was a Non-executive Director
from June 2008 and resigned from the Board in
early 2009
2 cherkizovo-group.com annual report 2008
Corporate social responsibility
We consider Cherkizovo to be a good corporate citizen. We aim both to
reduce the impact we make on the environment and to make positive
connections with the communities in which we operate. We also make
considerable efforts to communicate with our shareholders, suppliers
and employees.
Employment policies
Our employees are our most valuable asset, and we pursue a policy
of objective and systematic assessment of their skills. Our personnel
policy ensures we recruit and retain high-quality people at all levels of
the business.
Health, safety and the environment
We comply with applicable environmental legislation and observe biological
and veterinary safety requirements in our poultry and pig-farming
operations. This involves:
Training When new people join the Group, we provide introductory training
on the Company and its history, as well as on production, distribution, sales
and our quality policy. Professional development is an ongoing priority for
our employees.
We consider the shortage of suitably trained people to be one of the major
risks to our business. As a result, we work closely with final-year students
in educational establishments in a drive to attract the best people. We
have also instituted programmes to give existing senior members of staff
international training.
Equal opportunities We do not consider age, colour, ethnic origin,
gender, political or other opinions, religion or sexual orientation to be a
barrier to employment or advancement.
Benefits Employees work a 40-hour week, including a daily one-hour
lunch break. Each of our facilities has a staff canteen at which food is
available at low cost and for free for some categories of staff. In addition,
each employee is given a food hamper every month, as well as at New Year
and on national Women’s and Men’s Days.
We reward employees for particular achievements. These include
particularly good work, reaching or exceeding output targets, long service
(we have some employees who have worked for CMPP since it was founded
in 1974) and a generally outstanding contribution. Women are entitled
to 120 days’ paid maternity leave, receive a cash gift on the birth of a
child, and their jobs are kept open for three years. We also give financial
assistance on marriage and in cases of invalidity or bereavement.
The Company organises and partly funds summer camps for employees’
children, and many of our operations have a gym or facilities for football
and tennis.
Health Our employees are given medical examinations three times
a year. Those who work with raw meat receive additional examinations
and inoculations. All employees are given flu injections every autumn.
We have medical centres at which employees can receive help, although
Russian citizens have government medical insurance which entitles them
to free treatment.
Comfort We stimulate healthy growth and development of our poultry and
pigs by controlling air temperature and circulation, lighting and humidity.
Traceability To ensure the high quality of our products, we control
all stages of production, from feed production to breeding, processing
and distribution.
Balanced feed We produce our own feed to special formulas that ensure
it contains the optimum balance of energy and protein, micro-elements,
vitamins and amino acids.
Specialisation and separation of sites We carry out all stages of
production at discrete sites, divided by minimum sanitation zones of at least
five kilometers. This prevents the transfer of diseases between generations
of animals and between breeding and production stock. We also take
prevailing winds into consideration when choosing locations.
All full/all empty Individual sites only contain animals of the same
generation. Sites are cleaned and disinfected between production periods.
Preventative measures We seek to operate our agricultural facilities
to international best practice standards. We undertake a large number of
preventative measures to ensure that our sites are safe, both to limit stock’s
susceptibility to disease and to prevent the spread of any diseases which
may occur. These measures include:
• strictly controlling access to sites
• limiting the number of visitors, including foreign delegations
• prohibiting the movement of staff between sites
• ensuring the effective operation of veterinary and sanitary stations
• providing staff with work shoes and clothing
• using disposable packaging for deliveries
• prohibiting staff from visiting countries which suffer from pig and
poultry diseases
• regularly eliminating potential carriers of disease, such as rodents
and insects
• regularly testing blood samples from our pigs and chickens
• clinically examining and taking veterinary care of stock
• vaccinating to required procedures
Environmental measures We have systems at all sites that control
waste water, air pollution and energy consumption.
cherkizovo-group.com annual report 2008
Federal Law prohibits the Board of Directors from acting on issues that fall
within the exclusive competence of an AGM.
Our charter generally requires a majority of the directors present at a
Board meeting to vote for an action for it to be approved. The exceptions
are major or interested-party transactions, for which Russian legislation
requires a qualified or unanimous vote. A Board meeting is considered to be
duly assembled and legally competent to act when a majority of the Board
members are present.
The Board met 12 times during the year.
Chief Executive Officer
The Company’s Chief Executive Officer is responsible for day-to-day
operations. He is elected by the Board for up to a five-year period. With the
exception of matters exclusively assigned to the competence of an AGM or
to the Board of Directors, he has executive authority over all our activities.
Internal control/risk management
The Board of Directors has overall responsibility for ensuring that the
Company maintains an adequate system of internal control and risk
management, and for reviewing its effectiveness. It has established a
continuous process for identifying, evaluating and managing risk.
Internal control is carried out by the Revision Commission, the activities of
which are governed by our charter and revision commission regulations. The
commission oversees and co-ordinates audits of our financial and economic
activities. Its principal duties are to ensure that our activities comply with
applicable Russian legislation, and do not infringe shareholders’ rights, and
that our accounting and reporting do not contain material misstatements.
The members of the commission are elected for one year at the AGM and
may not include the Chief Executive Officer or other members of the Board.
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Corporate governance
Cherkizovo’s shares are listed on the Russian Trading System (RTS), and
the London Stock Exchange (LSE). They are also traded off the list on the
Moscow Stock Exchange (MSE) and Moscow Interbank Currency Exchange
(MICEX). In connection with our listing on the RTS, we are required to
comply with the corporate governance standards of our home country.
These include:
• the obligation to have at least one non-executive director: Cherkizovo’s
Board of Directors includes three independent directors, as defined in the
Corporate Governance Code approved by the FSFM. These criteria differ
from those set out in the UK’s Combined Code on Corporate Governance.
Despite his business relations with the Group, we believe that Mr Samuel
B Lipman can be regarded as ‘an independent director’ in accordance
with the Combined Code;
• the formation of an Audit Committee: the Audit Committee is formed
every year from independent Board members;
• the adoption of the bylaws on insider trading; and
• the implementation of internal control procedures.
The role of the Board
The Board is responsible for the general management of the Company and
has the power to form the:
• determination of our business priorities;
• convening annual and extraordinary general shareholders’ meetings,
including setting a date and time, approving the agenda and determining
the date of record for the shareholders entitled to participate (except
in certain circumstances specified under Federal Law on Joint-Stock
Companies);
• placement of our bonds and other securities, in certain cases provided for
by Federal Law on Joint-Stock Companies;
• determination of the price of our property and our securities to be
placed or repurchased, as provided for by Federal Law on Joint-Stock
Companies;
• repurchase of our shares, bonds and other securities, in certain cases
provided for by Federal Law on Joint-Stock Companies;
• election and early termination of the powers of our sole executive body
(general director);
• recommendations on the amount of dividends and the payment
procedure;
• use of our reserve fund and other funds;
• creation of branches and representative offices;
• approval of our internal documents, except for those documents for
which approval falls within the competence of the Company’s general
shareholders’ meeting or general director;
• approval of major and interested party transactions, in certain cases as
provided for by Federal Law on Joint-Stock Companies;
• increase of our share capital by the issuance of additional shares within
the limits of our authorised share capital, except in circumstances
specified under Federal Law on Joint-Stock Companies and our charter;
• approval of decisions regarding securities issuances and prospectuses
relating to such securities, as well as of reports on the results of such
share issuances, except in certain circumstances specified under Federal
Law on Joint-Stock Companies;
• approval of our share registrar; and
• other issues, as provided for by the Federal Law on Joint-Stock
Companies and our charter.
cherkizovo-group.com annual report 2008
Directors’ report
The directors present their annual report and audited financial statements
for the year ended 31 December 2008.
Directors in the year
The following served as directors of the Company during the year ended
31 December 2008:
Igor E Babaev, Chairman
Sergei Mikhailov, Chief Executive Officer
Yury Dyachuk, Head of Legal Department
Evgeny Mikhailov, Executive Director
Samuel B Lipman, Independent Non-executive Director
Musheg L Mamikonian, Non-executive Director
Paul James Ostling
Election and re-election of directors
Our charter provides that our entire Board of directors may be re-elected
at each Annual General Meeting. The Board is elected through cumulative
voting, under which each shareholder may cast an aggregate number of
votes equal to the number of voting shares he or she holds, multiplied
by the number of people to be elected to the Board. Each shareholder
is entitled to cast all his votes for one candidate or to spread them out
between a number of candidates. The directors may be removed as a group
at any time before the end of their terms of office, without cause, by a
majority vote at a shareholder meeting.
Disclosure of information to auditors
So far as each director is aware, there is no relevant audit information of
which the Company’s auditors are unaware. Each director has taken all
steps that he ought to have taken in his duty as a director to make himself
aware of any relevant audit information and to establish that the Company’s
auditors are aware of that information.
Principal activities and review of the business
Cherkizovo is one of the leading integrated diversified meat producers in
the Russian Federation. Operations are structured into three divisions:
Meat Processing division, Poultry division and Pork division. Each division
incorporates its own distribution unit, sales unit, network of trading centers,
storage facilities, marketing department; each is also involved in non-core
activities, such as dairy, farming and accompanying services.
Meat Processing division This comprises six plants at which raw meat is
processed into fresh and ready-to-cook products, and a wide range of other
processed products, including salamis, sausages and hams.
Poultry division Four poultry clusters, a feed mill and four processing
plants make up the Poultry division.
Pork division This comprises five pig farms and a feed plant.
More information about the business is set out in the Chairman’s
Statement, on pages 10 and 11, the Chief Executive Officer’s Statement,
on pages 14 and 15.
Future developments
The Group’s stated objective is to become the undisputed leading integrated
diversified producer of meat and meat products in the Russian Federation.
To achieve this aim, it will continue to modernise existing meat processing
facilities, invest in its poultry facilities – and look for possible acquisitions
– build new sales and distribution centers where these will increase its
geographic spread, and invest in its pork business.
The management believes that there are opportunities for continuing
expansion, in what is a fragmented market, through acquisition as well
as organic growth.
Going concern
After reviewing the 2009 budget and longer-term plans of the Group, the
directors are satisfied that, at the time of the approval of the financial
statements, it is appropriate to adopt the going concern basis in preparing
the financial statements of the Group.
Dividends
We do not expect to pay dividends for the foreseeable future, but plan to
invest all net profits into the business development. We have no doubt that
this will be to the long-term benefit of the Company and its shareholders.
cherkizovo-group.com annual report 2008
Financial accounts contents
46 Statement of management’s responsibilities for the preparation
and approval of the consolidated financial statements
47 Independent auditors’ report
48 Consolidated balance sheets
50 Consolidated income statements
51 Consolidated cash flow statements
53 Consolidated statements of changes in shareholders’ equity
and comprehensive income
54 Notes to the consolidated financial statements
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46 cherkizovo-group.com annual report 2008
Statement of management’s responsibilities for the preparation and
approval of the consolidated financial statements
Management is also responsible for:
• Designing, implementing and maintaining an effective and sound system
of internal controls throughout the Group;
• Maintaining proper accounting records that disclose, with reasonable
accuracy at any time, the financial position of the Group, and which enable
them to ensure that the consolidated financial statements of the Group
comply with US GAAP;
• Maintaining statutory accounting records in compliance with local
legislation and accounting standards in the respective jurisdictions in
which the Group operates;
• Taking such steps as are reasonably available to them to safeguard the
assets of the Group; and
• Preventing and detecting fraud and other irregularities.
The consolidated financial statements for the years ended 31 December 2008
and 2007 were approved on 3 April 2009 by:
For the years ended 31 December 2008 and 2007
The following statement, which should be read in conjunction with the
independent auditors’ responsibilities stated in the independent auditors’
report set out on page 3, is made with a view to distinguishing the respective
responsibilities of management and those of the independent auditors in
relation to the consolidated financial statements of OJSC Cherkizovo Group
and subsidiaries (“the Group”).
Management is responsible for the preparation of the consolidated financial
statements that present fairly, in all material respects, the consolidated
financial position of the Group at 31 December 2008 and 2007 and
the consolidated results of its operations, cash flows and changes in
shareholders’ equity and comprehensive income for the years then ended, in
conformity with accounting principles generally accepted in the United States
of America (“US GAAP”).
In preparing the consolidated financial statements, management is
responsible for:
• Selecting suitable accounting principles and applying them consistently;
• Making judgments and estimates that are reasonable and fairly represent
the most likely outcome of uncertainties;
• Stating whether US GAAP has been followed, subject to any material
departures disclosed and explained in the consolidated financial
statements; and
• Preparing the consolidated financial statements on a going concern
basis, unless it is inappropriate to presume that the Group will continue in
business for the foreseeable future.
Mr. Sergei I. Mikhailov
Chief Executive Officer
Mr. Arthur M. Minosyants
Chief Operating Officer
Ms. Ludmila I. Mikhailova
Chief Financial Officer
Independent auditors’ report
To the Board of Directors and Shareholders of OJSC Cherkizovo Group:
We have audited the accompanying consolidated balance sheets of OJSC
Cherkizovo Group and its subsidiaries (together the “Group”) as of
31 December 2008 and 2007 and the related consolidated statements of
income, cash flows and changes in shareholders’ equity and comprehensive
income for the years then ended. These financial statements are the
responsibility of the Group’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Group’s
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, the Group did not
maintain historical cost records for property, plant and equipment acquired
prior to 31 December 2001. On 31 December 2001, the Group established
the carrying value of such assets based on the estimated fair values at such
date. In our opinion, accounting principles generally accepted in the United
States of America require that property, plant and equipment be stated at
historical cost. The information needed to quantify the effects of these items
on the financial position, results of operations, and cash flows of the Group is
not reasonably determinable from the accounts and records.
In our opinion, except for the effects of including property, plant and
equipment based on fair values as described in the preceding paragraph,
such financial statements present fairly, in all material respects, the
consolidated financial position of the Group as of 31 December 2008 and
2007 and the consolidated results of its operations and cash flows for the
years then ended in conformity with accounting principles generally accepted
in the United States of America.
3 April 2009
cherkizovo-group.com annual report 2008 47
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48 cherkizovo-group.com annual report 2008
Consolidated balance sheets
As of 31 December 2008 and 2007
Assets
Current assets:
Cash and cash equivalents
Trade receivables, net of allowance for doubtful accounts of 3,135 and of 2,633
as of 31 December 2008 and 2007, respectively
Advances paid, net of allowance for doubtful accounts of 1,324 and of 834
as of 31 December 2008 and 2007, respectively
Inventory
Deferred tax assets
Other receivables, net of allowance for doubtful accounts of 562 and of 404
as of 31 December 2008 and 2007, respectively
Other current assets
Total current assets of continuing operations
Current assets of discontinued operations
Total current assets
Non-current assets:
Property, plant and equipment, net
Goodwill
Other intangible assets, net
Loans receivable
Deferred tax assets
Notes receivable, net
VAT receivable
Total non-current assets of continuing operations
Non-current assets of discontinued operations
Total non-current assets
Total assets
Notes
2008
US$000
2007
US$000
3
49,664
16,841
88,375
88,845
4
18
5
6
23
7
8
8
18
9
23
29,672
133,627
4,621
28,488
34,659
369,106
334
369,440
683,946
8,548
43,210
7,917
470
7,903
11,462
763,456
1,368
764,824
1,134,264
37,609
154,481
7,304
20,849
43,301
369,230
6,626
375,856
705,849
10,959
55,007
8,836
2,030
8,357
21,034
812,072
8,297
820,369
1,196,225
The accompanying notes are an integral part of these consolidated financial statements.
cherkizovo-group.com annual report 2008 49
Notes
2008
US$000
2007
US$000
10
11
18
23
10
18
11
21
23
24
12
66,283
236,351
7,549
54
12,233
3,808
11,285
2,713
4,049
344,325
1,705
346,030
325,666
28,594
6,935
929
144
362,268
819
363,087
74,716
229,060
6,811
177
14,334
2,722
16,055
2,673
3,044
349,592
9,210
358,802
425,222
42,982
10,003
1,167
212
479,586
7,087
486,673
24,169
21,226
15
289,146
(496)
(64,551)
176,864
400,978
1,134,264
14
209,861
–
20,890
98,759
329,524
1,196,225
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Liabilities and shareholders’ equity
Current liabilities:
Trade accounts payable
Short-term debt and current portion of finance leases
Tax related payables
Deferred tax liabilities
Payroll related liability
Advances received
Payables for non-current assets
Interest payable
Other payables
Total current liabilities of continuing operations
Current liabilities of discontinued operations
Total current liabilities
Non-current liabilities:
Long-term debt and finance leases
Deferred tax liabilities
Tax related payables
Payables to shareholders
Other liabilities
Total non-current liabilities of continuing operations
Total non-current liabilities of discontinued operations
Total non-current liabilities
Commitments and contingencies
Minority interest
Shareholders’ equity:
Share capital (par value – 0.01 Russian Roubles; 31 December 2008: total authorized shares –
54,702,600; issued shares – 43,069,355, outstanding shares – 43,028,022; 31 December 2007:
total authorized shares – 54,702,600, issued and outstanding shares – 39,564,300)
Additional paid-in capital
Treasury shares, at cost (41,333 shares as of 31 December 2008)
Other accumulated comprehensive (loss) income
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
50 cherkizovo-group.com annual report 2008
Consolidated income statements
For the years ended 31 December 2008 and 2007
Sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Impairment of non-current assets
Other operating expense
Operating Income
Other income, net
Interest expense, net
Income from continuing operations before income tax and
minority interest
Income tax
Income from continuing operations before minority interest
Minority interest
Income from continuing operations
Loss from discontinued operations, net of income tax (expense) benefit
of (546) and 395 in 2008 and 2007, respectively
Gain on disposal of discontinued operations, net of income tax benefit of 30
Net Income
Weighted average number of shares outstanding
Earnings per share (basic and diluted):
Income from continuing operations
Loss from discontinued operations, net of income tax
Gain on disposal of discontinued operations, net of income tax
Net income per share
Notes
13
14
15
8
7
16
17
18
23
23
2008
US$000
1,166,281
(886,839)
279,442
(172,405)
(2,258)
(851)
103,928
1,195
(22,725)
82,398
(1,409)
80,989
(3,994)
76,995
2007
US$000
820,763
(598,490)
222,273
(137,347)
–
(40)
84,886
7,451
(18,396)
73,941
(7,259)
66,682
(2,848)
63,834
(3,489)
4,599
78,105
41,725,834
(2,252)
–
61,582
39,564,300
US$
US$
1.84
(0.08)
0.11
1.87
1.62
(0.06)
–
1.56
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated cash flow statements
For the years ended 31 December 2008 and 2007
Cash flows from operating activities:
Income from continuing operations
Adjustments to reconcile income from continuing operations to net cash from operating activities:
Depreciation and amortisation
Bad debt expense
Loss on disposal of property, plant and equipment
Minority interest
Foreign exchange loss (gain)
Deferred tax (benefit) expense
Expense (income) related to expiration of statute of limitations on tax risks accrued
under FIN 48, net of penalties accrued on FIN 48 tax liabilities and new accruals
Impairment of non-current assets
Other adjustments
Changes in operating assets and liabilities
Decrease (increase) in inventories
Increase in trade receivables
Decrease (increase) in advances paid
Decrease (increase) in value added tax receivable
Increase in other current assets
Increase in trade accounts payable
Increase (decrease) in taxes payable
Increase in other current payables
Net cash from operating activities of continuing operations
Cash flows of discontinued operating activities:
Loss from discontinued operations
Adjustments to reconcile loss from discontinued operations
to net cash (used in) from operating activities of discontinued operations:
Bad debt expense
Minority interest in loss from discontinued operations
Deferred tax expense (benefit)
Depreciation
Foreign exchange loss (gain)
(Gain) loss on disposal of property, plant and equipment
Net change in operating assets and liabilities
Net cash (used in) from operating activities of discontinued operations
Total net cash from operating activities
cherkizovo-group.com annual report 2008 51
Notes
2008
US$000
2007
US$000
76,995
63,834
15
7
16
18
18
8
45,748
3,685
851
3,994
1,596
(5,557)
867
2,258
(1,693)
2,962
(17,844)
1,326
7,226
(4,503)
5,133
2,287
4,122
129,453
31,466
2,135
40
2,848
(3,205)
259
(2,528)
–
(953)
(38,914)
(20,640)
(15,535)
(6,440)
(14,431)
23,209
(2,221)
702
19,626
23
(3,489)
(2,252)
54
(1,035)
546
428
34
(30)
2,260
(1,232)
128,221
485
(743)
(395)
744
(12)
116
2,356
299
19,925
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The accompanying notes are an integral part of these consolidated financial statements.
52 cherkizovo-group.com annual report 2008
Consolidated cash flow statements continued
For the years ended 31 December 2008 and 2007
Cash flows from investing activities:
Purchases of long-lived assets
Proceeds from sale of property, plant and equipment
Sale of consolidated entities, net of cash surrendered
Acquisition of subsidiaries, net of cash acquired
Purchases of notes receivable
Issuance of long-term loans
Repayment on long-term loans issued
Issuance of short-term loans
Repayment on short-term loans issued
Net cash used in investing activities of continuing operations
Cash flows used in investing activities of discontinued operations:
Purchases of property, plant and equipment
Proceeds from sale of property, plant and equipment
Net cash used in investing activities of discontinued operations
Total net cash used in investing activities
Cash flows from financing activities:
Proceeds from long-term loans
Repayment of long-term loans
Repayment of notes payable
Purchase of treasury stock
Proceeds from short-term loans
Repayment of short-term loans
Proceeds from shares issued
Payments for services related to share issuance
Cash distributed to shareholders
Net cash from financing activities of continuing operations
Cash flows from financing activities of discontinued operations:
Repayment of long-term loans
Proceeds from short-term loans
Repayment of short-term loans
Net cash from financing activities of discontinued operations
Total net cash from financing activities
Total cash from (used in) operating, investing and financing activities
Impact of exchange rate difference on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents of continuing operations, at the beginning of the period
Cash and cash equivalents of discontinued operations, at the beginning of the period
Cash and cash equivalents of continuing operations, at the end of the period
Cash and cash equivalents of discontinued operations, at the end of the period
Supplemental Information:
Income taxes paid
Interest paid
Property, plant and equipment acquired under finance leases
The accompanying notes are an integral part of these consolidated financial statements.
2008
US$000
2007
US$000
(165,231)
973
58
–
(402)
(1,968)
1,342
(7,098)
56
(172,270)
(160)
55
(105)
(172,375)
114,103
(47,248)
–
(496)
273,950
(330,665)
82,340
(2,903)
(48)
89,033
–
2,629
(2,253)
376
89,409
45,255
(12,527)
32,728
16,841
98
49,664
3
8,521
71,697
6,494
(172,989)
3,629
–
(139,775)
–
(1,281)
1,560
(435)
433
(308,858)
(816)
119
(697)
(309,555)
121,825
(23,562)
(195)
–
312,323
(215,060)
–
–
(44)
195,287
(14)
2,190
(1,720)
456
195,743
(93,887)
3,838
(90,049)
106,952
36
16,841
98
11,404
47,802
8,376
Consolidated statements of changes in shareholders’ equity and
comprehensive income
For the years ended 31 December 2008 and 2007
cherkizovo-group.com annual report 2008 53
Total
Total
shareholders’ comprehensive
inome (loss)
US$000
equity
US$000
248,667
61,582
(2,664)
21,939
329,524
329,524
79,286
(496)
78,105
(85,441)
400,978
61,582
21,939
83,521
78,105
(85,441)
(7,336)
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Balances at 1 January 2007
Net income for the year
Cumulative effect of adjustment upon adoption of FIN 48
Translation gain
Balances at 31 December 2007
For the year ended 31 December 2007
Balances at 1 January 2008
New share issuance, net of issuance costs
Purchase of treasury shares
Net income for the year
Translation loss
Balances at 31 December 2008
For the year ended 31 December 2008
Share
capital
US$000
14
Additional
paid-in
capital
US$000
209,861
Retained
earnings
US$000
39,841
61,582
(2,664)
Other
accumulated
Treasury comprehensive
income (loss)
US$000
(1,049)
shares
US$000
–
14
209,861
98,759
–
14
1
209,861
79,285
98,759
78,105
(496)
15
289,146
176,864
(496)
21,939
20,890
20,890
(85,441)
(64,551)
The accompanying notes are an integral part of these consolidated financial statements.
54 cherkizovo-group.com annual report 2008
Notes to the consolidated financial statements
For the years ended 31 December 2008 and 2007
1 Business and environment
Incorporation and history
OJSC Cherkizovo Group (the “Company”) and its subsidiaries (together “the Group” or “Cherkizovo”) trace their origins back to the transformation of a formerly
state owned enterprise, Cherkizovsky Meat Processing Plant (Moscow), into a limited liability partnership and subsequent privatisation in the early 1990’s.
At the time of privatisation, one individual became the majority shareholder in the enterprise. Over the next decade, this individual continued to acquire other
meat processing and agricultural entities in the Russian Federation registering shareholding amounts personally as well as in the name of other immediate
family members or friends of the family, (collectively “the Control Group”). As the Group evolved with continuing acquisitions, two distinctive operating
structures emerged consisting of meat processing (APK Cherkizovsky) and agricultural (APK Mikhailovsky) entities.
A restructuring of ownership interests in Group companies was performed in 2005 by transferring direct interests in Group companies to the Company and
its wholly owned subsidiaries (“Restructuring”). The Restructuring was performed in order to legally consolidate control over the Group’s agricultural holdings
and meat processing companies. This Restructuring eliminated all direct ownership in such companies by the Control Group. This was accomplished by
contributing shares of companies held by the Control Group to the share capital of wholly owned subsidiaries. Companies whose business activities were
not in line with the overall business strategy of the Group were transferred to members of the Control Group (the “Spin-Off”). The Spin-Off was treated as a
distribution to owners. The historical share capital and additional paid in capital presented in these consolidated financial statements represent that of the
Company for all periods presented.
The business of the Group
The Group’s operations are spread over the full production cycle from feed production and breeding to meat processing and distribution. The operational
facilities of the Group include six meat processing plants, four pig production complexes, four poultry production complexes and one combined fodder
production plant. The Group also operates two trading houses with subsidiaries in 13 major Russian cities.
The Group’s geographical reach covers Moscow, the Moscow region, the regions of Saint Petersburg, Penza, Lipetsk, Vologda, Ulyanovsk, Tver, Chelyabinsk,
Tambov, Voronezh, Krasnodar, Ufa, Saratov, Samara, Ekaterinburg, Perm, Briansk and Kazan. The Group is represented in the European part of Russia through
its own distribution network.
The Group owns locally recognised brands which include Cherkizovsky (“Черкизовский”), Pyat Zvezd (“Пять Звезд”), Petelinka (“Петелинка”), Kurinoe
Tsarstvo (“Куриное Царство”) and Imperia vkusa (“Империя вкуса”) and has a diverse customer base. At 31 December 2008 and 2007 the number of staff
employed by the Group was 13,943 and 15,295, respectively.
During 2008 the Group was impacted by significant volatility in grain and feed prices and its financing costs were impacted by the worldwide financial crisis.
During the first half of 2008, the cost of grain and feed were unusually high. To help companies offset the increased costs, the Russian government provided
agricultural producers a one-time additional subsidy. This additional subsidy, which offset the majority of these increased costs, allowed the Group to maintain
relatively consistent margins.
During the second half of 2008, while the prices of grain and feed normalized, the Russian economy was impacted by the global financial crisis and saw the
rouble devalue by approximately 25%. In connection with this crisis, a number of major global financial institutions have been placed into bankruptcy, taken
over by other financial institutions and/or supported by government funding.
The Group’s operations have not been directly impacted by the global economic downturn due to a lower elasticity of demand on food products. Management
is assessing and making appropriate changes in the product mix to ensure that the products offered are those meeting the needs of consumers under current
market conditions. In addition, the Group is continuing to pursue its cost optimization plans that it began at the end of 2007 including the disposal of loss
making assets (Note 23). While the Group’s operations have not been significantly impacted by the global economic slowdown, the Group (along with other
companies throughout the world) has experienced a decrease in availability of credit and a significant increase in the costs of borrowing (Note 10). The Group
is forecasting a further significant increase in its borrowing costs in 2009 in connection with the refinancing of its short term borrowings. However, the Group
has a significant portion of its borrowings denominated in Russian roubles. Accordingly, the Group’s ability to service repayment of its outstanding borrowings
was not significantly impacted by the devaluation of the rouble in the second half of 2008.
Management expects to fund its forecasted 2009 investing cash outflow both through operating cash inflows, as well as through refinancing a portion of its
short term debt as it becomes due. Management is confident that based on current economic conditions that it will be able to refinance its borrowings and has entered
into new borrowings of 29 812 through March 2009. Management believes that the plans that it has in place are sufficient to enable the Group to be able to continue
to meet its obligations and discharge its responsibilities as they become due in the normal course of business.
cherkizovo-group.com annual report 2008 55
2 Summary of significant accounting policies
Accounting principles
The Group’s companies maintain their accounting books and records in accordance with Russian or foreign statutory accounting regulations, as applicable.
The accompanying consolidated financial statements have been prepared in order to present the consolidated financial position, results of operations and cash
flows of the Group in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The accompanying consolidated
financial statements differ from the financial statements prepared for statutory purposes in Russia in that they reflect certain adjustments that are appropriate
to present the financial position, results of operations and cash flows in accordance with US GAAP.
Basis of consolidation
The consolidated financial statements of the Group include the accounts of the Company and subsidiaries controlled through direct ownership of the majority
of the voting interests as described in Note 23. Companies acquired or disposed of during the periods presented are included in the consolidated financial
statements from the date of acquisition or to the date of disposal.
Foreign currency translation
The Group follows a translation policy in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation” and
has determined the Russian rouble to be the Group’s companies’ functional currency.
Management has selected the US Dollar as the Group’s reporting currency and translates the consolidated financial statements into US Dollars. Assets
and liabilities are translated at reporting period end exchange rates. Equity items are translated at historical exchange rates. Income and expense items
are translated at weighted average rates of exchange prevailing during the reporting period. The resulting translation adjustment is recorded as a separate
component of other comprehensive income.
The following table summarizes the exchange rates of the Russian rouble to 1 US dollar at 31 December 2008 and 2007.
31 December 2008
31 December 2007
Exchange rate
29.3804
24.5462
Management estimates
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual
results could differ from those estimates. The estimates and underlying assumptions are reviewed on an ongoing basis.
The principal management estimates underlying these consolidated financial statements include estimations used in assessing long lived assets for
impairment, allowances for bad debts, valuation allowances for deferred tax assets and valuation of assets and liabilities of the acquired entities used in
determining purchase price allocation.
Cash and cash equivalents
Cash and cash equivalents represent cash on hand and in bank accounts and short-term highly liquid investments having original maturities of less than three
months.
Accounts receivable and allowance for doubtful accounts
Accounts receivable are stated at their net realizable value, which approximates their fair value.
Group companies provide an allowance for doubtful accounts based on management’s periodic review of receivables, including the turnover of account
balances. Accounts receivable are written off when evidence exists that they will not be collectible.
Inventory
Inventories, including work in-process, are valued at the lower of cost or market value. Cost is determined using the average cost method. Cost is the sum
of the expenditures and charges, direct and indirect, in bringing goods to their existing condition or location. It includes the applicable allocation of fixed
production and variable overhead costs. Write downs are made for unrealizable inventory in full.
Livestock
Animals with short productive lives, such as poultry, are classified as inventory on the balance sheet. Full cost absorption (which includes all direct and indirect
costs) is used in determining the asset value of livestock. Newborn cattle and pigs, as well as other immature animals purchased for breeding are initially
accounted for as inventory. Immature cattle and pigs are not considered to be in service until they reach maturity, at which time their accumulated cost
becomes subject to depreciation. The Group treats breeding animals as fixed assets with costs to be depreciated over their useful lives, as follows:
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Notes to the consolidated financial statements continued
for the years ended 31 December 2008 and 2007
2 Summary of significant accounting policies continued
Sows
Cattle
Age of transfer to
property, plant and equipment,
years
1
2
Depreciation,
years
2
7
Value Added Tax
Value Added Tax (“VAT”) related to sales is payable based upon invoices issued to customers. Input VAT incurred on purchases may be offset, subject to
certain restrictions, against VAT related to sales. Input VAT related to purchase transactions that are subject to offset against taxes payable after the financial
statement date are recognized in the consolidated balance sheets on a net basis.
Property, plant and equipment
Due to the state of the records relating to the construction and acquisition of a significant portion of the assets of the Group companies, their carrying amounts
as of 31 December 2001 (the date of the first US GAAP balance sheet) were determined through valuation and are stated based on estimated fair value.
Certain fixed assets were adjusted for the allocation of the excess of the value of net assets acquired over the purchase price paid in business combinations
or adjusted to fair value as of the date of such combinations occurring subsequent to 31 December 2001. Assets acquired subsequent to 31 December 2001
are stated at historical cost.
Depreciation is calculated on a straight-line basis over the estimated remaining useful lives of the related assets, as follows:
Buildings and infrastructure
Machinery and equipment
Vehicles
Cattle
Sows
Other
10-39 years
3-22 years
3-10 years
7 years
2 years
3-10 years
Business Combination
The acquisition of businesses from third parties is accounted for using the purchase method. On acquisition, the assets and liabilities of an entity are
measured at their fair values as at the date of acquisition. The interest of minority shareholders is stated at the minority’s proportion of the book values of the
assets and liabilities recognized if applicable. Goodwill arising on acquisitions is recognized as an asset and initially measured at cost, being the excess of the
cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized.
Acquisitions of entities under common control are accounted for on a carryover basis, which results in the historical book value of assets and liabilities of the
acquired entity being combined with that of the Company. The consolidated historical financial statements of the Group are retroactively restated to reflect the
effect of the acquisition as if it occurred during the period in which the entities were under common control. Any difference between the purchase price and
the net assets acquired is reflected in shareholders’ equity.
Goodwill and other intangible assets
Goodwill represents the purchase price for businesses acquired in excess of the fair value of identifiable net assets acquired. Goodwill is not deductible for
income tax purpose in the Russian Federation.
Other intangible assets represent trademarks and computer software acquired. The fair value of the Group’s acquired trademarks is determined using a relief
from royalty method based on expected revenues by trademark. Certain trademarks have been determined to have an indefinite life. Management evaluates a
number of factors to determine whether an indefinite life is appropriate, including product sales history, operating plans and the macroeconomic environment.
Intangible assets with determinable useful lives and computer software are amortized over their useful lives.
Goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests at fiscal year end or earlier if indications of impairment
exist, in accordance with SFAS No. 142, Goodwill and Other Intangibles. In the Group’s assessment of goodwill, management makes assumptions regarding
estimates of future cash flows and other factors to determine the fair value of the reporting unit. For purposes of testing goodwill for impairment, the
management has determined that each segment represents a reporting unit.
The goodwill impairment analysis is a two-step process. The first step used to identify potential impairment involves comparing each reporting unit’s estimated fair
value to its carrying value, including goodwill. The Group uses a discounted cash flow approach to estimate the fair value of its reporting units. The assumptions
used are disclosed in Note 8. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered to not be impaired. If the carrying
value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment.
cherkizovo-group.com annual report 2008 57
The second step of the process involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated impairment.
The implied fair value of goodwill is determined similar to how goodwill is calculated in a business combination, by measuring the excess of the estimated
fair value of the reporting unit as calculated in step one, over the estimated fair values of the individual assets, liabilities and identifiable intangibles as if
the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to
the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an
impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss
establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted.
Impairment of long-lived assets, except for goodwill and intangible assets with indefinite lives
When events and circumstances occur indicating that the carrying amount of a long-lived asset (group) may not be recoverable, the Group estimates the
future undiscounted cash flows expected to be derived from the use and eventual disposition of the asset (group). If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of the long-lived asset (group), the Group then calculates impairment as the
excess of the carrying value of the asset (group) over the estimate of its fair market value.
Notes Receivables
Notes receivable purchased valued at cost upon acquisition with any discounts or premiums arising on purchase reported in the balance sheet as direct
deductions/additions to the face value. Amortisation of such discounts/premiums is recorded as additions to/reductions from interest income. Notes receivable
for which the Group has an intent and ability to hold to maturity are classified as held-to-maturity.
Revenue recognition
The Group derives its revenue from three main sources: sale of processed meat, poultry, and pork. Revenue is recognised when the products are shipped
or when goods are received by its customer, title and risk of ownership have passed, the price to the buyer is fixed or determinable and recoverability is
reasonably assured.
In accordance with the Group’s standard sales terms, title is transferred and the customer assumes the risks and rewards of ownership upon shipment.
However, on contracts with certain large retail chains, title transfers upon acceptance of goods by the customer at delivery. Sales made under these contracts
are recognised upon acceptance.
Sales are recognised, net of VAT and discounts, when goods are shipped to customers. The Group grants discounts to customers primarily based on the
volume of goods purchased. Discounts are based on monthly, quarterly, or annual target sales. Discounts range up to 19.5% for meat processing segment
and 12% for the poultry and pork segments. The discounts are graduated to increase when actual sales exceed target sales. Discounts are accrued against
sales and accounts receivable in the month earned.
Any consideration given to direct or indirect customers of the Group in the form of cash, such as listing fees, are included in the consolidated income
statements as deductions from sales in the period which it relates to.
The Group offers product guarantees to its customers, providing them with an option to return damaged and non conforming goods and goods of initial
improper quality. The period that goods may be returned is set to a maximum of one month from the date of shipment. Returns are accounted for as
deductions to sales.
Marketing expenses
Marketing costs are expensed as incurred. Marketing expenses are reflected in selling and distribution expenses in the accompanying consolidated
income statements.
Government subsidies
In accordance with Russian legislation, enterprises engaged in agricultural activities receive certain subsidies. The largest of such subsidies received relate to
reimbursement of interest expense. The Group records interest subsidies as an offset to interest expense during the period to which they relate.
Taxation
Deferred tax assets and liabilities are recognized for the expected future tax consequences of existing differences between the financial and tax reporting
bases of assets and liabilities, as well as loss carry forwards, using enacted tax rates expected to be in effect at the time these differences are realized. Under
Russian tax law, the Group is not allowed to file a consolidated tax return and is not allowed to offset tax assets and tax liabilities for the different legal entities.
Accordingly, deferred tax assets are offset, as appropriate, with deferred tax liabilities at each legal entity within the Group. Valuation allowances are recorded
for deferred tax assets where it is more likely than not that such assets will not be realised.
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) clarifies the accounting for uncertain tax positions stated in SFAS No. 109,
“Accounting for Income Tax.” FIN 48 applies to all tax positions that are within the scope of FAS No. 109 and requires a two-step approach for recognizing
and measuring tax benefits. FIN 48 establishes a “more-likely-than-not” recognition threshold that must be met before a tax benefit can be recognized in
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58 cherkizovo-group.com annual report 2008
Notes to the consolidated financial statements continued
for the years ended 31 December 2008 and 2007
2 Summary of significant accounting policies continued
the financial statements. To meet this threshold, the enterprise must determine that upon examination by the taxing authority, the tax position is more likely
to be sustained than not, based on the technical merits of the position. Once the recognition threshold has been met, the enterprise is required to recognise
the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with the taxing authority. In both steps,
enterprises must presume that the taxing authority has full knowledge of all relevant information.
Concentration of credit risk
Financial instruments that potentially expose the Group to concentration of credit risk consist primarily of cash and cash equivalents, accounts receivable
from customers and advances paid to vendors. As of 31 December 2008, 52% and 28% of total cash balances are held on deposit in two Russian financial
institutions. As of 31 December 2007, 47%, 22% and 14% of total cash balances are held on deposit in three Russian financial institutions.
As of 31 December 2008, approximately 12% of the Group’s net accounts receivable were due from one customer. As of 31 December 2007 the Group’s
risk associated with customers was diversified due to a large customer base, with no single customer or customer group representing greater than 10% of
accounts receivable.
As of 31 December 2008, approximately 24% and 16% of advances paid were outstanding with two vendors, respectively.
As of 31 December 2007, approximately 22% and 14% of advances paid were outstanding with two vendors, respectively.
The maximum amount of loss due to credit risk, based on the fair value of trade receivables and other receivables that the Group would incur if related parties
failed to perform according to the terms of contracts, was 35 094 and 33 066 as of 31 December 2008 and 2007 respectively.
Minority interest
Minority interest is accounted for at historical value, which is the minority’s share in the book value of a subsidiary’s net assets on the date, when the control
over a subsidiary was established by the Group.
Leasing
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other
leases are classified as operating leases. Assets held under finance leases are recognised as assets of the Group at their fair value or, if lower, at the present
value of the minimum lease payments, each determined at inception of the lease. The corresponding liability is included in the balance sheet as debt from
finance leases. Lease payments are apportioned between interest expense and reduction of the lease obligation so as to achieve a constant rate of interest on
the remaining balance of the liability. Interest expense is charged directly against income, unless it is directly attributable to qualifying assets, in which case it
is capitalised in accordance with the Group’s general policy on interest costs.
Pension costs
The Group makes payments for employees into the Pension fund of the Russian Federation. From 1 January 2005, all contributions to the Pension fund
are calculated by the application of a regressive rate from 20% to 2% of the annual gross remuneration of each employee. The Group does not have any
additional obligation other than the cash contribution described herein.
Effect of accounting pronouncements adopted
As of 1 January 2008, the Group adopted SFAS No. 157, “Fair Value Measurement” (“SFAS 157”). SFAS 157 provides a single definition of fair value, along
with a framework for measurement and requires additional disclosure about using fair value to measure assets and liabilities. SFAS 157 emphasises that
fair value measurement is market-based, not entity-specific, and establishes a fair value hierarchy in which the highest priority is quoted prices in active
markets. Under SFAS 157, fair value measurements are disclosed according to their level within this hierarchy. While the statement does not add any new fair
value measurements, it does change practice as follows: requiring entities to include their own credit standing when measuring their liabilities, modifying the
transaction price assumption, prohibiting broker-dealers and investment companies from using block discounts when valuing large blocks of securities and
requiring entities to adjust the value of restricted securities for the effect of the restriction even when the restriction lapses within one year. The Group
adopted SFAS 157 on 1 January 2008 and the adoption only had an impact on the disclosure of the fair value of the Group’s financial assets and liabilities.
The effective date for SFAS 157 as it relates to fair value measurements for non-financial assets and liabilities that are not measured at fair value on a
recurring basis has been deferred to fiscal years beginning after 15 December 2008 in accordance with FASB Staff Position (“FSP”), SFAS 157-2, “Effective
Date of FASB Statement No. 157”. The Group plans to adopt the deferred portion of SFAS 157 on 1 January 2009 and does not expect a material impact on
the financial statements from adopting the statement.
As of 1 January 2008, the Group adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, (“SFAS 159”). SFAS 159
permits an entity to measure certain financial assets and liabilities at fair value. Entities that elect the fair value option will report unrealised gains and losses
in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with a few exceptions, as long as
it is applied to the instrument in its entirety. The fair value option is irrevocable, unless a new election date occurs. The adoption of SFAS 159 did not have an
impact on the financial statements at the date of its adoption, as the Group did not elect the fair value option for any of its financial assets or liabilities.
cherkizovo-group.com annual report 2008 59
New accounting pronouncements
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R significantly changes the accounting
for business combinations. Under SFAS 141R, an acquiring entity will be required to recognise all the assets acquired and liabilities assumed in a transaction
at the acquisition date fair value with limited exceptions. SFAS 141R will change the accounting treatment for certain specific acquisition related items
including expensing acquisition related costs as incurred, valuing noncontrolling interests at fair value at the acquisition date and expensing restructuring
costs associated with an acquired business. SFAS 141R also includes a substantial number of new disclosure requirements. SFAS 141R is to be applied
prospectively to business combinations for which the acquisition date is on or after 1 January, 2009. The adoption of SFAS 141R will impact the accounting
for business combinations completed by the Group on or after 1 January 2009. Effective January 1, 2008, the Group adopted an accounting policy of
expensing acquisition-related costs incurred before the effective date of SFAS 141R for probable acquisitions not yet completed as of 31 December 2008. No
such costs were expensed during 2008.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research
Bulletin No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the treatment of noncontrolling interests in a subsidiary.
Noncontrolling interests in a subsidiary will be reported as a component of equity in the consolidated financial statements and any retained noncontrolling
equity investment upon deconsolidation of a subsidiary is initially measured at fair value. The Group will adopt the provisions of SFAS 160 on 1 January 2009.
The adoption of SFAS 160 will result in the reclassification of minority interests to equity.
In April 2008, the FASB issued FSP SFAS No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP SFAS 142-3”). FSP SFAS 142-3 amends
the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognised intangible asset under
FASB Statement No. 142, “Goodwill and Other Intangible Assets”. FSP SFAS 142-3 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years, with early adoption prohibited. The Group does not expect a material impact on the
consolidated financial statements from adopting FSP SFAS 142-3.
3 Cash and cash equivalents
Cash as of 31 December 2008 and 2007 comprised:
Cash in hand
Bank accounts
Total cash and cash equivalents
4 Inventory
Inventory as of 31 December 2008 and 2007 comprised:
Raw materials and goods for resale
Livestock
Work in-process
Finished goods
Total inventory
5 Other receivables, net
Other receivables, net, as of 31 December 2008 and 2007 comprised:
Subsidies receivable for interest expense reimbursement
Subsidies receivable for purchase of fodder
Subsidies receivable for meat produced
Other receivables
Total receivables, net
2008
US$000
144
49,520
49,664
2008
US$000
69,930
55,316
5,280
3,101
133,627
2008
US$000
13,961
5,086
1,416
8,025
28,488
2007
US$000
1,045
15,796
16,841
2007
US$000
88,998
52,879
7,195
5,409
154,481
2007
US$000
6,840
–
5,201
8,808
20,849
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For the six months ended 30 June 2008, the Federal Budget of the Russian Federation was amended to increase the total assignment of funds for subsidies
to agricultural producers by introducing subsidies designed to compensate producers for the high cost of mixed fodder used in production of poultry and pork
during the first half of 2008. Of the total amount of 33,077 expected to be received, 4,524 remain receivable as at 31 December 2008. Management expects
to receive the remaining portion within the next 12 months.
60 cherkizovo-group.com annual report 2008
Notes to the consolidated financial statements continued
for the years ended 31 December 2008 and 2007
6 Other current assets
Other current assets as of 31 December 2008 and 2007 comprised:
VAT and other taxes receivable
Notes receivable (effective annual interest rate of 9.41% and 7.52%
as of 31 December 2008 and 2007, respectively)
Prepaid expenses
Loans receivable
Other current assets
Total other assets
7 Property, plant and equipment, net
The carrying amounts of property, plant and equipment as of 31 December 2008 and 2007 comprised:
Land
Buildings, infrastructure and leasehold improvements
Machinery and equipment
Vehicles
Sows
Cattle
Other
Advances paid for property, plant and equipment
Construction in-progress and equipment for installation
Total property, plant and equipment, net
2008
US$000
16,732
3,160
2,627
8,303
3,837
34,659
2008
US$000
2,373
366,795
135,832
27,168
7,838
183
1,681
43,804
98,272
683,946
2007
US$000
29,141
3,678
3,348
2,807
4,327
43,301
2007
US$000
2,711
303,725
142,360
30,486
10,156
830
1,914
52,976
160,691
705,849
Accumulated depreciation amounted to 145,097 and 131,723 as of 31 December 2008 and 2007, respectively. Depreciation expense amounted to 45,269
and 31,216 for the years ended 31 December 2008 and 2007, respectively, which includes depreciation of leased equipment.
Vehicles and Machinery and equipment include 15,424 and 16,068 of leased equipment as of 31 December 2008 and 2007, respectively. Buildings,
infrastructure and leasehold improvements include 13,830 and 18,556 of leased buildings and constructions as of 31 December 2008 and 2007,
respectively. Accumulated depreciation on leased property and equipment amounted to 3,775 and 1,495 as of 31 December 2008 and 2007, respectively.
Loss on disposal of property, plant and equipment of 851 and 40 was recognized in the Other operating expenses line item in the consolidated income
statement for the year ended 31 December 2008 and 2007, respectively.
8 Goodwill and other intangible assets, net
Goodwill
The changes in the carrying amount of goodwill for 2008 and 2007 were as follows:
Balance at 31 December 2006
Acquisitions
Translation gain
Balance at 31 December 2007
Adjustment related to expiration of statute of limitations on tax risks accrued under FIN 48 upon
acquisition of Golden Rooster Co. Limited (Note 18)
Translation loss
Balance at 31 December 2008
Total
US$000
9,538
728
693
10,959
(608)
(1,803)
8,548
As of 31 December 2006, goodwill of 9,538 arose from the purchase by the Group of its controlling stakes in JSC BMPP (which is included in the meat
processing segment). During 2007, the Company purchased Golden Rooster Co. Limited (which is included in the poultry segment) and recorded goodwill of 728.
cherkizovo-group.com annual report 2008 61
As of 31 December 2008, management performed an annual impairment test and determined that goodwill was not impaired. The following specific
assumptions were used in the impairment test;
• Sales volumes increase by 6%, 5% and 4% during 2009, 2010 and 2011, respectively, and remain constant thereafter;
• Prices are forecast to increase by 4% and 15% in 2009 and 2010, respectively, and increase in line with inflation at an average of 10% per annum
thereafter;
• Operating costs are forecast to increase by 7% and 21% in 2009 and 2010, respectively, and increase by 10% per annum thereafter;
• Pre-tax discount rate of 24.6%.
Management believes that a 5% increase in future planned operating expenses, which is a key variable in determination of cash flows, would result in the
carrying value of the meat processing segment exceeding its fair value, thereby indicating potential impairment.
Other intangible assets
Other intangible assets as of 31 December 2008 and 2007 comprised:
Computer software
Trademark subject to amortisation
Indefinite life trademarks
Other intangible assets, net
2008
US$000
Gross
carrying Accumulated
amount amortization
(63)
4,034
–
–
39,239
–
(63)
43,273
Net
carrying
amount
3,971
–
39,239
43,210
Gross
carrying Accumulated
amortisation
amount
(190)
3,567
(36)
720
–
50,946
(226)
55,233
2007
US$000
Net
carrying
amount
3,377
684
50,946
55,007
Software
Software is amortised over its useful life of two to three years, with the exception of Oracle software, which is amortised over its estimated useful life of ten years.
Weighted-average useful life for software as of 31 December 2008 is 5.9 years.
Aggregate amortisation expense for the year ended 31 December 2008 and estimated amortisation expense for the following five subsequent years are as follows:
Computer software
2008
US$000
372
2009
US$000
771
2010
US$000
658
2011
US$000
742
2012
US$000
329
2013
US$000
329
Biruliovsky (“Бирюлевский”) trademark
The carrying value of the Biruliovsky trademark was 0 and 684 as of 31 December 2008 and 2007, respectively.
Prior to July 2007, the Biruliovsky trademark had an indefinite useful life. Based on operational plans to reposition the Biruliovsky trademark into a lower-
margin market segment during the second half of 2007, management reassessed the classification of this intangible as of 1 July 2007. As a result,
management determined that the trademark had a finite life and began amortisation of the asset over its estimated useful life of ten years. Amortisation
expense for the Biruliovsky trademark was 107 and 35 for the years ended 31 December 2008 and 2007, respectively
As of 31 December 2008, management tested the Biruliovsky trademark for impairment and determined the trademark to be fully impaired as a result
of implementation of a cost optimization plan which includes cessation of sales of products under the Biruliovsky trademark, with impairment loss of 481
recognized in Impairment of non-current assets in the consolidated income statement.
Kurinoe Tsarstvo (“Куриное Царство”) trademark
The carrying value of the Kurinoe Tsarstvo trademark was 24,408 and 33,195 as of 31 December 2008 and 2007, respectively.
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In 2008, the carrying value of the Kurinoe Tsarstvo trademark decreased by 1,548 due to expiration of the statute of limitations on tax risks accrued under
FIN 48 upon acquisition of Golden Rooster Co. Limited (Note 18).
As of 31 December 2008, management tested the Kurinoe Tsarstvo trademark for impairment and determined the trademark to be impaired primarily due to
an increase in the Group’s weighted average cost of capital from the time of the original valuation of the trademark in August of 2007. An impairment loss in
the amount of 1,777 was recognized in Impairment of non-current assets in the consolidated income statement.
62 cherkizovo-group.com annual report 2008
Notes to the consolidated financial statements continued
for the years ended 31 December 2008 and 2007
8 Goodwill and other intangible assets, net continued
The following specific assumptions were used in the impairment test:
• Sales volumes increase by 20%, 27% and 25% during 2009, 2010 and 2011, respectively, and remain stable thereafter;
• Prices are forecast to increase by 33% in 2009 and increase by 10% per annum thereafter;
• Pre-tax discount rate of 25.5%.
Management believes that a 1% increase in discount rate would increase the impairment loss by 1,552 and a 10% decrease in future planned trademark
revenues increases the impairment loss by 2,441.
Cherkizovsky (“Черкизовский”) trademark
The carrying value of the Cherkizovsky trademark was 14,831 and 17,751 as of 31 December 2008 and 2007, respectively.
As of 31 December 2008, management tested the Cherkizovsky trademark for impairment and determined that the trademark was not impaired.
Impairment summary
The impairment of non-current assets was reflected as follows as of 31 December 2008 and 2007:
Impairment of Biruliovsky trademark
Impairment of Kurinoe Tsarstvo trademark
Total impairment of non-current assets
2008
US$000
481
1,777
2,258
2007
US$000
–
–
–
For the impairment analysis the Group used cash flow projections based on actual operating results and business plans approved by management. The
discount rate used in the analysis for trademarks and goodwill reflects the time value of money and risks associated with each individual operating segment
and/or asset being analyzed. A summary of the key assumption management used in their fair value calculations were as follows:
• Cash flow projections covered a period of five years;
• Cash flow projections were prepared in nominal terms;
• Cash flow projections during the forecast period were based on long-term price trends for both sales prices and input costs;
• Consumer price inflation expectations (in Russian roubles) during the forecast period were 10%; and
• Discount rates were estimated for each item based on the following weighted average cost of capital (in Russian roubles) as calculated for each segment
and adjusted for any asset specific risk factors:
– Meat processing segment
– Poultry and pork segments
23.5%
20.5%
Values assigned to key assumptions and estimates used to measure fair value were consistent with external sources of information. Management believes that
the values assigned to the key assumptions and estimates represented the most realistic assessment of future trends. The impairment analyses were sensitive
to changes in key assumptions, in particular discount rates and changes in forecast revenues or expenses. The rates used in this analysis are meant to provide
information regarding levels of sensitivity of assumptions used and have, therefore, been tailored to reflect the specifics of each business segment.
9 Long-term notes receivable
During June 2006, the Group purchased Russian rouble denominated notes receivable from Gazprombank with a maturity date of June 2014 and a face value
of 12,851 at the issuance date for total cash consideration of 6,762. In addition, the Group purchased Russian rouble denominated notes receivable from
Sberbank in December 2008 at par value for a total cash consideration of 357. The maturity date of those notes is December 2010. As of 31 December 2008,
the balance comprised:
Gazprombank notes receivable
Sberbank notes receivable
Total long-term notes receivable
As of 31 December 2007, the balance comprised:
Gazprombank notes receivable
Carrying Value
US$000
7,563
340
7,903
Discount
US$000
(4,198)
–
(4,198)
Face Value
US$000
11,761
340
12,101
Effective
%
8.36%
11.00%
Carrying Value
US$000
8,357
Discount
US$000
(5,723)
Face Value
US$000
14,080
Effective
%
8.36%
10 Borrowings
Borrowings of the Group as of 31 December 2008 and 2007 comprised:
Finance leases
Bonds
Bank loans
Credit lines
Loans from government
Other borrowings
Total borrowings
Interest rates
WAIR*
8.30%-16.9% 14.22%
8.85%
8.85%
8.00%-19.00% 11.65%
8.00%-24.55% 13.13%
4.16%
2.34%
3.00%-6.00%
0.00%-7.00%
cherkizovo-group.com annual report 2008 63
14.22%
8.85%
4.71%
4.38%
4.16%
2.34%
EIR** Short-term***
4,179
68,073
5,058
129,449
27,308
2,284
236,351
2008
US$000
Long-term Short-term***
4,533
–
76,593
124,224
19,545
4,165
229,060
7,476
–
7,206
305,686
5,054
244
325,666
562,017
2007
US$000
Long-term
9,657
81,479
10,564
309,144
13,653
725
425,222
654,282
* WAIR represents the weighted average interest rate on outstanding loans.
** EIR represents the effective rate on borrowings at year end, adjusted by government subsidies for certain qualifying debt. Since approvals for subsidies are submitted annually by the Group
as required by law, the existence of such subsidies in any given year is not necessarily indicative of their existence in future periods. See Note 17 for further disclosure of government subsidies
related to interest on borrowings.
Maturity of long-term borrowings (excluding finance leases) is as follows:
Total borrowings
2010
US$000
77,106
2011
US$000
98,801
2012
US$000
29,097
2013
US$000
51,048
2014
US$000
50,894
>2014
US$000
11,244
Total
US$000
318,190
As of 31 December 2008, the Group’s borrowings are denominated in the following currencies: 542,042 in Russian roubles, 663 in Euro and 19,312 in
US dollars. As of December 31 2007, the Group’s borrowings are denominated in the following currencies: 552,502 in Russian roubles, 1,983 in Euro and
99,797 in US dollars.
The interest on the majority of borrowings is paid on a monthly or quarterly basis, with the exception of bonds, for which the interest is paid on a semi-annual basis.
Finance leases
As of 31 December 2008 and 2007, the Group used certain fixed assets under leasing contracts that qualified for treatment as finance leases. The lower of
the incremental borrowing and the rate implicit in the lease agreement was used in capitalizing the leases.
The total minimum lease payments due under these lease agreements comprised:
Payments falling due
Within one year
In year two
In year three
In year four
In year five
After year five
Total minimum
lease payments
US$000
5,525
3,051
1,319
869
858
7,932
19,554
2008
Portion
related Total minimum
to interest lease payments
US$000
6,243
4,090
1,807
1,045
1,026
10,521
24,732
US$000
1,346
910
720
675
647
3,601
7,899
2007
Portion
related
to interest
US$000
1,710
1,192
910
837
808
5,085
10,542
Bonds
During June 2006, the Group raised two billion roubles (74,881 at the issuance date) through an issue of putable bonds with a face value of 1,000 roubles
(37 at the issuance date). The issuance was completed in June 2006 with the bonds issued at par value and the Group incurring 378 related to issuance
costs that are being amortized into the income statement over the life of the borrowing. The bonds will mature in 2011, unless redeemed in 2009.
The coupon rate on the bonds, payable semi-annually, is set at 8.85% per annum for the first three years. In 2009, the Group will bid a coupon rate to be paid
for an additional two years. At that point, the investors in the bonds have the right to redeem the bonds at their par amount or may accept the Group’s bid,
causing the maturity to be extended to June 2011. The investors’ decision to redeem will be decided by each individual bondholder therefore it is possible that
either a portion, or the entirety, of the outstanding principle may become due in June 2009.
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64 cherkizovo-group.com annual report 2008
Notes to the consolidated financial statements continued
for the years ended 31 December 2008 and 2007
10 Borrowings continued
Bank loans
Gazprombank
Borrowings from Gazprombank consist of two long-term rouble denominated loans with interest of 12% per annum. Notes receivable with a carrying value of
7,563 were pledged as collateral under these loan agreements (Note 9). Principal payment is due on maturity in 2014. Amount outstanding was 6,127 and
7,333 as of 31 December 2008 and 2007, respectively.
Lipetzkkombank
Borrowings from Lipetzkkombank consist of one short-term rouble denominated loan with interest of 16% per annum. The loan is guaranteed by a Group
company and a related party. Principal payment is due on maturity in 2009. Amount outstanding was 681 and 2,037 as of 31 December 2008 and 2007,
respectively.
Savings Bank of Russia
Borrowings from Saving Bank of Russia consist of three short-term rouble denominated loans with interest ranging from 16% to 19% per annum. The loan is
guaranteed by a Group company. Principal payment is due on maturity in 2009. Amount outstanding was 1,293 and 1,548 as of 31 December 2008 and 2007,
respectively.
Lines of credit
Savings Bank of Russia
Borrowings from the Savings Bank of Russia consist of fifty five rouble denominated lines of credit with interest ranging from 11.5% to 17.25% per annum.
Several of these instruments are guaranteed by a related party. Principal payments are due from 2009 to 2014. Amount outstanding was 206,812 and 168,583
as of 31 December 2008 and 2007, respectively.
Gazprombank
Borrowings from Gazprombank consist of five rouble denominated lines of credit with interest ranging from 11.5% to 14% per annum. Some of these facilities
are guaranteed by Group companies and related parties. Principal payments are due from 2009 to 2016. Amount outstanding was 133,772 and 160,932 as
of 31 December 2008 and 2007, respectively.
Lipetzkkombank
Borrowings from Lipetzkombank consist of five rouble denominated and one US dollar denominated lines of credit with interest ranging from 8% to 15%
per annum. Principal payment is due on maturity in 2009. Amount outstanding was 11,201 and 11,997 as of 31 December 2008 and 2007, respectively.
Raiffeisen
Borrowings from Raiffeisen consist of one rouble denominated and one US dollar denominated unsecured loan facilities bearing interest equal to the MosPrime
one-month rate which at 31 December 2008 was 24.55% per annum. Principle payment is due on maturity in 2009. Amount outstanding was 16,257 and
37,061 as of 31 December 2008 and 2007, respectively.
Bank Zenith
Borrowings from Bank Zenith consist of two rouble denominated lines of credit with interest ranging from 11.5% to 12.8% per annum. Notes receivable with a
carrying value of 3,160 were pledged as collateral under these agreements. Some of these facilities are guaranteed by Group companies and related parties.
Principal payment is due on maturity in 2011. Amount outstanding was 66,699 and 54,469 as of 31 December 2008 and 2007, respectively.
The total amount of unused credit on lines of credit as of 31 December 2008 is 59,609. The unused credit can be utilized from 2009 to 2015 with varying
expiration of available amounts.
Loans from government
Department of Food Supply of the City of Moscow
Borrowings from the Department of Food Supply of the City of Moscow consist of one rouble denominated long-term and two rouble denominated short-term
loans with interest ranging from 3.4% to 4.0% per annum. Principal payments are due on maturity in 2009. Amount outstanding was 24,851 and 15,483 as
of 31 December 2008 and 2007, respectively.
Department of Taxes and Financial Policies, Moscow City Government
Borrowings from the Department of Taxes and Financial Policies of the Moscow City Government consist of two rouble denominated long-term loans with interest ranging
from 5.5% to 6% per annum. Principal payments are due from 2010 to 2011. Amount outstanding was 6,603 and 9,859 as of 31 December 2008 and 2007, respectively.
Other borrowings
Other borrowings primarily represent unsecured loans from shareholders and contractors with interest rates ranging from 0% to 7% per annum. Principal
payments are due from 2008 to 2011.
cherkizovo-group.com annual report 2008 65
Collateral under borrowings
Shares of and participating interests in the following Group companies are pledged as collateral under certain borrowings as of 31 December 2008:
– 92%
• JSC Vasiljevskaya
– 76%
• CJSC Petelinskaya
– 51%
• JSC Lipetskmyasoprom
– 51%
• LLC Budenovets Agrifirm
– 51%
• LLC Mikhailovsky Feed Milling Plant
– 51%
• LLC Kuznetsovsky Kombinat
– 51%
• LLC Ardymsky Feed Milling Plant
– 51%
• CJSC Botovo
– 35%
• JSC MPP Ulyanovsky
• LLC AIC Mikhailovsky
– 51%
• JSC Biruliovsky meat processing plant – 51%
Inventory with carrying value of 19,916 and 37,348 was pledged under certain borrowings as of 31 December 2008 and 2007, respectively.
Property, plant and equipment with carrying value of 151,166 and 136,747 was pledged under loan agreements as of 31 December 2008 and 2007, respectively.
11 Tax related payables
Short-term tax related payables as of 31 December 2008 and 2007 comprised:
Value added tax
Property tax payable
Payroll related taxes
Personal income tax withheld
Corporate income tax
Transportation tax
Other taxes
Total short-term tax related payables
Long-term tax related payables as of 31 December 2008 and 2007 comprised:
Corporate income tax
Payroll related taxes
Value added tax
Other taxes
Total long-term taxes payable
2008
US$000
3,312
1,342
1,180
1,067
461
79
108
7,549
2008
US$000
6,890
34
11
–
6,935
2007
US$000
1,857
1,142
1,520
1,296
774
71
151
6,811
2007
US$000
9,949
38
16
10,003
12 Shareholders’ equity
Share capital
On 10 July 2007, issued shares of OJSC Cherkizovo Group were split by converting each issued share with a par value of 1 rouble into 100 shares with a par
value of 0.01 roubles. This increased the number of authorized shares to 54,702,600 and the number of issued and outstanding shares to 39,564,300. All
share amounts have been adjusted retroactively to reflect the stock split.
In May 2008, the Group issued an additional 3,505,055 ordinary shares, of which 493,447 ordinary shares were acquired by OJSC Cherkizovo Group’s
existing shareholders (including holders of global depository receipts (GDRs) acting through the depositary) pursuant to their statutory pre-emptive rights. This
issuance increased the number of issued and outstanding shares to 43,069,355. The net proceeds from the offering, after share issuance costs of 3,054,
were 79,286. Share issuance costs of 122 remained unpaid as at 31 December 2008 and were recorded in other accounts payable.
In October 2008 the Group purchased 62,000 global depository receipts, which equates to 41,333 ordinary shares, for 496. These treasury shares were
accounted for using the cost method. This transaction decreased the number of outstanding shares to 43,028,022.
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Notes to the consolidated financial statements continued
for the years ended 31 December 2008 and 2007
12 Shareholders’ equity continued
All issued and outstanding shares have equal voting rights. As of 31 December 2008, MB Capital Partners Ltd. (formerly, Cherkizovsky Group Ltd.) owned
61.1% of the outstanding share capital of OJSC Cherkizovo Group. The Group is authorized to issue preferred shares not exceeding 25% of its ordinary share
capital. No such shares are currently issued.
In accordance with Russian legislation, earnings available for dividends are limited to retained earnings of OJSC Cherkizovo Group, calculated in accordance
with statutory rules in local currency. No dividends were declared or paid for the years ended 31 December 2008 and 2007.
Earnings per share
Earnings per share for the years ended 31 December 2008 and 2007 have been determined using the weighted average number of Group shares outstanding
over the period.
On 10 July 2007, the number of shares was increased through a share split. In accordance with SFAS No. 128, “Earnings Per Share”, earnings per share
figures were adjusted retrospectively to reflect the change in the number of shares.
The Group has no securities which should be considered for dilution.
13 Sales
Sales for the years ended 31 December 2008 and 2007 comprised:
Produced goods and goods for resale
Other sales
Sales volume discounts
Sales returns
Total sales
14 Cost of sales
Cost of sales for the years ended 31 December 2008 and 2007 comprised:
Raw materials and goods for resale
Personnel (excluding pension costs)
Depreciation
Utilities
Pension costs
Other
Total cost of sales
2008
US$000
1,203,637
13,785
(41,743)
(9,398)
1,166,281
2008
US$000
704,588
79,988
39,719
31,212
12,448
18,884
886,839
2007
US$000
849,079
3,900
(24,887)
(7,329)
820,763
2007
US$000
479,623
52,520
26,667
17,931
7,566
14,183
598,490
Raw materials and goods for resale are offset by subsidies received from local governments in the amount of 34,433 and 5,970 for the years ended
31 December 2008 and 2007, respectively. These targeted subsidies are received based on the amount of meat produced.
cherkizovo-group.com annual report 2008 67
15 Selling, general and administrative expenses
Selling, general and administrative expenses for the years ended 31 December 2008 and 2007 comprised:
Personnel (excluding pension costs)
Transportation
Materials and supplies
Pension costs
Taxes (other than income tax)
Security services
Depreciation and amortisation
Audit, consulting and legal fees
Advertising and marketing
Utilities
Bad debt expense
Repairs and maintenance
Veterinary services
Bank charges
Information technology and communication services
Insurance
Other
Total selling, general and administrative expenses
16 Other income, net
Other income and expenses for the years ended 31 December 2008 and 2007 comprised:
Interest income
Gain from expiration of payables
Other financial loss
Foreign exchange (loss) gain
Total other income, net
17 Interest expense, net
Interest expense for the years ended 31 December 2008 and 2007 comprised:
Interest expense, net
Finance lease interest expenses
Amortisation of discount
Total interest expense, net
2008
US$000
67,815
20,810
14,360
9,127
7,930
7,329
6,029
4,905
4,339
3,006
3,685
2,800
2,548
2,014
1,619
1,080
13,009
172,405
2008
US$000
1,983
1,011
(203)
(1,596)
1,195
2008
US$000
20,742
1,975
8
22,725
2007
US$000
56,699
11,288
10,935
7,061
6,122
4,400
4,799
3,977
8,236
1,676
2,135
2,190
2,147
1,347
844
699
12,792
137,347
2007
US$000
3,899
467
(120)
3,205
7,451
2007
US$000
17,669
710
17
18,396
In accordance with Russian legislation, enterprises engaged in agricultural activities and enterprises involved in purchasing meat receive subsidies on certain
qualifying loans. The Group has accounted for such subsidies by reducing the interest expense on the associated loans by 18,433 and 9,730 for the years
ended 31 December 2008 and 2007, respectively.
Interest capitalized in the years ended 31 December 2008 and 2007 was 7,910 and 4,475, respectively.
18 Income tax
The income tax expense for the years ended 31 December 2008 and 2007 comprised:
Current provision
Deferred tax (benefit) expense
Provision for income tax
2008
US$000
6,966
(5,557)
1,409
2007
US$000
7,000
259
7,259
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Notes to the consolidated financial statements continued
for the years ended 31 December 2008 and 2007
18 Income tax continued
All of the Group’s taxes are levied and paid in the Russian Federation.
The statutory income tax rates for all operations in the meat processing and non-agricultural operations in the poultry/pork segments are 24% and 0% for
agricultural operations within the poultry/pork segments for the years presented under Russian legislation.
In July 2008, the government of the Russian Federation delayed the introduction of income taxes for agricultural companies until 2013. In November 2008 the
government also decreased the statutory tax rate applicable to non-agricultural entities from 24% to 20% effective from 1 January 2009. These changes in
tax rates resulted in a reduction of net deferred income tax liability in the amount of 5,911 as of 31 December 2008.
The agricultural operations within the poultry and pork segments will be subject to income tax starting 1 January 2009 as follows:
Years
2013-2015
Thereafter
Income tax charge reconciled to the theoretical tax provision at the statutory rate for the years ended 31 December 2008 and 2007 is:
Income from continuing operations before income tax and minority interest
Income from continuing operations before income tax and minority interest of
entities taxed at agricultural rates
(Loss) income from continuing operations before income tax and minority interest of generally taxed entities
Statutory tax rate (Agricultural)
Statutory tax rate (General)
Theoretical income tax (benefit) expense at statutory rate
Impact from agricultural temporary differences calculated at enacted future tax rates
Adjusted theoretical income tax expense at statutory rates
Expenses not deductible for Russian statutory taxation purposes, net
Change in tax rates
Impact from reversal of FIN 48 accruals related to expiration of statute of limitation,
net of penalties accrued on FIN 48 tax liabilities
Other permanent differences
Change in valuation allowance
Actual income tax provision
Deferred tax assets/(liabilities) arising from tax effect of temporary differences:
Property, plant and equipment
Intangibles
Other non-current assets
Other non-current liabilities
Other current liabilities
Other current assets
Loss carry forwards
Valuation allowance
Net deferred tax liability
Deferred tax asset – long-term portion
Deferred tax liability – long-term portion
Long-term deferred tax liability, net
Deferred tax asset – current
Deferred tax liability – current
Current deferred tax asset, net
Total deferred tax liability, net
2008
US$000
82,398
87,601
(5,203)
0%
24%
(1,249)
2,094
845
4,481
(5,911)
867
691
436
1,409
2008
US$000
(30,687)
(3,089)
43
1,115
1,389
3,179
6,162
(1,669)
(23,557)
470
(28,594)
(28,124)
4,621
(54)
4,567
(23,557)
Income tax rate
18%
20%
2007
US$000
73,941
58,692
15,249
0%
24%
3,660
2,693
6,353
3,933
411
(2,528)
(829)
(81)
7,259
2007
US$000
(44,192)
(4,312)
52
2,039
2,484
4,545
7,115
(1,556)
(33,825)
2,030
(42,982)
(40,952)
7,304
(177)
7,127
(33,825)
cherkizovo-group.com annual report 2008 69
The valuation allowance is attributable to loss carryforwards which are not expected to be utilised by management. As the Group does not have a legal right to
offset deferred tax assets and deferred tax liabilities between different legal entities, management expects that the Group will not be able to utilize all of the tax
loss carryforwards as certain of the Group’s subsidiaries are expected to have operating losses in the future.
The Group’s tax loss carry forwards expire as follows:
Tax loss carry forwards
2012
US$000
55
2013
US$000
–
2014
US$000
438
2015
US$000
2,298
2016
US$000
11,481
2017
US$000
8,375
2018
US$000
8,899
Total
US$000
31,546
The movements in net deferred tax liability for the years ended 31 December 2008 and 2007 comprised:
Net deferred tax liability, beginning of the year
Impact of translation loss on beginning balance
Deferred tax expense (benefit)
Deferred tax acquired on acquisition of new consolidated entities
Net deferred tax liability, end of the year
2008
US$000
(33,825)
4,711
5,557
–
(23,557)
2007
US$000
(14,088)
(1,781)
(259)
(17,697)
(33,825)
Unrecognized income tax benefits
As of 31 December 2008, the Group included accruals for unrecognized income tax benefits of approximately 6,584 as a component of long-term tax related
payables (of which approximately 729 and 922 were penalties and fines, respectively).
As of 31 December 2007, the Group included accruals for unrecognized income tax benefits of approximately 9,582 as a component of long-term tax related
payables (of which approximately 732 and 1,040 were penalties and fines, respectively).
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at 1 January
Purchase of Golden Rooster Co. Limited (Note 23)
Translation (gain) loss
Additions based on tax positions related to the current year
Additions based on tax positions related to prior years
Reductions related to settlements with taxing authorities
Reductions as a result of a lapse of the applicable statute of limitations
Balance at 31 December
2008
US$000
7,810
–
(1,405)
521
–
–
(1,993)
4,933
2007
US$000
2,048
7,214
395
45
–
–
(1,892)
7,810
As of 31 December 2008, it is estimated that 4,933 of the unrecognized tax benefit will affect future effective tax rates.
In 2008 certain unrecognised tax benefits were recognised due to the expiration of the statutes of limitations. Tax benefits which arose in OJSC Kurinoe
Tsarstvo prior to its purchase by the Group were recognised by reducing the amount of goodwill to zero with the remainder reducing the carrying amount of
the trademark “Куриное Царство” (Kurinoe Tsarstvo).
The Group considers it reasonably possible that approximately 2,870 of the unrecognized income tax benefit (including interest and penalties) will be reversed
within the next year, due to the expiration of the statute of limitations.
The Group recognizes accrued penalties related to unrecognized tax benefits and fines in income tax expenses. During the years ended 31 December 2008
and 2007, the Group recognized approximately 827 and 732 in penalties, respectively.
As of 31 December 2008, the tax years ended 31 December 2006, 2007 and 2008 remained subject to examination by the Russian tax authorities.
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Notes to the consolidated financial statements continued
for the years ended 31 December 2008 and 2007
19 Fair value of financial instruments
Effective 1 January 2008, the Group adopted the provisions of SFAS 157 applicable to financial assets and liabilities. SFAS 157 provides a hierarchy of
valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect the Group’s assumptions with respect to how market participants would price an asset
or liability. These two inputs used to measure fair value fall into the following three different levels of the fair value hierarchy:
• Level One: Quoted prices for identical instruments in active markets that are observable.
• Level Two: Quoted prices for similar instruments in active markets; quote prices for identical or similar instruments in markets that are non-active; inputs
other than quoted prices that are observable and derived from or corroborated by observable market data.
• Level Three: Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
This hierarchy requires the use of observable market data when available.
As of 31 December 2008 and 31 December 2007, there were no financial instruments measured at fair value.
The carrying amounts of cash and cash equivalents, trade and other receivables, trade and other payables reported in the consolidated balance sheet
approximate fair value due to the short maturity of those instruments.
As of 31 December 2008, the Group had various long term borrowings that are measured at amortised cost. Solely for the purpose of presentation, the Group
has estimated fair value based on expected discounted cash flows incorporating interest rates on other similar debt adjusted for the Group’s estimated non-
performance risk, including credit risk. Other similar debt was determined based on rates available for similar facilities in the Russian Federation at
31 December 2008. Non-performance risk was estimated based on spreads between debt obtained by the Group and average interest rates in the Russian
Federation on other similar debt at the reporting date.
The carrying values and fair values of the Group’s long term borrowings, with the exception of finance leases, as of 31 December 2008 and 31 December 2007
are as follows:
Loans receivable*
Notes receivable, net (Note 9)
Borrowings other than finance leases (Note 10)
* This amount includes both the long-term loans to affiliates and short-term loans receivable
2008
US$000
Fair
Value
14,163
3,680
505,743
Carrying
Value
11,643
8,357
640,092
2007
US$000
Fair
Value
11,753
3,566
645,394
Carrying
Value
16,220
7,903
550,362
20 Related parties
Related parties include shareholders, entities under common ownership and control with the Group, members of key management personnel and affiliated
companies. The Company and its subsidiaries enter into various transactions such as the sale and purchase of inventory. In addition, the Group enters into
financing transactions with related parties. The amounts recognised are not necessarily indicative of the amounts that would be recognised for transactions
with third parties.
Trading transactions
Trading transactions with related parties comprise mostly of sales of mixed fodder to LLC RAO Penzenskaya Grain Company and CJSC Penzamyasoprom and
purchases of raw materials from these companies.
Trade receivables, trade receivables and advances issued are associated with such transactions. The Group expects to settle such balances in the normal
course of business.
Financing transactions
During 2008 and 2007, certain shareholders issued loans to the Group (Note 10) and, as of 31 December 2008, have personally guaranteed certain of the
bank loans and lines of credit for a total amount of 168,142.
cherkizovo-group.com annual report 2008 71
As of 31 December 2008 and 2007, and for the years then ended, balances and transactions with related parties are summarized as follows:
Balances
Short-term loan receivable
Trade receivables
Advances issued
Other receivables and prepayments
Long-term loans receivable
Trade payables
Short-term loans
Other payables
Current portion of long-term loans payable
Long-term loans payable
Long-term payables to shareholders related to lease agreements
Transactions
Sales
Rental income
Purchases of IT services
Purchases of security services
Purchases of goods and services
Purchases of property, plant and equipment
2008
US$000
8,235
15,314
7,319
2,187
2,039
2,380
937
548
34
5
929
17,836
135
582
1,241
24,288
40
2007
US$000
2,703
9,962
7,786
2,940
9,675
3,023
77
409
163
725
1,167
12,076
109
224
912
18,083
2,632
21 Long-term payables to shareholders
To retain the use of assets necessary for the Group’s business in companies disposed to shareholders as part of the restructuring undertaken in 2005, the
Group entered into finance leasing agreements with these entities. The assets under such leases were accounted for at their historical book value and the
liability incurred at origination of the lease agreements was accounted for as a distribution to shareholders. The lease terms include bargain options for
the Group to continue the agreement over the life of the underlying equipment. For the purposes of calculating the lease term, the Group used the remaining
useful life of the underlying assets. The value of property, plant and equipment at lease inception was 4,137 and the related deferred tax asset was 229.
Payables to shareholders for leased property, plant and equipment as of 31 December 2008 and 2007 amounted to 975 and 1,215, respectively, including a
long-term portion of 929 and 1,167, respectively.
Movements in the total liability for the years ended 31 December 2008 and 2007 were:
Liability incurred to shareholders in term of lease of this equipment as of 1 January
Interest accrued at 14% on leasing liability
Repayment
Translation gain (loss)
Liability incurred to shareholders in term of lease of this equipment as of 31 December
2008
US$000
1,215
166
(213)
(193)
975
2007
US$000
1,175
167
(207)
80
1,215
22 Segment reporting
The Group’s operations are divided into three segments by types of products produced: meat processing, poultry and pork. Substantially all of the Group’s
operations are located within the Russian Federation. The pork and poultry segments share a common legal and organizational structure. All segments share a
common chief operating decision maker. For the purpose of determining reportable segments, the Group has determined the chief operating decision maker to
be the individual responsible for allocating resources to and assessing the performance of each component of the business.
The meat processing segment is involved in the production of a wide range of meat products, including sausages, ham and raw meat.
Pork and poultry are strategic segments that produce and offer distinctive products, such as semi-finished poultry products, raw meat, eggs and other poultry
meat products in the poultry segment and live pigs in the pork segment.
All three segments are involved in other business activities, including production of dairy, crop cultivation and other services, which are non-core business activities.
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Notes to the consolidated financial statements continued
for the years ended 31 December 2008 and 2007
The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
22 Segment reporting continued
The Group evaluates segment performance based on profit before income taxes. The Group accounts for inter-segment sales and transfers as if the sales or
transfers were to third parties, that is, at current market prices.
Corporate assets comprise cash in bank received from both the issuance of new shares and bond issue, and loans to Group companies.
Segment information at 31 December 2008 and for the year then ended comprised:
Total sales
including other sales
including sales volume discount
Intersegment sales
Sales to external customers
Cost of sales
Gross profit
Operating expenses
Operating income
Other income and expenses, net
Interest expenses
Segment profit
Supplemental information:
Expenditure for long-lived assets
Depreciation and amortisation expense
Income tax expense
Meat-processing
US$000
577,919
4,581
(26,363)
(271)
577,648
(484,571)
93,348
(85,935)
7,413
71
(14,763)
(7,279)
12,233
17,217
1,398
Segment information at 31 December 2007 and for year then ended comprised:
Total sales
including other sales
including sales volume discount
Intersegment sales
Sales to external customers
Cost of sales
Gross profit
Operating expenses
Operating income
Other income and expenses, net
Interest expenses
Segment profit
Supplemental information:
Expenditure for long-lived assets
Depreciation and amortisation expense
Income tax expense
Poultry
US$000
505,204
39,773
(15,380)
(19,859)
485,345
(366,330)
138,874
(70,498)
68,376
(2,477)
(14,611)
51,288
74,994
22,248
(264)
Poultry
US$000
296,803
19,872
(7,217)
(5,165)
291,638
(203,381)
93,422
(46,256)
47,166
2,248
(10,659)
38,755
Corporate
assets/
expenditures
US$000
1,028
–
–
(1,024)
4
(40)
988
(12,125)
(11,137)
26,536
(14,460)
939
5,624
12
334
Corporate
assets/
expenditures
US$000
660
–
–
(658)
2
(4)
656
(8,969)
(8,313)
22,095
(10,868)
2,914
Pork
US$000
112,507
6,148
–
(9,223)
103,284
(64,939)
47,568
(8,292)
39,276
(102)
(1,724)
37,450
65,473
6,271
(59)
Pork
US$000
69,869
3,317
–
(5,186)
64,683
(40,684)
29,185
(4,680)
24,505
(64)
(1,390)
23,051
Intersegment
US$000
–
–
–
–
–
29,041
(1,336)
1,336
–
(22,833)
22,833
–
Consolidated
US$000
1,196,658
50,502
(41,743)
(30,377)
1,166,281
(886,839)
279,442
(175,514)
103,928
1,195
(22,725)
82,398
–
–
–
158,324
45,748
1,409
Intersegment
US$000
–
–
–
–
–
13,118
(667)
667
–
(18,411)
18,411
–
Consolidated
US$000
834,548
24,710
(24,887)
(13,785)
820,763
(598,490)
222,273
(137,387)
84,886
7,451
(18,396)
73,941
Meat-processing
US$000
467,216
1,521
(17,670)
(2,776)
464,440
(367,539)
99,677
(78,149)
21,528
1,583
(13,890)
9,221
13,815
15,695
3,271
47,911
11,267
280
124,616
4,502
2,644
14
2
1,064
–
–
–
186,356
31,466
7,259
cherkizovo-group.com annual report 2008 73
The reconciliation between net segment profit and net income per the consolidated income statements for the years ended 31 December 2008 and 2007 is
as follows:
Total net segment profit
Minority interest
Income taxes
Loss from discontinued operations, net of income tax
Gain on disposal of discontinued operations (Note 23)
Consolidated net income
2008
US$000
82,398
(3,994)
(1,409)
(3,489)
4,599
78,105
2007
US$000
73,941
(2,848)
(7,259)
(2,252)
–
61,582
The reconciliation between segment assets and total assets per the consolidated balance sheets as of 31 December 2008 and 2007 is as follows:
Meat processing
Poultry
Pork
Corporate assets
Intersegment
Assets of discontinued operations (Note 23)
Total assets
2008
US$000
292,196
404,582
334,204
308,517
(206,937)
1,702
1,134,264
2007
US$000
336,853
390,651
333,886
355,667
(235,755)
14,923
1,196,225
23 Subsidiaries, acquisitions, divestitures
Subsidiaries
As of 31 December 2008 and 2007 the Group controlled the meat processing and agricultural companies through its 100% ownership in AIC Cherkizovsky
Ltd. and AIC Mikhailovsky Ltd. and in Golden Rooster Co. Limited.
AIC Cherkizovsky Ltd. is a holding company under 100% control of the Company. AIC Cherkizovsky Ltd. includes the meat-processing segment, which consists
of meat processing plants, distribution companies and other companies registered and operating in the Russian Federation. As of 31 December 2008 and 2007
the following principal companies were included in AIC Cherkizovsky Ltd.:
Legal form
Closed Joint Stock Company
Open Joint Stock Company
Open Joint Stock Company
Name of company
JSC MPP Babaevskiy
JSC Belmyaso
JSC Biruliovsky meat processing plant (JSC BMPP)
JSC Meat and Poultry Processing Plant Penzensky
(JSC MPPP Penzensky)
JSC Meat Processing Plant Ulyanovsky
(JSC MPP Ulyanovsky)
JSC Cherkizovsky meat processing plant (JSC CMPP)
LLC MPP Salsky
TIC Cherkizovo Ltd. (Cherkizovo-2)
LLC Cherkizovo-Kashira (Cherkizovo-Kashira Ltd.)
LLC Cherkizovsky (Saint Petersburg)
JSC Trading Company of Agroindustrial Complex
Cherkizovsky (JSC Trading Company of AIC Cherkizovsky) Open Joint Stock Company
Open Joint Stock Company
Open Joint Stock Company
Limited Liability Company
Limited Liability Company
Limited Liability Company
Limited Liability Company
Open Joint Stock Company
Nature of business
Meat processing plant
Meat processing plant
Meat processing plant
% 31.12.2008
85%
0%
95%
% 31.12.2007
85%
75%
95%
Meat processing plant
Meat processing plant
Meat processing plant
Meat processing plant
Procurement company
Meat processing plant
Trading company
Trading company:
distribution of products
of AIC Cherkizovsky
95%
85%
87%
81%
100%
99%
100%
95%
85%
87%
81%
100%
99%
100%
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a
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F
100%
100%
74 cherkizovo-group.com annual report 2008
Notes to the consolidated financial statements continued
for the years ended 31 December 2008 and 2007
23 Subsidiaries, acquisitions, divestitures continued
AIC Mikhailovsky Ltd. is a holding company under 100% control of the Company. AIC Mikhailovsky Ltd. includes the pork and poultry segments that consist
of companies engaged in the production of various types of compound feed, raising of poultry, pigs and cattle and the distribution of meat registered and
operating in the Russian Federation. As of 31 December 2008 and 2007 the following principal companies were included in the AIC Mikhailovsky Ltd.:
Name of company
CJSC Petelinskaya
JSC Vasiljevskaya
LLC Petelino Trade House
Legal form
Closed Joint Stock Company
Open Joint Stock Company
Limited Liability Company
CJSC Botovo
LLC Petelinsky Poultry Factory
LLC Trading House Petelino-Samara
Closed Joint Stock Company
Limited Liability Company
Limited Liability Company
JSC Lipetskmyasoprom
LLC Mikhailovsky Feed Milling Plant
LLC Kuznetsovsky Kombinat
LLC Tambovmyasoprom
LLC Budenovets Agrifirm
Open Joint Stock Company
Limited Liability Company
Limited Liability Company
Limited Liability Company
Limited Liability Company
Nature of business
Raising poultry
Raising poultry
Trading company: distribution
of products of AIC Mikhailovsky
Pig breeding
Meat processing
Trading company: distribution
of products of AIC Mikhailovsky
Pig breeding
Mixed fodder production
Pig breeding
Pig breeding
Pig breeding
% 31.12.2008
84%
100%
% 31.12.2007
84%
100%
84%
76%
84%
100%
100%
100%
100%
99%
100%
84%
76%
84%
100%
100%
100%
100%
99%
100%
Acquisitions
Golden Rooster
On 28 August 2007, the Group completed an acquisition of 100% of the share capital of Golden Rooster Co. Limited. Golden Rooster Co. Limited is a company
registered in Cyprus that holds 100% of the share capital of OJSC Kurinoe Tsarstvo. OJSC Kurinoe Tsarstvo is a poultry producer with a fully integrated poultry
production cycle and operations in both the Lipetsk and Bryansk regions of the Russian Federation. The company produces chilled and frozen poultry products
under the “Chicken Kingdom” brand name.
The purchase consideration was 142,466 including 673 of transaction costs. The acquisition was accounted for using the purchase method with goodwill of
697 recognized as a result of the purchase price allocation. No adjustments were made to the purchase price in 2008.
Divestitures
2007 discontinued operations (LLC MPP Salsky)
In November 2007, management of the Group made a decision to dispose of a subsidiary in the meat processing segment – LLC MPP Salsky (“Salsky”).
The disposal was classified as an asset held for sale and reflected as a discontinued operation in 2007. The assets and liabilities classified as discontinued
operations were recorded at lower of cost or market. At the time of the classification as an asset held for sale, the Group had a plan for disposal. Subsequent
to that time, primarily due to the deterioration in the worldwide economy and lack of available financing, the Group was unable to close the sale of Salsky.
While the Group actively solicited offers during the period, it did not receive any other reasonable offers to purchase Salsky and in response, reduced the price.
The Group continues to actively market Salsky at a price that is reasonable given the change in market conditions. As at 31 December 2008, management
has determined that the Group has met the conditions for an exception to the one-year sale requirement under SFAS 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”. As a result, Salsky continues to be classified as held for sale as of 31 December 2008.
2008 discontinued operations (JSC Belmyaso)
In November 2008, management of the Group received an offer from a third party to purchase JSC Belmyaso, a subsidiary in the meat processing segment
located on the Ukrainian border in southwest Russia. Management accepted the offer as the sale was consistent with its plan to optimize the cost structure of
the meat processing segment. The sale was completed in December 2008, with the Group selling its 75% share ownership in JSC Belmyaso for proceeds of 68.
The Group will not have any significant continuing involvement with the entity. The gain on the sale of the subsidiary amounted to 4,599.
Net assets of discontinued operations were as follows as of 31 December 2008 and 2007
Cash
Trade and other receivables, net
Inventory
Deferred tax assets
Property, plant and equipment
Other assets
Total assets
Trade and other payables
Short and long-term loans
Total liabilities
Minority interest
Net liabilities of discontinued operations
Results from discontinued operations were as follows for 2008 and 2007:
Sales
Cost of sales
Gross (loss) profit
Operating expenses
Gain (loss) from disposal of property, plant and equipment
Operating loss
Other expenses, net
Loss before income tax and minority interest
Income tax (expense) benefit
Minority interest
Loss from discontinued operations
cherkizovo-group.com annual report 2008 75
2008
US$000
3
–
243
156
1,258
42
1,702
(504)
(2,020)
(2,524)
–
(822)
2008
US$000
15,675
(16,131)
(456)
(2,897)
30
(3,323)
(655)
(3,978)
(546)
1,035
(3,489)
2007
US$000
98
3,096
2,170
1,266
7,299
994
14,923
(5,432)
(10,865)
(16,297)
(1,065)
(2,439)
2007
US$000
26,405
(24,980)
1,425
(3,676)
(116)
(2,367)
(1,023)
(3,390)
395
743
(2,252)
24 Commitments and contingencies
Legal
As of 31 December 2008 and 2007 several Group companies reported negative net assets in their statutory financial statements. In accordance with the Civil
Code of the Russian Federation, a liquidation process may be initiated against a company reporting negative net assets. Management believes that it is remote
that the liquidation process will be initiated against those companies.
The Group has been and continues to be the subject of legal proceedings and adjudications from time to time. Management believes that the resolution of all
such outstanding matters will not have a material impact on the Group’s financial position or results of operations.
Taxation
Laws and regulations affecting businesses in the Russian Federation continue to change rapidly. These changes are characterized by different interpretations
and arbitrary application by the authorities. Management’s interpretation of such legislation as applied to the activity of the Group may be challenged by the
relevant regional and federal authorities. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive position
in their interpretation of the legislation and assessments and as a result, it is possible that transactions and activities that have not been challenged in
the past may be challenged. It is therefore possible that significant additional taxes, penalties and interest may be assessed. Under certain circumstances
reviews may cover longer periods. Where uncertainty exists, the Group has accrued tax liabilities as management’s best estimate of the probable outflow of
resources which will be required to settle such liabilities. Management believes that it has provided adequately for tax liabilities based on its interpretations
of tax legislation. However, the relevant authorities may have differing interpretations, and the effects could be significant. Management believes that the total
amount of possible tax risks, in accordance with FAS 5 “Accounting for Contingencies,” is 4,578 as of 31 December 2008.
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Environmental remediation costs
The Group’s management believes that it is in compliance with applicable legislation and is not aware of any potential environmental claims; therefore, no
liabilities associated with such costs are recorded as of 31 December 2008.
76 cherkizovo-group.com annual report 2008
Notes to the consolidated financial statements continued
for the years ended 31 December 2008 and 2007
24 Commitments and contingencies continued
Capital commitments
At 31 December 2008, the Group had large capital projects in progress at JSC Lipetskmyasoprom, LLC Tambovmyasoprom, and CJSC Petelinskaya. As part of
these projects, commitments had been made to contractors of approximately 51,699 towards completion of the projects.
Also the Group is in the process of implementing an integrated management planning and accounting system related to the meat processing segment of the
business. As part of this project, commitments have been made to contractors of approximately 1,849 towards completion of the project.
Operating lease commitments
At 31 December 2008, the Group had the following obligations under non-cancellable operating lease agreements:
Total commitments
2009
US$000
314
2010
US$000
314
2011
US$000
314
2012
US$000
314
2013
US$000
254
>2013
US$000
2,780
Total
US$000
4,290
25 Subsequent events
Acquisitions
In March 2009, the Group acquired 57.29% of the share capital of OAO Penzensky Kombinat Khleboproductov (“Penzensky”) from a third party for cash
consideration of 1,886. Penzensky is involved in grain processing and production of bread products in the Penza region of Russia. Penzensky will be a part
of operations in the poultry segment of the Group. As of 31 March 2009, the purchase price allocation was not finalised as the Group had not completed its
assessment of the fair value of the acquired net assets. As of the date of acquisition, Penzensky did not prepare financial statements in accordance with US
GAAP. As a result, the Group has not provided the disclosures as required by SFAS 141, Business Combinations, as the disclosure would be impracticable.
Borrowings
In the first quarter of 2009, the Group entered into several new credit facilities with Sberbank in the amount of 8,975 bearing interest rates ranging from
16.75% to 17.5%. The Group drew down on existing credit facilities with Sberbank in the amount of 20,837, repaid 15,991 on these facilities and fully paid
down the Raiffeisen facility in the amount of 16,257.
Advisers and corporate information
cherkizovo-group.com annual report 2008 77
... owning
the land
that will secure the
feed supply...
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main doc
Depository
JPMorgan Chase Bank, N.A.
4 New York Plaza
13th Floor
New York
NY 10004
United States of America
Solicitors
English law
Cleary Gottlieb Steen & Hamilton LLP
City Place House
55 Basinghall Street
London EC2V 5EH
United Kingdom
Public relations
Temple Bar Advisory
60 Cannon Street
London EC4N 6NP
United Kingdom
Company Lawyer
Yuri Dyachuk
Registered office
OJSC Cherkizovo Group
5 Permskaya Street
Moscow 107143
Russian Federation
Tel: +7 (495) 788-3232
Fax: +7 (495) 788-3233
Website: www.cherkizovo-group.com
Registered number
1057748318473
Registrars
OJSC Obyedinennaya Registratsionnaya
Kompaniya (OJSC ORK)
70 Pyatnitskaya Street
Moscow 113095
Russian Federation
Tel: +7 (495) 745-7891, +7 (495) 504-2886
Auditors
ZAO Deloitte and Touche CIS
Business Centre Mokhovaya
4/7 Vozdvizhenka St, bldg 2
Moscow 125009
Russian Federation
Wheat prices
Monthly average $ per Kg
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
05 06 07 08 09
0.35
0.30
0.40
Wheat prices
Since 2007, Cherkizovo has been building up a
Monthly average $ per Kg
substantial landbank to provide future protection
against fluctuations in the cost and availability of
feed, such as those we witnessed in 2008. This is
directly in line with the Group’s vertical integration
strategy, and we will continue to invest in land
where cost-effective opportunities present
themselves. In addition, we have made substantial
investments in our ability to produce fodder, a clear
source of advantage over many of our competitors.
0.25
0.20
0.10
0.05
0.15
0.00
05 06 07 08 09
Wheat prices US$ per Kg
Annual average
Monthly average
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
05 06 07 08
0.40
0.35
0.30
0.25
0.20
0.15
0.10
0.05
Designed and produced by Tor Pettersen & Partners.
Printed in England by Geoff Neal Litho - a ‘Carbon Neutral’ company environmentally
accredited to ISO 14001 and FSC Certified.
This brochure is printed using vegetable oil based inks from renewable raw materials.
It is printed on Revive 50:50 Silk which contains 50% recovered waste and 50% virgin
fibre and is certified as an FSC mixed sources product at a mill that is certified with
the ISO14001 Environmental Management Standard. FSC mixed sources products
are produced from recycled wood or fibre, well managed forests and other controlled
sources. All pulp is bleached using an Elemental Chlorine Free (ECF) process.
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OJSC Cherkizovo Group
5 Permskaya Street
Moscow 107143
Russian Federation
Tel: +7 (495) 788-3232
Fax: +7 (495) 788-3233
www.cherkizovo-group.com