Annual Report 2016
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Cherkizovo Group is...
Russia’s largest vertically integrated meat and feed producer. The Group is
among the top three producers and suppliers of raw and processed poultry
and pork products and the leading feed manufacturer in Russia. During
2016, Cherkizovo Group further strengthened its leading market position
across all of its key segments.
The Group’s operations are structured
into four operating divisions: Poultry,
Pork, Meat Processing, and Grain. The
Group also carries out associated sales
and trading operations.
The Group’s Poultry division consists
of eight full cycle poultry production
complexes with a combined capacity
of 600,000 tonnes live weight per
annum. The Pork operations consist of
15 modern, integrated pork production
complexes.
The Group operates six meat
processing plants with a combined
annual capacity of 226,000 tonnes,
where it produces fresh and ready-to-
cook products. In addition, the Group
owns: nine feed mills, with a combined
annual capacity of over 2.5 million
tonnes; grain storage facilities, with an
overall storage capacity of more than
850,000 tonnes; and over 140,000
hectares of agricultural land. Сherkizovo
Group employs 22,800 people.
Cherkizovo’s strategy is aimed at
ensuring stable organic growth and
efficient expansion, underpinned
by the continued development
of its infrastructure through the
implementation of a long-term
investment programme. Cherkizovo
Group’s shares and GDRs are traded
on the London Stock Exchange (LSE)
and on the Moscow Exchange under
the symbols LSE:CHE; MOEX:GCHE.
ABOUT COMPANY
04-19
Operational Review:
Our Year in Review
Key Figures
Our Key Strengths
Where We Operate
Key Events
Message from the Chairman
Message from the CEO
06
08
09
10
12
14
16
STRATEGIC REPORT
20-43
Market Overview
Our Strategy:
Strategy Overview
Business Model
New Markets
Investment Programme
Quality Control
Research & Development
22
26
26
27
28
28
30
32
Poultry
Pork
Meat Processing
Grain
FINANCIAL REPORT
44-55
CORPORATE GOVERNANCE 56-75
Corporate Governance
System
Directors Statement
Board of Directors
Board Committees
Management Board
Corporate Secretary
Internal Control and Risk
Management
Disclosure to Auditors
58
58
60
62
63
68
68
68
34
34
38
40
42
Investor and Shareholder
Information
Shareholder Structure
Dividend Policy
Bonds
Investor Relations
Shareholder Access
to Information
Sustainable Development
Employee Policies
Health, Safety
and the Environment
Community Relations and Charity
69
69
69
69
70
70
71
71
74
75
FINANCIAL STATEMENTS
76-139
ABOUT COMPANY
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
STEPPING UP
STEPPING UP
the Corporate Ladder
the Corporate Ladder
STEPPING UP
the Operating Ladder
STEPPING UP
the Transparency Ladder
82.4
82.4 RUB bln
CONSOLIDATED REVENUE
CONSOLIDATED REVENUE
10.3 RUB bln
CONSOLIDATED EBITDA
903 th. tonnes
MEAT PRODUCTS SALES
POULTRY
POULTRY
PORK
500.3
500.3
TH. TONNES
TH. TONNES
184.8
TH. TONNES
MEAT
PROCESSING
218.1
TH. TONNES
GRAIN
338.8
TH. TONNES
+57% from 2012
+57% from 2012
+78% from 2012
+71% from 2012
+201% from 2012
№1 RUSSIAN
№1 RUSSIAN
FEED PRODUCER
FEED PRODUCER
№2 RUSSIAN
POULTRY PRODUCER
№3 RUSSIAN
PORK PRODUCER
Sources: Poultry Union of Russia, Pork Union of Russia.
Sources: Poultry Union of Russia, Pork Union of Russia.
MOODY’S RATING B1
MOODY’S RATING B1
EXPERT RA RATING A++
EXPERT RA RATING A++
RUSSIA’S TOP
MEAT PRODUCER
ACCORDING TO THE
RANKING BY AGROINVESTOR
For more information,
please, visit our
corporate website:
www.cherkizovo.com
02
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Annual Report 2016 CHERKIZOVO GROUP 03
CONTENTS
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Stepping Up
A comprehensive re-branding of the Group undertaken
in 2016 reflects our enhanced positioning, vision and
strategy.
the Corporate
Ladder
New corporate colours:
Brand colours
Poultry
Turkey
Pork
Meat Processing
Grain
ABOUT COMPANY
06-19
Our Year in Review
Key Figures
Our Key Strengths
Where We Operate
Key Events
Message from the Chairman
Message from the CEO
06
08
09
10
12
14
16
OUR YEAR IN REVIEW
WHERE WE OPERATE
KEY EVENTS
In 2016, Cherkizovo Group
strengthened its positions as Russia’s
top meat producer with sales
surpassing 903,000 tonnes of meat
products.
Production facilities serve 80%
of the population of Russia.
A year of milestones for Cherkizovo
Group.
MESSAGE FROM
THE CHAIRMAN
MESSAGE FROM THE CEO
“Despite challenging macroeconomic
conditions, we not only delivered
strong financial and operational
results, but also significantly
improved our governance structure
to ensure that the Group is well
positioned for the next phase of its
development”.
“Our focus is shifting from
development to maintenance,
streamlining, production of higher-
margin value added products, further
development of the downstream
part of the business and investment
in operational efficiency across all
segments”.
P. 06-07
P. 10-11
P. 12-13
P. 14-15
P. 16-19
04
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Annual Report 2016 CHERKIZOVO GROUP 05
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
ABOUT COMPANY
Our Year in Review
In 2016, Cherkizovo Group strengthened its
position as Russia’s top meat producer with sales
surpassing 903,000 tonnes of meat products.
The Group’s sales volumes increased 9% year-on-
year, with particularly strong volume growth in the
Grain farming segment, which grew by 27% year-
on-year to around 339,000 tonnes.
Sales volumes of meat products in 2016
Poultry
Pork
Meat Processing
Sales volume, th. tonnes
Sales volume share
218.1
184.8
24%
21%
500.3
Revenue in 2016
Poultry
Pork
Meat Processing
Grain
Revenue, RUB bln
Revenue share
3.1
31.7
15.9
47.7
3%
32%
16%
POULTRY
PORK
MEAT PROCESSING
GRAIN
Cherkizovo Group is one of Russia’s
largest poultry meat producers and a
leading manufacturer of brand name
poultry products. In 2016, total sales
volumes for the Poultry division increased
by 6% year-on-year to 500,321 tonnes of
sellable weight. This growth was driven
by higher production levels achieved
through improvements in efficiency
and the launch of new poultry houses.
Cherkizovo Group also launched
production at the new Tambov Turkey
facility and expanded the export of
poultry products to international markets.
For more information see pages
34-35.
55%
In 2016, Cherkizovo Group maintained
its position as one of the top three pork
producers in Russia. Production volumes
for the Pork division increased by 9%
year-on-year in 2016 to 184,766 tonnes
of live weight. This was primarily due
to a new genetics enhancement
programme launched at the beginning
of the year to improve the health status
of livestock and efficiency by increasing
liveability and weekly farrows.
For more information see pages
38-39.
Cherkizovo Group is one of the top three
meat processing producers in Russia.
Cherkizovo manufactures a wide range of
high-quality meat products. In 2016, sales
volumes in the Meat Processing division
grew by 14% year-on-year to 218,085
tonnes. This increase was primarily due
to the launch of a new pig slaughter
facility at the Dankov meat processing
plant in the second half of 2015, which
boosted both the volume and the
product range.
For more information see pages
42-43.
Cherkizovo Group cultivated 81,000
hectares in Russia’s central regions in
2016 and achieved crop yields that are
above the national average. Cherkizovo
harvested 41% more grain in the Central
Black Earth region compared to the
previous year. The record results were
achieved through investments in new
technology, including the deployment
of highly intensive technologies in soil
treatment and using the top grade market
and hybrid seeds. Sales volumes of the
segment reached 338,808 tonnes
in 2016, increasing by 27% compared
to 2015.
For more information see pages
40-41.
47.7 RUB bln
REVENUE
15.9 RUB bln
REVENUE
31.7 RUB bln
REVENUE
3.1 RUB bln
REVENUE
49%
500.3
th. tonnes
SALES
184.8
th. tonnes
PRODUCTION
218.1
th. tonnes
SALES
338.8
th. tonnes
SALES
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Annual Report 2016 CHERKIZOVO GROUP 07
ABOUT COMPANY
Key Figures
Divisions
Poultry
Pork
Meat Processing
Grain
Revenue
Gross profit
Operating expenses
Adjusted EBITDA
Adjusted EBITDA margin
Operating profit / (loss)
Income / (Loss) before tax
Profit / (loss)
Net operating cash flow
Net debt
KEY OPERATIONAL FIGURES, TONNES
2016
500,321
184,766
218,085
338,808
2015
470,432
169,563
191,200
267,371
KEY FINANCIAL FIGURES, RUB MLN
2016
82,417.2
17,854.8
(12,798.3)
10,282.5
12.5%
5,056.5
1,960.4
1,919.2
9,368.5
36,949.1
2015
77,032.6
19,148.7
(11,614.7)
12,630.4
16.4%
7,534.0
5,871.7
6,007.5
4,992.3
35,009.6
Year-on-year
6%
9%
14%
27%
Year-on-year
7%
(7%)
10%
(19%)
(33%)
(67%)
(68%)
88%
6%
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Our Key Strengths
VERTICALLY
INTEGRATED
BUSINESS MODEL
STABLE FINANCIAL
POSITION
STRONG
BRANDS
A diversified, integrated business model
ensures Cherkizovo Group’s strong
presence across all key segments of the
meat production and processing chain.
As a result, the Group is well positioned,
in terms of its strategic sustainability and
readiness, to withstand challenges in the
marketplace.
For more information see
page 27.
Steady cash flow and access to
borrowing at low interest rates have
enabled Cherkizovo Group to continue
its investments in the development
of production. The Group maintains
a comfortable debt/EBITDA ratio
of 3.75 as at the end of 2016.
For more information see pages
44-55.
Cherkizovo Group has built a broad
portfolio of strong brands in the poultry
and meat processing market segments
and these have earned high levels of
brand recognition and consumer loyalty.
In 2016, the Group introduced new
brands targeted at the international
marketplace.
For more information see pages
10-11.
OUR TEAM
People represent our key advantage.
Cherkizovo Group has built a strong
professional team headed by experts
trained both in Russia and internationally
with distinguished track records in
leading Russian and foreign companies.
For more information see pages
63-67.
DEVELOPMENT
STRATEGY
ENCOMPASSING
ORGANIC GROWTH
AND M&A
The Group’s strategy encompasses
organic growth through investment in
new production facilities, as well as
taking advantage of selective M&A
opportunities that fit with the Group’s
business model and can increase its
market share.
For more information see pages
26-33.
LEADER IN
TECHNOLOGY
AND INNOVATION
All of Cherkizovo Group’s facilities are
equipped with the latest production
technologies and comply with the latest
biosecurity standards. The Group is an
established leader in innovation among
Russian agro-industrial companies.
For more information see pages
29-33.
DISTRIBUTION
AND LOGISTICS
Cherkizovo Group’s ‘production belt’ is
located in the most densely-populated
area of the Russian Federation. The
Group’s own logistics complexes and
refrigerator fleet of over 1,000 vehicles
ensure our chilled products can be
delivered promptly to our customers.
For more information see pages
10-11.
FAVOURABLE
REGULATORY
ENVIRONMENT
The agro-industrial sector and
national food security are key focuses
of Russia’s domestic policy, with
producers benefiting from favourable
local regulations and tax environment.
Cherkizovo Group, as a leading Russian
meat producer, benefits from this
favourable regulatory environment.
For more information see
page 16.
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Annual Report 2016 CHERKIZOVO GROUP 09
ABOUT COMPANY
Where We Operate
We have production facilities in Moscow and
Moscow region, as well as Bryansk, Voronezh,
Kursk, Lipetsk, Kaliningrad, Penza, Tambov,
Orel, Tula, Vologda and Ulyanovsk regions
and deliver our products to 80% of the
population of Russia.
OUR BRANDS
Our marketing strategy is aimed at
aligning our product offering with
the needs of our customers across
the markets where we operate. The
high level of recognition and loyalty
enjoyed by our brands reflect the
popularity of our products nationwide,
and increasingly abroad.
POULTRY
Petelinka
Domashnaya Kurochka
(Home Chicken)
Kurinoe Tsarstvo
(Chicken Kingdom)
Petelinka is Russia’s best known
and most popular chilled poultry
meat brand. The Petelinka brand
range includes more than 40
products: whole chickens, cuts,
by-products, minced meat, and
marinated kebabs. The National
Trade Association recognised
Petelinka as Product of the Year.
The Petelinskaya Poultry
Factory produces eco-products
made of chilled poultry meat
under the Domashnaya
Kurochka (Home Chicken)
brand. The product line
includes whole chickens and
cuts. The brand is sold in all
major retail chains in Moscow
and the Central Federal District.
Kurinoe Tsarstvo is one of
Russia’s leading chilled and
frozen poultry brands. The
product line includes whole
chickens, cuts, by-products and
minced meat. Kurinoe Tsarstvo
products have won numerous
medals and awards at leading
trade fairs.
Vasilievsky Broiler
Mosselprom
Dajajti
Latifa
Distribution Centre
Meat Processing Plant
Pork Complex
Turkey Complex
Poltry Complex
Feed Mill
Plowing Land
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Kaliningrad
St. Petersburg
Bryansk region
Greater Moscow Area
Vologda Region
Kursk region
Tula region
Orel region
Lipetsk region
Tambov region
Voronezh region
Kazan
Penza region
Ulyanovsk region
Rostov-on-Don
Samara
Chelyabinsk
CHERKIZOVO PREMIUM
Cherkizovo
Imperiya Vkusa
(The Taste Empire)
Myasnaya Gubernia
Vasilievsky Broiler is the market
leader in the chilled poultry
segment of the Volga and
Central Federal Districts. It
is produced at Vasilievskaya
Poultry Farm located in the
Penza region.
Mosselprom is one of the
most popular poultry brands
in Moscow and the Moscow
region. Poultry farms in the
Moscow and Tula regions
produce chilled and frozen
poultry, as well as ready-to-cook
products.
Cherkizovo Group launched
a new halal export brand,
Dajajti, in 2016 after it received
licences to export poultry
products to the Middle East.
Dajajti, which means ‘my
chicken’, is a brand aimed
primarily at the international
halal market.
Cherkizovo’s first halal brand,
Latifa, is sold on the domestic
market and in CIS countries.
Cherkizovo is one of Russia’s
leading meat product brands.
The product line includes
nearly 300 types of sausages,
as well as chilled and frozen
meats, ready-to-cook products,
ham and deli meats. The
company supplies raw meat for
Cherkizovsky Meat Processing
Plant from its own farms.
Imperiya Vkusa (The Taste
Empire) ham is produced
at Сherkizovo’s plants in
Kaliningrad and Ulyanovsk.
The product line includes four
kinds of deli meat: turkey, beef,
pork shoulder and poultry
meat, prepared with modern
equipment imported from
Spain.
Myasnaya Gubernia is a range
of sausage products offering an
optimum price/quality ratio. The
product line includes cooked
and semi-smoked sausages.
The products are manufactured
from domestic raw materials at
Cherkizovo’s plants in Moscow,
Penza and Ulyanovsk.
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Annual Report 2016 CHERKIZOVO GROUP
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ABOUT COMPANY
Key Events
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
They are smaller and lighter than
the turkeys Russian consumers are
accustomed to, with the average turkey
weighing just 7-9kg. The Group’s turkeys
will contain half the fat of other brands,
making it the healthiest meat available
on the market. The turkey products
that will be delivered to stores will be
branded with at least four different types
of packaging and designed to suit a
broad range of preferences.
For more information see the
website: http://cherkizovo.com/en/
press/company-news/5972/
APRIL
Cherkizovo Group implements
SAP in one of the biggest such
projects in the Russian food
industry
FEBRUARY
Cherkizovo Group acquires right
to export its products to the UAE
Cherkizovo Group receives all of the
necessary licences to export chicken
meat to the United Arab Emirates.
Cherkizovo Group’s largest chicken
production plant, Vasilievskaya Poultry
Farm, located in Penza Region, was
granted the right to export to the UAE.
The export authorisation was issued by
the UAE’s Ministry of Environment and
Water following an inspection of the
poultry factory in December 2015. The
Group’s halal products are made under
the Latifa and Dajajti brands.
For more information see the
website: http://cherkizovo.com/en/
press/company-news/5970/
Cherkizovo Group begins breeding
turkey unique for the Russian
market
Cherkizovo Group announces the
operational launch of a hatchery as part
of the Tambov Turkey project, which will
allow the Group to begin breeding
a variety of turkey that is unique for
the Russian market.
Cherkizovo Group’s ultra-fresh products,
which are delivered from slaughter to
store within 24 hours, were the main
driver behind the implementation of SAP
ERP. As a result of implementing SAP
ERP, Cherkizovo Group is now able to
track and meet the primary demand for
its products. The benefits of SAP ERP
can already be seen. The Group has
been able to halve headcount in the
sales department and reallocate these
staff to other departments, leading to
increased efficiency in other areas of
the business. Order processing time
has also fallen by half.
For more information see the
website: http://cherkizovo.com/en/
press/company-news/7105/
AUGUST
Cherkizovo Group starts exporting
poultry meat to Egypt
Cherkizovo Group dispatched its first
shipment of poultry meat to Egypt.
Products are shipped from Cherkizovo’s
Chicken Kingdom poultry farm in Lipetsk
region. The production process at these
facilities has been certified by the Halal
Centre of Moscow.
For more information see the
website: http://cherkizovo.com/en/
press/company-news/6512/
Cherkizovo Group ranks as
Russia’s top meat producer
Cherkizovo Group has come first
in Agroinvestor’s (Russia’s leading
agricultural publication) ranking of
Russia’s top 20 meat producers of 2015.
The Group tops this ranking by a margin
of 75,000 tonnes, which underlines its
leading position within the domestic
market. In 2015, the Company produced
582,000 tonnes of poultry meat in live
weight and 169,000 tonnes of live pork.
For more information see the
website: http://cherkizovo.com/en/
press/company-news/6511/
NOVEMBER
Cherkizovo Group receives
permission to export poultry
products to the EU
Cherkizovo Group’s Vasilyevskaya
poultry farm receives the EU Export
Compliance Certificate 58/4, allowing
the Group to export poultry products to
the European Union and beyond. This
certificate is also recognised by many
countries outside the EU, such as Serbia,
Macedonia, Georgia and South Africa.
As a result of receiving this certification,
the company is now a member of the
European Commission’s Trade Control
and Expert System (TRACES), which is an
online management tool for all sanitary
requirements for intra-EU trade.
For more information see the
website: http://cherkizovo.com/en/
press/company-news/7312/
John Ross appointed Chief
Operating Officer (COO)
at Cherkizovo Group
John Ross joins Cherkizovo Group
with over 25 years of operational
and management experience in the
agricultural sector. At Cherkizovo Group,
John Ross will be responsible for the
production functions across the Group’s
five business segments. Prior to this,
he was at Zacky Farms, USA, for over
20 years, working his way up from
operations manager to president of the
company. He began his career at Cargill.
For more information see the
website: http://cherkizovo.com/en/
press/company-news/7338/
Cherkizovo Group begins
construction of a new meat
processing plant in the Moscow
region
Cherkizovo Group begins construction
of a new meat processing plant in
the Kashira district of Moscow region.
When completed, this new plant will be
the largest of its kind in Europe. The
80-tonne daily production capacity of
this new facility outstrips that of any
other meat processing plant in Europe.
It will be fitted with state-of-the-art
equipment to ensure the highest quality
and biosafety of the end products.
For more information see the
website: http://cherkizovo.com/en/
press/company-news/7347/
DECEMBER
Cherkizovo launched a new
organic line ‘Clean Label’
The line represents new, affordable
organic products under the Petelinka
brand. ‘Clean Label’ includes cutlets,
sausages, barbecue meat and various
products for oven roasting. All of the
products are made using only poultry
meat and spices and are manufactured
in Moscow region at one of Russia’s
largest poultry production facilities.
For more information see the
website: http://cherkizovo.com/en/
press/company-news/7431/
Cherkizovo Group achieves
a record harvest in 2016
Over 465 thousand tonnes of grain were
gathered, an increase of 40% from the
previous year. The main crops harvested
in 2016 included corn (231,000 tonnes),
winter and spring wheat (181,000 tonnes),
soy (26,000 tonnes) and peas (26,000
tonnes). Production of corn, the highest
contributor to the crops, has doubled
compared to the previous year. To meet
the demand, a total of 79 harvesters and
100 tractors were deployed by the Group
during the harvesting campaign.
For more information see the
website: http://cherkizovo.com/en/
press/company-news/7584/
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Annual Report 2016 CHERKIZOVO GROUP 13
ABOUT COMPANY
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Message from the Chairman
“Last year, the Board of
Directors of Cherkizovo
Group entrusted me, as
its new Chairman, with
the privilege of looking
after the interests of our
shareholders. Therefore,
it gives me great pleasure
to present the Group’s
2016 Annual Report.
First of all, on behalf of the Board and all
our employees, I would like to express
our sincere gratitude to Igor Babaev,
the founder and former Chairman of
Cherkizovo Group, for his determination
and unrelenting effort in creating and
guiding the company from its inception
to becoming the hugely successful
organisation it is today. Thanks to his
unfailing enthusiasm, vast experience
and dedication, the Group is now Russia’s
largest meat company, which gives us
a solid foundation for continued future
growth and international expansion.
Last year, despite challenging
macroeconomic conditions, we not only
delivered strong financial and operational
results, but also significantly improved
our governance structure to ensure that
the Group is well positioned for the next
phase of its development with a key,
strategic focus on improving efficiency.
We put in place a new Board structure
to significantly increase the role of
independent directors and broaden
the pool of expertise. The newly
elected independent directors bring a
wealth of international and world-class
knowledge and experience, ranging
from the agriculture and food production
industries to strategic investment and
management. In order to strengthen our
existing corporate governance still further,
independent directors are now heading
all of our key Board committees.
The strengthened Board’s main focus
during the year has been on revamping
the Group’s long-term growth strategy.
The Board also made a number of
important operational decisions in order
to deal with the challenges posed by
the market during the reporting period.
I would like to thank the directors
for their invaluable contribution and
stewardship during this turbulent period.
I firmly believe that their unparalleled
experience and dedication will continue
to be instrumental in our next stage of
development.
In 2015, the Board of Directors approved
the Group’s new dividend policy. We
expect to maintain a steady dividend flow
to shareholders at a level of at least 20%
of our net profit.
In the drive to overhaul our governance
and management structure, we also
strengthened our Executive team. We
created the new position of Group
Chief operating officer (COO) to further
coordinate and improve the efficiency
of our operations across all divisions.
We welcome John Ross, with over
25 years of international operational
and management experience in the
agricultural sector, to this important role.
I am confident that John’s vast experience
will make an invaluable contribution to
achieving our strategic objectives.
The Board was faced with a challenging
macroeconomic situation on our
domestic market, as overall conditions
in the Russian economy continued
to put pressure on the agriculture
industry. The devaluation of the rouble,
falling disposable incomes and rising
inflation had a significant impact on our
operations, in particular during the first
quarter of 2016.
The Group was able to overcome the
significant challenges posed in the early
part of the year with a concerted sales
effort, which resulted in increased sales
volumes for the year of around 900,000
tonnes, making Cherkizovo the number
one producer of meat products in Russia.
In many respects, 2016 was a
breakthrough year for us in terms of
recognising our achievements over
the last ten years and identifying the
Group’s future strategic direction. We
are gradually coming to the end of a
significant, capital-intensive stage in our
development and investment, which has
seen the creation of a new, integrated
operational structure. With this now
in place, we are turning our attention
to investment in the processing and
production of high-margin value-added
products.
We have laid solid foundations for the
future profitable growth of the Group
and have put in place several strategic
initiatives designed to generate good
returns over the next three to five years.
That said, the priority for the Board
remains ensuring the continued growth
of the Group over the longer-term,
by capitalising on the new vertically
integrated structure and focusing on
the most profitable market segments.
The Group has a unique combination of
international expertise and home-grown
talent. We continuously aim to implement
the most advanced technologies and
strive to be at the forefront of scientific
developments in the agricultural and food
industry. Thus, in 2016, we established
the most high-tech state-of-the art
in-house R&D centre in the Russian food
production industry and became the first
partner of the Skolkovo Innovation Centre
in biotechnology.
Cherkizovo Group will continue building
on its competitive advantages and
focusing on the quality and biosafety
of our products. With the progress we
are making in achieving operational
and working capital efficiencies and our
strong and growing market position in
Russia, we are well-positioned to capture
growth opportunities, both domestically
and internationally.
On behalf of all of the shareholders and
the Board of Directors of Cherkizovo
Group, I would like to express my
sincere gratitude to the management
and all employees for their commitment
and contribution to the development
and growth of the Group, making it the
company it is today. I am confident,
that with our solid vertically integrated
operations, talented and dedicated
workforce and highly experienced
Board, we are on course to achieving our
long-held objective of becoming a truly
world-class company, radically changing
international perceptions of the Russian
agriculture sector along the way.
Evgeny Mikhailov
Chairman
14
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Annual Report 2016 CHERKIZOVO GROUP
15
ABOUT COMPANY
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
“While 2016 marked an
impressive year of expansion
for Cherkizovo Group, we
are now seeking to build
on this strong foundation
and consolidate our market-
leading position. Our focus is
shifting from development to
maintenance, streamlining,
production of higher-margin
value added products,
further development of the
downstream part of the
business and investment in
operational efficiency across
all segments.
Message from the CEO
I am pleased to report that 2016 proved
to be a year of milestones for Cherkizovo
Group. We completed a number
of landmark projects and achieved
significant progress on our strategic
initiatives. At the same time, we were
able to deliver a strong set of results
across all business divisions despite a
backdrop of adverse market conditions.
We also remained at the forefront of the
national agricultural industry, setting new
standards for the quality and biosafety
of our products and the efficiency of our
operations.
OUR PERFORMANCE
In 2016, we increased total meat product
sales by 9% year-on-year, reaching
903,000 tonnes and reclaiming our
status as Russia’s top meat producer.
Within this figure, the Poultry division’s
share of total sales increased by 6%
to 500,321 tonnes, which was primarily
attributable to the delivery of the new
Mosselprom poultry houses, the growth
of branded product sales and the
expansion of our presence in the ready-
to-eat, value-added segment.
Production in the Pork division grew
by 9% in 2016 to 184,766 tonnes, which
was primarily due to our new genetic
improvement strategy coming on stream
and the establishment of two new wean-
to-finish sites in Voronezh region.
The Meat Processing division’s sales
increased by 14%, to 218,085 tonnes in
2016, with the new pig slaughter facility
at the Dankov meat processing plant
working at full capacity during the year.
We managed to increase our market
share in meat processing despite the
challenging market conditions.
While all divisions delivered strong
results, the Grain division demonstrated
particularly robust sales, up 27% year-
on-year to 338,808 tonnes. The average
price, however, fell by 6% year-on-year
as a result of record harvest in the
country.
The Group’s revenue for the year grew
by 7% to RUB 82.4 billion with the Poultry
and Meat Processing segments being
the main growth drivers. The latter
performed particularly strongly and saw
revenue increase 9% to RUB 31.7 billion.
The fourth quarter was our best
performing quarter of the year. Our focus
on enhanced operational efficiency
across all segments has already helped
to deliver an uptick in EBITDA, with an
83% year-on-year increase in fourth
quarter EBITDA. Poultry prices remained
strong and the segment delivered over
half of the year’s EBITDA in the last three
months of the year.
CHALLENGING MARKET
ENVIRONMENT
During the year, Cherkizovo Group
faced extremely challenging market
conditions resulting from a combination
of macroeconomic factors. In particular,
the volatility of the rouble, which was
especially acute during the first half of
2016, combined with falling disposable
incomes, had a significant impact on our
operations.
At the same time, Russian pork and
poultry prices fell significantly and, when
combined with the effects of the rouble
devaluation, reached some of the lowest
levels seen in the world in US dollar
equivalent terms. The underlying fall in
pork and poultry prices was primarily
caused by a rise in supply as the Russian
government’s agricultural development
policy continued to boost domestic meat
production capacity during the year. As
a result of this policy, Russia is rapidly
moving towards full self-sufficiency in
domestic pork and poultry production,
thus dramatically reducing the share
of imported meat products on the
market. Overall, we had to overcome
the extreme volatility in pork and poultry
prices during the first half of the year,
although they then gradually stabilised
towards the end of the year.
REGULATORY ENVIRONMENT
In July 2016, a new amendment to
the law “On the Fundamentals of State
Regulation of the Trade Activities in the
Russian Federation” came into effect,
stipulating new pricing rules for retail
chains and their relationships with
suppliers. Prior to this, the amendment
had been subject to discussions for
almost two years. Among other things, it
abolishes retroactive bonuses and shifts
the balance slightly towards producers.
EU and US sanctions against Russia,
and the corresponding Russian
sanctions against the EU and US, had
little overall impact on the domestic
meat production industry. The low-price
environment, combined with increased
domestic meat production capacity,
made meat product imports into
Russia commercially unviable for many
international producers, notwithstanding
the sanctions.
I would like to highlight the great
significance of the support provided by
the Russian government for the domestic
agricultural industry. The national subsidy
programmes, along with the levels of
support offered by local authorities in the
regions, are essential for the continued
successful development of the sector.
The measures aimed at encouraging
domestic agricultural companies to
expand their presence in overseas
markets are also contributing significantly
to the growth of the industry. In 2016,
Cherkizovo Group and the Russian
Ministry of the Economic Development
signed a cooperation agreement to
promote foreign trade, which is designed
to support our export strategy.
16
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Annual Report 2016 CHERKIZOVO GROUP 17
ABOUT COMPANY
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Message from the CEO (continued)
“
An important element of our strategy is the
expansion of production capacity and the
enhancement of our product range with
higher value-added, higher-margin products
for domestic and international consumers,
leveraging our vertically integrated model.
NEW LANDMARK PROJECTS
In recent years, we have invested in the
development of landmark projects that
we believe will both ensure the Group’s
continued future growth and further
strengthen our competitive advantage as
Russia’s leading meat producer. In 2016,
we continued to open new production
facilities and we expect these to make
a significant positive contribution to our
overall performance in the future.
We completed the construction of the
Elets egg hatchery and started the
production at the new state-of-the-art
breeder farm with a total production
capacity of 64 million hatching eggs.
This will make us self-sufficient by the
end of 2017. We have invested over
RUB 3 billion into the project to date.
The Tambov Turkey project, a joint
venture between Cherkizovo Group
and our partner, Spain’s Grupo Fuertes,
became operational in 2016. This brand
new facility represents a joint investment
of approximately RUB 10 billion and has
a live weight production capacity of
approximately 50,000 tonnes per year.
Another important achievement for us
was the successful launch of our new
state-of-the-art, in-house R&D centre,
which represents a landmark project
for the entire Russian food production
industry. The quality and safety of food
products is rapidly becoming one of the
most important factors for consumers
and, with this new R&D centre in place,
we, as a Group, are fully committed to
ensuring that our production process
is the most efficient and safest in the
industry.
We also invested almost RUB 650 million
in the construction of new infrastructure
at our Mosselprom site, to create the
largest poultry production facility in
the Moscow region. Some 24 new
poultry houses with technologically
advanced facilities were completed
this year and are expected to boost
the Group‘s annual production volumes
by 12,000 tonnes. Meanwhile, in the
Pork division, we launched a new
genetic improvement strategy at the
beginning of 2016, designed to improve
both overall pig health and efficiency by
increasing liveability and weekly farrows.
In 2016, we also began construction of
the Kashira meat processing plant. This
project marks the beginning of a new
stage in our strategic development, as
we look to create the largest facility of its
kind in Europe equipped with the latest
technology and correspondingly high
levels of automation. Capital expenditure
on the project is expected to total
approximately RUB 6.7 billion, making
it the largest food sector investment
project to date in the Moscow region.
LAUNCH OF NEW VALUE-ADDED
PRODUCT LINES
An important element of our strategy
is the expansion of production capacity
and the enhancement of our product
range with higher value-added, higher-
margin products for domestic and
international consumers, leveraging our
vertically integrated model.
In 2016, we also developed a new range
of branded products specifically for
the Middle East and African markets to
strengthen our international offering in
line with our export expansion strategy
and, at the same time, continued our
efforts to increase export deliveries
to the Middle East, African and Asian
markets. Another important achievement
for us during the year was receiving
EU permission for the export of poultry
products, which not only creates new
export opportunities for us in terms
export opportunities for us in terms
of EU countries, but also opens up other
of EU countries, but also opens up other
markets to us outside the EU
markets to us outside the EU
that recognise the EU certification.
that recognise the EU certification.
As for the domestic market, we added
As for the domestic market, we added
the new, natural Clean label to our
the new, natural Clean label to our
Petelinka brand, which is additive and
Petelinka brand, which is additive and
preservative-free, and meets the growing
preservative-free, and meets the growing
consumer demand for healthy products.
consumer demand for healthy products.
We also launched a new range of ready-
We also launched a new range of ready-
to-cook pork products in 2016, becoming
to-cook pork products in 2016, becoming
one of the top three producers in Russia
one of the top three producers in Russia
in this very promising segment.
in this very promising segment.
EFFICIENCY AND QUALITY
EFFICIENCY AND QUALITY
CONTROL
CONTROL
Our operations now cover the whole
Our operations now cover the whole
value chain in line with our “Farm to
value chain in line with our “Farm to
Fork” approach. This allows us full
Fork” approach. This allows us full
control over the quality of final products
control over the quality of final products
and the efficiency of the production
and the efficiency of the production
process, while significantly reducing
process, while significantly reducing
our dependence on imports. We are
our dependence on imports. We are
confident that this will have a long-
confident that this will have a long-
term positive effect on our financial
term positive effect on our financial
performance.
performance.
Ensuring high quality production
across all product ranges remains
an absolute priority for us. In July last
year, with this objective in mind, we
began the deployment of our new
state-of-the-art quality control system.
This system represents a significant
investment for us and is intended to
lead to the full centralisation of quality
control practices across all divisions,
and uniform compliance to the highest
standards. To put this into perspective,
we already conduct around 350,000
microbiological, and over 60,000
chemical tests per year as part of the
Group-wide quality excellence drive.
MANAGEMENT SYSTEMS
During 2016, we implemented a number
of initiatives aimed at streamlining
business processes and enhancing
overall operational efficiency in terms
of marketing, distribution and logistics.
In particular, in 2016, we announced
the implementation of a transformational
project, unique in its scale for the
domestic agriculture industry. Our
new SAP ERP solution on the HANA
platform at our Petelino trading house
is a centralised platform allowing us
to deliver ultra-fresh products from
slaughter to store within 24 hours.
As a result of the SAP implementation,
we are now able to track and quickly
satisfy orders through our fully
automated, real-time communications
channels with the leading federal retail
chains in Russia. Following the success
of this first phase of the SAP project at
Petelino, we are planning to roll out a
similar Group-wide unified sales system
within the next few years.
BUILDING FUTURE GROWTH
ON A SOLID FOUNDATION
Over the last decade, our main focus
has been on developing a solid,
vertically integrated structure for our
business to provide a strong foundation
for the next stage of growth. This
past year has marked the end of this
extensive phase of development, as
a number of landmark projects have
reached fruition. Going forward, we now
expect to see significant benefits from
the investment projects that we
have completed in recent years,
both in 2017 and the years ahead.
We are unquestionably a leading player
in the Russian agriculture industry, with
a broad portfolio of well recognised
and trusted brands, offering high quality
products to our customers nationwide.
From now on, while maintaining our
strong customer focus, we intend to
further streamline our operations, ensure
greater efficiencies and synergies
between our various vertically integrated
business segments.
To reflect our new enhanced positioning
and support our new strategy, we
have embarked on a comprehensive
re-branding of the Group, involving a
new logo and new corporate colours
to be launched and rolled out across
all business divisions in 2017.
I strongly believe that the combination
of our increased production capacity,
state-of-the-art, highly vertically-
integrated production facilities, newly-
strengthened world-class Board and
highly-skilled workforce, ensures that
we are well-positioned to face the
challenges that lie ahead. We therefore
look to the future with confidence and
optimism in terms of our continued
growth, our expansion into new
international markets, our opportunity
to positively impact international
perceptions of the Russian food industry
and, ultimately, our ability to become
a leading player in the global food
production industry.
Sergey Mikhailov
CEO
18
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Annual Report 2016 CHERKIZOVO GROUP 19
CONTENTS
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Stepping Up
the Operating
Ladder
With the introduction of the new state-of-the-art facilities,
the creation of a unique Research and Development Centre,
the launch and expansion of export deliveries and the
ongoing commitment to quality and efficiency, Cherkizovo
Group is well positioned to further capitalise on its leadership
in the food market.
Business model chain:
Grain
Grain
Feed
production
Poultry
Pork
Meat
processing
Distribution
Consumers
Financial
highlights
STRATEGIC REPORT
20-43
Market Overview
Our Strategy:
Strategy Overview
Business Model
New markets
Investment Programme
Quality Control
Research & Development
Operational Review:
Poultry
Pork
Meat Processing
Grain
22
26
26
27
28
28
30
32
34
34
38
40
42
MARKET OVERVIEW
Cherkizovo Group retained its
leading position in the Russian meat
processing market, with a market
share of 7%, up 1 pp from 6% in 2015.
STRATEGY & BUSINESS
MODEL
We use our leading market position
to advance Russia’s agriculture
sector through knowledge, sharing
skills, making investments, helping to
develop the legislative framework for
the sector and applying leading global
solutions and technological advances
to our operations.
INVESTMENT
PROGRAMME
QUALITY CONTROL
Using a combination of the most
advanced production and construction
techniques, state-of-the-art technology,
modern equipment and international
expertise, we have developed highly
efficient meat and grain production,
meat processing facilities, and
upgraded our sales and logistics
operations.
Our quality control system ensures
that the Group’s production complies
with all relevant Russian and
international safety and hygiene
requirements and standards. In
mid-2016, Cherkizovo began the
implementation of its centralised
quality control system and created a
new quality assurance department.
RESEARCH &
DEVELOPMENT
We have always been early adopters
of new technology and work with
top industry experts to achieve our
vision. In order to pursue this strategy,
we created the unique European-
standard, innovative R&D Centre.
P. 22-25
P. 26-27
P. 28-29
P. 30-31
P. 32-33
20
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Annual Report 2016 CHERKIZOVO GROUP 21
STRATEGIC REPORT
Market Overview
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
US dollar to Russian rouble
exchange rate dynamics, 2013-2017F
Wheat production and export,
2013/14-2016/17*
Consumption of key meat
categories, 2014-2016, mln tonnes
Meat consumption per capita, 2016,
kg/year
Declines in the share of imports,
%
Change in output of meat products
and key substitutes, 2015/2016
66.8
61.3
61.2
38.4
31.8
Production, tonnes
Share of exports
Export, tonnes
Poultry
Beef
Pork
Meat consumption per capita, kg
59,080
61,040
52,091
72,500
36%
39%
18,568
22,800
42%
40%
25,540
29,000
72
10.3
2.3
3.3
4.6
69
10.1
2.1
3.4
4.7
70
10.3
1.9
3.6
4.8
Poultry
Pork
Beef
113
98
32%
82
75
70
75
13%
10%
Beef (excl. boneless meat)
4%
Pork (excl. boneless meat)
13%
Poultry (incl. subproducts)
3%
22%
9%
6%
18%
7%
5%
2013
2014
2015
2016
2017F*
2013/2014 2014/2015 2015/2016 2016/2017
2014
2015
2016
Russia
EU
Canada Australia USA
Biological
Standard
2014
2015
2016
* - Forecast provided by Bloomberg
Source: OANDA
* - USDA forecast
Source: USDA
Source: Rosstat, Belstat, Federal Custom Service, EEU
Source: USDA
Source: Cherkizovo
RUSSIAN ROUBLE
STRENGTHENING
The rouble recovered over the course of
2016, with the yearly average exchange
rate standing at 66.8 RUB/USD. The
currency stability that set in during the
middle of the year had a two-fold impact
on the agro-industrial sector in Russia.
First, costs across the industry stabilised
at the same time as Russia saw a record
grain harvest. Second, negatively, it had
an adverse effect on the livestock and
poultry exports.
HIGH WHEAT PRODUCTION
AVAILABLE MEAT RESOURCES
The record harvest in Russia led to
a significant increase in the volume
of grain reserves. Wheat production
grew by 19% to reach a record high
level of 72.5 million tonnes in the 2016-
2017 agriculture season, compared to
61.4 million tonnes in the 2015-2016
season. Despite exceptional levels of
grain production, the share of exported
wheat is expected to decline slightly
to 40% in 2016-2017, according to the
USDA, from 42% in 2015-2016. This was
primarily due to heightened competition
on international markets and currency
stabilisation on the domestic market.
Against the backdrop of an increased
grain supply, the Group benefited from
falling animal feed costs.
During 2016, levels of meat consumption
in Russia began to show signs of
recovery, as industry leaders competed
for market share by offering attractive
prices to consumers. Total meat
consumption (excluding goat and sheep
meat) increased by 1.5% to 10.3 million
tonnes in 2016, from 10.1 million tonnes in
2015. Meat consumption per capita grew
by 1.4% to 70 kg in 2016, compared with
69 kg in 2015. This increase was primarily
attributable to pork meat regaining
the market share it lost over the last
few years. Despite this growth, Russia
continues to offer substantial long-term
growth opportunities when compared
to more developed markets, with meat
consumption per capita of 75 kg to 113 kg
in the EU and the USA respectively.
The share of imports in Russian meat
consumption declined during 2016,
mainly due to increasing production
volumes by domestic meat producers
(excluding beef), as well as refocused
meat exports by the Brazilian suppliers
to other markets. This is evident across
all types of meat. In poultry, the decrease
was only 1%, from 6% in 2015 to 5%
in 2016. The share of imported pork
declined to 7% from 9% in 2015 and the
share of beef fell to 18% from 22% in
2015. Brazil and Belarus remain the main
meat suppliers to Russia.
During 2016, meat products output
reflected trends in consumer demand
for affordable over premium products
as a consequence of the continuing
pressures on household budgets.
As such, the production of sausages
declined by 2% to 2.41 million tonnes last
year, compared to 2.46 million tonnes
in 2015. By contrast, the production of
chilled, ready-to-cook meat products
including cheaper cuts / broilers
increased by 11% to 1.22 million tonnes
in 2016 from 1.1 million tonnes in 2015.
We believe that the expected economic
recovery and growth in disposable
income will drive demand for sausages.
Sausage products
-2%
Chilled ready-to-eat
products
Frozen ready-to-eat
products
-1%
Cooking
meat products
Canned meat
-6%
Canned
cereal
-9%
Fish and fish
products
Liquid milk
processed
Cheese and curd
Cheese and
cheese products
11%
12%
3%
1%
0%
3%
-10%
-5%
0%
5%
10%
15%
Source: Rosstat
22
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Annual Report 2016 CHERKIZOVO GROUP 23
STRATEGIC REPORT
Market Overview
(continued)
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Export of poultry (excluding
chicken feet), 2014-2016, th. tonnes
Monthly changes in real incomes, YoY, %,
2009-2016
Russian poultry market structure
Russian pork market structure
Change in average retail prices,
2015/2016
92
62
25
15%
10%
5%
0%
-5%
-10%
Prioskolye
Resurs
Belgrankorm
Cherkizovo
Belaya Ptitsa
Other
Miratorg
Cherkizovo
Velikoluksky meat
Rusagro
Agro-Belogorie
Other
63%
11%
10%
6%
5%
5%
70%
11%
5%
5%
5%
4%
2012
2014
2016E
2009
2010
2011
2012
2013
2014
2015
2016
Source: FCS, EEU
Source: Rosstat
Source: Russian Poultry Union
Source: National Union of Pork Producers, Cherkizovo
EXPORTS
In 2016, total Russian export of poultry
(excluding chicken feet) grew by 48%
to 92,000 tonnes, compared to 62,000
tonnes in 2014. Export to the countries of
the Eurasian Economic Union was stable
at 42,000 tonnes, while export to other
countries stood at 50,000 tonnes.
FACTORS INFLUENCING
CONSUMER CHOICE
In 2016, consumer demand continued to
decline. As a result, the key factor that
has dictated consumer choice has been
price. Consumer demand has switched to
goods that have seen falling retail prices.
THE GROUP’S MARKET POSITION
Bread**
In 2016, Cherkizovo Group retained its
leading position in the Russian meat
processing market, with a market share
of 7%, up 1 pp from 6% in 2015. In the
poultry sector, we remained in second
position with a market share of 10%,
up by 0,2 pp from 2015. In the pork
segment, we held third position in the
market with a market share of 5.2%,
marginally down from 5.4% in 2015.
Buckwheat
Pasta***
Potatoes
-22%
Cucumbers
Tomatoes
Apples
Bananas
-2%
-20%
-10%
-5%
0%
10%
20%
** - from rye flour and mixed rye-wheat flour
*** - from premium wheat flour
Source: Rosstat
24
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Annual Report 2016 CHERKIZOVO GROUP 25
Chopped meat
Beef (excl. boneless meat)
1%
1%
Pork (excl. boneless meat)
-6%
-3%
-2%
Chicken (chilled and frozen)
Chicken quarters
Wiener sausage
Bologna sausage
Fish (fresh and chilled)
Cheese (rennet, hard and soft)
Chicken eggs (10)
3%
3%
9%
5%
2%
7%
5%
5%
3%
3%
21%
STRATEGIC REPORT
Our Strategy
Cherkizovo Group has come a long way in order to become the largest
vertically integrated meat and feed producer in Russia. We use our leading
market position to advance Russia’s agriculture sector through knowledge,
sharing skills, making investments, helping to develop the legislative
framework for the sector and applying leading global solutions and
technological advances to our operations. All of this creates additional
value for all stakeholders in the industry.
OUR STRATEGIC PRIORITIES
PRODUCT PORTFOLIO
AND ASSET DEVELOPMENT
TECHNOLOGY, RESEARCH
AND KNOWLEDGE LEADERSHIP
EFFICIENT GROWTH
■ Well-balanced development of the
brand portfolio with increasing share
of value-added products
■ Strengthen in-house research and
development facilities and industry
expertise
■ Ensure qualitative expansion of
business in all key segments via
organic growth and M&A
■ Continue increasing the number of
products and service quality with
a focus on implementing robust
biosecurity standards and practices
■
Implementation of investment
programme through upgrading
production assets and opening new
facilities
■ Develop cooperation with Russian
■ Drive efficiency throughout entire
and international food research and
production experts to bring the most
advanced global expertise to the
domestic food market
■ Empower human capital and reward
organisation, sourcing and value chain
■ Maintain high quality of management
across the whole vertically integrated
structure and adhere to the best
practices of corporate governance
excellence
STRENGTHENING MARKET
POSITION IN OUR KEY MARKETS
■ Maintain and strengthen market
leadership in core Russian meat
markets
■ Expand existing export supplies
■ Open new, international markets
for our products
FINANCIAL STABILITY
■ Reduce earnings/cash flow volatility
through vertical integration, diverse
product line and exports
■ Maintain comfortable leverage level
■ Drive profits and cash flow, while
delivering attractive returns to
investors
ABOUT COMPANY
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BUSINESS MODEL
Cherkizovo Group is the largest vertically
integrated meat and feed producer in
Russia. Our principle of ‘Quality from
Farm to Fork’ is at the heart of our
strategy. The Group’s farms grow crops
that are used by our feed mills. Feed
producing facilities are fully owned by
the Group, ensuring the high quality of
feed and biosafety for the livestock. Our
work in selective breeding and genetics
is aimed at preserving the best qualities
of the breeds. In poultry farming,
we strive to achieve complete self-
sufficiency when it comes to hatching
eggs. Our highly skilled employees
oversee the whole cycle of pork and
poultry breeding with adherence to the
highest standards of animal welfare. Our
sausage production facilities use only
the freshest meat supplied by our own
farms, ensuring the highest quality for
our consumers. The final link in our chain
is our own fleet of refrigerated trucks
that promptly deliver chilled products
to distributors, supermarket chains and
other retail stores nationwide.
Such a high degree of vertical
integration not only gives us a
competitive edge, but also ensures
the full control of the entire production
cycle, effective cost management and
a high degree of responsiveness to
rapidly changing consumer demand.
Over the last few years, the model has
proven to be successful and resilient
against a background of challenging
macroeconomic conditions and
fluctuating commodity prices, enabling
the Group to deliver incremental returns
to our shareholders and much needed
support to the communities where we
operate.
The Group is managed as four business
segments that combine common
industry expertise, operational capability
and market intelligence. Operational
decisions are made at a local level by
teams of highly skilled managers who
are closer to the day-to-day running
of the business and have a granular
knowledge of their business segments.
The head office is small and sees its
main function to provide a framework
in which the business unit managers
can take the lead in implementing the
strategic priorities set by the Board
of Directors. It uses short lines of
communication to provide prompt,
inclusive and direct decision making and
to ensure that all business activities are
appropriately monitored and supported.
Consumers
■ Covering up to
80% of the Russian
population
■ New consumers
on international
markets
Research
and development
■ Using the latest
technologies
■ Launch of
Cherkizovo R&D
centre
Employee
development
■ Professional growth
opportunities
■
Industry leading
experts
Environment
■ Beyond compliance
Communities
■ Socially responsible
approach
employer
■ A strategy of reducing
the environmental
footprint of operations
■ Support of local
economies
26
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Annual Report 2016 CHERKIZOVO GROUP 27
STRATEGIC REPORT
Our Strategy
(continued)
NEW MARKETS
INVESTMENT PROGRAMME
We see a targeted, international
expansion of our exports to the Middle
East, South East Asia and Africa as
a significant driver of future growth.
Our leading domestic market position,
combined with our robust production
capacity and the strength of our balance
sheet, positions us to be a leading
Russian food exporter. During 2016, we
made good progress in strengthening
our overseas offering and customer
base. During the year, the Group was
also awarded a EU Export Compliance
Certificate allowing us to export products
to European Union countries. To support
our strategy for international exports
expansion still further, we signed a
cooperation agreement with the Russian
Export Centre (REC), giving us direct
access to a large established network
of potential export partners.
The Group believes that diversifying our
revenues geographically will strengthen
our financial and operational position
and will help to ensure our long-term
success and growth in Russia and
abroad.
Gaining access to new markets involves
rigorous inspection of the Group’s
production processes and technologies,
as well as ensuring that we meet the
strictest biosafety requirements. Our
newly granted export licences are
testament to the relentless work of our
highly experienced and committed team
across all of our operational divisions to
meet the highest international product
safety and quality industry standards.
Cherkizovo Group has invested heavily
in the construction, development and
modernisation of production facilities
over recent years. This significant
investment programme, financed from
profits, additional debt capital and state
subsidies, is already starting to pay off.
In 2016, all of our investment projects
continued to make progress on
schedule. Using a combination of
the most advanced production and
construction techniques, state-of-the-
art technology, modern equipment
and international expertise, we have
developed highly efficient meat and
grain production, meat processing
facilities, and upgraded our sales and
logistics operations.
We have accumulated significant
expertise in the construction of meat
production facilities, combining
international best practices with our own
know-how. In the context of our export
expansion strategy, we have ensured
that our plants comply with the requisite
quality and safety standards of our target
export markets.
We are focused on making constant
improvements to all areas of our
operations. We maintain a close dialogue
with our peers as well as leaders in the
global agricultural industry in order to
ensure that we share ideas and remain
at the forefront of the most advanced
technologies and solutions. In addition,
we have established our own corporate
Research & Development Centre in
order to consolidate and develop our
industry knowledge and skills still further.
Our corporate culture is defined by
our openness to discussion and the
free exchange of ideas. This helps us
to retain flexibility and deploy the most
effective solutions in the framework of
our investment programme.
An important element of our investment
policy is supporting long-term
cooperation with contractors and
suppliers. This approach helps us to
deliver the most ambitious investment
programmes on time, in strict compliance
will all applicable requirements and in
line with the best international standards.
Largest completed investment
projects:
10 RUB bln
INVESTMENTS IN TAMBOV TURKEY
PROJECT
3.7 RUB bln
INVESTMENTS IN ELETSPROM
HATCHERY AND BROILER
PRODUCTION FACILITY
1.7 RUB bln
INVESTMENTS IN VORONEZH
FEED MILL
1.4 RUB bln
INVESTMENTS IN ELETS GRAIN
STORAGE FACILITY
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Our investment projects in progress:
ELETSPROM
During 2016, Cherkizovo Group
continued to develop Eletsprom, Russia’s
largest poultry breeding facility. As part
of the project, Cherkizovo launched a
hatchery in the Lipetsk region with an
annual capacity of 240 million eggs. The
project ensures we can meet our import
substitution goals in our egg hatching
production.
This has been a breakthrough project
for the Russian food industry as a whole,
as it has created a platform for the local
egg hatching at a high volume. For
Cherkizovo Group, the project brings
a wide range of business advantages,
including the expansion of our presence
in the high-margin segment of poultry
meat production as well as boosting the
overall efficiency of the Poultry division
and decreasing our dependency on
imported deliveries of hatching eggs.
The Group launched the first parent
stock cluster at Lipetsk in 2016 and there
are currently three more parent stock
sites nearing completion. The entire
project, consisting of two replacement
chick sites and four parent stock sites,
will be fully completed in 2017.
We use modern, state-of-the-art
equipment at the facility, with high levels
of automation, while complying with the
highest sanitary and biosafety standards.
325 million hatching eggs per year,
making it 92% self-sufficient in hatching
eggs. Total investment in the project has
exceeded RUB 3.7 billion.
This project represented the first time
that stabilised soil technology was used
in building poultry production facilities
in Russia. This helped us to reduce the
time required for construction by several
months. We used the most advanced
insulation and ventilation systems and
applied the best international practices
in the construction of the facilities. When
the project is completed, the Group’s
production capacity will reach
3.7 RUB bln
TOTAL INVESTMENT IN THE PROJECT
92%
SELF-SUFFICIENT IN HATCHING EGGS
Hatching eggs: results and forecasts
Hatching eggs
(thousands)
In-house
2016
2017f
2018f
2019f
274,603
300,314
325,222
325,222
Including 2 sites (at Butyrky)
-
39,092
64,000
64,000
Bought from outside
99,464
54,978
30,070
30,070
Total
374,067
355,292
355,292
355,292
% of in-house hatching eggs
73%
85%
92%
92%
KASHIRA MEAT PROCESSING PLANT
In 2016, Cherkizovo Group began
construction of a new, highly efficient
meat processing plant in Kashira district,
Moscow region. The project represents
the largest food industry construction
project in the Moscow region, with total
capital expenditure expected to reach
RUB 6.7 billion. The Group is planning
to create the largest meat plant of its
kind in Europe, with a daily production
capacity of 80 tonnes and employing
approximately 150 people.
The Group intends to use modern
equipment and energy-efficient
technology as well as state-of-the-art
IT system, with the full automation of
all processing operations. We are also
committed to ensuring the highest
levels of product quality and biosafety.
The plant, which is scheduled to open
in 2018, will form part of the Group’s
vertically integrated structure, processing
mostly raw materials produced by
Cherkizovo’s other divisions.
28
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Annual Report 2016 CHERKIZOVO GROUP 29
STRATEGIC REPORT
Our Strategy
(continued)
PIG-BREEDING CLUSTER PROJECT
SAP ERP SOLUTION
Cherkizovo Group undertook one
of the most notable projects in the
Russian food industry last year, with the
implementation of the SAP Enterprise
Resource Planning (ERP) solution on
the HANA platform at Petelino Trading
House. The SAP ERP solution has
streamlined business processes and
improved efficiency at the Petelino
Trading House, helping us to ensure
delivery of ultra-fresh products from
slaughter to store within 24 hours.
The system provides us with accurate,
real-time information and automates
our communications with Russia’s
federal retail chains. As a result, our
supply chain is now tailored to meet the
requirements of each of our customers.
The system also gives us access to a
new suite of analytical tools designed
to upgrade our sales and marketing
activities. The project, which is unique
in scale in the entire Russian food sector,
will be used in the creation of a unified,
company-wide sales system.
In 2016, we began development of
a new pig-breeding cluster project
in Lipetsk and Voronezh regions. The
use of the latest technologies has
helped us to cut construction costs by
almost a third. The project comprised
the construction of two facilities, each
with seven finisher sites and an annual
production capacity of 294,000 animals
(35,000 tonnes of live weight). In 2016,
we completed the construction of one
sow farm in Lipetsk region and two
finisher sites in Voronezh region.
CORN PRODUCTION PROJECT (AHI)
OREL GRAIN DRYER FACILITY
A grain dryer facility was launched last
year in Znamensk district, Orel region. It
has been constructed using both foreign
and Russian-made equipment and has
a capacity of 200 tonnes of wheat or
110 tonnes of corn per hour.
QUALITY CONTROL
The highest standards of production
quality remain an absolute priority for
Cherkizovo Group. Our quality control
system ensures that the Group’s
production complies with all relevant
Russian and international safety and
hygiene requirements and standards.
In mid-2016, Cherkizovo began the
implementation of its centralised quality
control system and created a new quality
assurance department.
The main purpose of the department is
to integrate quality control procedures
across the entire production chain, from
growing grain to the manufacturing of
meat products. With the new department
and system in place, issues of quality
control are centralised and subject to
common standards. Promoting a quality
control culture among all employees
is one of the top elements of the new
programme.
The Group’s new R&D centre represents
a key element of the new quality control
system. During the year, Cherkizovo
Group launched several new quality
control programmes. The Group’s
production now complies with the halal
standards of the UAE and Egypt and we
have started exporting our production
to these Muslim countries. The Group
is also in compliance with standards
in China and other South-East Asian
countries. Other new quality control
programmes were launched to comply
with the specific requirements of global
restaurant chains, such as KFC and
Burger King.
In 2015, we began a new corn
production project (AHI) in Lipetsk region
aimed at increasing corn yields year-
on-year. In 2016, the project has already
proved highly successful.
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Key elements of the Quality
Control System
Contractor training
Training of new contractors.
Working with suppliers
An audit of all new suppliers and regular
audits of purchased production.
Handling consumer complaints
The Group has two hotlines for our
clients. All claims are dealt with within
seven days.
Going forward we are planning
to continue the integration and
centralisation of the new Quality Control
System to encompass each division
of the Group. We will also focus on
ensuring compliance with international
quality standards. We are working on
the implementation of a new feedback
system to respond to consumer
comments on product taste and quality.
Key elements of the Quality Control System
Production & Distribution
Procurement
External Relations
■ Certification body
■ Authority
■ Support PR
■ HACCP & Sanitary programme
■ Training for plants and DCs
management
■ Food safety audits
■ Handling consumer complaints
■ Crisis plan
■ Traceability programme
■ Detergents and disinfection
■ Group food safety and
quality requirements
■ RM and PM supplier
assessment
■ Critical supplier audits
■ Traceability programme
■ Material mock recall
■ Legislative requirements
plan
■ Pest control
What we do to ensure better quality control:
Develop food safety
policies to be introduced
at each stage of production
Ensure compliance
with biosecurity
principles
Build a quality team
including the most talented
and skilled QA managers
Carry out hygiene
audits of suppliers
Carry out a food safety
risk assessment for
each plant
Ensure control of food
safety and application
of food quality indicators
Hazard Analysis and Critical Control
Points (HACCP)
This is a systematic and preventive
approach to safeguarding food from
biological, chemical, and physical
hazards in production processes.
Mercury
The automated system launched by
the Federal Service for Veterinary
and Phytosanitary Surveillance for the
electronic certification of production.
It tracks all movements of product in
Russia to enhance its veterinary and
biological safety.
Good Manufacturing Practices (GMP)
These are the practices required to
conform to the guidelines recommended
by the agencies that control the
authorisation and licencing for the
manufacture and sale of food. These
guidelines provide the minimum
requirements that a food product
manufacturer must meet to ensure that
the products are of high quality and do
not pose any risk to the consumer or
wider public.
Hygienic practices
These practices regulate the regular
cleaning of equipment and production
areas, requiring the use of only top-
quality detergents.
Pest control
This is a complex system and includes
humane methods of preventing potential
contamination from rodents, insects and
birds.
Laboratory control
The system of regular laboratory analysis
at all stages of the production process.
Employee training
Regular training of all employees to
ensure that the highest standards
of health and safety are met.
30
CHERKIZOVO GROUP Annual Report 2016
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Annual Report 2016 CHERKIZOVO GROUP 31
STRATEGIC REPORT
Our Strategy
(continued)
RESEARCH AND DEVELOPMENT
CENTRE
We firmly believe that technological
and scientific advances are critical
to ensuring long term success in the
agricultural industry. We have always
been early adopters of new technology
and work with top industry experts to
achieve our vision. In order to pursue
this strategy, we created the unique
European-standard, innovatvie R&D
centre.
With the latest technology and testing
methods, the R&D centre is able to carry
out over 1,000 laboratory tests across
all areas of agricultural activity, from soil
analysis to quality control of finished
goods. It is equipped to diagnose and
prevent animal diseases at an early
stage, test feed quality, detect changes
in the quality of food and determine food
energy values. It can measure the impact
that quality standards and product
ingredients have on human health.
The R&D centre is at the core of our own
Quality Control System, as it ensures a
total control of the quality of our products
at every stage of the production from
farm to fork. It supervises the compliance
of our products with the Technical
Regulation of the Customs Union, GOST,
ISO and other applicable requirements.
The R&D centre can guarantee the
biosecurity of products through the early
detection of animal diseases, toxins and
other substances dangerous to humans.
The R&D centre’s team conducts
extensive research in a wide range
of areas such as biotechnologies,
genomics, molecular biology, veterinary-
sanitary examination and medicine.
The findings help us to increase our
productivity and efficiency levels.
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OUR PARTNERS
The R&D centre’s mission is to improve the
quality of human life by helping to maintain
a healthy lifestyle with a well balanced diet.
The R&D centre also contributes to solving a
broad range of issues affecting the industry
as a whole, such as reviving Russia’s livestock
herds and genetic improvement in poultry and
pork production.
THE R&D CENTRE STRUCTURE
CENTRE FOR TESTING
OF FEED AND ANIMAL
PRODUCTS
CENTRE FOR
VETERINARY-SANITARY
EXAMINATION
CENTRE FOR GENETICS
AND MOLECULAR
BIOLOGY
Physical and chemical
analysis of feed
Fnished and semi-
finished products and
ingredients research
Soil, fertilisers and
water quality research
Amino acid analysis
Biochip multiplex rapid
analysis
PCR-based diagnostics
of animal diseases
Microbiological and
toxicological analysis
Biochemical blood
tests
GMO detection and
molecular-biological
evaluation
Genomics and DNA
sequencing
The R&D centre operates in line with
the strictest Russian and international
standards using the most advanced
scientific equipment, some of which
is unique in Russia. It employs highly
qualified scientists who regularly
expand their professional expertise with
advanced training in Germany, France,
the USA and other countries.
In addition, the R&D centre acts as an
industry-wide facility and its services are
available to other industry players.
The R&D centre develops innovative
laboratory technologies for use in
agriculture and works to establish and
expand cooperation with other major
Russian and international research
institutions.
In November 2016, Cherkizovo Group
signed a cooperation agreement
with the Skolkovo Technology
Park, envisaging the creation of an
acceleration centre for research in
the agricultural biotechnology sector.
Cherkizovo was the first partner to join
the park.
In December 2016, the R&D centre
received an ISO/IEC 17043:2010
(GOST ISO/IEC 17043-2013) certificate
for provider work, which allows it to
conduct tests for other laboratories.
This accreditation underlines the R&D
centre’s technical competence and
the efficacy of its quality management
system.
350 RUB mln
INVESTED IN THE PROJECT
Young aspiring
team
1,500 m2
OF STATE-OF-THE-ART SCIENTIFIC
FACILITIES
100
TYPES OF TESTS ARE CONDUCTED
FOR AGRICULTURE, THE FOOD
INDUSTRY AND MEDICINE
32
CHERKIZOVO GROUP Annual Report 2016
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Annual Report 2016 CHERKIZOVO GROUP 33
STRATEGIC REPORT
Operational Review
Poultry
In 2016, poultry sales
volumes rose by 6%
to 500,321 tonnes,
compared to 470,432
tonnes in 2015.
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Performance indicators, 2014-2016
Indicators
2014
2015
2016
‘16/‘15, %
Meat finished goods yield, % of live weight
Feed conversion rate per kg of live weight
Average growing period, days
Average daily gain, g
Liveability, %
82.7
1.76
37.1
54.5
92.9
84.0
1.69
37.2
56.9
93.4
84.5
1.66
36.7
57.5
94.6
0.7%
(1.8%)
(1.3%)
1.1%
1.3%
This growth was largely attributable
to a combination of improvements
in productivity and the establishment
of 24 new poultry houses at the
Mosselprom production facility, aided by
higher consumer demand for branded,
processed and ready-to-cook products
and in part resulting from the growth in
exports.
During the year, the Group continued to
further implement its vertical integration
strategy, with the first cluster of a new
parent stock-breeding farm completed
in Elets in the Lipetsk region. This
represents a key step towards import
substitution, the Group’s further vertical
integration and self-sufficiency
in egg hatching.
The average gross price per product
achieved in 2016 was 94.94 RUB/kg,
a slight improvement on the average
gross price per product of 94.52 RUB/kg
achieved in 2015.
The Group also implemented a new and
centralised Enterprise Resource Planning
(ERP) technology platform simultaneously
across 14 sites designed to streamline
operations and increase productivity.
In 2016, the Group began exporting
poultry products to several new
countries. For example, in August, we
began exporting to Egypt and Tanzania.
At the same time the Group launched the
new Dajajti brand, which was especially
created to serve the Halal poultry export
market to Muslim countries. The Group
was also awarded two significant new
export licences in 2016, receiving a
poultry export licence for the United
Arab Emirates in January and an EU
poultry export licence in the fourth
quarter of the year, the latter of which
confirmed the Group’s Vasilievskaya
production facility’s compliance with
the EU’s strict veterinary and sanitary
requirements.
During the year, the Group maintained its
focus on ensuring strict compliance with
the highest Russian and international
biological safety standards at its facilities.
In 2016, the Group also established a
new laboratory designed to monitor the
quality of incoming ingredients to our
animal feed plants. This has allowed us
to produce animal feed to the highest
quality standards, resulting in the faster
and healthier growth of our poultry.
OUR PLANS
During 2017, key initiatives are to further
reduce costs in the Poultry division, while
also improving the KPIs of the breeding
programme. The Group also plans to
increase the ready-to-eat share of total
sales and expand cooperation with
retail customers, such as the HoReCa
segment.
Sales by channels in 2016
Sales by brands in 2016
Modern retail
Wholesale
HoReCa
Traditional retail
Export
Kurinoe Tsarstvo
(Chicken Kingdom)
Mosselprom
Petelinka
Vasilievsky Broiler
Private label
Lisko Broiler
Others
Non branded products
2%
2%
34%
9%
Sales volume, th. tonnes
Revenue, RUB mln
122.6
54.8
14.6
22.4
13.6
17,724.8
3,261.3
106.8
1,566.5
12,397.9
8,677.4
1,564.1
2,425.2
53%
240.9
29.0
2.3
Sales of finished products, th. tonnes
Sales by channels in 2016
500
470
417
319
343
2012
2013
2014
2015
2016
Export
Wholesale
Modern Retail
Other
Traditional Retail
HoReCa
Sales volume, th. tonnes
Revenue, RUB mln
16.4
1,518.6
1,194.7
15,827.0
202.0
1,001.9
3,981.2
24,200
16.1
206.6
6.8
52.4
Cherkizovo Group’s poultry production
facilities in Central Russia, which utilise
advanced veterinary security and
production efficiency technologies,
include the Mosselprom and
Petelinskaya facilities near Moscow,
the Vasilievskaya facility in Penza region,
the Lisko Broiler facility in Voronezh
region and the Kurinoe Tsarstvo facilities
in Bryansk and Lipetsk Regions. The
Group has a total of eight full cycle
poultry manufacturing clusters located
in the Moscow, Bryansk, Voronezh,
Kursk, Lipetsk, Penza and Tula regions
with a combined total live weight
production capacity of over half
a million tonnes per year, or more
than 200 million broilers.
Find out The Company’s division
location on Map of Operations
on page 10-11.
34 CHERKIZOVO GROUP Annual Report 2016
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Turkey
Tambov Turkey
Tambov Turkey, a joint project with Grupo
Fuertes, a major European agricultural
company based in Spain, became fully
operational in 2016.
This project has established and
solidified Cherkizovo Group’s position in
the fast growing Russian turkey market,
a segment offering substantial long-term
growth potential. With Tambov Turkey
expected to achieve full operating
capacity in 2017, Cherkizovo will become
one of the top-three turkey producers in
Russia. The Group also plans to launch
export sales of turkey products to the
European Union, Asia and the Middle
East as well as the CIS region.
By the end of 2016, the number of
livestock at the facility reached 660,000
birds. The Group supplied over 6,000
tonnes of turkey meat during 2016, with
the first consignment being delivered
to retail outlets and HoReCa customers
in autumn 2016. Cherkizovo’s turkeys
differ from those currently available in
Russia in its compact size and relatively
small weight (7-9kg), which makes it
perfect for home cooking. The Group
has developed four turkey meat brands
designed to reach all segments of the
market.
In February 2016, as part of the Tambov
Turkey project, Cherkizovo Group
commenced operations at its state-of-
the-art hatchery, which has an annual
capacity of 5.9 million eggs. The first
batch of 30,000 Grade Maker hatching
eggs was imported from France.
A grain elevator with capacity of 90,000
tonnes and a feed mill, with annual
capacities of 180,000 tonnes and
90,000 tonnes respectively, along with a
slaughter site, were constructed as part
of the project. Tambov Turkey’s current
annual live weight production capacity
is 50,000 tonnes.
We have room to double capacity
if necessary to meet future demand.
EVENT OF THE YEAR
TAMBOV TURKEY HIGHLIGHTS
TAMBOV TURKEY HIGHLIGHTS
Grupo Fuertes, as project partner, is
overseeing each stage of the production
process from egg hatching to slaughter,
ensuring that our turkey products
fully comply with ISO 22000/FSSC
2200 European quality and biosafety
standards. Grupo Fuertes also brings
its expertise to feed production and the
development of ready-to-eat products,
where fully automated processes help
the Group achieve high levels
of production efficiency.
Cherkizovo Group has invested around
RUB 10 billion in the project to date.
The investment by regional authorities
has been delivered as promised: the
roads have been built and gas and
electricity have been supplied to all
of our operating facilities.
In 2016, the first phase of the Tambov
Turkey project won the ‘Event of the
year. Russia 2015’ online vote held by
publisher Vremya Rossii. The prize came
in the agricultural category in recognition
of the size of the investment, the level of
innovation displayed by the project, as
well as the number of jobs created.
An integrated project
An integrated project
comprising all stages from
comprising all stages from
feed production to meat
feed production to meat
processing
processing
Expertise of Grupo Fuertes,
Expertise of Grupo Fuertes,
a leading European
a leading European
turkey producer and a
turkey producer and a
major Spanish agricultural
major Spanish agricultural
company
company
Construction launched
in 2015, with full operational
capacity planned for 2017
The lowest cost of sales
in the market
Product quality meets
Product quality meets
highest European
highest European
standards
standards
Modern equipment and
machinery, state-of-the-art
technology
10 th. ha
LAND PLOT
50 th. tonnes
TURKEY MEAT (LIVE WEIGHT)
CAPACITY PER YEAR
350 km
FROM THE MOSCOW REGION,
EXCELLENT LOCATION
x2
POTENTIAL OF DOUBLING CAPACITY
TO MEET FUTURE DEMAND
36
CHERKIZOVO GROUP Annual Report 2016
www.cherkizovo.com
www.cherkizovo.com
www.cherkizovo.com
Annual Report 2016 CHERKIZOVO GROUP
37
STRATEGIC REPORT
Operational Review
Pork
The Pork division delivered a strong
performance in 2016, with production volumes
increasing by 9% to a record-high 184,766
tonnes, compared to 169,563 tonnes in 2015.
These new, state-of-the-art greenfield
pork facilities have enabled Cherkizovo
Group to achieve industry-leading
margins. The efficiency indicators are
some 50-70% higher compared to
previously designed pork farms.
Following its renovation in 2016, the
Dankov pig slaughter facility began
operating at full capacity. With this
capacity, Cherkizovo Group is now
able to slaughter 80% of pigs at its own
facilities, compared to 40% before the
renovation was completed.
In 2016, the Group also continued to
devote particular attention to ensuring
high biosafety standards with the
result that infrastructure, technology
and safety regulations across all of the
Group’s facilities now adhere to the
highest Russian and international safety
standards.
The Group’s new R&D centre
commenced operations in 2016 with
the goal of increasing the quality and
biosafety of all Cherkizovo Group’s pork
products.
These excellent results were
primarily attributable to a new genetic
improvement strategy implemented at
the beginning of the year and aimed
at improving both pig health as well as
productivity through increased liveability
and weekly farrows. At the same time
the establishment of two new wean-to-
finish sites in the Voronezh region also
contributed to increased production
volumes.
The Pork division suffered from pricing
pressure in 2016, with average pork
prices falling 10% during the year from
98.51 RUB/kg in 2015 to 88.28 RUB/kg
in 2016. The decline in average pork
prices was primarily attributable to the
lower purchasing power of Russian
consumers and an overall increase in
pork production across the country
during the year.
In 2016, Cherkizovo Group implemented
a new genetic improvement strategy
which has eliminated several chronic
diseases in the pig stock, improved
overall animal health and has led to
the ability to produce better tasting
and higher quality meat at a reduced
cost. The Group envisages that this
strategy will allow us to make significant
increases in genetic potential over
the medium term and this should
also improve our international
competitiveness.
Cherkizovo Group is also focusing
attention on gilt development units
(GDU), where sows are allowed to
develop their genetic potential to the
maximum as the animal is grown until
mature and ready to breed. The Group
currently breeds approximately 1,800
gilts per week.
In 2016, the Group continued the
development of its pork facility clusters
in Lipetsk and Voronezh regions, with
the second phase of the Voronezh
project being completed in June.
When completed the cluster project
will comprise two units with a total of 14
finisher facilities, two breeding facilities
and a feed mill. One breeding and three
finisher facilities were completed in 2016,
while the Group began construction of
seven further finisher facilities during
the year with plans to build an additional
three in 2017.
Each unit has been built using state-of-
the-art technology and is designed for
294,000 heads or 35,000 tonnes live
weight per year. The Group benefits from
relatively low building costs for these
facilities compared to industry norms,
utilising a wooden framework similar to
that used in house construction, which
has also been shown to reduce pigs’
stress levels resulting in higher quality
meat. The Group uses a type of screen
in the construction of the floor, commonly
used in the construction of airstrips. Its
use is unique in the pork industry to
date and ensures the efficient and safe
collection of manure.
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Performance indicators, 2014-2016
Indicators
Pigs weaned per crate per year
Average hog weight, kg
Feed conversion rate
Finisher loss, %
Products sold/sow, kg
2014
109.4
117.3
2.68
7.1
2,131
2015
2016
‘16/‘15, %
115.9
121.4
2.61
8.0
2,138
119.0
119.0
2.66
8.3
2,597
2.7%
(2.0%)
1.9%
3.8%
21.5%
OUR PLANS
Sales, th. tonnes
In 2017, the Group plans to complete the
construction of pork clusters in Voronezh
and Lipetsk regions. As a result, by 2018,
we expect to be able to increase pork
product production volumes significantly,
as these two new production facilities,
with a combined annual output of 70,000
tonnes, become operational. The Group
plans to finish construction of ten further
fattening facilities in 2017, allowing us to
eventually reach production of 275,000
tonnes live weight per annum.
We also anticipate sales of pork products
rising to record levels in 2017, following
the further improvement of our genetic
system.
Our medium-term strategy for the
Pork division is to ensure its high
performance through the utilisation of
the most modern production facilities
and one of the best feeding and
nutritional programmes in the world. We
aim to develop the most cost-efficient
production of pork products to ensure
our competitiveness on the world
stage as we look to expand our export
strategy.
178
170
163
185
104
2012
2013
2014
2015
2016
185 th. tonnes
PRODUCTION VOLUME
15.9 RUB mln
TOTAL SALES
The Group operates 15 major pig-
breeding facilities in the Central and
Volga Federal Districts, all located
in close proximity to the Group’s
grain elevators and feed mills, and
constructed in accordance with the
highest international standards. The
excellent location of the pig breeding
facilities contributes to their veterinary
and biological safety, as well as the
high quality of the pork produced. Each
standard module facility consists of a
sow farm for 5,800 sows, a nursery site
for up to 20,000 animals and two finisher
sites for 22,000 pigs each.
Find out The Company’s division
location on Map of Operations
on page 10-11.
38 CHERKIZOVO GROUP Annual Report 2016
www.cherkizovo.com
www.cherkizovo.com
Annual Report 2016 CHERKIZOVO GROUP 39
STRATEGIC REPORT
Operational Review
Grain
The Grain division delivered record-breaking
operational results in 2016. Harvest volume
increased by 41% to the highest level to date,
reaching around 468,000 tonnes of gross
weight compared to around 333,000 tonnes
the previous year.
As a result, the grain sales reached
around 339,000 tonnes in 2016, which
is a 27% increase from 267,000 tonnes
in 2015. The average crop yield of the
cultivated land increased by 47% to
5.75 tonnes per hectare, while the tillable
land area grew by 4% to 95 thousand
hectares following the integration of
previously abandoned land in Tambov
region. This outstanding performance is
attributable to a combination of factors,
such as exceptionally good weather
in the regions of operations, a gradual
increase of the share of more cost-
efficient corn in farming and higher yields
in regions where the soil improvement
programme is in place.
The soil improvement programme
was launched in 2015 and is aimed
at reducing soil acidity harmful to
crops and consequently improving
soil nutrients, which in turn leads to
higher yields. To increase the harvest,
we have implemented moisture
saving technologies such as soil deep
loosening and liquid fertiliser. Among
other cost saving initiatives implemented
in 2016, was the adoption of organic
fertilisers, which reduced the cost of
the mineral fertilisers. As a result, the
manure from the Group’s Poultry
and Pork segments forms the main part
of the organic fertiliser needs of the
Grain division.
As a Group, we are committed to
achieving efficiency through technology,
research and knowledge leadership.
We keep working to identify and adopt
cost-saving technologies, which help us
to achieve the best crop yields among
peers in the Central Black Earth region.
In 2016, we researched and made
a decision to invest in two initiatives –
Precision Planting and the use of liquid
nitrogen fertiliser.
Precision Planting is an American
innovative technology that enables us
to plant crops more accurately at higher
speeds. The system allows farmers
to plant a row of crops like corn up to
twice as fast compared to conventional
machinery, while achieving top crop
yields.
The liquid nitrogen fertiliser, due
to its low cost production is far more cost
effective than granulated ammonium
nitrate. In addition, its storage and
handling does not require any additional
investment.
The financial performance of the Grain
division in 2016 was affected by the
decline in the grain market. The average
price of the product fell by 6% in 2016
as a result of a record harvest in Russia.
The Group as a whole benefited from
this trend due to its vertically integrated
model: 75% of the Grain division output
was sold to other Group’s divisions
at market price.
During 2016, the Group continued to
strengthen its leading position on the
feed market through operating both of
its feed mills in Voronezh and Bryansk
region at full capacity. This led to an
increase in production of high-quality
feed to 1.57 million tonnes in 2016 from
1.50 million tonnes in 2015.
OUR PLANS
The Group’s strategic long-term
objective is to increase its harvest
volumes to 1,500,000 tonnes by 2020.
This would ensure Group’s full self-
sufficiency in terms of the grain for
the internal animal feed production.
In order to further improve our cost
efficiency, we are planning to increase
the share of the corn and soy in the
crop mix to 80%, while reducing the
production cost to 5 RUB/kg and to
12 RUB/kg respectively, as well as
the corn processing cost to RUB 600
per tonne of product.
In 2017, in line with our long-term
strategy we anticipate to increase the
Group’s harvest volumes by 20%. The
new precision farming project aimed at
improving the efficiency of resources is
due to be rolled out across our farms.
It is expected to contribute significantly
towards achieving the harvest volumes
target. The Group also plans to increase
the crop area in Tambov region by 5,000
hectares in 2017.
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Assets, 2014-2016
Assets
2014
2015
2016
‘16/‘15, %
Land bank, thousand ha
Crop areas, thousand ha
Feed mills, pcs
Grain elevator capacity, thousand
tonnes
140
58
8
588
140
85
9
854
140
81
9
854
n/c
(4.7%)
n/c
n/c
Crop
Wheat
Corn
Barley
Peas
Sunflower
Soy
Total
2014
2015
2016
Yield,
th. tonnes
Cultivated
area, th. ha
Yield,
th. tonnes
Cultivated
area, th. ha
Yield,
th.tonnes
Cultivated
area, th. ha
125
42
25
23
19
8
242
21
10
5
7
8
8
58
150
116
6
17
23
20
333
43
16
2
6
7
11
182
233
-
26
-
27
85
468
36
24
-
10
-
11
81
Gross yield and crop area,
2012-2016
Operational land
bank, th. ha
Gross yield, th. tonnes
339 th. tonnes
GRAIN SALES IN 2016
500
400
300
200
100
0
3.1 RUB mln
TOTAL SALES
100
80
60
40
20
0
2012
2013
2014
2015
2016
Cherkizovo Group started growing its
own grain in 2011 after deepening its
level of vertical integration. The Group
has a land bank of more than 140,000
hectares, of which it owns nearly 60%.
Approximately 92,000 hectares are
located in the most fertile Central Black
Earth regions such as Lipetsk, Orel,
Tambov and Voronezh and were actively
cultivated during 2016.
Find out The Company’s division
location on Map of Operations
on page 10-11.
40
CHERKIZOVO GROUP Annual Report 2016
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www.cherkizovo.com
Annual Report 2016 CHERKIZOVO GROUP 41
STRATEGIC REPORT
Operational Review
Meat Processing
In 2016, sales in
the Meat Processing
division grew by 14%
to 218,085 tonnes
compared to 191,200
tonnes in 2015.
The increase was primarily attributable to
the growth in production of non-sausage
products with the new pig slaughter
facility at the Dankov meat processing
plant running at full capacity in 2016,
boosting both volume and product
assortment.
Average product price decreased by
3% in 2016 to 167.84 RUB/kg compared
to 2015, with non-sausage products
representing a greater proportion of
sales. This reflects a common trend
in the Russian market with consumers
preferring natural meat and healthy food
products. The Group intends to capitalise
on this trend over the medium-term.
Cherkizovo Group maintained its
leadership in the smoked sausage
segment of the Russian market in 2016
and plans to continue to increase the
share of smoked sausage products in its
sales. At the same time, we are focusing
on value-added, ready-to-cook products,
which are key revenue drivers for the
Group. We will continue to monitor
market trends closely and adjust our
product portfolio accordingly, in line with
shifts in demand in the domestic market.
In 2016, for example, we developed
a new mid-priced sausage product
pipeline, under the ‘Fermerskaya’ brand,
in response to growing demand in the
medium price sausage segment.
As the Group supplies its own raw meat
to its modern production system, we
are able to control processing at all key
stages, while our ability to deliver from
slaughter to store within 24 hours is one
of our key strategic advantages.
Over recent years, Cherkizovo Group
has made substantial investments in
upgrading its meat processing facilities.
Modern high-performance European
equipment has been installed throughout
its facilities, with the result that all
facilities are GOST R ISO 9001 – 2008
certified.
OUR PLANS
In the year ahead, Cherkizovo Group is
focused on improving margins on meat
processing products through increased
sales of natural meat products compared
to sausage products. At the same
time, the Group plans to strengthen its
leading position in the smoked sausage
market by constructing the new Kashira
meat processing facility in Moscow
region, due for completion in 2018. This
facility, which will use state-of-the-art
technology and be fully automated,
will be the largest producer of smoked
sausage products in Europe, with an
annual capacity of approximately 30,000
tonnes. The Group plans to invest a total
of approximately RUB 6.7 billion in the
project.
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Performance indicators, 2014-2016
Indicators
2014
2015
2016
‘16/‘15, %
Product sales per employee, tonnes
Output per workshop employee,
tonnes
31.3
40.6
40.7
51.7
45.8
62.0
12.5%
19.9%
SALES TO THE LEADING FEDERAL RETAIL CHAINS, TONNES
Ready-to-eat
products
Sausage and Ready-
to-eat products
Sausage
products
2015
11,788
10,199
5,192
2016
13,182
14,730
6,071
5,031
5,032
2,958
3,297
1,498
3,816
3,312
1,738
39,963
47,880
X5 Retail
Tander
Dixy
Auchan
and Atak
Lenta
Metro
O’key
Total
%
12
44
17
0
29
0
16
20
2015
2016
X5 Retail
8,853
16,896
3,985
3,899
4,159
1,224
1,755
295
3,505
3,894
1,825
2,696
Auchan
and Atak
Dixy
Lenta
Tander
O’key
Metro
Total
2015
2016
X5 Retail
20,641
30,077
Tander
11,954
16,555
Dixy
9,351
9,576
%
91
(2)
(16)
218
Auchan
and Atak
4
Lenta
813
Metro
9,017
8,930
4,182
3,300
1,793
7,710
4,220
4,434
3
908
30,167
O’key
20,275
33,622
66
Total
60,238
81,503
Product sales, th. tonnes
Product sales by channels in 2016
218
191
135
144
127
2012
2013
2014
2015
2016
Retail Chains
HoReCa
Distribution
Myasnov
Wholesale
Exports
Traditional Retail
Meat Processing
Sausage
3%
6%
1%
2%
6%
28%
44%
2%
3%
1%
4%
31%
15%
%
46
38
2
(1)
84
28
147
35
The Cherkizovsky Meat Processing Plant
in Northeast Moscow is the Group’s
flagship facility in the Meat Processing
division. The division also includes: the
Penzensky Meat and Poultry Processing
Plant, which has its own slaughtering
facility; the Ulyanovsky Meat Processing
Plant; and the Otechestvenny Product
Meat Processing Plant in Pravdinsk,
Kaliningrad region. These plants produce
several hundred tonnes of high-quality
sausages, hams, deli meats, cutlets,
vacuum-packed chilled products and
ready-to-eat products every day.
54%
Find out The Company’s division
location on Map of Operations
on page 10-11.
42
CHERKIZOVO GROUP Annual Report 2016
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www.cherkizovo.com
Annual Report 2016 CHERKIZOVO GROUP 43
FINANCIAL REPORT
Financial Report
“In 2016, Cherkizovo’s
rouble revenue increased
by 7% year-on-year
to RUB 82.4 billion.
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
The year 2016 was a challenging one
for the agricultural sector in Russia. For
Cherkizovo Group, the weakness in the
rouble at the beginning of the year led
to an increase in costs which, combined
with low meat and grain prices last year,
put some pressure on our margins,
which overall registered a slight decline
year-on-year.
In spite of these challenging market
conditions, I am pleased to report that
we were able to demonstrate strong
operational results across all business
segments, especially in the Poultry and
Meat Processing divisions, with the
result that the Group’s total revenues
increased 7% year-on-year to RUB
82.4 billion in 2016. Net operating cash
flow over the same period rose by
an impressive 88% to RUB 9.4 billion
compared with RUB 5.0 billion in 2015.
This rise was primarily attributable to the
improvement in working capital.
In 2016, the Group rebalanced its debt
structure, increasing the share of long-
term debt to 63% of total debt from 39%
in 2015 and, correspondingly, reducing
the share of short-term debt to 37% from
61% in 2015. Overall, total debt fell by
6% year-on-year from RUB 41.2 billion
as at the end of December 2015 to RUB
38.6 billion as at the end of December
2016. Our debt ratios also remained
comfortably within all our covenant
requirements.
Total capital expenditure was RUB 9.9
billion in 2016, with the Pork division
accounting for RUB 3.8 billion and the
Poultry division RUB 2.9 billion. The
remaining RUB 3.2 billion was spread
across the other business divisions.
BUSINESS REVIEW
The Group is the largest, vertically
integrated meat and feed producer in
Russia, while we rank among the top
three players in the country for pork and
poultry. Our principal operations include:
the production and sale of processed
meat products, primarily in the European
region of Russia; the breeding of broiler
chickens; the processing and sale of
chilled and frozen poultry products
produced at our facilities in the Bryansk,
Voronezh, Kursk, Lipetsk, Moscow,
Penza and Tula Regions; the breeding
of pigs at our facilities in the Vologda,
Voronezh, Lipetsk, Moscow, Orel, Penza
and Tambov Regions; the sale of live
pigs; and the production of grain on the
Group’s land bank. We also carry out
trading and distribution activities, as well
as producing feed, which is used at our
pork and poultry facilities.
The Group’s operations are structured
as four business divisions: Poultry,
Pork, Meat Processing and Grain. The
Poultry division consists of eight poultry
breeding facilities and their associated
trading company.
The Pork division operates fifteen state-
of the-art breeding facilities, while the
Meat Processing division comprises six
processing plants, producing sausages,
hams, ready-to-eat meats and other meat
products. This division also carries out
associated sales and trading operations.
In 2016, the Grain division had 81,000
hectares of land under cultivation.
Cherkizovo Group operates nine feed
mills to meet the needs of its divisions.
All of our operating divisions are also
involved in other non-core activities.
The expenses of the management
company are recorded under Corporate
Expenditure.
In 2016, Cherkizovo Group sold over
903,000 tonnes of meat products,
outperforming all of our industry peers.
According to the Russian Poultry Union,
as well as our own estimates, we are the
second largest poultry producer overall
in Russia but have a market leading
position in Moscow and Moscow region.
According to the National Union of Pork
Producers, we are also the third largest
producer in Russia’s highly fragmented
pork market.
In 2016, total sales by volume in the
Poultry division reached 500,000 tonnes
of sellable weight, 218,000 tonnes
in the Meat Processing division and
185,000 tonnes of live weight produced
in the Pork division while grain sales
totalled 339,000 tonnes. The Group
also produced 1.57 million tonnes
of feed for internal consumption.
MARKET AND REGULATORY
REVIEW
Income tax benefit
According to the Russian Tax Code,
agricultural producers benefit from zero
income tax. For Cherkizovo Group, this
rate applies to the poultry, pork and
grain operations. However, the zero
tax rate does not apply to our Trading,
Distribution, Feed Production and Meat
Processing segments. As a result, the
effective tax rate was 3.7% in 2016,
compared to 2.5% in 2015, whereas the
general corporate tax rate in Russia is
20%.
Beginning in 2017, the Group is allowed
to offset 50% of the taxable profit
produced by each subsidiary against any
tax loss accumulated by the subsidiary
carried forward. There is no expiration
date for any tax losses carried forwards
(after amendments to the Russian Tax
Code effective 1 January 2017).
Reimbursement of interest
expense
Agricultural enterprises are eligible for
reimbursement of interest expense on
investment and working capital loans
taken before 31 December 2016, equal
to the official Central Bank of Russia
(CBR) refinancing rate (the “refinancing
rate”) effective on the date of the
loan agreement, where two thirds of
the refinancing rate is reimbursed by
the State Budget and the remaining
one third of the refinancing rate us
reimbursed by the regional authorities.
From 1 January 2016, the refinancing
rate was equal to the key rate. Between
1 January and 10 June 2016, the key rate
was fixed at 11%; from 10 June 2016 to 16
September 2016, the key rate was fixed
at 10.5%; and from 19 September 2016
to 31 December 2016 the key rate was
fixed at 10%.
44
CHERKIZOVO GROUP Annual Report 2016
www.cherkizovo.com
www.cherkizovo.com
Annual Report 2016 CHERKIZOVO GROUP 45
FINANCIAL REPORT
Financial Report
(continued)
Following the stagnation in the economy
in 2016 and the resulting significant
budget deficit, the Russian Government
has slowed down subsidy payments. In
the fourth quarter of 2016, the Russian
Government announced a new policy
regarding subsidies to agricultural
producers – starting from 1 January 2017
accredited banks will provide loans to
agricultural producers at reduced rates
not exceeding 5% per annum on rouble-
denominated loans. The Government
then provides a subsidy to the banks
compensating them for the difference
between the market and actual rates.
Given the uncertainty surrounding the
collectability of subsidies accrued under
the previous policy, management has
taken the view that only subsidies on
qualifying loans that are confirmed
by the Ministry of Agriculture will be
recognised in the accounts. The change
in estimated amount of subsidies to be
received has resulted in a decrease in
the subsidies receivable balance and
an increase in interest expense of
RUB 1.3 billion.
FOREIGN EXCHANGE
DIFFERENCES
Cherkizovo products are typically
priced in roubles. A significant portion
of raw materials costs such as feed
components and veterinary supplies are
denominated in foreign currency. Other
costs, such as payroll, transportation
expenses and interest expense, are
incurred in roubles.
At the beginning of 2016, there was
significant rouble weakness and volatility
against the leading global currencies.
During first and second quarters, the
rouble was less volatile and started
to strengthen against global currencies.
According to the Central Bank of
Russia, the official exchange rates
as at 1 January 2016 were 72.93 rouble
per US dollar and 79.64 rouble per
euro while by 31 December 2016, these
exchange rates were 60.66 and 63.81
respectively. As at 31 December 2016,
97% of our long-term and 100% of our
short-term outstanding debt (excluding
finance leases) consisted of rouble-
denominated loans.
PJSC CHERKIZOVO GROUP 2016
CONSOLIDATED RESULTS
The year 2016 was very much one of
two halves for the Group. Although we
were able to achieve strong volume
growth, we experienced particularly
challenging market conditions with
unusually low prices in early 2016. As
market conditions and prices gradually
improved throughout the year, we were
able to deliver a strong set of operating
results for the year as a whole, with
Group revenue for 2016 of RUB 82.4
billion, an increase of 7% year on year,
and driven largely by the Poultry and
Meat Processing segments.
Gross profit fell by 7% in 2016 to RUB
17.9 billion from RUB 19.1 billion in 2015.
The majority of this decrease can
be attributed to the Poultry and Pork
segments, where a significant portion
of costs are denominated in foreign
currencies (mainly the US dollar) and are,
therefore, affected by exchange rate
movements. As a result of these higher
costs, principally caused by adverse
exchange rate fluctuations in the
beginning of the year, the gross margin
consequently fell to 21.7% in 2016 from
24.9% in 2015.
Operating expenses increased by
10% year-on-year to RUB 12.8 billion
in 2016, compared to RUB 11.6 billion
in 2015, as a result of higher payroll,
taxes, transportation and other selling
expenses. Adjusted EBITDA fell by 19%
year-on-year to RUB 10.3 billion from
RUB 12.6 billion in 2015.
The adjusted EBITDA margin fell to
12.5% in 2016. Our focus in the year
ahead remains on enhancing operational
efficiency across all segments, and
we are confident that our continuing
efforts combined with the anticipated
improvement in market conditions, will
lead to an improvement in profitability
in 2017.
Interest expense rose 14% year-on-year
to RUB 4.5 billion in 2016. While the
Group’s loan portfolio decreased by
6% to RUB 38.6 billion as at the end of
2016 (2015: RUB 41.2 billion), net interest
expense for 2016 was RUB 3.7 billion,
up 174% from RUB 1.4 billion in 2015
resulting from write-off of RUB 1.3 billion
of unrecoverable interest subsidies.
The Group accrued RUB 0.7 billion of
subsidies in 2016, which are included
in the net interest expense figure above
and represent a year-on-year decrease
of 71%, primarily due to the change in
management’s estimates of subsidy
recognition and the related write-off
of subsidies receivable which are not
expected to be recovered.
See market and regulatory
review section.
Net profit decreased by 68% in 2016
to RUB 1.9 billion compared to RUB 6.0
billion in 2015. This was primarily due to
the write-off of RUB 1.3 billion of interest
subsidies, which are not expected to
be recovered, and to the write-off of
RUB 0.3 billion of receivables due from
insurance regarding ASF compensation.
As a result, the net profit margin fell
to 2.3% in 2016 from 7.8% in 2015.
In 2016, net operating cash flow rose
to RUB 9.4 billion compared with RUB
5.0 billion in 2015 as a result of the
improvement in working capital (revision
of payment terms with suppliers and
better inventory management).
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Consolidated income statement data
(in thousands of roubles)
Sales
incl. Sales volume discounts
incl. Sales returns
Net change in fair value of biological assets and agricultural produce
Cost of sales
Gross profit
Gross margin
Operating expenses
Operating Income
Operating margin
Profit before income tax and non-controlling interests
Profit attributable to Group Cherkizovo
Net profit margin
Weighted average number of shares outstanding
Earnings per share
Profit attributable to Cherkizovo Group per share – basic and diluted
(roubles)
Consolidated Adjusted EBITDA reconciliation*
Profit before income tax and non-controlling interests
Add:
Interest expense, net of subsidies
Interest income
Foreign exchange (gain)/loss, net
Depreciation and amortisation
Net change in fair value of biological assets and agricultural produce
Share of loss of a joint venture
Write-off of receivables from insurance company
Loss on disposal of subsidiaries
Consolidated Adjusted EBITDA*
Adjusted EBITDA Margin
Year ended
31 December 2016
Year ended 31
December 2015
82,417,193
(5,886,114)
(952,321)
(340,063)
(64,222,344)
17,854,786
21.7%
(12,798,313)
5,056,473
6.1%
1,960,379
1,919,227
2.3%
43,855,590
77,032,622
(5,343,155)
(1,034,171)
(1,163,727)
(56,720,216)
19,148,679
24.9%
(11,614,653)
7,534,026
9.8%
5,871,749
6,007,482
7.8%
43,855,590
43.76
136.98
1,960,379
3,738,315
(343,737)
(621,087)
4,660,365
340,063
200,191
347,975
-
10,282,464
12.5%
5,871,749
1,364,766
(285,762)
646,802
3,826,525
1,163,727
-
-
42,569
12,630,376
16.4%
46
CHERKIZOVO GROUP Annual Report 2016
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Annual Report 2016 CHERKIZOVO GROUP 47
FINANCIAL REPORT
Financial Report
(continued)
12 Months 2016 ended December 31, 2016 Consolidated Selected Financial Data
(in thousands
of roubles)
Meat
Processing
Pork
Poultry
Grain
Feed
Corporate
assets/
expenditure
Inter-
division
Combined
Total sales
31,667,448
15,920,146
47,724,031
3,055,762
28,727,843
126,251
(44,804,288)
82,417,193
including other sales
526,538
171,106
1,331,875
47,426
including sales volume
discounts
(4,545,908)
-
(1,340,206)
-
-
-
126,251
(783,561)
1,419,635
-
-
(5,886,114)
Intersegment sales
(22,795)
(12,634,006)
(1,961,921)
(1,956,712)
(28,146,309)
(82,545)
44,804,288
-
Sales to external customers
31,644,653
3,286,140
45,762,110
1,099,050
581,534
43,706
-
82,417,193
Net change in fair value
of biological assets and
agricultural produce
-
861,422
(288,114)
(477,482)
-
-
(435,889)
(340,063)
Cost of sales
(26,141,947)
(12,182,666)
(40,049,212)
(2,873,596)
(28,109,353)
(78,511)
45,212,941
(64,222,344)
Gross profit / (loss)
5,525,501
4,598,902
7,386,705
(295,316)
618,490
47,740
(27,236)
17,854,786
Operating expense
(3,743,466)
(782,107)
(5,035,890)
(267,828)
(404,658)
(2,645,471)
81,107
(12,798,313)
Operating income /
(expense)
1,782,035
3,816,795
2,350,815
(563,144)
213,832
(2,597,731)
53,871
5,056,473
Other income (expense), net
207,378
(289,198)
(114,744)
4,885
319,704
820,560
(306,364)
642,221
Interest expense, net
(245,885)
(964,742)
(1,076,908)
(94,361)
(930,799)
(731,984)
306,364
(3,738,315)
Profit before income tax
(division profit)
Adjustments for:
1,743,528
2,562,855
1,159,163
(652,620)
(397,263)
(2,509,155)
53,871
1 ,960, 379
Interest expense, net
245,885
964,742
1,076,908
94,361
930,799
731,984
(306,364)
3,738,315
Interest income
(9,561)
(33,764)
(173,895)
(1,710)
(10,723)
(420,448)
306,364
(343,737)
Foreign exchange loss/(gain)
(192,501)
(22,285)
304,147
(3,026)
(307,559)
(399,863)
639,237
1,010,334
1,969,279
295,430
590,646
155,439
-
-
(621,087)
4,660,365
Depreciation and
amortisation expense
Net change in fair value
of biological assets and
agricultural produce
Share of loss of a joint
venture
Write-off of receivables from
insurance company
-
(861,422)
288,114
477,482
-
-
-
347,975
-
-
-
-
-
-
-
-
435,889
340,063
200,191
-
-
-
200,191
347,975
Adjusted EBITDA
2,426,588
3,968,435
4,623,716
209,917
805,900
(2,241,852)
489,760
10,282,464
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
POULTRY DIVISION
In 2016, sales volumes increased 6%
year-on-year to 500,321 tonnes of
sellable weight, from 470,432 tonnes in
2015. This growth was driven primarily by
higher production levels, which resulted
from improvements in efficiency and
the launch of new poultry houses at the
Mosselprom production facility.
The average price during 2016 was
flat compared to the previous year and
stood at 94.94 RUB/kg*. Total sales for
the division increased 7% year-on-year
to RUB 47.7 billion (2015: RUB 44.6
billion).
* Here and below, all average prices
exclude VAT.
Gross profit fell by 12% year-on-
year to RUB 7.4 billion from RUB 8.4
billion in 2015 due to higher costs
for feed components, hatching eggs
and veterinary supplies which are
denominated in foreign currencies
(mostly US dollars) and were, therefore,
negatively impacted by adverse
exchange rate movements during the
year. The negative impact was most
acute in the first quarter of the year when
the Russian rouble hit a new record
low. The currency situation has since
stabilised, although the average real
exchange rate for 2016 was still 10%
lower year-on-year. The gross margin
for 2016 decreased to 15.5% from 18.9%
in 2015.
Operating expenses as a percentage
of sales were slightly lower at 10.6%,
compared to 11.4% in 2015. Operating
income fell by 30% year-on-year to RUB
2.4 billion from RUB 3.3 billion in 2015,
while the operating margin fell to 4.9%
from 7.5% in the corresponding period
of last year. Net profit for the division
was RUB 1.2 billion, a year-on-year
drop of 67%. This was mainly a result
of the higher costs of feed components
and other direct materials, which were
denominated in foreign currencies
and were negatively impacted by the
adverse exchange rate movements
during the year.
Adjusted EBITDA fell by 16% year-on-
year to RUB 4.6 billion (2015: RUB
5.5 billion), while the adjusted EBITDA
margin fell to 9.7% from 12.3% in 2015.
Poultry division income statement data
(in thousands of roubles)
Total Sales
Interdivision sales
Sales to external customers
Net change in fair value of biological assets and agricultural produce
Cost of sales
Gross profit
Gross margin
Operating expenses
Operating Income
Operating margin
Interest income
Interest expense, net
Other (expenses) income, net
Division profit
Division profit margin
Year ended 31 December 2016
Year ended 31 December 2015
47,724,031
(1,961,921)
45,762,110
(288,114)
(40,049,212)
7,386,705
15.5%
(5,035,890)
2,350,815
4.9%
173,895
(1,076,908)
(288,639)
1,159,163
2.4%
1,159,163
1,076,908
(173,895)
304,147
1,969,279
288,114
4,623,716
9.7%
44,590,211
(2,640,958)
41,949,253
(283,880)
(35,901,044)
8,405,287
18.9%
(5,061,999)
3,343,288
7.5%
175,026
(628,523)
619,720
3,509,511
7.9%
3,509,511
628,523
(175,026)
(614,651)
1,862,574
283,880
5,494,811
12.3%
Total net division profit
Non-controlling interests
Income taxes
Profit attributable to Cherkizovo Group
1,960,379
31,709
(72,861)
1,919,227
Poultry processing division Adjusted EBITDA reconciliation*
Division profit
Add:
Interest expense, net of subsidies
Interest income
Foreign exchange loss/(gain)
Depreciation and amortisation
Net change in fair value of biological assets and agricultural produce
Poultry processing division Adjusted EBITDA*
Adjusted EBITDA Margin
48
CHERKIZOVO GROUP Annual Report 2016
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www.cherkizovo.com
Annual Report 2016 CHERKIZOVO GROUP 49
FINANCIAL REPORT
Financial Report
(continued)
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
PORK DIVISION
Production volumes in the Pork division
increased by 9% year-on-year in 2016,
to 184,766 tonnes. This was primarily due
to a new genetics improvement strategy
launched by the management at the
beginning of the year to improve the
health status of pigs and efficiency by
increasing liveability and weekly farrows.
The launch of two new wean-to-finish
sites in Voronezh region also helped
to boost production.
In 2016, the average pork price
decreased by 10% year-on-year to
88.28 RUB/kg. This fall was primarily
a result of Russian consumers’ lower
purchasing power and an overall
increase in pork production across
the country.
Total sales in the Pork division fell by 4%
in 2016 to RUB 15.9 billion compared to
RUB 16.6 billion in 2015. This dip in sales
was expected, and in line, with the 10%
fall in the average price year-on-year.
Gross profit in 2016 stood at RUB 4.6
billion, a decrease of 1% from 2015
(2015: RUB 4.7 billion) while the gross
margin rose to 28.9% from 28.1% in 2015.
Operating expenses as a percentage
of sales in 2016 were slightly higher
compared to 2015 and stood at 4.9%
(2015: 4.0%), the rise being primarily
attributable to the increase
in transportation expenses.
Operating income fell by 5% year-
on-year to RUB 3.8 billion from RUB
4.0 billion in 2015, while the operating
margin fell to 24.0% from 24.1% in the
previous year. Net profit decreased by
28% year-on-year to RUB 2.6 billion
(2015: RUB 3.6 billion).
Adjusted EBITDA declined to RUB
4.0 billion, representing a year-on-year
decrease of 37%. The adjusted EBITDA
margin fell to 24.9% in 2016 from 37.9%
in 2015.
MEAT PROCESSING DIVISION
During 2016, sales volumes in the Meat
Processing division grew by 14% year-
on-year to 218,085 tonnes from 191,200
tonnes in 2015, which was primarily due
to production growth in non-sausage
products. The average price in this
segment fell by 3% year-on-year to
167.84 RUB/kg due to non-sausage
products representing a greater share of
sales. Overall total sales were 9% higher
in 2016 and reached RUB 31.7 billion
(2015: RUB 29.2 billion).
Gross profit increased by 28% year-on-
year to RUB 5.5 billion, compared to RUB
4.3 billion in 2015, while the gross margin
rose to 17.4% in 2016 from 14.8% in 2015.
In 2016, operating expenses as a
percentage of sales rose to 11.8%,
compared to 10.5% in 2015, which was
primarily due to higher transportation
and payroll expenses. Operating income
increased by 42% year-on-year to RUB
1.8 billion from RUB 1.3 billion in 2015,
while the operating margin rose to 5.6%
from 4.3% in 2015.
The Meat Processing segment
generated net profit of RUB
1.7 billion in 2016, representing an
increase of 96% compared to 2015
(2015: RUB 0.9 billion).
In 2016, adjusted EBITDA demonstrated
growth of 38% and reached RUB 2.4
billion (2015: RUB 1.8 billion), while the
adjusted EBITDA margin rose to 7.7%
in 2016, compared to 6.0% in 2015.
Pork division income statement data
Meat Processing division income statement data
(in thousands of roubles)
Total Sales
Interdivision sales
Sales to external customers
Net change in fair value of biological assets and agricultural produce
Cost of sales
Gross profit
Gross margin
Operating expenses
Operating Income
Operating margin
Interest income
Interest expense, net
Other (expenses)/income, net
Division profit
Division profit margin
Pork division Adjusted EBITDA reconciliation*
Division profit
Add:
Interest expense, net of subsidies
Interest income
Foreign exchange (gain)/loss
Depreciation and amortisation
Net change in fair value of biological assets and agricultural produce
Write-off of receivables from insurance company
Loss on disposal of subsidiaries
Pork division Adjusted EBITDA*
Adjusted EBITDA Margin
Year ended 31 December 2016
Year ended 31 December 2015
(in thousands of roubles)
Year ended 31 December 2016
Year ended 31 December 2015
15,920,146
(12,634,006)
3,286,140
861,422
(12,182,666)
4,598,902
28.9%
(782,107)
3,816,795
24.0%
33,764
(964,742)
(322,962)
2,562,855
16.1%
2,562,855
964,742
(33,764)
(22,285)
1,010,334
(861,422)
347,975
-
3,968,435
24.9%
16,579,185
(11,502,192)
5,076,993
(1,387,143)
(10,529,115)
4,662,927
28.1%
(662,041)
4,000,886
24.1%
11,102
(356,155)
(84,954)
3,570,879
21.5%
3,570,879
356,155
(11,102)
71,822
869,643
1,387,143
-
42,569
6,287,109
37.9%
Total Sales
Interdivision sales
Sales to external customers
Cost of sales
Gross profit
Gross margin
Operating expenses
Operating Income
Operating margin
Interest income
Interest expense, net
Other (expenses)/income, net
Division profit
Division profit margin
Meat Processing division Adjusted EBITDA reconciliation*
Division profit
Add:
Interest expense, net of subsidies
Interest income
Foreign exchange (gain)/loss
Depreciation and amortisation
Meat Processing division Adjusted EBITDA*
Adjusted EBITDA Margin
31,667,448
(22,795)
31,644,653
(26,141,947)
5,525,501
17.4%
(3,743,466)
1,782,035
5.6%
9,561
(245,885)
197,817
1,743,528
5.5%
1,743,528
245,885
(9,561)
(192,501)
639,237
2,426,588
7.7%
29,150,254
(32,016)
29,118,238
(24,835,957)
4,314,297
14.8%
(3,060,987)
1,253,310
4.3%
10,405
(202,541)
(173,722)
887,452
3.0%
887,452
202,541
(10,405)
205,719
467,157
1,752,464
6.0%
50
CHERKIZOVO GROUP Annual Report 2016
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www.cherkizovo.com
Annual Report 2016 CHERKIZOVO GROUP 51
FINANCIAL REPORT
Financial Report
(continued)
GRAIN DIVISION
Sales in the Grain division, representing
a variety of different crops, grew by 27%
in 2016 to 338,808 tonnes compared
to 267,371 tonnes in 2015. This increase
was primarily driven by a 41% increase in
the Group’s harvest to 467,916 tonnes,
versus 332,866 tonnes in 2015.
The average crop yield of the Group’s
land under cultivation increased by 47%
to 5.75 t/ha, while the Group’s tillable
land area grew by 4% year-on-year
to 94,814 ha.
The average grain price for 2016 fell by
6% year-on-year to 8.83 RUB/kg as a
result of a record harvest in the country.
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
LIQUIDITY AND CAPITAL
RESOURCES
capital, the Group’s capital is used to
finance the following:
Capital requirements
During 2016, significant progress was
made to improve the Group’s working
capital, evidenced by a strengthened net
operating cash flow position at the end
of the year. In addition to the working
■ capital expenditure, primarily to further
enhance our production segments;
■
repayment of debt.
We anticipate capital expenditure and
repayment of our long-term debt to be
the most significant expense items over
the next few years.
We generally rely on operating cash
flows and bank loans to finance capital
expenditure. In 2016, our major funding
sources were cash from operating
activities, as well as short-term and long-
term bank loans.
We financed our capital expenditure
primarily with long-term loans and own
funds.
Grain division income statement data
Maturities of long-term loans and borrowings (excluding finance leases), as of 31 December 2016
(in thousands
of roubles)
Total Sales
Interdivision sales
Sales to external customers
Net change in fair value of biological assets and agricultural produce
Cost of sales
Gross (loss)/profit
Gross margin
Operating expenses
Operating (Loss)/Income
Operating margin
Interest income
Interest expense, net
Other (expenses)/income, net
Division (loss)/ profit
Division profit margin
Grain processing division Adjusted EBITDA reconciliation*
Division (loss)/profit
Add:
Interest expense, net of subsidies
Interest income
Foreign exchange (gain)/loss
Depreciation and amortisation
Net change in fair value of biological assets and agricultural produce
Grain processing division Adjusted EBITDA*
Adjusted EBITDA Margin
Year ended
31 December 2016
Year ended
31 December 2015
Maturities of long-term
loans and borrowings
2017,
RUB bn
2018,
RUB bn
2019,
RUB bn
2020,
RUB bn
2021,
RUB bn
2022,
RUB bn
>2022,
RUB bn
Total,
RUB bn
3,055,762
(1,956,712)
1,099,050
(477,482)
(2,873,596)
(295,316)
(9.7%)
(267,828)
(563,144)
(18.4%)
1,710
(94,361)
3,175
(652,620)
(21.4%)
(652,620)
94,361
(1,710)
(3,026)
295,430
477,482
209,917
6.9%
2,580,713
(2,117,129)
463,584
326,376
(1,827,087)
1,080,002
41.8%
(242,294)
837,708
32.5%
330
(14,277)
15,225
838,986
32.5%
838,986
14,277
(330)
17,144
167,236
(326,376)
710,937
27.5%
Total loans and borrowings
3.4
7.3
5.3
6.7
1.8
2.0
1.0
27.5
Debt structure, RUB bln
Long-term debt
Short-term debt
41.2
25.1
16.1
38.6
14.1
24.5
2015
2016
Debt
As of 31 December 2016, net debt
amounted to RUB 36.9 billion, compared
to RUB 35.0 billion at the end of 2015.
Total debt stood at RUB 38.6 billion as
of 31 December 2016, a decrease of 6%
from the end of 2015. As of 31 December
2016, long-term debt represented 63%
of the debt portfolio and amounted to
RUB 24.5 billion. Short-term debt stood
at RUB 14.1 billion, or 37% of the portfolio.
The effective cost of debt was 9.7% in
2016 (2015: 3.3%). Subsidised loans and
credit lines made up 35% of the debt
portfolio in 2016 (2015: 81%). Cash and
cash equivalents totalled RUB 1.0 billion
as of 31 December 2016.
Capital expenditure
The Group’s capital expenditure
on property, plant, equipment and
maintenance amounted to RUB 9.9
billion in 2016, representing a year-
on-year decrease of 10%. Of that, RUB
2.9 billion was invested in the Poultry
division, primarily in the construction of
the hatchery and grain storage facility in
the Lipetsk region (Eletsprom Project).
In the Pork division, RUB 3.8 billion was
invested in the purchase of equipment
for the new finisher complexes in
Voronezh region, as well as constructing
new finisher complexes in Lipetsk region.
RUB 1.5 billion was invested in the Meat
Processing division for the construction
of the Kashira meat processing plant in
Moscow Region.
52
CHERKIZOVO GROUP Annual Report 2016
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Annual Report 2016 CHERKIZOVO GROUP 53
FINANCIAL REPORT
Financial Report
(continued)
In the Grain division, RUB 1.2 billion was
invested in the construction of a new
grain drying facility. The feed division
received RUB 0.2 billion of investment
while the Cherkizovo Group also
invested RUB 1.1 billion in the Tambov
Turkey project in 2016.
Subsidies
In 2016, the Group accrued subsidies for
interest reimbursement of RUB 0.7 billion,
which offset interest expense (2015: RUB
2.6 billion). The Group received RUB 1.4
billion of subsidies in 2016, compared
to RUB 2.0 billion in 2015.
Cash flows
Net operating cash flow for 2016 was
RUB 9.4 billion, representing a significant
increase compared with RUB 5.0 billion
in 2015. This was primarily attributable
to the improvement in working capital
(revision of payment terms with suppliers
and better inventory management).
Operating activities
Net cash from operating activities
grew by 88% to RUB 9.4 billion in 2016
compared to RUB 5.0 in 2015.
In 2016, the Group reduced its working
capital by RUB 2.6 billion year-on-year
(2015: increase of RUB 5.7 billion).
The key factors driving the change
in working capital include:
■ А RUB 0.8 billion decrease in
inventories (2015: an increase
of RUB 4.6 billion)
■ A RUB 0.9 billion decrease in other
receivables and other current assets
(2015: growth of RUB 1.5 billion)
■ A RUB 0.8 billion decrease in
advances paid (2015: an increase
of RUB 0.5 billion)
A year-on-year decrease in inventory
was due to improvements in inventory
management.
A decrease in other receivables was
due to write-off of unrecoverable interest
subsidies.
Capital expenditures, RUB bln
Meat Processing
Pork
Poultry
Other
5.8
0.04
3.3
2.0
0.5
5.1
0.6
2.4
1.2
0.9
6.7
0.9
2.6
2.5
0.7
11.0
3.4
4.4
1.9
1.3
9.9
1.7
2.9
3.8
1.5
2012
2013
2014
2015
2016
7.1
0
2.7
4.1
0.3
2011
5.2
0.1
2.6
2.4
0.1
2010
2016
9.4
(10.6)
(3.3)
(4.6)
2015
5.0
(10.1)
9.6
4.6
Since 31 December 2016, we have
continued to meet our payment
obligations to trade creditors using cash
generated from operating activities and
debt financing.
As at 31 December 2016, our trade
working capital, calculated as current
assets less current liabilities, excluding
short-term loans and the current portion
of long-term debt, was RUB 19.6 billion
(2015: RUB 27.3 billion).
Cash flows, RUB bln
Net cash flows from operating activities
Net cash flows used in investing activities
Net cash (used in) / generated from financing
activities
Net (decrease)/increase in cash and cash
equivalents
A decrease in advances paid was
attributable to the implementation of
a new payment policy with improved
standard payment terms.
Investing activities
Net cash used in investing activities was
RUB 10.6 billion in 2016, compared to
RUB 10.1 billion in 2015.
Financing activities
In 2016, net cash used in financing
activities was equal to RUB 3.3 billion.
Liquidity
As at 31 December 2016, total cash and
cash equivalents was RUB 1.0 billion
(2015: RUB 5.6 billion), and working
capital stood at RUB 5.5 billion (2015:
RUB 2.2 billion).
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Group’s business. The Group’s first
quarter margins tend to be the lowest in
the year as a result of the typical post-
holiday drop in consumer spending and
seasonally low meat consumption at the
beginning of the year.
Having completed the majority of our
capital-intensive development phase,
Cherkizovo Group is now looking at
a more modest CAPEX in 2017. We
are shifting our investment focus from
development to a combination of
maintenance, operational efficiency
and the production of higher-margin,
value-added products. In 2017, we will
continue to build on our competitive
advantages, as well as capitalising on
both domestic market consolidation and
selective international opportunities.
Ludmila Mikhailova
Chief Financial Officer
of the bases for investors, analysts and credit
rating agencies to evaluate and compare the
periodic and future operating performance and
value of companies within our industry.
** Net debt is calculated as total debt minus
cash and cash equivalents, short-term bank
deposits and long-term bank deposits.
In 2016, trade receivables grew to
RUB 4.9 billion (2015: RUB 4.4 billion).
As at 31 December 2016, our trade
receivables from related parties totalled
RUB 0.3 billion (2015: RUB 0.2 billion). As
at 31 December 2016, trade receivables
turnover averaged 21 days (2015: 20
days) while the allowance for doubtful
accounts was RUB 0.05 billion (2015:
RUB 0.05 billion).
As at 31 December 2016, our trade
payables increased to RUB 8.6 billion
(2015: RUB 8.5 billion). Our payables
to related parties was RUB 0.15 billion
(2015: RUB 0.02 billion). As at the
reporting date, our trade payables
turnover averaged 49 days (2015:
41 days).
As at 31 December 2016, advances paid,
excluding the allowance for doubtful
accounts, amounted to RUB 1.7 billion
(2015: RUB 2.7 billion). Of total advances
paid, RUB 0.2 billion was given to related
parties (2015: RUB 0.1 billion). As at
31 December 2016, the allowance for
doubtful accounts on advances paid
was RUB 0.1.
Our inventories consist primarily of raw
materials and goods for resale, work
in progress, and finished goods. As
at 31 December 2016, inventories
amounted to RUB 10.6 billion (2015:
RUB 12.3 billion).
As at 31 December 2016, the value
of our livestock amounted to RUB
10.7 billion (2015: RUB 9.8 billion). Other
receivables primarily include subsidies
from the government, which decreased
to RUB 1.1 billion in 2016 (2015: RUB
1.4 billion).
OUTLOOK
There are signs that the macroeconomic
situation in Russia is starting to
recover, with GDP expected to return
to moderate growth during 2017.
Consumer spending is expected to rise
as inflation is forecast to be at a record
low level. The investment climate is also
improving and foreign direct investment
is expected to continue its rebound from
pre-recession levels. It is anticipated
that the first quarter of the year will be
soft, as is often the case for Cherkizovo
*Non-IFRS financial measures. This report
includes financial information prepared
in accordance with international financial
reporting standards, or IFRS, as well as other
financial measures referred to as non-IFRS.
The non-IFRS financial measures should
be considered in addition to, but not as a
substitute for, the information prepared in
accordance with IFRS.
Adjusted Earnings before Interest, Income
Tax, Depreciation and Amortization
(“Adjusted EBITDA”). Adjusted EBITDA is
defined as profit for the period before income
tax expense/benefit, interest income and
interest expense, net, foreign exchange
loss/gain, depreciation and amortisation
expense, net change in fair value of biological
assets and agricultural produce, write-off of
receivables from insurance company, share
of loss of a joint venture and loss on disposal
of subsidiaries. Adjusted EBITDA margin is
defined as Adjusted EBITDA as a percentage
of our net revenues. Our adjusted EBITDA may
not be similar to adjusted EBITDA measures
of other companies; is not a measurement
under IFRS accounting principles and should
be considered in addition to, but not as a
substitute for, the information contained in
our consolidated statement of operations.
We believe that adjusted EBITDA provides
useful information to investors because it is
an indicator of the strength and performance
of our ongoing business operations, including
our ability to fund discretionary spending
such as capital expenditures, acquisitions
and other investments and our ability to
incur and service debt. While depreciation
and amortization are considered operating
costs under generally accepted accounting
principles, these expenses primarily represent
the non-cash current period allocation of costs
associated with long-lived assets acquired
or constructed in prior periods. Our adjusted
EBITDA calculation is commonly used as one
54
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Annual Report 2016 CHERKIZOVO GROUP 55
CONTENTS
ABOUT COMPANY
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Stepping Up
the Transparency
Ladder
In 2016, Cherkizovo Group enhanced its Corporate
In 2016, Cherkizovo Group enhanced its Corporate
Governance structure and moved towards greater
Governance structure and moved towards greater
transparency while making the role of independent director
transparency while making the role of independent director
on the Board more prominent. The newly elected members
on the Board more prominent. The newly elected members
of the Board and the strengthened Executive team bring a
of the Board and the strengthened Executive team bring a
wealth of international knowledge and experience to lead
wealth of international knowledge and experience to lead
the Group through its new, exciting development phase
the Group through its new, exciting development phase
for the benefit of all its stakeholders.
for the benefit of all its stakeholders.
CORPORATE GOVERNANCE 56-75
Shareholder Structure
Corporate Governance System
Directors Statement
Board of Directors
Board Committees
Management Board
Corporate Secretary
Internal Control and Risk
Management
Disclosure to Auditors
Investor and Shareholder
Information
Dividend Policy
Bonds
Investor Relations
Shareholder Access
to Information
Sustainable Development
Employee Policies
Health, Safety
and the Environment
Community Relations and Charity
58
58
60
62
63
68
68
68
69
69
69
69
70
70
71
71
74
75
CORPORATE
GOVERNANCE
The Board of Directors and the
Management are committed to
the creation of shareholder value
and following sound corporate
governance practices that meet
the expectations of all of our
stakeholders.
SHAREHOLDER
SHAREHOLDER
STRUCTURE
STRUCTURE
INVESTOR RELATIONS
SUSTAINABLE
DEVELOPMENT
The Group’s biggest shareholders are
The Group’s biggest shareholders are
MB Capital Europe Ltd., Prosperity
MB Capital Europe Ltd., Prosperity
Capital Management Limited, Norges
Capital Management Limited, Norges
Bank and Grupo Fuertes.
Bank and Grupo Fuertes.
Cherkizovo recognises the importance
of maintaining open and transparent
communication with shareholders,
bondholders and potential investors.
We see sustainability as the
main pillar of our future growth,
underpinning the robustness and
resilience of our business model.
P. 58-68
P. 69
P. 70
P. 71-75
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Annual Report 2016 CHERKIZOVO GROUP 57
CORPORATE GOVERNANCE
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Corporate Governance
DIRECTORS STATEMENT
The Board of Directors and the
Management are committed to the
creation of shareholder value and
following sound corporate governance
practices that meet the expectations of
all of our stakeholders. Therefore, we are
pleased to present the Group’s annual
report and audited financial statements
for the year ending 31 December 2016.
During 2016, we further strengthened
our Board to ensure our team brings
together the world-class expertise
needed to lead the Group through
its next stage of development.
Corporate governance system
Cherkizovo Group has been a public
company for over ten years. The Group’s
ordinary shares are listed on the Moscow
Exchange (Listing Level 1) and its Global
Depository Receipts (GDRs) are listed on
the London Stock Exchange (LSE), with
a combined free float of approximately
35% of total shares.
To meet its ongoing obligations, the
Group follows the guidelines of the
Corporate Governance Code (2014), as
approved by the Russian Government,
and recommended to issuers by the
Central Bank of Russia.
CORPORATE GOVERNANCE STRUCTURE
The document is available at:
http://www.cbr.ru/Eng/sbrfr/files/
Corporate_Governance_Code.pdf
Under Russian law, the Russian Civil
Code governs the Group’s actions, as
do the Law on Joint Stock Companies,
other Russian laws and regulations,
and its Charter. In addition, the Group is
governed by its own internally approved
regulations, including:
■ Regulations for the General Meeting
of Shareholders
■ Regulations for the Board of Directors
■ Regulations for the Review
Commission
■ Regulations for the Management
Board
■ Regulations for the General Director
■ Regulations for the Board of Directors
Audit Committee
Review Commission
■ Regulations for the Board of Directors
General Shareholder
Meeting
Board of Directors
Chief Executive Officer
Chairman of the
Management Board
Board Committees
Investments and Strategic
Planning Committee
Personnel and Remuneration
Committee
Audit Committee
Independent auditor
Personnel and Remuneration
Committee
■ Regulations on dividend policy
■ Regulations on insider information
■ Regulations on bonuses and
allowances payable to members
of the Board of Directors
These documents are available
at: http://cherkizovo.com/en/
company/corporate-governance/
documents/.
In 2016, Cherkizovo Group took a
number of steps designed to increase
the role of independent directors
and strengthening the Board and
other governance systems in order
to safeguard the interests of all
shareholders. The new Board will now
focus on developing the Group’s future
development strategy and leveraging
the Group’s vertically integrated structure
to drive increases in operational
efficiency.
Management Board
Corporate Secretary
Reports to
Appoints/Elects
Recommends
Going concern
The Board of Directors is satisfied that
the Group’s financial statements have
been prepared by applying the ‘going
concern’ principle, and that the same
principle is embedded in the 2017
budget and long-term plans of the
Group.
Dividends
In 2016, Cherkizovo Group paid RUB
1 billion in dividends (RUB 22.75 per
ordinary share).
General Meeting of Shareholders
The Group’s ultimate governing body is
the General Meeting of Shareholders,
which provides all shareholders with
the opportunity to communicate directly
with members of the Board and the
Management team. The Annual General
Meeting of Shareholders (AGM) provides
a forum for shareholders to raise issues
both formally and informally with the
directors. The running order of the AGM
includes the presentation and approval
of PJSC Cherkizovo Group’s audited
accounts, the election of directors and
the appointment of auditors for the next
year.
Last year, the Group held its AGM on
22 April 2016. Seven members were
either elected or re-elected to serve on
the new Board of Directors including four
new non-executive directors.
See Board of Directors section
on page 55 for more details.
During 2016, only one General Meeting
of Shareholders was held with the
following agenda items:
■ Election of members to the Counting
Comission
■ Approval of the Group’s annual report
■ Approval of the Group’s annual
financial statements
■ Review and approval of the Group’s
profit distribution and dividend
payments for 2015
■ Approval of the number of members
to be included in the Group’s Board
of Directors
■ Election of the Group’s Board
of Directors
■ Election of members to the Group’s
Review Commission
■ Approval of the Group’s auditor
■ Approval of the Group’s internal
documents
BOARD OF DIRECTORS
In 2016, we reviewed the composition
of the Board to ensure the combined
expertise of our directors is aligned with
the Group’s future plans.
The new Board comprises seven
members, including four new non-
executive Directors. The Board was
elected on 22 April 2016. The current
Board brings together a group of
talented individuals with a strong
understanding of our industry, our sector
and our strategic goals. We are confident
that we now have the right team in place
to drive future growth and exploit the
full potential of our vertically integrated
structure.
The Board of Directors includes three
independent directors: Elliot Brinton
Jones, Emin Tofik Oglu Mammadov,
elected to the Board in April 2016,
and Vitaliy Podolskiy, re-elected to the
Board in April 2016, all of whom meet
the independent director criteria of the
Russian and UK Corporate Governance
Codes. Richard Paul Sobel and Rafael
Fuertes were also elected to the Board
in April 2016 as non-executive directors.
Further significant changes to the
Board in 2016 included the election
of Evgeny Mikhailov as Chairman of the
Board of Directors. Previously head
of the Investment Projects department
at Cherkizovo Group, he was elected
Chairman at the first meeting of the
Group’s new Board of Directors held on
17 May 2016. During the same session,
the Board also passed a resolution to
create a new position, deputy Chairman
of the Board of Directors, to which
Richard Sobel was elected.
The role of the Board
The Board is accountable to
shareholders for the creation and
delivery of a strong, sustainable financial
performance and long-term shareholder
value. It meets these objectives by
confirming the Group’s strategy and
ensuring that the necessary resources
are in place to achieve these strategic
goals. The Board also sets the Group’s
key policies and reviews management
and financial performance.
The full list of the Board’s
responsibilities at: http://cherkizovo.
com/en/company/corporate-
governance/.
The Board operates within a clearly
established framework of controls and
procedures and follows defined lines
of responsibility. This structure allows for
the internal controls and external risks
to be assessed and managed effectively.
The Board of Directors is responsible
for the general management of the
Group, including determining its
business priorities, convening the Annual
and Extraordinary General Meeting
of Shareholders and appointing the
executive bodies of the Group, among
other functions.
The full list of Board competences
is outlined in Art. 12.1,2 of the
Charter available on the website
at: http://cherkizovo.com/upload/
iblock/40d/40d48ca92e930d064
a23dbb9ec3bcad4.pdf
According to the Group’s Charter,
Board resolutions are adopted upon
their approval by a majority vote of
the Directors present at the meeting.
Exceptions to this rule are matters,
such as major transactions, that
require approval by unanimous vote in
accordance with Russian law. Meetings
of the Board are considered duly
convened if the majority of the directors
are present.
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Annual Report 2016 CHERKIZOVO GROUP 59
CORPORATE GOVERNANCE
Corporate Governance
(continued)
Meetings of the Board are held as per
the annual schedule and on an ad hoc
basis whenever necessary, but no fewer
than five times a year. Matters requiring
decisions outside of the scheduled
meetings are dealt with through
additional meetings and conference
calls.
As of the date of publication of this
report, the Board had met seven times
since the beginning of the corporate
year (April 22, 2016) to discuss all
relevant matters within its remit.
Information on the items reviewed at
these Board meetings is disclosed in
the form of press releases and these
are available at: http://cherkizovo.
com/en/press/
Election and Re-election
According to the Group’s Charter, the
entire Board of Directors is re-elected
at every Annual General Meeting of
Shareholders. Directors are elected
by cumulative voting, where each
shareholder may cast all of their votes
equal to the number of voting shares
held, multiplied by the number of
directors to be elected to the Board.
Each shareholder may either cast all of
their votes for one nominee or distribute
votes among two or more nominees.
Directors may be removed from office
by a majority vote at the Meeting of
Shareholders at any time and without
explanation.
Members of the Board
The Board of Directors was elected
on 22 April 2016 and consists of seven
members with a wide range
of professional expertise.
EVGENY MIKHAILOV
RICHARD PAUL SOBEL
Chairman of the Board
Evgeny Mikhailov is the Chairman of the
Board of Directors of Cherkizovo Group
PJSC. From 2004, he was also a member
of the Board of Directors and first deputy
CEO of AIC Mikhailovsky OJSC. In
2002, he worked as a financial analyst
at Morgan Stanley, and, in 2001, was
an assistant to the vice president of US
telecommunications company, aTelo Inc.,
in Washington DC. He graduated from
the University of California (Los Angeles)
in 2004 with a degree in Business
Economics.
SERGEY MIKHAILOV
Chairman of the Investment and
Strategic Planning Committee,
CEO of Cherkizovo Group
Sergey Mikhailov has been Chief
Executive Officer and a member of the
Board of Directors of Cherkizovo Group
since 2006. Mr Mikhailov led Cherkizovo
Group during its successful IPO on
the London Stock Exchange in 2006,
representing the first Russian agricultural
company to be listed on the LSE.
In 2001, Mr Mikhailov was marketing
director of Cherkizovo’s Meat Processing
Plant. He was promoted to deputy chief
executive officer of the plant in 2002
and, a year later, he became its CEO.
In 1998, he founded the
telecommunications company, aTelo, Inc.,
in the US and was its CEO until 2001. In
1998, he trained as a financial analyst
at Goldman Sachs before moving to
Morgan Stanley in 1999.
He graduated from Georgetown
University (Washington DC) in 2000 with
a degree in Finance and Economics.
Deputy Chairman of the Board,
non-executive director
Richard Paul Sobel was elected to
the Board of Directors of Cherkizovo
Group in 2016. He is a recognised
expert in the field of direct investment.
As one of the pioneers of the Russian
private equity industry, Mr Sobel was
a senior fund manager at Baring Asset
Management (1994-1997) and at Alfa
Capital Partners (2003-2011). He is the
founder and manager of Altai Advisors, a
consulting company which specialises in
providing advice on potential investment
opportunities in Russia, the CIS, Europe
and the US. Previously, Mr Sobel was a
consultant at Bain & Company in Boston,
USA, and an investment executive
in Moscow at Batterymarch Financial
Management, the European Bank for
Reconstruction and Development and
CIBC Oppenheimer. He graduated from
Stanford University and has an MBA from
Harvard Business School.
RAFAEL FUERTES
Non-executive director
Rafael Fuertes was elected to
Cherkizovo Group’s Board of Directors
in 2016. He has extensive experience
in the agricultural industry, primarily in
animal breeding, meat processing and
crop farming. Mr Fuertes is the Chairman
of the Board of Directors of Grupo
Fuertes, a leading Spanish agricultural
holding company, which is a minority
shareholder of Cherkizovo Group,
with a 5.06% stake, and is a partner
in the Tambov Turkey joint venture.
He graduated from University of Murcia,
Spain.
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
1
5
2
6
ELLIOT BRINTON JONES
Independent non-executive director
Elliot Brinton Jones was elected to
Cherkizovo Group’s Board of Directors
in 2016. He has a strong track record in
the agricultural industry. Mr Jones is the
owner of Jones and Jones Consulting
and has over 16 years of experience
in advising various poultry companies
in the US and other countries on their
strategic development. Prior to that, he
worked for a number of US poultry and
turkey production companies, including
Foster Farms, Zacky Farms, Swift Dairy
and Poultry Group. He graduated from
the University of San Francisco.
EMIN TOFIK OGLU MAMMADOV
Chairman of the Personnel
and Remuneration Committee,
independent non-executive director
Emin Tofik Oglu Mammadov was elected
to Cherkizovo Group’s Board of Directors
in 2016. He has broad experience in
retail and consumer brand development
in emerging markets. Mr Mammadov is
President, Global Foodservice of Kraft
Heinz Company.
Prior to that, he led a number of large
multinational corporations in India,
South Africa, Middle East and China.
He graduated from the Baku Institute
of Social Management and Political
Science, Azerbaijan, with a degree
in International Relations.
VITALIY PODOLSKIY
Chairman of the Audit Committee,
independent non-executive director
Vitaliy Podolskiy joined Cherkizovo
Group’s Board of Directors in June 2012.
He has more than 17 years experience
in the financial and retail/FMCG sectors
in the US, UK, Germany and Russia.
From 2003 to 2006, he was CFO at
one of Russia’s leading supermarket
chains, Perekrestok. Between 2006
and 2008, following the merger with the
leading discount chain, Pyaterochka,
he became CFO and a member of the
Management Board of X5 Retail Group
N.V., which is listed on the London Stock
Exchange and is the largest retail chain
in Eastern Europe. In 2008, he joined
the crisis management team at Euroset
as First Vice President, Finance and
Administration.
4
1. Evgeny Mikhailov
2. Sergey Mikhailov
3. Richard Paul Sobel
4. Rafael Fuertes
5. Elliot Brinton Jones
6. Emin Tofik oglu Mammadov
7. Vitaliy Podolskiy
3
7
From June to November 2009, he was
CEO and deputy Chairman of the Board
of Directors at the hypermarket chain,
Mosmart CJSC (Russia), where he led
a major restructuring.
From 2008, he was a member of both
the Board of Directors and the Audit
and Personnel Committees at Rosinter
Restaurants OJSC (Russia), Europe’s
largest restaurant chain. From 2011, he
was a member of the Board of Directors
and Chairman of the Finance and
Strategic Committee at RG Brands OJSC
(Kazakhstan), a leading soft drink FMCG
company in Central Asia. From 2012, he
was on the Board of Directors of Caesar
Satellite OJSC. He graduated from
Moscow State University (Department
of Journalism). He received an MBA in
International Business and Finance from
the University of Chicago.
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CORPORATE GOVERNANCE
Corporate Governance
(continued)
BOARD COMMITTEES
The Board delegates the review of
certain matters to three committees:
the Audit Committee, the Personnel
and Remuneration Committee, and
the Investment and Strategic Planning
Committee. These three committees
serve as consultative and advisory
bodies that deal with issues that are
raised by the Board. The Committees are
not considered as management bodies
of the company.
Committee meetings are held when
required, with a minimum of a five times
a year. They are held separate to the
Board meetings and focus on issues
that may require preliminary Board
consideration. The decisions of each
Committee are taken by a majority vote
of all committee members taking part in
the meeting. Each member has one vote.
Each of the committees met six times
from the beginning of the corporate year
(April 22, 2016).
The Board is satisfied that the
Committees have sufficient skills,
experience and resources to carry out
their duties effectively. The respective
committee chairmen report on their
activities at the following Board meeting.
Details of committee membership, roles
and work are set out below:
Audit Committee
The Board of Directors established
the Audit Committee in April 2006.
Its exclusive functions are to assess
candidates for the role of Group auditor,
review the auditor’s reports and evaluate
the effectiveness of internal control
procedures, as well as suggest areas
where these procedures could be
improved. Membership of the committee
is reviewed annually, with members
selected from among the independent
directors. In 2016, with the appointment
of new independent directors, new
members jointed the committee. As at
20 May 2016, Elliot Brinton Jones and
Emin Tofik Oglu Mammadov joined the
existing Chairman of the committee,
Vitaliy Podolskiy.
The Audit Committee adheres to a
formal list of items to be considered
at each committee meeting.
Committee members:
Vitaliy Podolskiy
Chairman, independent non-executive
director
Elliot Jones
Independent non-executive director
Emin Mammadov
Independent non-executive director
Primary functions:
■
Ensure the completeness, accuracy
and consistency of financial
statements
■ Ensure the reliability and efficiency of
risk management and internal control
systems
■ Ensure the independence and
integrity of internal and external audits
■ Maintain an efficient system of
reporting of internal and external
fraud (including unauthorised use
of insider or confidential information)
and other violations, and oversee
the implementation of any related
measures approved by the Group’s
management
Full list of the Committee functions is
available at: http://cherkizovo.com/
en/company/corporate-governance/
documents/
Personnel and Remuneration
Committee
The Personnel and Remuneration
Committee was established in July 2010.
Membership is reviewed annually and in
2016, Emin Tofik Oglu Mammadov was
appointed as Chairman of the Personnel
and Remuneration Committee and
was joined on the committee by Vitaliy
Podolskiy and newly-elected Board
member, Elliot Brinton Jones.
The Board approved the new version
of Regulations for the Board of Directors
Personnel and Remuneration Committee
to conform to the Moscow Exchange
Listing Rules.
The committee adheres to a formal
list of items to be considered at each
committee meeting during the financial
year.
Committee members:
Emin Mammadov
Chairman, independent non-executive
director
Elliot Jones
Independent non-executive director
Vitaliy Podolskiy
Independent non-executive
director
Primary functions:
■ Formulating key aspects
of the corporate HR policy
■ Approval of performance targets
for the remuneration of Directors,
members of the Management Board
and the Chief Executive Officer
■ Perform the Board assessment
procedure
Full list of the Committee functions is
available at: http://cherkizovo.com/
en/company/corporate-governance/
documents/
Investment and Strategic Planning
Committee
The Investment and Strategic Planning
Committee was established in June
2012. Its membership is reviewed
annually. Following the expansion of the
Board in 2016, all four newly-elected
non-executive directors, namely Elliot
Jones, Emin Mammadov, Richard Sobel
and Rafael Fuertes, were appointed as
members of the committee with Sergey
Mikhailov, the CEO of the Group, as its
Chairman.
The committee adheres to a formal
list of items to be considered at each
committee meeting during the financial
year.
Committee members:
Sergey Mikhailov
Chairman, CEO of Cherkizovo Group
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Elliot Jones
Independent non-executive director
Emin Mammadov
Independent non-executive director
Richard Sobel
Non-executive director
Rafael Fuertes
Non-executive director
Primary functions:
■
The business priorities of Cherkizovo
Group
■ The development strategy and long-
term strategic goals and objectives of
the Group, as well as annual and long-
term investment programmes
Full list of the Committee functions is
available at: http://cherkizovo.com/
en/company/corporate-governance/
documents/
Acting within the scope of its
competence, the Committee works
with the CEO, Management Board and
relevant business divisions of the Group.
MANAGEMENT BOARD
The Group’s Management Board was
established in June 2010 and was
strengthened further in 2016 to 14 from
10 members as at the end of 2015.
The Group’s Board of Directors approves
both the size of the Management Board
and selects the people to serve on
the Management Board on the basis
of proposals from the Chairman of the
Management Board. The size of the
Management Board should be optimal
for constructive business discussions,
as well as timely and effective decision-
making.
The Management Board is authorised
to approve strategic plans, as well as
the business priorities, and review the
business performance of the Group and
its subsidiaries and affiliates. The powers
of Cherkizovo Group’s Management
Board are set out in the Charter.
SERGEY MIKHAILOV
JOHN ROSS
Chief Executive Officer
Chief Operating Officer
Sergey Mikhailov has been Chief
Executive Officer and a member of the
Board of Directors of Cherkizovo Group
since 2006. Mr Mikhailov led Cherkizovo
Group during its successful IPO on
the London Stock Exchange in 2006,
representing the first Russian agricultural
company to be listed on the LSE.
In 2001, Mr Mikhailov was marketing
director of Cherkizovo’s Meat Processing
Plant. He was promoted to deputy chief
executive officer of the plant in 2002
and, a year later, he became its CEO.
In 1998, he founded the
telecommunications company, aTelo, Inc.,
in the US and was its CEO until 2001. In
1998, he trained as a financial analyst
at Goldman Sachs before moving to
Morgan Stanley in 1999.
He graduated from Georgetown
University (Washington DC) in 2000 with
a degree in Finance and Economics.
John Ross has been the Chief Operating
Officer of Cherkizovo Group since
October 2016 and reports directly
to Sergey Mikhailov, Group CEO.
For the last 25 years, John has been
the head of a number of integrated,
multi-plant production corporations as
well as a member of the management
team at major international poultry
companies.
Prior to joining Cherkizovo Group,
John held the position of president
at Arasco Food (Saudi Arabia). Before
that he worked at Zacky Farms for over
20 years, joining the company as an
operations manager and going on to
become the president of the Group. His
career began at the agricultural holding
company, Cargill. He is a graduate of
Kansas State University with a degree
in Agriculture Mechanisation.
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CORPORATE GOVERNANCE
Corporate Governance
(continued)
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
LUDMILA MIKHAILOVA
SERGEY POLYAKOV
MAKSIM ZUDIN
ANDREY CHOLOKYAN
YURY DYACHUK
MARINA KAGAN
Chief Financial Officer
Head of Poultry Division
Head of Agro Division
Head of Meat Processing Division
Head of Legal Department
Head of Corporate Communications
Ludmila Mikhailova has been the Group’s
CFO since 2006.
Between 2001 and 2004, she worked as
a financial analyst at McFarlane Gordon
Inc, General Mills Co (Canada) and at ING
Barings (UK). She then held a number
of managerial positions at Cherkizovo
Group and AIC Cherkizovsky.
She is ranked among the Top 1,000
Managers in Russia.
She graduated from the Financial
Academy of the Government of the
Russian Federation and received an
MBA from York University, Canada.
Sergey Polyakov has been CEO
of the Poultry Division Management
Company since 2014. From 2000 to
2008, he held management positions
at the Sodruzhestvo Group. Prior to
joining Cherkizovo Group, he worked at
Obyedinennaya Zernovaya Kompaniya
OJSC, where he carried out the functions
of a CEO and was in charge of the
company’s business activities.
He was also CEO of PRODO from
2009 to 2011.
He graduated with honours from the
Economics Department of the European
Humanities University.
Maksim Zudin has been the head of the
Agro Division of Cherkizovo Group since
2015. He is responsible for the strategic
development of the Pork, Feed and
Grain farming divisions.
Prior to joining Cherkizovo Group,
he was the Head of the oil production
division at Solnechniye Produkti.
Between 2003 and 2013, he was the
Head of the Agro Division as well as
a member of the management board
at Razgulyai Group, where he was
responsible for the Eastern branch.
He is a graduate of Moscow State
University with a degree in Mechanics
and Mathematics.
Andrey Cholokyan has been managing
director of the Meat Processing segment
of Cherkizovo Group OJSC since 2010.
He was deputy CEO of Development
and Marketing in the executive office of
Lianozovsky Kolbasny Zavod from 2002.
Prior to this, he held senior management
positions at the Ostankinsky, Biryulevsky
and Cherkizovsky meat processing
plants. He is a graduate of the Moscow
Technological Institute of the Meat
and Dairy Industry and has a PhD in
Economics.
Yury Dyachuk has been head of
the Group’s Legal Support and Real
Estate Operations Department since
2006. He has 14 years of experience
as a practising lawyer, and was head
of the Group’s Legal Business Units
for 12 years. In 2005, he was senior
counsel and managed the restructuring
of Cherkizovo Group, after being
Head of the Legal Department of AIC
Cherkizovsky since 2001. He was head
of the Legal Department of Cherkizovsky
Meat Processing Plant (CMPP) between
1996 and 2000, and was a member of
the department from 1995 to 1996. He
graduated from the Moscow State
Law Academy in 1995 with a degree
in Civil Law.
Marina Kagan has served as
Cherkizovo Group’s head of Corporate
Communications since 2015.
Marina began her career in London
on BBC radio and television. Between
1998 and 2004, she advised Russian
companies preparing for IPOs.
In 2004, she was appointed Director of
Corporate Communications at Wimm-Bill-
Dann Foods OJSC and was a member
of the management board. She later
served as Vice President of Corporate
Communications, Eastern Europe at
PepsiCo. Prior to joining Cherkizovo,
Ms Kagan held the position of Director
of Corporate Communications at O’Key
Group of Companies.
She graduated from Westminster
University, London.
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CORPORATE GOVERNANCE
Corporate Governance
(continued)
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
ANDREY KHIZHNYAK
ALEXEY SKOROBOGATOV
VLADISLAV BELYAEV
LEONID IZMAILOV
ALEXANDER GUSAKOV
VERA ELISEEVA
Head of Sales and Marketing
Head of Procurement and Logistics
Head of IT
Andrey Khizhnyak has been Head of
Sales and Marketing since September
2013. He has 17 years of experience
in marketing and sales management.
Prior to joining Cherkizovo Group,
he worked for a range of companies,
including Obyedinennye Konditery
LLC, Razgulyai Market LLC, and OST
Group. Between 2001 and 2004, he was
Head of Marketing at the Cherkizovsky
Meat Processing Plant OJSC and AIC
Cherkizovsky Trading Group OJSC. He
was recognised as one of Russia’s top
five business managers in 2010, and one
of the top ten food marketing managers
in 2007 by the Russian Managers
Association.
He graduated from the Moscow State
Law Academy.
Alexey Skorobogatov has been
head of Procurement and Logistics
at Cherkizovo Group OJSC since
October 2011. From 2009 to 2011, he
was regional head of Procurement at
Danone Nutricia Baby Food, Eastern
Europe, and between 2006 and 2009,
he was head of Procurement at Wimm-
Bill-Dann Foods OJSC. Prior to this, he
worked at Mobilnye Telesistemy (MTS)
OJSC, where he set up and headed the
procurement and logistics department,
which was later combined into a single
logistics department. He is a graduate of
the Pyatigorsk State Linguistic University.
Vladislav Belyaev has been head of IT
since February 2012. Between 2008
and 2012, he was head of the Enterprise
Management Systems Department at
Vimpel-Kommunikatsii OJSC. Prior to this,
he held senior management positions
at CafeMax CJSC and at Moskovskiy
Industrialny Bank OJSC. He is a graduate
of the Moscow Institute of Radio
Engineering, Electronics, and Automation
and Moscow State University.
Head of the Investment Projects
Department
Leonid Izmailov has been the head
of the Investment Projects Department
at Cherkizovo Group since 2014.
He is responsible for managing the
construction process of major investment
projects.
Between 2010 and 2014, Leonid was
the technical director and operational
cluster director of AgroTerra LLC. Prior
to this role, he held a number of senior
management positions across a range
of companies, including Russkiye Masla
(now part of Kernel), Bunge, Unilever and
Nestle Food.
He graduated from Moscow State
University with a degree in Chemistry.
Head of Security Department
Head of HR
Alexander Gusakov has been the
security director of Cherkizovo Group
since February 2016.
Vera Eliseeva was appointed chief
people officer of Cherkizovo Group
in May 2016.
Mr Gusakov has over ten years of
experience in corporate security. Prior to
joining Cherkizovo Group, he worked for
Henkel Rus, Zurich Insurance Group and
Gazprom. Between 1981 and 2005, he
worked in the state security services.
He graduated from The Higher School
of the Committee for State Security with
a degree in Law.
Prior to joining Cherkizovo Group,
Vera served as head of Organisational
Development with a major finance
and retail holding company, vice
president and director of the Personnel
Department at MTS Bank, and Head of
the Organisational Department and a
Member of the Management Board at
the mobile retailer, Svyaznoy. Before
that, she headed up the personnel
management division for Wimm-Bill-Dann
Foods OJSC.
She is a graduate of the Moscow State
Institute of International Relations
(MGIMO) and has an MBA degree from
California State University, East Bay
(Hayward).
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CORPORATE GOVERNANCE
Corporate Governance
(continued)
CORPORATE SECRETARY
In line with the best international
corporate governance practices, the
Board of Directors created the new
role of Corporate Secretary in 2012
to support the Board’s functions and
document flow. Valery Kuprienko was
appointed Corporate Secretary for the
current term of the Board (April 2016 –
April 2017), but subsequently stepped
down. In November 2016, the Board
appointed Anastasia Bakhmacheva
to this role.
INTERNAL CONTROL AND RISK
MANAGEMENT
The Board of Directors has overall
responsibility for maintaining an
adequate internal control and risk
management system at the Group,
as well as reviewing its effectiveness.
Internal control is also exercised by
the Review Commission in compliance
with the Charter and the Regulation on
the Review Commission. The Review
Commission coordinates financial
and business audits at the Group,
the key task being to ensure that the
business operations of Cherkizovo
Group comply with Russian law, meet
the interests of shareholders, and that
financial statements and audit reports
do not contain material misstatements.
Members of the Review Commission
are elected by the General Meeting of
Shareholders for one year. The CEO or
other members of the Board of Directors
are not permitted to be members of the
Review Commission.
Disclosure procedures within Cherkizovo
Group follow the guidelines set out
in the relevant corporate regulation
approved on 25 April 2011. Cherkizovo
Group protects inside information in
accordance with the Regulation on
Insider Information adopted on
28 December 2011. This regulation
contains a list of insider information
relating to the Group and was updated
in 2015.
Cherkizovo Group complies with
European Union’s Market Abuse
Regulation (MAR). The company
maintains a list of insiders with the help
of Insider manager program, which
is licensed by the Financial Conduct
Authority of Great Britain (FCA) and is
disclosing insider information according
to the requirements of MAR.
Cherkizovo Group’s senior management
has made itself familiar with the
requirements of MAR.
The Group has prepared a new
document, the Information policy of
PJSC Cherkizovo Group, formulating the
responsibility for compliance with MAR,
as well as internal documents regulating
the procedure of transactions involving
PJSC Cherkizovo Group’s securities.
Review Commission
The Group’s Charter and respective
regulation govern the work of the Review
Commission. It oversees and coordinates
audits of the Group’s financial and
economic activities. Its principal duties
are to ensure that the Group’s activities
comply with the applicable Russian
legislation, do not infringe on the rights
of shareholders, and that accounting
and reporting do not contain material
misstatements.
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Investor and Shareholder
Information
The members of the commission are
elected for one year at the General
Meeting of Shareholders and may not
include the chief executive officer or any
other members of the Board.
DISCLOSURE TO AUDITORS
As far as each of the directors is
aware, there is no material information
undisclosed to the Group’s auditors.
Each of the directors has taken all steps
required of them to obtain all material
information and provide it to the Group’s
auditors.
The Groups’ current auditors, Deloitte
& Touche CIS ZAO, were appointed
on March 2016 and are due for re-
appointment in 2017.
Shareholder structure, %
SHAREHOLDER STRUCTURE
MB Capital Europe Ltd.
Prosperity Capital Management Limited
Norges Bank
Grupo Fuertes
Other
7.74%
5.06%
4.89%
21.30%
61.01%
Igor Babaev and his family control 65%
of Cherkizovo Group’s issued share
capital, mainly through MB Capital
Europe Ltd. The Group’s free float*
is 35%.
As at 31 December 2016, Prosperity
Capital Management (21.30%) and
Norges Bank Limited (4.89%) were
among the top five shareholders.
* The free float ratio of 35% was calculated
based on information disclosed by the issuer
and other publicly available data about the
(beneficiary) owners of ordinary shares and/or
depositary receipts.
Stock price dynamics in 2016, RUB
1200
1100
1000
900
800
700
23.10.2015
31.01.2016
10.05.2016
18.08.2016
26.11.2016
06.03.2017
Source: Moscow Exchange
GDR price vs. Industry Index in 2016
PJSC CHERK S
Food Producers
5%
0%
-5%
-10%
-15%
-20%
-25%
Feb
Apr
Jun
Aug
Oct
Dec
Source: London Stock Exchange
The total number of shares is the number of
outstanding shares and/or shares represented
by depositary receipts within the same
category (type) as of the calculation date.
The free float is calculated as the total number
of outstanding shares minus the number
of shares that are not in free float. The free
float ratio is the ratio between the number
of shares in free float and the total number
of outstanding shares, expressed as
a percentage.
Common Shares
The Group has listed its common shares
on Moscow exchange (MOEX) in 2006.
During 2016, the price declined by 26%
from RUB 1,040 to RUB 773 against a
market background of further declines
in consumer demand in Russia.
As of 31 December 2015 on close
12-month high
12-month low
As of 31 December 2016 on close
12-month average price on close
12-month average daily trade
volume, shares
Source: Moscow Exchange
1,040
1,098
738
773
874
2,346
GDRs
The Group’s global depositary receipts
(GDRs) have been traded on the London
Stock Exchange (LSE) since 2006. Every
three receipts represent two common
shares. In 2016, the GDR price declined
by 11% from US$ 9.26 to US$ 8.6 as of
the end of December 2016, in line with
the Food Producers Index.
As of 31 December 2015 on close
12-month high
12-month low
As of 31 December 2016 on close
12-month average price
12-month average daily trade
volume, shares
Source: LSE
9.26
9.88
7.52
8.6
8.61
10,394
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CORPORATE GOVERNANCE
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Investor and Shareholder Information
(continued)
Sustainable Development
SHAREHOLDER ACCESS
TO INFORMATION
We ensure shareholders have the details
of the Group’s results and other news
releases through the London Stock
Exchange’s Regulatory News Service.
The news releases are published
on the Press Centre section of the
Group’s website at: http://cherkizovo.
com/en/press/
All financial reports and
presentations are available at:
http://cherkizovo.com/en/investors/.
DIVIDEND POLICY
BONDS
The Board of Directors of the Group
approved the Dividend Policy in April
2015. It is based on the principle of the
rational distribution of profit, taking into
account the interests of the shareholders
and investment capital required for the
future development of business of the
Group.
In considering the payment of dividends,
the Board will, with the assistance of
the Investment and Strategic Planning
committee, take into account the current
financial status of the Group and the
amount of the proposed dividend, which
shall be at least 20% of the consolidated
net profit for the reporting period, in
accordance with Russian Accounting
Standards.
The General Meeting of Shareholders
makes the final resolution approving
the payment of dividends.
The full version of the Divided Policy
of the Group is available at: http://
cherkizovo.com/dividendpolicy-en.
pdf
In 2016, Cherkizovo Group paid
RUB 1 billion in dividends (RUB 22.75
per ordinary share).
The Group’s only corporate bond issue,
the BO-001P-01 series (registration
number 4B02-01-10797-A-001P), with an
annual coupon rate of 12.5%, was issued
in October 2015 for a total amount of
RUB 5 billion with a five-year maturity.
The bonds are traded on the Moscow
Exchange and, as of 30 December 2016,
its yield to maturity was 11.47%.
In April 2016, Cherkizovo Group
redeemed its BO-04 series semi-annual
coupon bonds for a total of RUB 3 billion.
The bonds were issued in March 2013.
INVESTOR RELATIONS
The Group continued to operate
in a challenging macroeconomic
environment during 2016, but we have
noted encouraging signs for a potential
recovery, with the stabilisation of oil
prices and interest rates, as well as
the slow-down in the devaluation of
the Russian currency. Overall, Russia,
continues to experience a degree
of negative shareholder sentiment.
The Cherkizovo Group recognises
the importance of maintaining open
and transparent communication with
shareholders, bondholders and potential
investors, especially in these testing
times. We do this through meetings,
presentations, investor conferences and
ad hoc events with institutional investors
and sell-side analysts.
Cherkizovo Group
aims to ensure its
sustainable growth
in an ever-changing
environment. We
see sustainability as the
main pillar of our future
growth, underpinning
the robustness and
resilience of our
business model.
Our corporate governance practices
and stakeholder engagement principles
encompass the interests of all parties
and are continuously reviewed
and taken into account across all
levels of our operational activities.
Our operations are far reaching
and encompass a broad variety of
stakeholders, including our employees,
shareholders, partners, governments,
local authorities and communities,
peers and competitors, as well as our
customers in Russia and abroad. In 2016,
we continued to engage with all of our
stakeholders to identify and discuss
policy issues relevant to sustainability of
the Group’s business model. We maintain
constant dialogue with all interested
parties in order to develop strategic
approaches that meet the requirements
of our stakeholders.
EMPLOYEE POLICIES
Cherkizovo Group is one of the leading
employers in the Russian agricultural
sector. We create jobs across the
whole value chain from grain farming,
meat production and processing to
distribution and other segments of the
food industry. The Group adheres to
the strictest Russian and international
employment standards and follows best
practices when it comes to providing
the most comfortable work environment
and opportunities for professional
development for our employees. As at
the end of 2016, the Group employed
22,800 people across all of its facilities.
Recruitment
We recognise the importance of
attracting, developing and retaining
highly skilled and qualified professionals,
as well as nurturing young talent to
ensure the continuing and sustainable
success of our business. Our People
Management policy is designed to
deliver on this. The Group finds and
recruits accomplished experts and
managers, while also actively engaging
and developing young talent from a
graduate entry level. In addition, our
operations also require production
staff with no previous experience.
During 2016, we continued to work
with educational institutions in the
regions where we operate, including the
Timiryazev Agricultural Academy, the
Voronezh State Agricultural University
and others.
We welcome students to apply
for internships, on-the-job training
programmes and pre-degree
apprenticeship. In addition, Cherkizovo
Group launched the Youth Programme
last year, and it has already helped our
facilities recruit more than 40 graduates.
Each business segment within
Cherkizovo Group has its operational
specifics and its own requirements for
new personnel, but the Group as a
whole adheres to the same principles
of finding and retaining the best
professionals in the industry as well
as top graduate talent. Our leadership
across some of the key segments of
the Russian food industry, combined
with our ambitions to become a major
international food supplier, drive our
demand for highly skilled and ambitious
professionals.
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ABOUT COMPANY
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
CORPORATE GOVERNANCE
Sustainable Development
(continued)
Сherkizovo presentation for MADI students
In 2016, Cherkizovo Group held a talk on
employment opportunities in the Group for
the students of the Moscow Automobile and
Road Construction State Technical Institute
(MADI). MADI’s high calibre graduates, offering
a range of mechanics, logistics specialists,
traffic controllers and transportation economics
expertise are of particular interest to the Group’s
operations.
22.8 th.
EMPLOYEES ACROSS ALL FACILITIES
IN CHERKIZOVO GROUP
40
GRADUATES WERE RECRUITED
BY THE GROUP AFTER YOUTH
PROGRAMME
Training and Development
Cherkizovo Group seeks to be a leader
in innovation in the agricultural sector
and places great importance on the use
of the most advanced solutions and
technologies. This approach involves
the continuous development of the
expertise and skills of our employees.
The Group has a large-scale training
programme and educational courses
in place to foster the professional
growth of all our staff. Also, we have
developed a comprehensive system of
mentoring, which is designed to transfer
the experience and skills to the new
employees. We regularly participate in
trade conferences and other industry
events across the globe to ensure we
are on par with the global food industry
leaders.
The Group pays particular attention
to the continuous improvement of
management skills. We have developed
a series of dedicated programmes for
our senior and middle level management
covering all key management disciplines,
such as human resources management
and development of soft skills.
In 2016, we launched the Management
Competency Model, developed to
ensure a consistent approach to the
selection of talented managers.
During 2016, the Group held the
second “Cherkizovo People” Strategic
Management Conference. Managers
from across all of the business segments
attended the event to exchange ideas
and continue discussions on current
opportunities, trends, strategic direction
and the Group’s long-term growth plans
to ensure its market leadership in the
coming years.
In addition to the regular and ad hoc
training programmes, the Group
launched its Distance Learning
programme. The project was piloted in
the Meat Processing division in 2015 and
continued throughout 2016. All courses
can be accessed and completed via
dedicated in-house software, which is
also used to regular monitor the learning
progress. It is planned to roll out the
Distance Learning programmes across
the whole Group.
Compensation and benefits
Compensation and benefits
Cherkizovo Groups offers its employees
Cherkizovo Groups offers its employees
competitive remuneration packages on
competitive remuneration packages on
par with the average salary levels in the
par with the average salary levels in the
relative region of operations. The Group
relative region of operations. The Group
also has in place a system of rewards
also has in place a system of rewards
and compensation for outstanding
and compensation for outstanding
achievements.
achievements.
The Group fully complies with Russian
The Group fully complies with Russian
legal requirements for providing social
legal requirements for providing social
support to its employees and runs a
support to its employees and runs a
series of additional social programmes
series of additional social programmes
aimed at ensuring social protection for
aimed at ensuring social protection for
our staff and their families. The Group
our staff and their families. The Group
offers transparent compensation system,
offers transparent compensation system,
paid sick leave and annual holiday,
paid sick leave and annual holiday,
paid three-year parental leave with
paid three-year parental leave with
guaranteed return to the workplace,
guaranteed return to the workplace,
as well as a number of other benefits
as well as a number of other benefits
ranging from an additional paid holiday
ranging from an additional paid holiday
allowance based on the length of service
allowance based on the length of service
to financial assistance for important
to financial assistance for important
events in our employees lives, such
events in our employees lives, such
as getting married or having a baby.
as getting married or having a baby.
The majority of our operations have
on-site staff canteens serving daily hot
meals, free transfers to sites, as well as
subsidised travel to health resorts and
children’s summer camps for employees
and their families.
The Group pays particular attention
to the health of employees and
provides regular health checks and on-
demand access to the on-site medical
professionals at the Group’s facilities.
Internal communications
Our corporate culture is based on the
principles of transparency, leadership,
openness to innovations and respect.
We are focused on developing and
nurturing our corporate culture and
sharing our vision and values with every
member of our team. The opinion of
each employee is very important to
us therefore we encourage the free
exchange of view and ideas.
We share our corporate news with our
employees across all facilities through
a monthly internal newspaper and a
corporate intranet portal, which facilitates
further exchange of knowledge and
ideas across the Group. In 2015, we
launched the “Your Opinion Counts”
survey designed to measure and
improve employees’ engagement with
the business. The results of the Survey
helped us to fine-tune our engagement
initiatives in 2016.
Cross-cultural communications
Cherkizovo Group is fully committed
to implementing the best international
practices across our operations
and managerial functions and sees
an ongoing dialogue between our
employees and industry experts from
other countries as essential to delivering
on this pledge.
The Cross-Cultural Communication and
Expat Induction Programme helps our
employees from other countries become
acquainted with the practices and
specifics of our facilities. The programme
was initially launched at our Grain
division, and the work is underway
to roll it out across the Group.
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Annual Report 2016 CHERKIZOVO GROUP 73
CORPORATE GOVERNANCE
Sustainable Development
(continued)
HEALTH, SAFETY AND
THE ENVIRONMENT
As a leader in the Russian agricultural
industry and one of the largest
employers in the country, with
production facilities nationwide, we
pay particular attention to the health
and safety of our employees and
our impact on the environment. The
Group not only complies with all legal
requirements for ensuring safety in the
workplace, biological and veterinary
security, natural resource management,
and environmental protection, it also
goes further by running a wide range
of programmes focused on sustainable
growth and excellence in Health, Safety
and Environment (HSE) issues.
We have the strictest requirements for
maintaining biological safety at all our
production sites. Each facility is fully
equipped with all the necessary tools to
minimise biological risks that are natural
for the meat production and processing.
We monitor and prevent environmental
risks using the latest equipment and
technologies, as well as constantly
monitoring our environmental impact.
To ensure the high quality of our
products, we carry out inspections at
every stage of the production cycle, from
the feed production to the breeding of
young stock, to processing and sales.
The Group has programmes in place
aimed at minimising its negative
environmental impact and reducing
consumption of energy and natural
resources. Each of our facilities set
targets on reducing air pollution, waste
generation and energy consumption,
in line with the Russian legislation
and internal regulatory requirements.
In addition, we comply with the
requirements in terms of establishing
buffer zones around our production
facilities. We monitor environmental
conditions at production facilities,
regularly assess and take measures
to prevent and minimise any negative
HSE COMPLIANCE IN MEAT PRODUCTION
Comfort
We maintain optimum conditions for all livestock by
controlling air temperature and circulation, lighting
and humidity.
Traceability
We control systems that run through all stages of the
production process, from the feed production to the
breeding, processing and sales, to ensure the high
quality of our products.
Balanced
feeding
We produce our own feed with a balanced formula of
proteins, microelements, vitamins, and amino acids to
ensure the our livestock receives the optimum energy
source.
Specialisation
and separation
of facilities
by territory
We carry out all production stages at individual
sites separated by at least a five-kilometre sanitary
protection zone. Separating production sites helps
prevent the spread of the diseases between different
generations of animals and between breeding and
production stock.
All-in / All-out
principle
Each production site has animals of the same
generation only. The sites are thoroughly cleaned
and disinfected between production processes.
Preventive
measures
We strictly monitor production processes at our
facilities to ensure they comply with the highest
international standards. The measures include strict
control of access to all production sites, limiting the
number of visitors, prohibiting staff from moving
between sites, maintaining effective operation of
all veterinary and sanitary stations, handling clinical
examination and veterinary care of all stock.
Environmental
protection
We monitor effluent discharges, air pollution, water
and energy consumption at all our facilities.
impact on the environment in the
regions where we operate. For example,
as part of our zero-waste production
programme, manure from pork
production facilities has been certified
as a natural fertiliser that can be used
by Grain farming division.
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
COMMUNITY RELATIONS
AND CHARITY
Cherkizovo Group plays an important
role in the life of the local communities
in the regions where it operates. The
Group’s companies are among the
largest taxpayers in the agricultural
industry in the central regions of Russia.
We maintain close relationships with the
local authorities and communities.
In addition to ongoing cooperation
with communities, the Group regularly
runs various charitable projects for
local orphanages, schools, cultural
and sporting organisations. Each of
the Group’s facilities provides support
to socially vulnerable groups as part
of a strategy of responsible citizenship.
LETTERS TO FATHER FROST
EASTER GIFTS
As part of our charity programme, we
support children from the Ark social
rehabilitation centre, near Elets. Every
year the kids are encouraged to write
letters to Farther Frost, Russia’s Santa
Claus. In response to these letters we
bring New Year gifts and arrange a fancy
dress party, helping to create a festive
mood for the children.
We support local orphanages and other
facilities for children, providing financial
assistance, arranging visits and gift giving
to celebrate holidays. In April 2016, our
Lipetsk Chicken Kingdom team visited
the Eduard Belan Children’s Support
Centre to celebrate the Easter holiday
with the children, and they brought the
kids Easter cakes and sweets.
NEW YEAR GIFTS FOR CHILDREN
CHILDREN’S DAY
WEEKEND VOLUNTARY WORK
In 2016, the Group’s employees held
an inaugural corporate New Year Charity
event to raise money for children
suffering from cancer. The Group
matched the donations of employees.
Such initiatives not only raise much-
needed funds and the awareness of
worthy causes, but also promote a
culture of compassion across the Group.
Each summer, we arrange a celebration
on Children’s Day. In 2016 we also held
a Group-wide drawing contest for the
children of our employees. Over 300
kids participated in the competition and
sent in drawings portraying their parents
at work.
The Group’s Poultry division regularly
holds weekend events where our
employees volunteer their time at
schools and orphanages in local towns.
In line with this voluntary ethos, the
Group organised a series of events and
barbecues in spring of 2016 in Bryansk,
Kursk, Liski, Penza, Lipetsk and Tula.
Teams of our employees helped local
children to clean their schoolyards, plant
trees and then arranged a barbecue
for the kids. Everyone involved greatly
appreciated the opportunity to share
in the spring holidays with the kids.
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Annual Report 2016 CHERKIZOVO GROUP 75
CONTENTS
ABOUT COMPANY
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
In spite of the challenging market conditions, Cherkizovo
In spite of the challenging market conditions, Cherkizovo
Group was able to demonstrate strong operational results
Group was able to demonstrate strong operational results
across all business segments, increasing total revenue 7%
across all business segments, increasing total revenue 7%
year-on-year to RUB 82.4 billion in 2016, with net operating
year-on-year to RUB 82.4 billion in 2016, with net operating
cash flow over the same period rising by an impressive
cash flow over the same period rising by an impressive
88% to RUB 9.4 billion. The Group rebalanced its debt
88% to RUB 9.4 billion. The Group rebalanced its debt
structure with total debt falling by 6% year-on-year to RUB
structure with total debt falling by 6% year-on-year to RUB
38.6 billion as at the end of December 2016. Our debt
38.6 billion as at the end of December 2016. Our debt
ratios also remained comfortably within all of our covenant
ratios also remained comfortably within all of our covenant
requirements.
requirements.
Consolidated
Financial
Statements
Consolidated Financial Statements
for the year ended 31 December 2016
and Independent Auditor’s Report
Consolidated statement of changes
in equity
Consolidated statement of cash
flows
Notes to the consolidated financial
statements
Contact information
84
88
90
139
Statement of management
responsibilities for the preparation
and approval of the consolidated
financial statements
Independent auditor’s report
Consolidated financial statements
for the year ended 31 December
2016
Consolidated statement of profit
or loss and other comprehensive
income
Consolidated statement of financial
position
78
79
83
83
84
76
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77
FINANCIAL STATEMENTS
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Statement of management responsibilities
for the preparation and approval of the consolidated
financial statements
(For the year ended 31 December 2016)
Management is responsible for the preparation of the consolidated financial statements that present fairly the financial position
of PJSC Cherkizovo Group (the “Company”) and its subsidiaries (the “Group”) as at 31 December 2016, and the consolidated results
of its operations, cash flows and changes in equity for the year then ended, in compliance with International Financial Reporting
Standards (“IFRS”).
In preparing the consolidated financial statements, management is responsible for:
■ Properly selecting and applying accounting policies;
■ Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and
understandable information;
■ Providing additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to
understand the impact of particular transactions, other events and conditions on the Group’s consolidated financial position
and financial performance;
■ Making an assessment of the Group’s ability to continue as a going concern.
Management is also responsible for:
■ Designing, implementing and maintaining an effective system of internal controls throughout the Group;
■ Maintaining adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose
with reasonable accuracy at any time the consolidated financial position of the Group, and which enable them to ensure
that the consolidated financial statements of the Group comply with IFRS;
■ Maintaining statutory accounting records in compliance with local legislation and accounting standards;
■ 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 of the Group for the year ended 31 December 2016 were approved by Management
on 1 March 2017.
On behalf of the Management:
Sergey Mikhailov
Chief Executive Officer
Ludmila Mikhailova
Chief Financial Officer
Independent Auditor’s Report
(To the Board of Directors and Shareholders of PJSC Cherkizovo Group)
OPINION
We have audited the consolidated financial statements of PJSC Cherkizovo Group (the “Company”) and its subsidiaries
(collectively – the “Group”), which comprise the consolidated statement of financial position as at 31 December 2016, and
the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and
consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including
a summary of significant accounting policies.
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial
position of the Group as at 31 December 2016, and its consolidated financial performance and its consolidated cash flows for
the year then ended in accordance with International Financial Reporting Standards (“IFRSs”).
BASIS FOR OPINION
We conducted our audit in accordance with International Standards on Auditing (“ISAs”). Our responsibilities under those
standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section
of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’
Code of Ethics for Professional Accountants (the “IESBA Code”) together with the ethical requirements that are relevant to our
audit of the consolidated financial statements in the Russian Federation, and we have fulfilled our other ethical responsibilities in
accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis for our opinion.
KEY AUDIT MATTERS
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated
financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Why the matter was determined a key audit matter
How the matter was addressed in the audit
RECOVERABILITY OF GOVERNMENT SUBSIDIES
At 31 December 2016 the amount of subsidies receivable for
interest expense reimbursement was RUB 1,104,972 thousand
(2015: RUB 1,417,074 thousand).
In the fourth quarter of 2016 the Group changed the estimate
regarding the timing of subsidy recognition which resulted in
the write-off of the full balance of subsidies receivable accrued
on qualifying loans that were not confirmed for subsidizing by
the regional bodies of the Ministry of agriculture of the Russian
Federation (RUB 1,285,474 thousand).
Further details are provided in Notes 4 and 21 to
the consolidated financial statements.
We focused on this area as a key audit matter because
the management of the Group had to apply significant
judgement in assessing the recoverability of the subsidies
receivable balance.
For subsidies receivable we performed the following audit
procedures to assess recoverability of the balance:
■ we verified the appropriateness of the change in
the accounting estimate by reference to the negative
changes in the macroeconomic environment, deviation from
the historical pattern of significant portion of subsidies being
collected in the fourth quarter of the year and a new policy
on subsidy assignment to agricultural producers announced
by the government in the fourth quarter of 2016 and effective
from 1 January 2017;
■ on a sample basis we verified that compliance criteria for
recognition of subsidies were met;
■ on a sample basis we verified that the Group received
proofs of subsidizing from the regional bodies of the Ministry
of agriculture of the Russian Federation;
■ we analytically recalculated the subsidies accrual for
2016 and checked the accuracy of the subsidy rates and
calculation of the subsidized shares of the borrowed funds;
■ we analysed the subsidies receivable balance by regions of
the Russian Federation to identify abnormal concentration,
which may indicate potential recoverability issues for
subsidies from that particular region.
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FINANCIAL STATEMENTS
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Independent Auditor’s Report (continued)
(To the Board of Directors and Shareholders of PJSC Cherkizovo Group)
Why the matter was determined a key audit matter
How the matter was addressed in the audit
OTHER INFORMATION
VALUATION OF BIOLOGICAL ASSETS
At 31 December 2016 the carrying values of current and
non-current biological assets were RUB 10,712,481 thousand
and RUB 1,926,714 thousand respectively (2015: RUB 9,829,675
thousand and RUB 1,597,495 thousand).
Biological assets are stated at fair value less estimated
costs to sell. The Group recognized a fair value adjustment
of RUB 3,877,070 thousand at 31 December 2016
(2015: RUB 3,303,761 thousand).
Further details are provided in Notes 4 and 15 to
the consolidated financial statements.
We focused on this area as a key audit matter because
the assessment of the fair value using valuation techniques
involves complex and significant judgements about future
poultry and pork prices and other assumptions, involving
additional uncertainty due to the current volatility of poultry
and pork prices in the market.
We performed audit procedures on all valuation models
relating to material types of biological assets.
Our audit procedures included verification of management’s
assumptions used in the models.
The assumptions to which the models were most sensitive
and most likely to lead to material mistakes in valuation were:
■
future selling prices and
■ projected cost per head/ kg.
We challenged management’s assumptions in the models with
reference to historical data and, where applicable, external
benchmarks, noting that the assumptions used fell within an
acceptable independently determined range. We compared
the current performance up to the date of the audit report with
the forecasts to ensure no significant changes had occurred
after the testing had been performed.
We tested the accuracy of the models with the assistance
of our own specialists and carried out audit procedures on
management’s sensitivity calculations.
We tested the appropriateness of the related disclosures
provided in the consolidated financial statements. In particular,
we focused on the disclosure of key unobservable inputs
and the related sensitivity analysis.
RELATED PARTY TRANSACTIONS
As described in Note 29 “Related Parties” to the consolidated
financial statements, the Group enters into various significant
transactions with related parties. The transactions include sales
and purchases of inventories, provision of services, and sales
and purchases of property, plant and equipment.
The transactions with related parties exceeding certain criteria
are approved by the Board of Directors.
We consider the transactions with related parties to be a key
audit matter because the Audit Committee regularly discusses
transactions with related parties and the terms on which these
transactions have been conducted, in addition to the regulatory,
investors’ and management’s interest in this area, especially in
determining appropriate pricing for such transactions.
Our audit procedures included obtaining an understanding of
key controls around the process of approval and authorization
of related party transactions.
Our substantive audit procedures included testing, on a sample
basis, the transactions with related parties by reviewing
supporting documentation.
We also challenged management’s conclusion that
the transactions were done on an arm’s length basis by
means of reviewing a sample of agreements and comparing
the related party transactions prices to those quoted by
comparable companies and market data, where available.
We also checked the completeness and accuracy of
the related parties disclosure by reference to the audited data.
Management is responsible for the other information. The other information comprises the information included in the Annual report,
but does not include the consolidated financial statements and our auditor’s report thereon. The Annual report is expected to be
made available to us after the date of this auditor’s report.
Our opinion on the consolidated financial statements does not cover the other information and we will not express any form
of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified
above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with
the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.
When we read the Annual report, if we conclude that there is a material misstatement therein, we are required to communicate
the matter to those charged with governance.
RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED
FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with
International Financial Reporting Standards (“IFRSs”), and for such internal control as management determines is necessary to
enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as
a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting
unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group’s financial reporting process.
AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect
a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or
in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these
consolidated financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout
the audit. We also:
■
identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate
to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one
resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal
control;
■ obtain an understanding of internal control relevant to the audit in order to design 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;
■ evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related
disclosures made by management;
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Annual Report 2016 CHERKIZOVO GROUP 81
FINANCIAL STATEMENTS
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Independent Auditor’s Report (continued)
(To the Board of Directors and Shareholders of PJSC Cherkizovo Group)
■ conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on
the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw
attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s
report. However, future events or conditions may cause the Group to cease to continue as a going concern;
■ evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and
whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair
presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit
and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements
regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear
on our independence, and where applicable, related safeguards.
From the matters communicated to those charged with governance, we determine those matters that were of most significance
in the audit of the consolidated financial statements of the current period, which constitute the key audit matters included herein.
1 March 2017
Moscow, Russian Federation
Rinat Khasanov, Director
(license no. 03-000790)
ZAO Deloitte & Touche CIS
The Entity; PJSC Cherkizovo Group
Audit Firm: ZAO “Deloitte&Touche CIS”
Primary State Registration Number:
1057748318473
Certificate of registration in the United State
Register № 1057748318473 of 22.09.2005,
issued bu Moscow Interdistrict Inspectorate
of Russian Ministry of Taxation №46.
Adress: 5B, Lesnaya street, Moscow, Russian
Federation, 125047
Certificate of state registration № 018.482,
issued by the Moscow Registration Chamber
on 30.10.1992.
Primary State Registration Number:
1027700425444
Certificate of Registration in the United State
Register № 77 004840299 of 13.11.2002,
issued by Moscow Interdistrict Inspectorate
of Russian Ministry of Taxation №39.
Member of Self-regulated organization
of auditors “Russian Union of auditors”
(Association), ORNZ 11603080484.
.
Consolidated statement of profit or loss and other
comprehensive income
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
Revenue
Net change in fair value of biological assets and agricultural produce
Cost of sales
Gross profit
Selling, general and administrative expenses
Other operating income, net
Share of loss of a joint venture
Operating profit
Interest income
Interest expense, net
Other income (expenses), net
Profit before income tax
Income tax (expense) benefit
Profit for the year and total comprehensive income
Profit and total comprehensive income attributable to:
Cherkizovo Group
Non-controlling interests
Earnings per share
Weighted average number of shares outstanding – basic and diluted:
Net income attributable to Cherkizovo Group per share – basic and diluted
(in Russian roubles):
Notes
2016
2015
5
15
6
7
16
8
9
10
82,417,193
77,032,622
(340,063)
(1,163,727)
(64,222,344)
(56,720,216)
17,854,786
19,148,679
(13,008,713)
(11,947,142)
410,591
(200,191)
332,489
-
5,056,473
7,534,026
343,737
285,762
(3,738,315)
(1,364,766)
298,484
(583,273)
1,960,379
5,871,749
(72,861)
149,060
1,887,518
6,020,809
1,919,227
(31,709)
6,007,482
13,327
43,855,590
43,855,590
43.76
136.98
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Annual Report 2016 CHERKIZOVO GROUP 83
FINANCIAL STATEMENTS
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Consolidated statement of financial position
(As at 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
Notes
31 December
2016
31 December
2015
Notes
31 December
2016
31 December
2015
ASSETS
Non-current assets:
Property, plant and equipment
Investment property
Goodwill
Intangible assets
Non-current biological assets
Notes receivable, net
Investments in joint venture
Long-term deposits in banks
Deferred tax assets
Other non-current assets
Total non-current assets
Current assets:
Biological assets
Inventories
Taxes recoverable and prepaid
Trade receivables, net
Advances paid, net
Other receivables, net
Cash and cash equivalents
Other current assets
Total current assets
TOTAL ASSETS
11
12
13
14
15
16
17
10
15
18
19
20
21
22
23
64,445,256
60,436,029
443,676
557,191
432,771
557,191
1,949,663
1,603,903
1,926,714
510,000
2,061,472
641,365
479,624
508,140
1,617,833
300,000
1,301,663
641,365
331,300
430,811
73,523,101
67,652,866
10,712,481
9,829,675
10,602,118
12,258,555
1,904,786
4,942,884
1,721,691
1,393,473
1,002,203
534,838
2,835,987
4,444,991
2,733,842
1,782,019
5,560,824
612,566
32,814,474
40,058,459
106,337,575
107,711,325
EQUITY AND LIABILITIES
Equity:
Share capital
Treasury shares
Additional paid-in capital
Retained earnings
Total shareholder’s equity
Non-controlling interest
Total equity
Non-current liabilities:
Long-term borrowings
Provisions
Deferred tax liability
Other liabilities
Total non-current liabilities
Current liabilities:
Short-term borrowings
Trade payables
Advances received
Payables for non-current assets
Tax related liabilities
Payroll related liabilities
Other payables and accruals
Total current liabilities
Total liabilities
TOTAL EQUITY AND LIABILITIES
24
24
24
25
26
10
440
(78,033)
440
(78,033)
5,588,320
5,588,320
47,503,411
46,582,955
53,014,138
52,093,682
1,026,280
1,055,392
54,040,418
53,149,074
24,469,704
16,118,747
58,131
420,299
14,379
67,131
405,097
96,185
24,962,513
16,687,160
26
14,122,997
25,093,017
8,608,271
8,461,657
27
562,584
1,061,629
849,400
1,394,940
734,823
443,018
1,445,128
790,344
1,372,176
269,751
27,334,644
37,875,091
52,297,157
54,562,251
106,337,575
107,711,325
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Annual Report 2016 CHERKIZOVO GROUP 85
FINANCIAL STATEMENTS
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Consolidated statement of changes in equity
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
Share capital
Treasury
shares
Balances at 1 January 2015
Profit for the year and total comprehensive income
Acquisition of non-controlling interests
Dividends
Amount
Number of shares
440
-
-
-
43,963,773
-
-
-
Amount
(78,033)
-
-
-
Number of shares
Additional
paid-in capital
Retained earnings
Total
shareholder’s
equity
Non-controlling
interests
(108,183)
5,591,204
43,968,239
-
6,007,482
(2,884)
-
49,481,850
6,007,482
(2,884)
-
(3,392,766)
(3,392,766)
1,057,073
13,327
(15,008)
-
-
-
-
Balances at 31 December 2015
440
43,963,773
(78,033)
(108,183)
5,588,320
46,582,955
52,093,682
1,055,392
Profit for the year and total comprehensive income
Additional non-controlling interests arising on set up of new
subsidiaries
Dividends
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,919,227
1,919,227
-
-
(31,709)
2,597
(998,771)
(998,771)
-
(998,771)
Balances at 31 December 2016
440
43,963,773
(78,033)
(108,183)
5,588,320
47,503,411
53,014,138
1,026,280
54,040,418
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Annual Report 2016 CHERKIZOVO GROUP 87
Total equity
50,538,923
6,020,809
(17,892)
(3,392,766)
53,149,074
1,887,518
2,597
FINANCIAL STATEMENTS
Consolidated statement of cash flows
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
CASH FLOWS FROM OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
2016
2015
2016
2015
Profit before income tax
Adjustments for:
Depreciation and amortization
Bad debt expense
Foreign exchange (gain) loss, net
Interest income
Interest expense, net
Net change in fair value of biological assets and agricultural produce
Gain on disposal of property, plant and equipment, net
Gain on disposal of non-current biological assets, net
Write-off of receivables from insurance company
Share of loss of a joint venture
Other adjustments, net
Operating cash flows before working capital and other changes
Decrease (increase) in inventories
Increase in biological assets
Increase in trade receivables
Decrease (increase) in advances paid
Decrease (increase) in other receivables and other current assets
Increase in other non-current assets
Increase in trade payables
Increase in tax related liabilities (other than income tax)
Increase (decrease) in other current payables
Operating cash flows before interest and income tax
Interest received
Interest paid
Government grants for compensation of interest expense received
Income tax paid
Net cash from operating activities
1,960,379
5,871,749
Purchase of property, plant and equipment
(8,569,640)
(9,415,480)
4,660,365
3,826,525
Purchase of intangible assets
Purchase of non-current biological assets
231,981
(621,087)
(343,737)
3,738,315
340,063
(8,054)
32,062
646,802
(285,762)
1,364,766
1,163,727
(49,793)
Proceeds from sale of property, plant and equipment
Proceeds from disposal of non-current biological assets
Investments in joint venture
Placing of deposits and issuance of short-term loans
Placing of notes receivable
Repayment of short-term loans issued and redemption of deposits
(1,110,778)
(555,633)
34,013
755,422
(960,000)
-
(210,000)
6,273
(432,481)
(273,343)
220,832
537,051
(450,000)
(156,855)
(300,000)
183,895
(402,456)
(282,827)
Net cash used in investing activities
(10,610,343)
(10,086,381)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term loans
Repayment of long-term loans
Proceeds from short-term loans
Repayment of short-term loans
Dividends paid
Disposal (acquisition) of non-controlling interests
Net cash (used in) generated from financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
11,862,021
(5,363,445)
9,218,443
(5,110,160)
21,834,999
21,686,431
(30,652,746)
(12,736,663)
(998,771)
(3,392,766)
1,127
(17,892)
(3,316,815)
9,647,393
(4,558,621)
4,553,270
5,560,824
1,007,554
1,002,203
5,560,824
347,975
200,191
(28,059)
-
-
(108,612)
10,075,876
12,178,637
770,364
(4,648,048)
(202,031)
(477,366)
796,090
947,249
(70,105)
675,348
41,155
142,585
(1,586,899)
(466,088)
(522,982)
(1,450,027)
(28,022)
3,607,415
17,693
(651,507)
12,699,165
6,450,172
255,850
219,758
(4,895,763)
(3,530,632)
1,433,471
(124,186)
2,019,481
(166,521)
9,368,537
4,992,258
88 CHERKIZOVO GROUP Annual Report 2016
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ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
1. NATURE OF THE BUSINESS
General information
PJSC Cherkizovo Group (the “Company”) is a public joint stock company incorporated in Russia. The registered office
of the Company is 5, Lesnaya st., building B, Moscow, 125047, Russia.
The Company’s parent is MB Capital Europe Ltd., which is registered in Cyprus and owned approximately 61% of the Company’s
shares at 31 December 2016 and 2015. The ultimate controlling party of PJSC Cherkizovo Group is Babaev / Mikhailov family who
jointly control MB Capital Europe Ltd.
At 31 December 2016 and 2015 the Group included the following principal companies:
Name of company
Legal form
Nature of business
% 31.12.2016 % 31.12.2015
OJSC Cherkizovsky Meat
Processing Plant (JSC CMPP)
Open Joint Stock Company
Meat processing plant
LLC PKO Otechestvennyi Product
Limited Liability Company
Meat processing plant
JSC Cherkizovo-Kashira
Joint Stock Company
Meat processing plant
LLC TPC Cherkizovo
Limited Liability Company
Procurement company
CJSC Petelinskaya
OJSC Vasiljevskaya
Closed Joint Stock Company
Raising poultry
Open Joint Stock Company
Raising poultry
OJSC Kurinoe Tsarstvo
Open Joint Stock Company
Raising poultry
CJSC Kurinoe Tsarstvo Bryansk
Closed Joint Stock Company
Raising poultry
CJSC Mosselprom
LLC Lisko Broiler
Closed Joint Stock Company
Raising poultry
Limited Liability Company
Raising poultry
LLC Petelino Trade House
Limited Liability Company
Trading company:
distribution of poultry
CJSC Botovo
Closed Joint Stock Company
Pig breeding
LLC Cherkizovo-Pork*
Limited Liability Company
Pig breeding
LLC Kuznetsovsky Kombinat
Limited Liability Company
Pig breeding
LLC Cherkizovo-Grain Production
Limited Liability Company
Grain crops cultivation
95%
95%
95%
95%
88%
100%
100%
100%
100%
100%
88%
76%
100%
100%
100%
95%
95%
95%
95%
88%
100%
100%
100%
100%
100%
88%
76%
100%
100%
100%
* In December 2015, 7 companies of pork segment: LLC Lipetskmyaso, LLC RAO Penzenskaya Grain Company (PZK), LLC Orelselprom, LLC Resurs,
LLC Agroresurs-Voronezh, LLC TD Myasnoe Tsarstvo and LLC Tambovmyasoprom were merged into LLC Cherkizovo-Pork. Subsequently in November
and December 2016 LLC Cherkizovo-Feed Production and LLC Voronezhmyasoprom were also merged into LLC Cherkizovo-Pork.
The business of the Group
The Group’s operations are spread over the full production cycle from grain and feed production and breeding to meat processing
and distribution. The operational facilities of the Group include six meat processing plants, fifteen pig production complexes, eight
poultry production complexes, six combined fodder production plants and four grain farming complexes and a swine nucleus unit.
The Group also operates three trading houses with subsidiaries in several major Russian cities.
The Group’s geographical reach covers Moscow, the Moscow region, the regions of Saint Petersburg, Kaliningrad, Penza, Lipetsk,
Vologda, Ulyanovsk, Chelyabinsk, Tambov, Krasnodar, Ekaterinburg, Rostov-na-Donu, Briansk, Voronezh, Belgorod, Kursk, Orel and
Kazan. The Group is represented in the European part of Russia through its own distribution network.
Operating environment
Emerging markets such as Russia are subject to different risks than more developed markets, including economic, political and
social, and legal and legislative risks. Laws and regulations affecting businesses in Russia continue to change rapidly; tax and
regulatory frameworks are subject to varying interpretations. The future economic direction of Russia is heavily influenced by
the fiscal and monetary policies adopted by the government, together with developments in the legal, regulatory, and political
environment.
Because Russia produces and exports large volumes of oil and gas, its economy is particularly sensitive to the price of oil and gas
on the world market.
Starting from 2014, sanctions have been imposed in several packages by the U.S. and the E.U. on certain Russian officials,
businessmen and companies. This led to reduced access of the Russian businesses to international capital markets.
The above mentioned events have led to reduced access of the Russian businesses to international capital markets, increased
inflation, slackening of the economic growth rates and other negative economic consequences. The impact of further economic
developments on future operations and financial position of the Group is difficult to determine at this stage.
2. SIGNIFICANT ACCOUNTING POLICIES
Statement of compliance
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards
(“IFRSs”).
Basis of preparation
The entities of the Group maintain their accounting records in accordance with laws, accounting and reporting regulations of
the jurisdictions in which they are incorporated and registered. Accounting policies and financial reporting procedures in these
jurisdictions may differ substantially from those generally accepted under IFRS. Accordingly, the consolidated financial statements,
which have been prepared from the Group’s statutory basis accounting records, reflect adjustments necessary for such financial
statements to be presented in accordance with IFRS.
The consolidated financial statements have been prepared under the historical cost convention, except for biological assets
measured at fair value less estimated point-of-sale costs; and assets and liabilities of subsidiaries acquired and recorded in
accordance with IFRS 3 “Business combinations” (“IFRS 3”).
Historical cost is generally based on the fair value of the consideration given in exchange for goods and services.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation
technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability
if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair
value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except
for leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but are not fair
value, such as net realizable value in IAS 2 or value in use in IAS 36.
In addition, for financial reporting purposes, fair value measurements are categorized into Level 1, 2 or 3 based on the degree
to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement
in its entirety, which are described as follows:
■ Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access
at the measurement date;
■ Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either
The Group owns locally recognised brands, which include Cherkizovo (“Черкизово”), Pyat Zvezd (“Пять Звезд”), Petelinka
(“Петелинка”), Kurinoe Tsarstvo (“Куриное Царство”) and Imperia Vkusa (“Империя вкуса”) and has a diverse customer base.
directly or indirectly;
■ Level 3 inputs are unobservable inputs for the asset or liability.
At 31 December 2016 and 2015 the number of staff employed by the Group approximated 22,775 and 21,690, respectively.
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FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
Functional and presentation currency
The functional currency of the Company, and each of its subsidiaries, is the Russian rouble. These consolidated financial statements
are also presented in Russian roubles which is the presentation currency used by the Group.
Foreign currency transactions
In preparing the financial statements of each individual group entity, transactions in currencies other than the entity’s functional
currency (foreign currencies) are recognised at the rates of exchange prevailing at the dates of the transactions. At the end of each
reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-
monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
Exchange differences on monetary items are recognised in profit or loss in the period in which they arise.
Going concern
These consolidated financial statements have been prepared on the assumption that the Group will continue as a going concern
in the foreseeable future, which implies the realization of assets and settlement of liabilities in the normal course of business.
The Group continues to monitor its existing liquidity needs on an on-going basis. Management believes that the Group will have
sufficient operating cash flows and borrowing capacity to continue as a going concern in the foreseeable future.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company
(its subsidiaries).
Control is achieved when the Company:
■ Has power over the investee;
■
Is exposed, or has rights, to variable returns from its involvement with the investee;
■ Has the ability to use its power to affect its returns.
The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one
or more of the three elements of control listed above.
When the Company has less than a majority of the voting rights of an investee, it has power over the investee when the voting
rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers
all relevant facts and circumstances in assessing whether or not the Company’s voting rights in an investee are sufficient to give it
power, including:
■ The size of the Company’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders;
■ Potential voting rights held by the Company, other vote holders or other parties;
■ Rights arising from other contractual arrangements;
■ Any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct
the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings.
Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses
control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included
in the consolidated statement of profit or loss and other comprehensive income from the date the Company gains control until
the date when the Company ceases to control the subsidiary.
Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-
controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-
controlling interests even if this results in the non-controlling interests having a deficit balance.
When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with
the Group’s accounting policies.
All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members
of the Group are eliminated in full on consolidation.
Business combinations (from third parties)
Acquisitions of businesses from third parties are accounted for using the acquisition method. The consideration transferred in
a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets
transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued
by the Group in exchange for control of the acquiree. Acquisition-related costs are recognized in profit or loss as incurred.
At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognized at their fair value
at the acquisition date, except for:
■ Deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognized and measured
in accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits respectively;
■ Liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment
arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured
in accordance with IFRS 2 Share-based Payment at the acquisition date; and
■ Assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations are measured in accordance with that Standard.
Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in
the acquiree, and the fair value of the acquirer’s previously held interest in the acquiree (if any) over the net of the acquisition-
date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date
amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount
of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any),
the excess is recognized immediately in profit and loss as a bargain purchase gain.
Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net
assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests’ proportionate share
of the recognised amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by-
transaction basis. Other types of non-controlling interests are measured at fair value or, when applicable, on the basis specified in
another IFRS.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs,
the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted
during the measurement period, or additional assets or liabilities are recognized, to reflect new information obtained about facts
and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognized as of that
date. The measurement period is the period from the date of acquisition to the date the Group obtains complete information about
facts and circumstances that existed as of the acquisition date – and is subject to a maximum of one year.
Acquisitions of entities under common control
Acquisitions of entities under common control are accounted for on the basis of predecessor carrying values, which results in
the historical book value of assets and liabilities of the acquired entity being combined with that of the Group. For common control
transactions the consolidated historical financial statements of the Group are retrospectively restated to reflect the effect of
the acquisition as if it occurred at the beginning of the earliest period presented. Consideration paid is reflected as a decrease
in additional paid in capital.
Goodwill
Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business (see
accounting policy on Business combinations (from third parties) above) less accumulated impairment losses, if any.
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CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
For the purposes of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (or groups of cash-
generating units) that is expected to benefit from the synergies of the combination.
A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is
an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount,
the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets
of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in
profit or loss. An impairment loss recognised for goodwill is not reversed in subsequent periods. On disposal of the relevant cash-
generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.
Investments in joint venture
A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets
of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when
decisions about the relevant activities require unanimous consent of the parties sharing control.
The Group reports its interests in joint venture using the equity method of accounting, whereby an investment in an associate or
a joint venture is initially recognised in the consolidated statement of financial position at cost and adjusted thereafter to recognise
the Group’s share of the profit or loss and other comprehensive income of the associate or joint venture. When the Group’s share
of losses of an associate or a joint venture exceeds the Group’s interest in that associate or joint venture (which includes any long-
term interests that, in substance, form part of the Group’s net investment in the associate or joint venture), the Group discontinues
recognising its share of further losses. Additional losses are recognised only to the extent that the Group has incurred legal or
constructive obligations or made payments on behalf of the associate or joint venture.
An investment in an associate or a joint venture is accounted for using the equity method from the date on which the investee
becomes an associate or a joint venture.
The requirements of IAS 39 are applied to determine whether it is necessary to recognise any impairment loss with respect to
the Group’s investment in an associate or a joint venture. When necessary, the entire carrying amount of the investment (including
goodwill) is tested for impairment in accordance with IAS 36 Impairment of Assets as a single asset by comparing its recoverable
amount (higher of value in use and fair value less costs to sell) with its carrying amount, Any impairment loss recognised forms part
of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with IAS 36 to the extent
that the recoverable amount of the investment subsequently increases.
When a group entity transacts with a joint venture of the Group, profits and losses resulting from the transactions with the joint
venture are recognised in the Group’s consolidated financial statements only to the extent of interests in the joint venture that are
not related to the Group.
Property, plant and equipment
Owned assets
Property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Land is not depreciated.
Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes
the cost of materials, direct labour, and any other costs directly attributable to bringing the asset to a working condition for its
intended use, and the costs of dismantling and removing the items and restoring the site in which they are located. Purchased
software that is integral to the functionality of the related equipment is capitalized as part of that equipment.
When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major
components) of property and equipment.
Gains and losses on disposal of an item of property, plant and equipment are recognized net in other income in profit or loss.
Repairs and maintenance
The cost of replacing part of an item of property, plant and equipment is recognized in the carrying amount of the item if it is
probable that future economic benefits embodied within the part will flow to the Group and its cost can be measured reliably.
The carrying amount of the replaced part is derecognized. The costs of day-to-day servicing of property, plant and equipment are
recognized in profit or loss as incurred.
Depreciation
Depreciation is recognized to write off the cost of assets (other than freehold land and properties under construction) less their
residual values over their useful lives, using the straight-line method. Leased assets are depreciated over the shorter of the lease
term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term.
The estimated useful lives for the current and comparative periods are as follows:
Land
Buildings, infrastructure and lease hold improvements
Machinery and equipment
Vehicles
Other
indefinite life
20-40 years
3-22 years
3-10 years
3-10 years
Depreciation methods, useful lives and residual values are reassessed at each reporting date, with the effect of any changes in
accounting estimate recognized on a prospective basis.
Investment property
Investment properties represent buildings and land held to earn rentals and/or for capital appreciation (including property under
construction for such purposes). Investment properties are measured at cost, including transaction costs, less accumulated
depreciation and impairment losses. Land is not depreciated.
Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives (10-40 years) of each building.
An investment property is derecognised upon disposal or when the investment property is permanently withdrawn from use and no
future economic benefits are expected from the disposal. Any gain or loss arising on derecognition of the property (calculated as
the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the period
in which the property is derecognised.
Intangible assets
Intangible assets represent acquired trademarks and computer software. All trademarks have been determined to have
an indefinite life.
Intangible assets with finite useful lives are carried at cost less accumulated amortisation and accumulated impairment losses.
Amortisation is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation
method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on
a prospective basis. Intangible assets with indefinite useful lives are carried at cost less accumulated impairment losses.
Impairment of tangible and intangible assets other than goodwill
The carrying amounts of the Group’s non-current assets are reviewed at each reporting date to determine whether there is any
indication that those assets have suffered an impairment loss. If any such indication exists, then the asset’s recoverable amount
is estimated. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment
at least annually, and whenever there is an indication that the asset may be impaired.
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FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that
reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future
cash flows have not been adjusted. For the purpose of impairment testing, assets are grouped together into the smallest group of
assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups
of assets (the “cash-generating unit”). The goodwill acquired in a business combination acquisition, for the purposes of impairment
testing, is allocated to cash-generating units that are expected to benefit from the synergies of the combination.
An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount.
Impairment losses are recognised immediately in profit or loss. Impairment losses recognized in respect of cash-generating units
are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount
of the other assets in the unit (group of units) on a pro rata basis.
When an impairment loss subsequently reverses, the carrying amount of the asset (or a cash-generating unit) is increased to
the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount
that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years.
a reversal of an impairment loss is recognised immediately in profit or loss.
Inventories
Inventories are measured at the lower of cost and net realizable value.
The cost of inventories is based on the weighted average principle and includes expenditure incurred in acquiring the inventories,
production or conversion costs and other costs included in bringing them to their existing location and condition. In the case of
manufactured inventories and work in progress cost includes an appropriate share of production overheads based on normal
operating capacity.
Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion
and selling expenses.
Biological assets and agricultural produce
Biological assets of the Group consist of livestock (pigs and poultry) and unharvested crops (grain crops and other plantations).
Based on the above policy, the principal groups of biological assets and agricultural produce are stated as follows:
Biological assets
1) Broilers
Broilers comprise poultry held for chicken meat production. The fair value of broilers is determined by reference to the cash
flows that will be obtained from sales of finished chickens, with an allowance for costs to be incurred and risks to be faced during
the remaining transformation process.
2) Breeders (laying hens and replacement flock)
Breeders comprise poultry held for regeneration of broilers. The fair value of breeders is determined by reference to the cash
flows that will be obtained from sales of hatchery eggs, with an allowance for costs to be incurred and risks to be faced during
the remaining productive period.
3) Market hogs
Market hogs comprise of pigs held for pork meat production. The fair value of broilers is determined by reference to the cash
flows that will be obtained from sales of finished pigs, with an allowance for costs to be incurred and risks to be faced during
the remaining transformation process.
4) Sows
Sows comprise pigs held for regeneration of market hogs population. The fair value of sows is determined by reference to the cash
flows that will be obtained from sales of weaned piglets, with an allowance for costs to be incurred and risks to be faced during
the remaining productive period.
5) Unharvested crops (wheat, corn, sunflower, barley, pea and others)
At the year-end unharvested crops are carried at the accumulated costs incurred, which approximate the fair value since little
biological transformation has taken place due to the seasonal nature of the crops. Subsequent to the year-end unharvested crops
in fields are measured at fair value, which is determined by reference to the cash flows that will be obtained from sales of harvested
crops, with an allowance for costs to be incurred at the point of sale and risks to be faced during the remaining transformation
process.
The Group recognizes a biological asset or agricultural produce when the Group controls the asset as a result of past events, it is
probable that future economic benefits associated with the asset will flow to the Group, and the fair value or cost of the asset can
be measured reliably.
Agricultural produce
1) Dressed poultry and pork
Biological assets are stated at fair value less estimated costs to sell at both initial recognition and as of the reporting date, with
any results recognized in profit or loss. Costs to sell include all costs that would be necessary to sell the assets, including costs
necessary to get the assets to market.
The difference between fair value less costs to sell and total production costs is allocated to biological assets held in stock as of
each reporting date as a fair value adjustment. The change in this adjustment from one period to another is recognized as “Net
change in fair value of biological assets and agricultural produce” in profit or loss.
Agricultural produce harvested from biological assets is recognised in inventory and measured at its fair value less costs to sell at
the point of harvest. a gain or loss arising on initial recognition of agricultural produce at fair value less costs to sell is recognized as
“Net change in fair value of biological assets and agricultural produce” in profit or loss and for items sold is presented on net basis
as a reduction of the line “Cost of sales”.
The fair value of dressed poultry and pork is determined by reference to market prices at the point of harvest.
2) Crops
The fair value of crops is determined by reference to market prices at the point of harvest.
The Group’s biological assets are classified into bearer and consumable biological assets depending upon the function of
a particular group of biological assets in the Group’s production process. Consumable biological assets are those that are to be
harvested as agricultural produce, and include broilers, market hogs and unharvested crops. Bearer biological assets include
poultry breeders and sows.
Revenue recognition
The Group derives its revenue from four main sources: sale of processed meat, poultry, pork and grain crops. Revenue is
recognised when the products are shipped or when goods are received by its customer, title and risk of ownership has passed,
the price to the buyer is fixed or determinable and recoverability is reasonably assured.
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FINANCIAL STATEMENTS
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
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 recognized upon acceptance by customer.
Sales are recognised at the fair value of the consideration received or receivable, net of VAT, discounts and returns. 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 are offered in the meat processing segment and in the poultry segment. The discounts are graduated
to increase when actual sales exceed target sales.
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 in the period to which sales relate.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that
necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until
such time as the assets are substantially ready for their intended use or sale.
All other borrowing costs are recognized in profit or loss in the period in which they are incurred.
Government grants
In accordance with Russian legislation, enterprises engaged in agricultural activities receive certain government grants. Government
grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and
that the grants will be received.
The largest of such government grants relate to reimbursement of interest expense on qualifying loans (“interest subsidies”).
The Group records interest subsidies as an offset to interest expense during the period to which they relate.
The Group also receives government grants based on square of cultivated land and volumes of meat or eggs produced and fodder
purchased. These grants are less systematic and therefore in general the Group recognizes them only when receives the grant or
it is highly probable that the grant will be received. These grants are recorded as reductions to cost of sales during the period to
which they relate.
In addition to that, from time to time the Group receives government grants for compensation of certain capital expenditures. These
grants are non-systematic and therefore the Group recognizes them only when receives the grant. These grants are recorded as
reductions to costs capitalized during the period to which they relate.
Employee benefits
Remuneration to employees in respect of services rendered during the reporting period is recognized as an expense in that
reporting period. The Group does not have any material long-term employee benefits.
The Group contributes to the State Pension Fund of the Russian Federation. The only obligation of the Group with respect to these
defined contribution plans is to make the specified contributions in the period in which they arise. These contributions to the State
Pension Fund of the Russian Federation are recognized in the consolidated statement of profit or loss and other comprehensive
income when employees have rendered services entitling them to the contribution. The Group does not maintain any supplemental
post-retirement benefit plans for its employees.
Taxation
Income tax expense represents the sum of the tax currently payable and deferred tax.
Current tax
The tax currently payable is based on taxable profit for the year. Taxable profit differs from ‘profit before tax’ as reported in
the consolidated statement of profit or loss and other comprehensive income because of items of income or expense that are
taxable or deductible in other years and items that are never taxable or deductible. The Group’s current tax is calculated using tax
rates that have been enacted or substantively enacted by the end of the reporting period.
Deferred tax
Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the consolidated
financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally
recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary
differences to the extent that it is probable that taxable profits will be available against which those deductible temporary
differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from
the initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither the taxable
profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and
interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable
that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary
differences associated with such investments and interests are only recognised to the extent that it is probable that there will be
sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in
the foreseeable future.
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no
longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Leases
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 lease liability. 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 (see Borrowing cost above).
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.
Provisions
A provision is recognized if, as a result of a past event, the Group has a present legal or constructive obligation that can be
estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. The amount
recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of
the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured
using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows (when
the effect of the time value of money is material).
Share capital
Ordinary shares are classified as equity and are recorded at the par value of proceeds received. Where shares are issued above
par value, the proceeds in excess of par value are recorded in additional paid-in capital, net of direct issue costs.
Treasury shares
Where the Company or its subsidiaries purchase the Company’s equity instruments, the consideration paid, including any directly
attributable incremental costs, net of income taxes, is deducted from equity attributable to the Company’s owners until the equity
instruments are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration
received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity
attributable to the Company’s owners.
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FINANCIAL STATEMENTS
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
Dividends
Dividends are recognized as a liability and deducted from equity at the reporting date only if they are declared before or on
the reporting date by the shareholders at a general meeting. Dividends are disclosed when they are proposed before the reporting
date or proposed or declared after the reporting date but before the consolidated financial statements are authorized for issue.
Financial instruments
Financial assets and financial liabilities are recognised when a group entity becomes a party to the contractual provisions
of the instruments.
Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to
the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value
through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate,
on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value
through profit or loss are recognised immediately in profit or loss.
Financial assets
Financial assets are classified into the following specified categories: financial assets ‘at fair value through profit or loss’ (FVTPL),
‘held-to-maturity’ investments, ‘available-for-sale’ (AFS) financial assets and ‘loans and receivables’. The classification depends on
the nature and purpose of the financial assets and is determined at the time of initial recognition. At the reporting dates, the Group
had only financial assets classified as ‘loans and receivables’.
Effective interest method
The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income
over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all
fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or
discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on
initial recognition.
Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active
market. Loans and receivables (including trade and other receivables, bank balances and cash) are measured at amortised cost
using the effective interest method, less any impairment.
Interest income is recognised by applying the effective interest rate, except for short-term receivables when the effect
of discounting is immaterial.
Impairment of financial assets
Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial
assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after
the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.
For financial assets carried at amortised cost, the amount of the impairment loss recognised is the difference between the asset’s
carrying amount and the present value of estimated future cash flows, discounted at the financial asset’s original effective
interest rate.
The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception
of trade receivables, where the carrying amount is reduced through the use of an allowance account. When a trade receivable
is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written
off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit
or loss.
For financial assets measured at amortised cost, if, in a subsequent period, the amount of the impairment loss decreases and
the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised
impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment
is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.
Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed
collectively in groups that share similar credit risk characteristics.
Derecognition of financial assets
The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or when it transfers
the financial asset and substantially all the risks and rewards of ownership of the asset to another party. On derecognition of
a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and
receivable and the cumulative gain or loss that had been recognised in other comprehensive income and accumulated in equity is
recognised in profit or loss.
Financial liabilities
Financial liabilities are classified as either financial liabilities ‘at FVTPL’ or ‘other financial liabilities’. At the reporting dates, the Group
had only financial liabilities classified as ‘other financial liabilities’.
Other financial liabilities
Other financial liabilities (including borrowings and trade and other payables) are initially recognised at fair value less transaction
costs. Subsequently they are measured at amortised cost using the effective interest method.
Derecognition of financial liabilities
The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire.
The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is
recognised in profit or loss.
3. NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS
IFRS and IFRIC interpretations adopted in the current year
The Group has adopted all IFRS and Interpretations that are relevant to its operations and effective for annual reporting periods
beginning on 1 January 2016. The adoption did not have a material impact on the Group’s consolidated financial statements.
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ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
IFRS and IFRIC interpretations in issue but not yet effective
At the date of authorization of these consolidated financial statements, the following standards and interpretations have been
published that are mandatory for the Group’s accounting periods beginning on or after 1 January 2016 or later periods and which
the entity has not early adopted:
Standards and Interpretations
IFRS 9 “Financial Instruments”
IFRS 15 “Revenue from Contracts with Customers”
IFRS 16 “Leases”
Amendments to IAS 7 – Disclosure Initiative
Amendments to IFRS 10 and IAS 28 – Sale or Contribution
of Assets between an Investor and its Associate or Joint Venture
Amendments to IAS 12 – Recognition of Deferred Tax Assets
for Unrealised Losses
Amendments to IFRS 2 – Classification and Measurement
of Share-based Payment Transactions
Amendments to IAS 40 – Transfers of Investment Property
IFRIC 22 Foreign Currency Transactions and Advance
Consideration
Annual Improvements to IFRSs 2014-2016 Cycle
IFRS 9 “Financial Instruments”
Effective for annual periods beginning on or after
1 January 2018
1 January 2018
1 January 2019
1 January 2017
Date to be determined by the IASB
1 January 2017
1 January 2018
1 January 2018
1 January 2018
1 January 2018
IFRS 9 issued in November 2009 introduced new requirements for the classification and measurement of financial assets.
IFRS 9 was subsequently amended in October 2010 to include requirements for the classification and measurement of financial
liabilities and for derecognition, and in November 2013 to include the new requirements for general hedge accounting. Another
revised version of IFRS 9 was issued in July 2014 mainly to include a) impairment requirements for financial assets and b) limited
amendments to the classification and measurement requirements by introducing a ‘fair value through other comprehensive income’
(FVTOCI) measurement category for certain simple debt instruments.
The key requirements of IFRS 9 are:
■ Classification and measurement of financial assets. All recognised financial assets that are within the scope of IAS 39
Financial Instruments: Recognition and Measurement are required to be subsequently measured at amortised cost or fair value.
Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and
that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally
measured at amortised cost at the end of subsequent accounting periods. Debt instruments that are held within a business
model whose objective is achieved both by collecting contractual cash flows and selling financial assets, and that have
contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest on the principal
amount outstanding, are generally measured at FVTOCI. All other debt investments and equity investments are measured at their
fair value at the end of subsequent accounting periods. In addition, under IFRS 9, entities may make an irrevocable election to
present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income,
with only dividend income generally recognised in profit or loss.
■ Classification and measurement of financial liabilities. With regard to the measurement of financial liabilities designated
as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability that is
attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of
the effects of changes in the liability’s credit risk in other comprehensive income would create or enlarge an accounting mismatch
in profit or loss. Changes in fair value attributable to a financial liability’s credit risk are not subsequently reclassified to profit or
loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as fair value through profit
or loss is presented in profit or loss.
■
Impairment. In relation to the impairment of financial assets, IFRS 9 requires an expected credit loss model, as opposed to an
incurred credit loss model under IAS 39. The expected credit loss model requires an entity to account for expected credit losses
and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. In
other words, it is no longer necessary for a credit event to have occurred before credit losses are recognised.
■ Hedge accounting. The new general hedge accounting requirements retain the three types of hedge accounting mechanisms
currently available in IAS 39. Under IFRS 9, greater flexibility has been introduced to the types of transactions eligible for
hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the types of risk
components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled
and replaced with the principle of an ‘economic relationship’. Retrospective assessment of hedge effectiveness is also no longer
required. Enhanced disclosure requirements about an entity’s risk management activities have also been introduced.
The standard is effective from 1 January 2018 with early application permitted. The impact of adoption of these standards and
interpretations in the preparation of the consolidated financial statements in future periods is currently being assessed by
management. Management expects to complete the assessment and disclose the impact of adoption in the consolidated financial
statements for the year ended 31 December 2017.
IFRS 15 Revenue from Contracts with Customers
In May 2014, IFRS 15 was issued which establishes a single comprehensive model for entities to use in accounting for revenue
arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue,
IAS 11 Construction Contracts and the related interpretations when it becomes effective.
The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and
services. Specifically, the standard provides a single, principles based five-step model to be applied to all contracts with customers.
The five steps in the model are as follows:
■
■
Identify the contract with the customer
Identify the performance obligations in the contract
■ Determine the transaction price
■ Allocate the transaction price to the performance obligations in the contracts
■ Recognise revenue when (or as) the entity satisfies a performance obligation.
Under IFRS 15, an entity recognises revenue when or as a performance obligation is satisfied, i.e. when ‘control’ of the goods or
services underlying the particular performance obligation is transferred to the customer. Far more prescriptive guidance has been
added in IFRS 15 to deal with specific scenarios. Furthermore, extensive disclosures are required by IFRS 15.
The impact of adoption of these standards and interpretations in the preparation of the consolidated financial statements in future
periods is currently being assessed by management. Management expects to complete the assessment and disclose the impact
of adoption in the consolidated financial statements for the year ended 31 December 2017.
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Annual Report 2016 CHERKIZOVO GROUP 103
FINANCIAL STATEMENTS
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
IFRS 16 Leases
IFRS 16 Leases brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating
and finance leases. Lessor accounting however remains largely unchanged and the distinction between operating and finance
leases is retained.
Under IFRS 16 a lessee recognises a right-of-use asset and the lease liability. The right-of-use asset is treated similarly to other non-
financial assets and depreciated accordingly and the liability accrues interest. The lease liability is initially measured at the present
value of the lease payments payable over the lease term, discounted at the rate implicit in the lease, or if that cannot be readily
determined, the lessee shall use their incremental borrowing rate.
As with IAS 17, lessors classify leases as operating of finance in nature. a lease is classified as a finance lease if it transfers
substantially all the risks and rewards incidental to ownership of an underlying asset. Otherwise, a lease is classified as an operating
lease. For finance leases a lessor recognises finance income over the lease term, based on a pattern reflecting a constant periodic
rate of return on the net investment. a lessor recognises operating lease payments as income on a straight-line basis or, if more
representative of the pattern in which benefit from use of the underlying asset is diminished, another systematic basis.
The management of the Group anticipates that the application of IFRS 16 in the future may have a significant impact on the amount
of assets and liabilities due to recognition of all leases for contracts where the Group is a lessee. However, it is not practicable
to provide a reasonable estimate of the effect of IFRS 16 until a detailed review has been completed. Management expects
to complete the assessment and disclose the impact of adoption in the consolidated financial statements for the year ended
31 December 2017.
Amendments to IFRS 10 and IAS 28 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
The amendments to IFRS 10 and IAS 28 deal with situations where there is a sale or contribution of assets between an investor and
its associate or joint venture. Specifically, the amendments state that gains or losses resulting from the loss of control of a subsidiary
that does not contain a business in a transaction with an associate or a joint venture that is accounted for using the equity method,
are recognised in the parent’s profit or loss only to the extent of the unrelated investors’ interests in that associate or joint venture.
Similarly, gains and losses resulting from the remeasurement of investments retained in any former subsidiary (that has become an
associate or a joint venture that is accounted for using the equity method) to fair value are recognised in the former parent’s profit or
loss only to the extent of the unrelated investors’ interests in the new associate or joint venture.
The effective date of the amendments has yet to be set by the IASB; however, earlier application of the amendments is permitted.
The impact of adoption of these amendments in the preparation of the consolidated financial statements in future periods is
currently being assessed by management.
Amendments to IAS 7 Disclosure Initiative
The amendments require an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities
arising from financing activities. The amendments apply prospectively for annual periods beginning on or after 1 January 2017 with
earlier application permitted. The management of the Group does not anticipate that the application of these amendments will have
a material impact on the Group’s consolidated financial statements.
Amendments to IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses
The amendments clarify the following:
■ Decreases below cost in the carrying amount of a fixed-rate debt instrument measured at fair value for which the tax base
remains at cost give rise to a deductible temporary difference, irrespective of whether the debt instrument’s holder expects
to recover the carrying amount of the debt instrument by sale or by use, or whether it is probable that the issuer will pay all
the contractual cash flows;
■ When an entity assesses whether taxable profits will be available against which it can utilise a deductible temporary difference,
and the tax law restricts the utilisation of losses to deduction against income of a specific type (e.g. capital losses can only be set
off against capital gains), an entity assesses a deductible temporary difference in combination with other deductible temporary
differences of that type, but separately from other types of deductible temporary differences;
■ The estimate of probable future taxable profit may include the recovery of some of an entity’s assets for more than their carrying
amount if there is sufficient evidence that it is probable that the entity will achieve this;
■
In evaluating whether sufficient future taxable profits are available, an entity should compare the deductible temporary
differences with future taxable profits excluding tax deductions resulting from the reversal of those deductible temporary
differences.
The amendments apply retrospectively for annual periods beginning on or after 1 January 2017 with earlier application permitted.
The impact of adoption of these amendments in the preparation of the consolidated financial statements in future periods is
currently being assessed by management.
IFRIC 22 Foreign Currency Transactions and Advance Consideration
The Interpretation clarifies that when an entity pays or receives consideration in advance in a foreign currency, the date of
the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or
income is the date of the advance consideration, i.e. when the prepayment or liability in respect of the income received in advance
was recognised. If there is more than one advance payment or receipt the date of the transaction for each payment of receipt of
advance consideration should be determined. The amendments apply to annual periods beginning on or after 1 January 2018 with
earlier application permitted. Entities may elect to apply amendments either retrospectively or prospectively. The management of
the Company does not anticipate that the application of this IFRIC will have a material impact on the Group’s consolidated financial
statements as the Group currently uses the approach prescribed in IFRIC 22.
Amendments to IAS 40 Transfers of Investment Property
The amendments are intended to clarify that an entity can only reclassify a property to/ from investment property when, and only
when, there is evidence that a change in the use of the property has occurred. The amendments emphasise that a change in
management’s intentions alone would not be enough to support a transfer of property. The standard has a list of circumstances
that evidence a change in use, which is perceived by some as being exhaustive, the amendments make it clear that they are only
examples. The amendments apply to annual periods beginning on or after 1 January 2018 with earlier application permitted. Entities
may elect to apply them either retrospectively (if it is possible without the use of hindsight) or prospectively. The management of
the Group does not anticipate that the application of these amendments will have a material impact on the Group’s consolidated
financial statements.
4. KEY SOURCES OF ESTIMATION UNCERTAINTY
Management has made a number of judgments, estimates and assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with IFRSs.
The estimates and associated assumptions are based on historical experience and other factors that are considered relevant.
Actual results may differ from those estimates. Additional information relating to contingencies and commitments is disclosed
in Note 30.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized
in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future
periods if the revision affects both current and future periods.
The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of
the reporting period, that may have a significant risk of causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year.
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Annual Report 2016 CHERKIZOVO GROUP 105
FINANCIAL STATEMENTS
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
Biological assets
Biological assets are recorded at fair values less costs to sell. Fair value of the Group’s biological assets was determined by using
valuation techniques, as there were no observable market prices near the reporting date for biological assets of the same physical
conditions. Fair value is determined using Level 3 of fair value hierarchy and the following key unobservable inputs:
Description
Fair value as at
31 December 2016
Valuation
technique
Broilers
2,243,036
Discounted cash
flows
Breeders held for
hatchery eggs
production
1,512,225
Discounted cash
flows
Sows
1,902,652
Discounted cash
flows
Market hogs
5,504,933
Discounted cash
flows
Unobservable inputs
Average weight of one
broiler – kg
Poultry meat price –
roubles
Projected production
costs – roubles per kg
Number of hatchery eggs
produced by one breeder
Hatchery egg price –
roubles
Projected production costs
of hatchery egg – roubles
Average number of piglets
produced by one sow
Market price of weaned
piglet – roubles
Discount rate
Average weight of one
market hog – kg
Pork meat price – roubles
per kg
Projected production
costs – roubles per kg
Crops yield – ton/Ha
Unharvested crops
(except for year-
end)
509,012
Discounted cash
flows
Selling price
Projected production costs
Value of
unobservable
inputs
Relationship
of unobservable inputs
to fair value
The higher the weight,
the higher the fair value
The higher the price,
the higher the fair value
The higher the costs,
the lower the fair value
The higher the number,
the higher the fair value
The higher the price,
the higher the fair value
The higher the costs,
the lower the fair value
The higher the number,
the higher the fair value
The higher the price,
the higher the fair value
The higher the discount
rate, the lower the fair
value
The higher the weight,
the higher the fair value
The higher the price,
the higher the fair value
The higher the costs,
the lower the fair value
The higher the yield,
the higher the fair value
The higher the price,
the higher the fair value
The higher the costs,
the lower the fair value
2.2
97.3
71.3
161
13.4
7.1
26.8
1,631
13.8%
118.2
86.0
63.0
Not
applicable
for year-
end
Not
applicable
for year-
end
Not
applicable
for year-
end
Among the unobservable inputs stated above, there are several key assumptions that the Group estimates to determine the fair
values of biological assets:
■ Expected crops yield (except for year-end);
■ Expected selling prices;
■ Projected production costs and costs to sell;
■ Discount rate.
Although some of these assumptions are obtained from published market data, a majority of these assumptions are estimated
based on the Group’s historical and projected results.
Should key assumptions used in determination of fair value of biological assets have been 10% higher or lower with all other
variables held constant, the fair value of biological assets at the reporting date would be higher or (lower) by the following amounts:
Expected selling prices
Projected production costs and costs
to sell
Discount rate
31 December 2016
10% increase
10% decrease
1,874,732
(1,202,920)
(42,455)
(1,794,247)
1,123,164
43,243
Recognition of subsidies receivable
The Group recognizes government grants when there is reasonable assurance that the Group will comply with the conditions
attaching to them and that the grants will be received. Historically, the Group recognized government grants related to
reimbursement of interest expense (“interest subsidies”) when management verified that the loan agreement qualify for subsidizing,
because the historical experience showed that this is the point of time when the recoverability of the subsidy became probable.
Following stagnation of the economic growth rates and significant budget deficit in Russia in 2015 and 2016 the government slowed
down subsidy payments in 2016 and in the fourth quarter 2016 announced a new policy on subsidy assignment to agricultural
producers - starting from 1 January 2017 accredited banks will provide loans to agricultural producers at reduced rates not
exceeding 5% per annum on RUR-denominated loans. The government will then provide a subsidy to the banks compensating
the difference between market and factual rates.
Considering the negative change in the environment as well as increase in uncertainty regarding collectability of subsidies accrued
under the previous policy, management reassessed the timing of the interest subsidy recognition and determined that only
subsidies on qualifying loans that are confirmed by Ministry of agriculture shall be recognized. Typically, the Group considers that
confirmation is received only when a portion of the subsidy relating to a qualifying loan is collected. The change in estimate resulted
in decrease of subsidies receivable balance and increase in interest expense for the year ended 31 December 2016 for 1,285,474
(interest expense subsidies offset the related interest expense).
The remaining balance of subsidies receivable at 31 December 2016 consists of only subsidies on qualifying loans that are
confirmed by Ministry of agriculture, however, there is still uncertainty regarding recoverability of these receivables. Management
believes that it is probable that the balance will be collected based on its interpretations of current legislation. However, the relevant
authorities may have differing interpretations, and the effects could be significant.
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ABOUT COMPANY
STRATEGIC REPORT
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CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
Useful lives of property, plant and equipment
The Group assesses the remaining useful lives of items of property, plant and equipment at least at each financial year-end. If
expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate in accordance
with IAS 8 “Accounting policies, changes in accounting estimates and errors”. These estimates may have a material impact on
the amount of the carrying values of property, plant and equipment and on depreciation expense for the period. There have
been no significant changes in estimates of useful lives of property, plant and equipment during the periods included in these
consolidated financial statements.
Impairment of trademarks
All trademarks owned by the Group have been determined to have an indefinite life because the patent securing the Group’s title
can be renewed an unlimited number of times and therefore are tested for impairment annually, or more frequently when there is an
indication that they may be impaired. Determining whether a trademark is impaired requires an estimation of the recoverable value
of the asset, being higher of fair value of value in use. Fair value, which is determined using a relief from royalty method based on
expected sales by trademark. This approach requires the management to estimate the future sales by trademark, royalty rate and
a suitable discount rate in order to calculate present value. Where the actual future cash flows are less than expected, a material
impairment loss may arise. Where the recoverable amount determined on a fair value basis indicates impairment, the Group must
also compute a value in use in order to determine if the asset is impaired. The carrying amount of trademarks at 31 December 2016
was 1,215,509 (31 December 2015: 1,215,509). No impairment loss was recognised during 2016 and 2015. Details are set out in
Note 14.
Impairment of property, plant and equipment
The Group reviews at each reporting date the carrying amounts of property, plant and equipment to determine whether there
is any indication that assets are impaired. This process involves judgment in evaluating the cause for any possible reduction in
value, including a number of factors such as changes in current competitive conditions, expectations of growth in the industry,
increased cost of capital, changes in the future availability of financing, technological obsolescence, discontinuance of service,
current replacement costs and other changes in circumstances that indicate impairment exists. Whenever such indications exist,
management makes an estimate of the asset’s recoverable amount to ensure that it is not less than its carrying value. If the asset’s
fair value is not readily determinable or is less than asset’s carrying value plus costs to sell, management necessarily applies
its judgment in determining the appropriate cash-generating unit to be evaluated, estimating the appropriate discount rate and
the timing and value of the relevant cash flows for the value in-use calculation.
Allowance for impairment of receivables and advances to suppliers
Management maintains an allowance for impairment of receivables and advances to suppliers in the form of an allowance account
equal to estimated losses resulting from the inability of customers and other debtors to make required payments. When evaluating
the adequacy of this allowance account, management bases its estimates on the ageing of accounts receivable balances and
historical write-off experience, customer creditworthiness and changes in customer payment patterns. If the financial condition of
customers were to deteriorate, actual write-offs might be higher than expected. As of 31 December 2016 and 2015 the allowance for
impairment of receivables was recognized in the amount of 59,480 and 77,840, respectively (see Notes 20, 21) and the allowance
of advances to suppliers was recognized in the amount of 81,608 and 113,686, respectively.
5. OPERATING SEGMENTS
The Group’s operations are divided into five segments by types of products produced: poultry, pork, meat processing, grain and
feed. Substantially all of the Group’s operations are located within the Russian Federation. All segments have different segment
managers responsible for the segments’ operations. The chief operating decision maker (the Chief Executive Officer) is individual
responsible for allocating resources to and assessing the performance of each segment 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. The pork and poultry segments produce and offer distinctive products, such as semi-finished poultry products, raw meat
and other poultry meat products in the poultry segment and raw pork meat in the pork segment. The grain segment is involved in
the farming of wheat and other crops. The feed segment is involved in the production of feed for internal use by pork and poultry
segments. All five segments are involved in other business activities, including production of dairy, sale of non-hatchery eggs and
other services, which are non-core business activities.
The Group evaluates segment performance based on Adjusted EBITDA. Adjusted EBITDA is defined as profit for the period before
income tax expense/benefit, interest income and interest expense, net, foreign exchange loss/gain, depreciation and amortisation
expense, net change in fair value of biological assets and agricultural produce, write-off of receivables from insurance company,
share of loss of a joint venture and loss on disposal of subsidiaries. This is the measure reported to the chief operating decision
maker for the purposes of resource allocation and assessment of segment performance. The Group accounts for inter-segment
sales and transfers as if the sales or transfers were to third parties. The accounting policies of the reportable segments are
the same as the Group’s accounting policies described in Note 2.
108 CHERKIZOVO GROUP Annual Report 2016
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ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
Segment information for the year ended at 31 December 2016 comprised:
Total sales
including other sales
including sales volume discounts
Intersegment sales
Sales to external customers
Net change in fair value of biological assets and agricultural
produce
Cost of sales
Gross profit / (loss)
Operating expense*
Operating income / (expense)
Other income (expense), net**
Interest expense, net
Profit / (loss) before income tax
Adjustments for:
Interest expense, net
Interest income
Foreign exchange loss (gain)
Depreciation and amortisation expense
Net change in fair value of biological assets and agricultural
produce
Write-off of receivables from insurance company
Share of loss of a joint venture
Adjusted EBITDA
Supplemental information:
Meat-processing
31,667,448
526,538
(4,545,908)
(22,795)
31,644,653
-
(26,141,947)
5,525,501
(3,743,466)
1,782,035
207,378
(245,885)
1,743,528
245,885
(9,561)
(192,501)
639,237
-
-
-
Pork
15,920,146
171,106
-
(12,634,006)
3,286,140
861,422
(12,182,666)
4,598,902
(782,107)
3,816,795
(289,198)
(964,742)
2,562,855
964,742
(33,764)
(22,285)
1,010,334
(861,422)
347,975
-
Poultry
47,724,031
1,331,875
(1,340,206)
(1,961,921)
45,762,110
(288,114)
(40,049,212)
7,386,705
(5,035,890)
2,350,815
(114,744)
(1,076,908)
1,159,163
1,076,908
(173,895)
304,147
1,969,279
288,114
-
-
Grain
3,055,762
47,426
-
(1,956,712)
1,099,050
(477,482)
(2,873,596)
(295,316)
(267,828)
(563,144)
4,885
(94,361)
(652,620)
94,361
(1,710)
(3,026)
295,430
477,482
-
-
Feed
Total operating
segments
28,727,843
127,095,230
-
-
(28,146,309)
581,534
-
2,076,945
(5,886,114)
(44,721,743)
82,373,487
95,826
(28,109,353)
(109,356,774)
618,490
(404,658)
213,832
319,704
(930,799)
(397,263)
930,799
(10,723)
(307,559)
590,646
-
-
-
17,834,282
(10,233,949)
7,600,333
128,025
(3,312,695)
4,415,663
3,312,695
(229,653)
(221,224)
4,504,926
(95,826)
347,975
-
Corporate
Intersegment
Total consolidated
126,251
126,251
-
(82,545)
43,706
-
(78,511)
47,740
(2,645,471)
(2,597,731)
820,560
(731,984)
(2,509,155)
731,984
(420,448)
(399,863)
155,439
-
-
200,191
(44,804,288)
(783,561)
-
44,804,288
-
(435,889)
45,212,941
(27,236)
81,107
53,871
(306,364)
306,364
53,871
(306,364)
306,364
-
-
435,889
-
-
82,417,193
1,419,635
(5,886,114)
-
82,417,193
(340,063)
(64,222,344)
17,854,786
(12,798,313)
5,056,473
642,221
(3,738,315)
1,960,379
3,738,315
(343,737)
(621,087)
4,660,365
340,063
347,975
200,191
2,426,588
3,968,435
4,623,716
209,917
805,900
12,034,556
(2,241,852)
489,760
10,282,464
Expenditure for segment property, plant and equipment
Income tax expense (benefit)
1,456,365
79,442
3,751,235
71,961
2,938,689
(67,967)
1,204,436
8,978
191,254
50,983
9,541,979
143,397
328,777
(70,536)
-
-
9,870,756
72,861
* Operating expenses include selling, general and administrative expense, other operating income, net and share of loss of a joint venture.
** Other income (expense), net presents interest income and other income/expense as a combined line item.
110 CHERKIZOVO GROUP Annual Report 2016
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ABOUT COMPANY
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CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
Segment information for the year ended at 31 December 2015 comprised:
Meat-processing
Pork
Poultry
Total sales
including other sales
including sales volume discounts
Intersegment sales
Sales to external customers
Net change in fair value of biological assets and agricultural
produce
Cost of sales
Gross profit / (loss)
Operating expense*
Operating income / (expense)
Other income (expense), net**
Interest expense, net
Profit / (loss) before income tax
Adjustments for:
Interest expense, net
Interest income
Foreign exchange loss (gain)
Depreciation and amortisation expense
Net change in fair value of biological assets and agricultural
produce
Loss on disposal of subsidiaries
Adjusted EBITDA
Supplemental information:
Expenditure for segment property, plant and equipment
Income tax expense (benefit)
29,150,254
416,945
(3,954,954)
(32,016)
29,118,238
-
(24,835,957)
4,314,297
(3,060,987)
1,253,310
(163,317)
(202,541)
887,452
202,541
(10,405)
205,719
467,157
-
-
1,752,464
1,339,934
(110,423)
16,579,185
172,835
-
(11,502,192)
5,076,993
(1,387,143)
(10,529,115)
4,662,927
(662,041)
4,000,886
(73,852)
(356,155)
3,570,879
356,155
(11,102)
71,822
869,643
1,387,143
42,569
6,287,109
1,932,674
6,698
44,590,211
1,511,443
(1,388,201)
(2,640,958)
41,949,253
(283,880)
(35,901,044)
8,405,287
(5,061,999)
3,343,288
794,746
(628,523)
3,509,511
628,523
(175,026)
(614,651)
1,862,574
283,880
-
5,494,811
4,390,494
(8,040)
* Operating expenses include selling, general and administrative expense, other operating income, net and share of loss of a joint venture.
** Other income (expense), net presents interest income and other income/expense as a combined line item.
Items included within Corporate mainly include payroll and other expenses of the holding company.
No single customer contributed 10% or more to the Group’s revenue for both 2016 and 2015.
Segment assets and liabilities are not disclosed, as this information is not provided to the chief operating decision maker.
Grain
2,580,713
57,512
-
(2,117,129)
463,584
326,376
(1,827,087)
1,080,002
(242,294)
837,708
15,555
(14,277)
838,986
14,277
(330)
17,144
167,236
(326,376)
-
710,937
812,359
5,962
Feed
27,855,810
-
-
Total operating
segments
120,756,173
2,158,734
(5,343,155)
(27,458,461)
(43,750,756)
397,349
-
77,005,417
(1,344,647)
(27,033,691)
(100,126,894)
822,119
(590,873)
231,246
(96,885)
(192,010)
(57,649)
192,010
(25,059)
129,179
399,855
-
-
19,284,632
(9,618,194)
9,666,438
476,247
(1,393,506)
8,749,179
1,393,506
(221,922)
(190,787)
3,766,465
1,344,647
42,569
Corporate
Intersegment
Total consolidated
27,205
27,205
-
-
27,205
-
(13,484)
13,721
(2,089,879)
(2,076,158)
(314,189)
(430,748)
(2,821,095)
430,748
(523,438)
837,589
60,060
-
-
(43,750,756)
(647,109)
-
43,750,756
-
180,920
43,420,162
(149,674)
93,420
(56,254)
(459,569)
459,488
(56,335)
(459,488)
459,598
-
-
(180,920)
77,032,622
1,538,831
(5,343,155)
-
77,032,622
(1,163,727)
(56,720,216)
19,148,679
(11,614,653)
7,534,026
(297,511)
(1,364,766)
5,871,749
1,364,766
(285,762)
646,802
3,826,525
1,163,727
-
42,569
638,336
14,883,657
(2,016,136)
(237,145)
12,630,376
2,034,685
4,421
10,510,146
(101,382)
459,969
(47,678)
-
-
10,970,115
(149,060)
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ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
6. COST OF SALES
8. INTEREST EXPENSE, NET
Cost of sales for the years ended 31 December 2016 and 2015 comprised:
Interest expense, net for the years ended 31 December 2016 and 2015 comprised:
Raw materials and goods for resale
Personnel (excluding pension costs)
Depreciation
Utilities
Pension costs
Other
Total cost of sales
2016
44,264,751
7,996,612
4,213,810
3,480,318
1,477,768
2,789,085
2015
39,911,889
6,962,848
3,454,254
3,174,341
1,286,236
1,930,648
Interest on bank overdrafts and loans
Interest on obligations under finance leases
Less: amounts included in the cost of qualifying assets
Total interest expense
Government grants for compensation of interest expenses
Less: amounts included in the cost of qualifying assets
64,222,344
56,720,216
Total government grants for compensation of interest expenses
Raw materials and goods for resale include as an offset subsidies received from local governments in the amount of 67,787
and 33,902 for the years ended 31 December 2016 and 2015, respectively. These subsidies were received based on square
of cultivated land and volumes of meat and eggs produced.
Total interest expense, net
9. OTHER EXPENSES, NET
7. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the years ended 31 December 2016 and 2015 comprised:
Other expenses, net for the years ended 31 December 2016 and 2015 comprised:
2016
4,920,223
54,349
(492,099)
4,482,473
(1,070,023)
325,865
(744,158)
3,738,315
2016
621,087
25,372
(347,975)
298,484
2015
3,976,055
49,231
(92,545)
3,932,741
(2,616,550)
48,575
(2,567,975)
1,364,766
2015
(646,802)
63,529
-
(583,273)
Foreign exchange gain (loss)
Other income, net
Write-off of receivables from insurance company
Total other expense, net
10. INCOME TAX
All of the Group’s taxes are levied and paid in the Russian Federation.
Under Russian legislation, the statutory income tax rate for entities designated as agricultural entities is 0%. The statutory tax rate for
non-agricultural entities is 20%.
The main components of income tax for the years ended 31 December 2016 and 2015 were as follows:
Current tax expense
Deferred tax benefit
Total income tax (expense) benefit
2016
(205,983)
133,122
(72,861)
2015
(93,882)
242,942
149,060
Personnel (excluding pension costs)
Transportation
Taxes (other than income tax)
Pension costs
Advertising and marketing
Materials and supplies
Rent expenses
Depreciation and amortization
Security services
Audit, consulting and legal fees
Information technology and communication services
Utilities
Change in bad debt allowance and other write-off
Veterinary services
Insurance
Repairs and maintenance
Bank charges
Other
Total selling, general and administrative expenses
2016
4,541,506
1,656,604
752,460
698,965
676,903
666,390
458,576
446,535
431,931
322,062
300,026
237,292
231,981
147,531
130,138
72,467
25,676
1,211,670
13,008,713
2015
4,216,641
1,442,255
687,737
675,212
657,163
902,606
673,789
372,271
427,248
191,010
231,153
222,247
32,063
126,251
103,208
106,012
30,212
850,064
11,947,142
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ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
The income tax benefit (expense) can be reconciled to the theoretical tax provision at the statutory rate for the years ended
31 December 2016 and 2015 as follows:
Profit before income tax
Profit before income tax of entities taxed at zero rates (agricultural entities and
other tax regimes)
2016
1,960,379
2,601,653
2015
5,871,749
7,495,350
Loss before income tax of generally taxed entities
(641,274)
(1,623,601)
Statutory income tax rate (agricultural entities and other tax regimes)
Statutory income tax rate (general)
Theoretical income tax benefit at the statutory tax rates
Expenses not deductible for Russian statutory taxation purposes
Effect of unused tax losses and tax offsets not recognised as deferred tax assets
Other
Income tax expense (benefit)
0%
20%
(128,255)
122,313
-
78,803
72,861
0%
20%
(324,720)
103,359
47,953
24,348
(149,060)
The following amounts, determined after appropriate offsetting, are presented in the consolidated statement of financial position as
of 31 December 2016 and 2015:
Deferred tax asset
Deferred tax liability
Net deferred tax asset (liability)
31 December 2016
31 December 2015
479,624
(420,299)
59,325
331,300
(405,097)
(73,797)
The movement in the net deferred tax liability for the year ended 31 December 2016 comprised:
Property, plant and equipment and investment property
Trade receivables
Other assets and liabilities
Tax loss carry forward
Net deferred tax liability
31 December 2015
Recognised
in profit or loss
31 December 2016
(563,093)
(92,840)
144,585
437,551
(73,797)
25,376
(5,315)
(93,201)
206,262
133,122
(537,717)
(98,155)
51,384
643,813
59,325
The movement in the net deferred tax liability for the year ended 31 December 2015 comprised:
Property, plant and equipment and investment property
Trade receivables
Other assets and liabilities
Tax loss carry forward
Net deferred tax liability
1 January 2015
Recognised
in profit or loss
31 December 2015
(610,486)
(120,498)
172,978
241,267
(316,739)
47,393
27,658
(28,393)
196,284
242,942
(563,093)
(92,840)
144,585
437,551
(73,797)
Starting from 2017 the Group can offset only 50% of taxable profit of each subsidiary against tax loss carry forwards accumulated
by the subsidiary and the Group’s tax loss carry forwards have no date of expiration (after amendments to the Russian Tax Code
effective 1 January 2017).
11. PROPERTY, PLANT AND EQUIPMENT, NET
The following table represents movements in property, plant and equipment for the years ended 31 December 2016 and 2015:
Land
Buildings,
infrastructure
and leasehold
improvements
Machinery
and
equipment
Vehicles
Other
Construction
in progress
Total
Cost
Balance as at 1 January
2015
Additions
Disposals
Disposal of subsidiary
2,563,605
36,971,546
19,356,462
3,547,983
146,047
7,590,035
70,175,678
82,969
(29,344)
(188)
4,769,768
3,567,109
837,617
(59,216)
(96,188)
(268,031)
(151,602)
(22,159)
(11,473)
61,177
(1,931)
(81)
1,268,643
10,587,283
(17,596)
(39,210)
(527,720)
(169,299)
As at 31 December 2015
2,617,042
41,585,910
22,633,381
4,222,525
205,212
8,801,872
80,065,942
Additions
Disposals
143,306
(12,201)
3,440,362
3,487,031
781,968
52,341
441,998
8,347,006
(106,341)
(382,483)
(114,006)
(13,152)
(19,091)
(647,274)
As at 31 December 2016
2,748,147
44,919,931
25,737,929
4,890,487
244,401
9,224,779
87,765,674
Accumulated
depreciation or
impairment loss
Balance as at 1 January
2015
Depreciation charge
Eliminated on disposals
Eliminated on disposal of
subsidiary
As at 31 December 2015
Depreciation charge
Eliminated on disposals
As at 31 December 2016
Carrying amounts
-
-
-
-
-
-
-
-
(6,552,580)
(8,258,922)
(1,520,374)
(85,448)
(1,321,935)
(1,872,860)
(429,257)
(25,554)
8,027
62,408
201,937
147,349
10,305
4,987
1,931
73
(7,804,080)
(9,919,540)
(1,797,295)
(108,998)
(1,478,315)
(2,179,253)
(558,541)
(41,858)
88,707
367,507
104,142
7,106
(9,193,688)
(11,731,286)
(2,251,694)
(143,750)
-
-
-
-
-
-
-
-
(16,417,324)
(3,649,606)
359,244
77,773
(19,629,913)
(4,257,967)
567,462
(23,320,418)
At 31 December 2015
2,617,042
33,781,830
12,713,841
2,425,230
96,214
8,801,872
60,436,029
At 31 December 2016
2,748,147
35,726,243
14,006,643
2,638,793
100,651
9,224,779
64,445,256
Net book values of buildings, infrastructure and leasehold improvements include 89,585 and 122,484 of leased buildings and
infrastructure as of 31 December 2016 and 2015, respectively. Net book values of vehicles and machinery and equipment include
437,571 and 349,636 of leased equipment as of 31 December 2016 and 2015, respectively.
Advances paid for acquisition and construction of property, plant and equipment are included in construction in progress
in the amount of 1,878,755 and 2,611,365 as at 31 December 2016 and 2015, respectively.
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ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
12. INVESTMENT PROPERTY
The Group’s investment property consists of commercial units located in Vostochnoe Biryulevo region of Moscow and land plots.
The changes in the carrying amount of investment property for the years ended 31 December 2016 and 2015 were as follows:
The recoverable amount of both cash-generating units is determined based on a value in use calculation, which uses cash flow
projections based on financial budgets approved by the management.
The management believes that any reasonably possible change in the key assumptions on which recoverable amount is based
would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the cash-generating unit.
Land
Buildings
Total
14. INTANGIBLE ASSETS
Cost
Balance as at 1 January 2015
Reconstruction and modernisation
Transfer into other non-current assets
Sale of land plots
As at 31 December 2015
Reconstruction and modernisation
As at 31 December 2016
Accumulated depreciation or impairment loss
Balance as at 1 January 2015
Depreciation charge
As at 31 December 2015
Depreciation charge
As at 31 December 2016
Carrying amounts
At 31 December 2015
At 31 December 2016
489,679
-
(100,801)
(113,929)
274,949
-
274,949
-
-
-
-
-
274,949
274,949
183,814
28,232
-
-
212,046
17,487
229,533
(48,565)
(5,659)
(54,224)
(6,582)
(60,806)
157,822
168,727
673,493
28,232
(100,801)
(113,929)
486,995
17,487
504,482
(48,565)
(5,659)
(54,224)
(6,582)
(60,806)
432,771
443,676
For disclosure purpose only, the Group determined the fair value of the buildings as at 1 January 2014 (the date of transition to IFRS)
based on the income approach. The fair value is equal to approximately 1 billion roubles and it did not significantly change
in subsequent years.
The Group recognised the following amounts in respect of the investment property in profit or loss:
Rental income from investment property
Direct operating expenses arising from investment property that generated rental
income during the year
Operating profit from investment property
13. GOODWILL
2016
171,648
(134,733)
36,915
2015
188,009
(90,018)
97,991
There have been no changes in the carrying amount of goodwill for the years ended 31 December 2016 and 2015.
Goodwill has been allocated for impairment testing purposes to the following cash-generating units, being also operating segments
of the Group, and represents the lowest level at which goodwill is monitored for impairment by management:
■ Meat-processing – 250,247 thousand roubles;
■ Poultry – 306,944 thousand roubles.
The following table represents movements of intangible assets for the years ended 31 December 2016 and 2015:
Computer
software
Indefinite life
trademarks
Other intangible
assets
Total
Cost
Balance at 1 January 2015
384,302
1,215,509
Additions
Balance at 31 December 2015
Additions
230,845
615,147
469,996
-
1,215,509
-
30,847
42,498
73,345
85,637
1,630,658
273,343
1,904,001
555,633
Balance at 31 December 2016
1,085,143
1,215,509
158,982
2,459,634
Accumulated amortisation and impairment loss
Balance at 1 January 2015
Amortisation expense
Balance at 31 December 2015
Amortisation expense
Balance at 31 December 2016
Carrying amounts
At 31 December 2015
At 31 December 2016
(101,429)
(147,371)
(248,800)
(169,588)
(418,388)
-
-
-
-
-
(16,491)
(34,807)
(51,298)
(40,285)
(91,583)
(117,920)
(182,178)
(300,098)
(209,873)
(509,971)
366,347
666,755
1,215,509
1,215,509
22,047
67,399
1,603,903
1,949,663
Computer software
Software is amortised over its useful life ranging from 2 to 10 years.
Indefinite life trademarks
Kurinoe Tsarstvo (“Куриное Царство”) trademark
The carrying value of the Kurinoe Tsarstvo trademark was 744,935 as of 31 December 2016 and 2015.
As of 31 December 2016 and 2015, management tested the Kurinoe Tsarstvo trademark for impairment and determined that
the trademark was not impaired. The fair value was determined using a relief from royalty method based on expected sales by
trademark derived from the segment business plan approved by the management covering a five-year period. The cash flows
beyond that period have been extrapolated using a steady 3.6% per annum growth rate, which is the projected long-term average
general inflation in Russia.
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ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
The key assumptions used for impairment testing purposes are set out below.
The following table represents movements in sows:
In percent
Discount rate
Terminal value growth rate
Royalty rate
Trademark revenue growth rate (average of next five years)
31 December 2016
31 December 2015
18.8%
3.6%
3.3%
4.7%
18%
5%
3.3%
8%
The Group expected and achieved a major increase in sales under that trademark in 2015 driven by massive advertising campaign
in Central part of Russia and increase in production capacity after Lisko acquisition.
The values assigned to the key assumptions represented management’s assessment of future trends in the relevant industries and
were based on historical data from both external and internal sources.
The management believes that any reasonably possible change in the key assumptions on which recoverable amount is based
would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the trademark.
Cherkizovo (“Черкизово”) trademark
The carrying value of the Cherkizovo trademark was 435,737 as of 31 December 2016 and 2015.
As of 31 December 2016 and 2015, management tested the Cherkizovo trademark for impairment and determined that
the trademark was not impaired. The fair value was determined using a relief from royalty method based on current year actual
sales by trademark and royalty rate of 3.3%. Potential royalty from one-year sales covers the carrying value of the trademark and
therefore the Group did not make a detailed calculation for the whole life of the trademark.
The management believes that any reasonably possible change in the key assumptions on which recoverable amount is based
would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the trademark.
15. BIOLOGICAL ASSETS
Non-current biological asset
The balances of non-current biological assets were as follows:
31 December 2016
31 December 2015
Units Carrying amount
Units Carrying amount
Sows, heads
Cattle, heads
90,959
1,902,652
434
24,062
Total bearer non-current biological assets
91,393
1,926,714
76,640
423
77,063
1,597,495
20,338
1,617,833
Balance at 1 January 2015
Increase due to purchases and breeding costs of growing livestock
Decrease due to sale
Loss arising from changes in fair value less estimated point-of-sales costs
Balance at 31 December 2015
Increase due to purchases and breeding costs of growing livestock
Decrease due to sale
Loss arising from changes in fair value less estimated point-of-sales costs
Balance at 31 December 2016
Amount
1,749,344
432,481
(537,051)
(47,279)
1,597,495
1,110,778
(755,422)
(50,199)
1,902,652
Current biological asset and related work-in progress
All current biological assets are consumable except for breeders, which are bearer biological assets. The balances of current
biological assets were as follows:
31 December 2016
31 December 2015
Units Carrying amount
Units Carrying amount
870,402
870,402
5,504,933
5,504,933
799,184
799,184
4,232,255
4,232,255
Pork
Market hogs, heads
Poultry
Broilers, heads
28,828,752
2,243,036
29,890,640
Breeders, heads (bearer biological assets)
2,440,969
1,512,225
2,402,262
Hatchery eggs, quantity
Other
Unharvested crops, hectares
Work-in progress related to cultivation of crops
Total current biological assets and related work-in
progress
31,269,721
3,755,261
32,292,902
20,972,292
224,085
21,195,577
414
25,682
31,586
509,012
687,604
10,712,481
435
26,482
1,728,769
2,602,867
4,331,636
287,676
30,028
406,427
541,653
9,829,675
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ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
The following table represents movements in the most material classes of the current biological assets:
The main crops of the Group’s agricultural production and output were as follows (in thousands of tonnes):
Pork
Broilers
Breeders
Unharvested
crops and
related WIP
Total
Balance at 1 January 2015
4,870,838
1,860,688
1,892,419
444,534
9,068,479
Increase due to purchases and gain arising from
cost inputs
11,154,812
33,041,422
1,083,897
2,293,804
47,573,935
Transfer to consumable biological assets
-
810,452
(810,452)
-
-
Decrease due to sale or harvest of assets
(16,406,350)
(38,968,269)
Disposal of pigs due to African Swine Fever
(271,610)
-
-
-
(2,523,201)
(57,897,820)
-
(271,610)
Gain arising from changes in fair value less
estimated point-of-sales costs
4,884,565
4,984,476
437,003
732,943
11,038,987
Balance at 31 December 2015
4,232,255
1,728,769
2,602,867
948,080
9,511,971
Increase due to purchases and gain arising from
cost inputs
12,403,964
38,125,785
1,053,872
3,737,790
55,321,411
Transfer to consumable biological assets
-
948,803
(948,803)
-
-
Decrease due to sale or harvest of assets
(15,749,040)
(43,279,009)
Disposal of pigs due to African Swine Fever
(6,281)
-
-
-
(3,250,078)
(62,278,127)
-
(6,281)
Gain (loss) arising from changes in fair value less
estimated point-of-sales costs
4,624,035
4,718,688
(1,195,711)
(239,176)
7,907,836
Balance at 31 December 2016
5,504,933
2,243,036
1,512,225
1,196,616
10,456,810
Reconciliation of net change in fair value of biological assets and agricultural produce for the years ended 31 December 2016 and
2015 are as follows:
Corn
Winter wheat
Spring wheat
Pea
Soya bean
2016
183
136
37
26
24
The production output of pork and poultry segments of the Group were as follows (in thousands of tonnes):
Pork meat
Poultry meat
2016
185
500
2015
111
106
42
17
17
2015
169
470
Key inputs in fair value measurement of biological assets together with sensitivity to reasonably possible changes in those inputs
are disclosed in Note 4.
16. INVESTMENTS IN JOINT VENTURE
During the year ended 31 December 2012 the Group, together with Grupo Corporativo Fuertes, S.L., established a joint venture,
LLC Tambovskaya Indeika. The joint venture’s primary business is breeding of turkey. The joint venture started construction of an
integrated full cycle turkey production complex in 2013 and started operations in November 2016.
Summarised financial information in respect of the Group’s joint venture and its reconciliation to the carrying amount of the interest
in the joint venture are set out below. The summarised financial information below represents amounts shown in the joint venture’s
financial statements prepared in accordance with IFRSs adjusted by the Group for equity accounting purposes.
Fair value adjustment at the beginning of the year (biological assets transferred
to inventory and subsequently sold)
Fair value adjustment at the beginning of the year (agricultural produce
subsequently sold)
Fair value adjustment at the end of the year (biological assets)
Fair value adjustment at the end of the year (agricultural produce)
Net change in fair value of biological assets and agricultural produce
2016
2015
31 December 2016
31 December 2015
(3,303,761)
(4,974,784)
Cash and cash equivalents
(681,645)
(174,349)
3,877,070
(231,727)
(340,063)
3,303,761
681,645
(1,163,727)
Other current assets
Non-current assets
Trade and other payables
Short-term borrowings
Other current liabilities
Long-term borrowings
Other non-current liabilities
Net assets of the joint venture
Proportion of the Group’s ownership interest in the joint venture
The Group’s equity interest in the joint venture
Notes receivable classified as net investment in the joint venture*
Carrying amount of the Group’s interest in the joint venture
14,952
1,167,530
8,426,574
(244,500)
(1,033,401)
(176,295)
(7,844,353)
(118,963)
191,544
50%
95,772
1,965,700
2,061,472
195,016
697,494
6,192,398
(4,700)
-
(9,702)
(6,359,617)
(118,963)
591,926
50%
295,963
1,005,700
1,301,663
*the Notes are considered to represent an ‘in substance’ equity interest in the joint venture. The Group, together with the second venturer, expect to
legally convert the Notes to an equity investment in the joint venture in 2017.
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ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
Revenue
Loss for the year and total comprehensive loss for the year
The Group’s share of loss of a joint venture
The above loss for the year includes the following:
Depreciation and amortisation
Interest income
Interest expense
Income tax
17. LONG-TERM DEPOSITS IN BANKS
Deposits in Gazprombank
Total long-term deposits in banks
18. INVENTORIES
Raw materials
Spare parts
Work in-process
Finished goods
Total inventory
19. TAXES RECOVERABLE AND PREPAID
Value added tax
Other taxes
Total tax recoverable and prepaid, net
2016
626,605
(400,383)
(200,191)
2016
60,270
(21,707)
3,098
(2,838)
CCY
RUR
Effective rate,
%
Maturity
31 December
2016
31 December
2015
8%
2019
641,365
641,365
641,365
641,365
31 December 2016
31 December 2015
7,784,431
693,730
333,379
1,790,578
9,655,054
742,454
311,393
1,549,654
10,602,118
12,258,555
31 December 2016
31 December 2015
1,694,821
209,965
1,904,786
2,570,134
265,853
2,835,987
20. TRADE RECEIVABLES, NET
Trade receivables
Less: allowance for doubtful trade receivables
Total trade receivables, net
31 December 2016
31 December 2015
4,988,952
(46,068)
4,942,884
4,492,507
(47,516)
4,444,991
The following table summarizes the changes in the allowance for doubtful trade receivables for the years ended 31 December 2016
and 2015:
Balance at beginning of the year
Additional allowance, recognized during the year
Trade receivables written off during the year
Balance at end of the year
21. OTHER RECEIVABLES, NET
Subsidies receivable for interest expense reimbursement
Subsidies receivable for purchase of fodder
Other receivables
Less: allowance for doubtful other receivables
Total other receivables, net
2016
47,516
29,876
(31,324)
46,068
2015
99,071
20,239
(71,794)
47,516
31 December 2016
31 December 2015
1,100,598
4,374
301,913
(13,412)
1,417,074
4,916
390,353
(30,324)
1,393,473
1,782,019
The following table summarizes the changes in the allowance for doubtful other receivables for the years ended 31 December 2016
and 2015:
Balance at beginning of the year
Additional allowance, recognized during the year
Other receivables written off during the year
Balance at end of the year
2016
30,324
25,484
(42,396)
13,412
2015
8,270
23,163
(1,109)
30,324
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FINANCIAL STATEMENTS
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
22. CASH AND CASH EQUIVALENTS
25. NON-CONTROLLING INTERESTS
31 December 2016
31 December 2015
The following table summarises the information relating to each of the Group’s subsidiaries that has material NCI, before any intra-
group eliminations:
RUR-denominated cash at banks
EURO-denominated cash at banks
USD-denominated cash at banks
Bank deposits
Cash in hand
Total
227,208
3,411
65,759
700,951
4,874
1,002,203
468,173
74
84,997
5,002,812
4,768
5,560,824
Bank deposits are denominated in roubles and have original maturity of less than 3 months.
23. OTHER CURRENT ASSETS
Prepaid expenses
Prepaid interest expense
Receivables from insurance company
Loans receivable
Other assets
Total other current assets
31 December 2016
31 December 2015
151,388
372,470
-
10,892
88
534,838
182,551
-
319,987
105,919
4,109
612,566
In the last week of December 2014 and in January 2015, African Swine Fever (further – ASF) was discovered at Group’s units in Orel
region, which has a big population of wide boars and high ASF risks. Pigs from that unit were sent to Voronezh unit for fattening,
which caused a transmission of the disease. As a result of the ASF outbreak, the Group closed two units in the Orel and Voronezh
regions and slaughtered and disposed of approximately 50,000 heads of pigs. All of the disposed animals were insured and
the Group expected to receive full compensation equal to their cost and therefore accrued the amount of expected compensation
as receivables from insurance company at 31 December 2015. Subsequently in 2016, the Group lost a court case against
the insurance company and wrote-off the related receivables.
24. SHAREHOLDER’S EQUITY
Share capital
As of 31 December 2016 and 2015, issued shares of the Company had a par value of 0.01 roubles. The total number of authorized
shares was 54,702,600 and the number of issued shares was 43,963,773. All issued and outstanding shares have equal voting
rights. The Company is authorized to issue preferred shares not exceeding 25% of its ordinary share capital. No such shares are
currently issued.
Dividends
In accordance with Russian legislation, earnings available for dividends are limited to retained earnings of the Company, calculated
in accordance with statutory rules in local currency. On April 2016 dividends of approximately 22.77 Russian roubles per share
(998,771 in total) were approved at the extraordinary shareholders’ meeting and have been fully paid during the year ended
31 December 2016. On 6 April 2015 and 29 September 2015 dividends of approximately 54.60 and 22.75 roubles per share,
respectively (3,392,766 in total) were approved at the extraordinary shareholders’ meeting and have been fully paid during the year
ended 31 December 2015.
As at 31 December 2016 and for 2016
CJSC Petelinskaya
CJSC CMPP
Total
NCI percentage
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Net assets
Carrying amount of NCI
Revenue
Profit
Total comprehensive income
Profit allocated to NCI
Cash flows from operating activities
Cash flows from investment activities
Cash flows from financing activities (dividends to NCI: nil)
Net increase in cash and cash equivalents
11.8%
1,999,701
3,129,030
(126,014)
(1,014,595)
3,988,122
470,598
5,750,462
(884,547)
(884,547)
(104,377)
588,622
(181,676)
(391,648)
15,298
4.9%
5,498,317
5,037,466
(1,466,801)
(8,954,936)
114,046
5,633
31,861,303
(1,706,366)
(1,706,366)
(84,274)
539,779
(698,639)
48,558
(110,302)
7,498,018
8,166,496
(1,592,815)
(9,969,531)
4,102,168
476,231
37,611,765
(2,409,081)
(2,409,081)
(179,671)
1,128,401
(880,315)
(343,090)
(95,004)
As at 31 December 2015 and for 2015
CJSC Petelinskaya
CJSC CMPP
Total
NCI percentage
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Net assets
Carrying amount of NCI
Revenue
Profit
Total comprehensive income
Profit allocated to NCI
Cash flows from operating activities
Cash flows from investment activities
Cash flows from financing activities (dividends to NCI: nil)
Net increase in cash and cash equivalents
11.8%
1,914,873
5,269,449
(144,241)
(2,098,165)
4,941,916
583,146
5,323,190
321,251
321,251
37,908
(681,980)
(358,562)
1,041,352
810
4.9%
5,614,060
5,128,212
(196,629)
(8,610,891)
1,934,752
95,554
29,643,821
(777,751)
(777,751)
(38,412)
75,628
(424,768)
469,749
120,609
7,528,933
10,397,661
(340,870)
(10,709,056)
6,876,668
678,700
34,967,011
(456,500)
(456,500)
(504)
(606,352)
(783,330)
1,511,101
121,419
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FINANCIAL STATEMENTS
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
26. BORROWINGS
This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings, which are
measured at amortised cost. For more information about the Group’s exposure to interest rate, foreign currency and liquidity risk,
see Note 29. Terms and conditions of outstanding loans were as follows:
Principal payments are due from 2017 to 2022. The amount outstanding of loans was 12,624,909 and 9,190,801 as of 31 December
2016 and 31 December 2015, respectively.
Rosselkhozbank
Borrowings from Rosselkhozbank consist of twenty four rouble and one euro denominated long-term lines of credit with fixed
interest rates ranging from 10.00% to 15.00% per annum. Principal payments are due from 2017 to 2023. The amount outstanding
was 2,274,894 and 3,218,894 as of 31 December 2016 and 31 December 2015, respectively.
Nominal
interest rate
EIR*
Adjusted
EIR**
Year of
maturity
31 December 2016
31 December 2015
Current Non-current
Current Non-current
Bank VTB
Bonds
Bank loans
Factoring
Other borrowings
Interest payable
Finance lease
liabilities
Total borrowings
12.50% 12.50%
12.50%
2020
-
5,000,000
2,500,000
5,000,000
1.20%-15.00%
10.81%
7.21% 2017-2024
13,079,826
19,099,708
21,845,147
10,830,813
10.81%-11.56%
10.81%
10.81%
-
-
-
2017
2023
628,933
-
303,310
-
-
10,947
-
10,947
298,588
-
363,084
-
8.57%-16.62%
14.16%
14.16% 2017-2024
115,650
359,049
81,476
276,987
14,122,997 24,469,704 25,093,017
16,118,747
* EIR represents the weighted average interest rate on outstanding loans.
** Adjusted 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 8 for further disclosure of government subsidies related to interest on borrowings.
As of 31 December 2016, the Group’s borrowings are denominated in the following currencies: 37,867,221 in Russian roubles and
725,480 in Euro. As of 31 December 2015, the Group’s borrowings were denominated in the following currencies: 40,874,513 in
Russian roubles and 337,251 in Euro.
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.
Bonds
Bonds due in October 2020
In October 2015, the Group placed 5,000,000 bonds in roubles at par value (1,000 roubles at the issuance date) with a maturity date
in October 2020. The coupon rate on the bonds, payable semi-annually, is set at 12.5% per annum. The Group accounts for these
instruments at amortized cost.
Bank loans
Sberbank of Russia
Borrowings from the Sberbank of Russia consist of one long-term euro denominated bank loan with an interest set at 2.50% per
annum, fourteen long-term and eleven short-term rouble denominated lines of credit with interest ranging from 9.50% to 13.10% per
annum. Principal payments are due from 2017 to 2024. The amount outstanding was 10,678,385 and 15,950,933 as of 31 December
2016 and 31 December 2015, respectively.
Gazprombank
Borrowings from Bank VTB consist of one long-term euro denominated loan with an interest set at 2.01% per annum, four long-term
and three short-term rouble denominated lines of credit with interest ranging from 10.00% to 12.25% per annum. Principal payments
are due from 2017 to 2018. Amount outstanding was 1,798,954 and 2,644,099 as of 31 December 2016 and 31 December 2015,
respectively.
Alfa bank
Borrowings from Alfa Bank consist of two long-term euro denominated loan with an interest rate of 4.10% per annum, thirteen long-
term rouble denominated loans and one short-term rouble denominated loan with an interest ranging from 8.76% to 10.80% per
annum. Principal of the long-term loan is due on maturity from 2017 to 2019. The amount outstanding was 4,803,644 and 1,627,648
as of 31 December 2016 and 31 December 2015, respectively.
Unused lines of credit
The total amount of unused credit on lines of credit as of 31 December 2016 is 33,627,605. The unused credit can be utilized from
2017 to 2020 with expiration of available amounts varying as follows: 10,183,972 expires by 30 April 2017, 15,830,262 expires by
31 December 2018, 3,202,000 expires by 30 April 2019, 4,411,371 expires by September 2020.
Collateral under borrowings
Shares of and participating interests in the following Group companies are pledged as collateral under certain borrowings:
as of 31 December 2016:
JSC Vasiljevskaya
LLC Cherkizovo Pork
LLC Kuznetsovsky kombinat
LLC Kurinoe Tsarstvo – Bryansk
JSC Kurinoe tsarstvo
LLC Lisko Broiler
31 December 2016
31 December 2015
51%
25%
100%
99%
100%
99%
51%
25%
100%
99%
100%
99%
Non-current biological assets with a carrying value of 114,050 and 152,246 were pledged as security under certain borrowings
as of 31 December 2016 and 2015, respectively.
Current biological assets with a carrying value of 380,765 and 485,251 were pledged as security under certain borrowings as
of 31 December 2016 and 2015, respectively.
Property, plant and equipment with a carrying value of 12,770,216 and 16,563,987 was pledged as security under loan agreements
as of 31 December 2016 and 2015, respectively.
Borrowings from Gazprombank consist of two long-term euro denominated loans with interest ranging from 1.20% to 3.40% per
annum, eight long-term and twenty six short-term rouble denominated loans with interest ranging from 9.50% to 12.60% per annum.
Notes receivable, net with a carrying value of 510,000 and 300,000 were pledged as security under loan agreements as
of 31 December 2016 and 2015, respectively.
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Annual Report 2016 CHERKIZOVO GROUP 129
FINANCIAL STATEMENTS
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
Certain significant loan agreements with the Sberbank of Russia, Rosselkhozbank, Bank VTB, Gazprombank and Alfa-bank contain
financial covenants requiring maintenance of specific debt to EBITDA, net short-term debt to EBITDA, EBIT to Interest expense and
debt service coverage ratios. The Group is in compliance with these covenants as of 31 December 2016.
Finance leases liabilities
The Group uses certain fixed assets under leasing contracts that qualified for treatment as finance leases. The lower
of the incremental borrowing rate and the rate implicit in the lease agreement was used in capitalising the leases.
Financial lease liabilities are payables as follows:
As at 31 December 2015 and for 2015
Not later than 1 year Between 1 and 5 years
Later than 5 years
At 31 December 2015
Future minimum lease payments
Portion related to interest
Present value of minimum lease payments
At 31 December 2016
Future minimum lease payments
Portion related to interest
Present value of minimum lease payments
27. TAX RELATED LIABILITIES
Value added tax
Payroll related taxes
Property tax
Personal income tax withheld
Land tax
Transportation tax
Other taxes
Total tax related liabilities
125,255
43,779
81,476
171,607
55,927
115,680
290,264
85,587
204,677
401,733
94,677
307,056
86,401
14,091
72,310
52,012
5,982
46,030
31 December 2016
31 December 2015
379,843
258,464
113,517
63,186
10,484
2,599
21,307
849,400
313,552
213,792
165,934
69,858
12,392
5,673
9,143
790,344
28. FINANCIAL INSTRUMENTS
Categories of financial instruments and fair value measurements
The carrying values and fair values of the Group’s financial assets and liabilities as of 31 December 2016 and 2015 are as follows:
Financial assets not measured at fair value
Loans and receivables:
Notes receivable, net
Long-term deposits in banks
Other non-current assets
Trade receivables
Other receivables
Other current assets
31 December 2016
31 December 2015
Carrying value
Fair value Carrying value
Fair value
510,000
641,657
111,663
504,034
631,034
111,663
300,000
641,365
96,379
296,044
601,369
96,379
4,942,884
4,942,884
4,444,991
4,444,991
1,393,473
1,393,473
10,892
10,892
1,782,019
425,906
1,782,019
425,906
Cash and cash equivalents
1,002,203
1,002,203
5,560,824
5,560,824
8,612,772
8,596,183
13,251,484
13,207,532
Financial liabilities not measured at fair value
Amortised cost:
Borrowings, other than finance lease*
38,118,002
36,304,998
40,853,301
39,545,901
Financial lease liabilities
Trade payables
Payables for non-current assets
Payroll related liabilities
Other payables and accruals
474,699
436,848
358,463
336,368
8,608,271
8,608,271
8,461,657
8,461,657
1,061,629
1,061,629
1,394,940
1,394,940
362,395
362,395
1,445,128
1,372,176
269,751
1,445,128
1,372,176
269,751
50,019,936
48,169,081
52,760,476
51,430,981
* at 31 December 2016 the Group used 11.7% as market rate of cost of debt for the fair value estimation (for borrowings nominated in RUB). That rate
of the cost of debt excludes the effect of subsidies (12.9% at 31 December 2015).
Financial risk management
The main risks arising from the Group’s financial instruments are capital risk management, interest rate risk, credit risk and liquidity
risk. Management considers that foreign currency risk is not material to the Group, because the Group has no material outstanding
balances denominated in foreign currencies.
The Group’s management identifies measures and manages financial risks in accordance with the Group’s policies and procedures.
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FINANCIAL STATEMENTS
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
Capital risk management
The Group manages its capital to ensure that it will be able to continue as a going concern while maximizing the return to the equity
holders. The capital structure of the Group consists of debt, cash and cash equivalents and equity, comprising issued capital,
reserves and retained earnings. The management of the Group reviews the capital structure on a regular basis. As part of this
review, management considers the cost of capital and the risks associated with each class of capital.
Credit risk
Credit risk refers to the risk that counterparty may default on its contractual obligations resulting in financial loss to the Group.
Financial assets which potentially subject the Group to credit risk consist primarily of trade and other receivables, long-term
deposits, notes receivable and cash in current and deposit accounts with banks and other financial institutions.
The Group’s maximum exposure to credit risk arises from the following classes of financial assets:
Long-term deposits in banks
Notes receivable, net
Other non-current assets
Trade receivables
Other receivables
Other current assets
Cash and cash equivalents (except for cash in hand)
Total maximum credit risk
31 December 2016
31 December 2015
641,365
510,000
111,663
4,942,884
1,393,473
10,892
997,329
8,607,606
641,365
300,000
96,379
4,444,991
1,782,019
425,906
5,556,056
13,246,716
Trade receivables
The maximum exposure to credit risk for trade receivables by counterparty was as follows:
Company 1
Company 2
Company 3
Company 4
Company 5
Other counterparties
Total
31 December 2016
31 December 2015
858,116
774,955
307,474
302,699
285,520
2,414,120
4,942,884
725,702
742,947
208,630
262,253
367,084
2,138,375
4,444,991
Trade receivables disclosed above include amounts (see below for aged analysis) that are past due at the end of the reporting
period for which the Group has not recognised an allowance for doubtful debts because there has not been a significant change
in credit quality and the amounts are still considered recoverable. The ageing of trade receivables that were not impaired was as
follows:
Neither past due nor impaired
Past due 1-90 days
Past due 91-180 days
Past due 180-365 days
Past due more than 365 days
Total
31 December 2016
31 December 2015
4,165,808
729,529
31,725
15,822
-
4,082,044
321,957
18,677
7,086
15,227
4,942,884
4,444,991
Other receivables
Other receivables disclosed above mainly consists of subsidies receivable from regional Ministries of agriculture. Timing of
collection depends on availability of budget funds and on average is approximately 6 months. In 2016 management carefully
reviewed the recoverability of the balance and reassessed timing of subsidy recognition, see Note 4. At 31 December 2016,
the amount of subsidies receivable outstanding more than one year was 508,460 (at 31 December 2015: 199,034).
Cash and cash equivalents and long-term deposits
The credit risk on cash and cash equivalents and long-term deposits is limited because these funds are placed only with banks
with high credit ratings assigned by international credit-rating agencies. All balances on bank accounts are neither overdue nor
impaired.
The table below shows the rating and cash and cash equivalents balances with major banks at the reporting dates:
Bank 1
Bank 2
Bank 3
Other banks
Total cash and cash equivalents at banks
Rating agency
Rating
Fitch Ratings
Moody’s
Standard & Poor’s
-
BB+
BBB-
BB+
-
31 December
2016
31 December
2015
739,814
237,541
1,362
18,612
2,034,351
490,328
3,003,177
28,200
997,329
5,556,056
The table below shows the rating and long-term bank deposits balances at the reporting dates:
The average credit period on sales of goods is 30 days. No interest is charged on trade and other receivables. Before accepting
any new customer, the Group uses an internal credit scoring system to assess the potential customer’s credit quality and defines
credit limits by customer. Limits and scoring attributed to customers are regularly reviewed.
Gazprombank
Total long-term bank deposits
Rating agency
Rating
Fitch Ratings
BB+
31 December
2016
31 December
2015
641,365
641,365
641,365
641,365
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Annual Report 2016 CHERKIZOVO GROUP 133
Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to
managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under
both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.
FINANCIAL STATEMENTS
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
The following tables detail the Group’s expected maturity for its financial assets, except for cash and cash equivalents. The tables
below have been drawn up based on the undiscounted contractual maturities of the financial assets, including interest that will be
earned on those:
Interest rate risk
Changes in interest rates impact primarily loans and borrowings by changing either their fair value (fixed rate debt) or their future
cash flows (variable rate debt). The Group adopts a policy of limiting its exposure to changes in interest rates by borrowing on
a fixed rate basis and therefore the interest rate risk is not considered material to the Group.
Effective
interest rate, %
Less than
6 months
6 months-
1 year
1-3 years
More than
3 years
Total
29. RELATED PARTIES
Parties are generally considered to be related if one party has the ability to control the other party or can exercise significant
influence over the other party in making financial or operational decisions, as defined by IAS 24 Related Party Disclosures. In
considering each possible related party relationship, attention is directed to the substance of the relationship not merely the legal
form. Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may
not be effected on the same terms, conditions and amounts as transactions between unrelated parties.
The Company and its subsidiaries enter into various transactions with related parties such as the sale and purchase of inventory.
Transactions with key management personnel
Key management personnel of the Group are all members of Board of Directors and members of Management Board.
The remuneration of key management personnel during the years ended 31 December 2016 and 2015 were as follows:
Salaries and bonuses
Share-based payments
2016
321,396
-
2015
285,681
2,612
Trading transactions with entities under common control
Trading transactions with related parties comprise mostly of purchases of grain crops from and rendering of storage services to
TZK NAPKO, Agrarnaya Gruppa and CJSC Penzamyasoprom. The Group also sells sausages, raw meat and poultry to a retail chain
“Myasnov”.
Trade receivables, trade payables and advances issued are associated with such transactions. The Group expects to settle such
balances in the normal course of business.
8%
9%-9.5%
6,227,010
25,666
14,005
-
425,906
-
25,666
14,005
-
-
-
761,433
328,010
-
-
-
-
-
96,379
6,227,010
812,765
356,020
96,379
-
425,906
6,692,587
39,671
1,089,443
96,379
7,918,080
Long-term deposits in banks
8%
Notes receivable, net
6.35%-9.5%
Other non-current assets
Other current assets
Total
6,336,357
25,666
21,250
-
10,892
-
25,666
21,250
-
-
-
710,100
530,889
6,190
-
-
-
-
105,473
-
6,336,357
761,432
573,389
111,663
10,892
6,394,165
46,916
1,247,179
105,473
7,793,734
The following are the contractual maturities of financial liabilities, including estimated interest payments:
Effective
interest rate, %
Less than
6 months
6 months-
1 year
1-3 years
More than
3 years
Total
At 31 December 2015
Trade and other receivables
Long-term deposits in banks
Notes receivable, net
Other non-current assets
Other current assets
Total
At 31 December 2016
Trade and other receivables
At 31 December 2015
Borrowings, other than finance
lease
Trade and other payables
Payables for non-current assets
Payroll related liabilities
Total
At 31 December 2016
Borrowings, other than finance
lease
3.39%– 15%
14,818,169
12,952,502
11,438,923
10,701,330
49,910,924
Balances with companies under common control are summarized as follows:
Finance lease obligations
10.91%– 15.3%
62,642
62,642
248,992
126,121
500,397
31 December 2016
31 December 2015
8,731,408
1,445,128
1,372,176
-
-
-
-
-
-
-
-
-
8,731,408
1,445,128
1,372,176
Trade receivables
Other non-current assets
Advances paid
26,429,523
13,015,144
11,687,915
10,827,451
61,960,033
Advances paid for property, plant and equipment
1.2%– 15%
7,933,038
9,137,930
25,008,128
5,818,571
47,897,667
Finance lease obligations
8.57%– 16.62%
85,803
85,803
346,809
106,936
625,351
Trade and other payables
Payables for non-current assets
Payroll related liabilities
8,970,666
1,061,629
1,394,940
-
-
-
-
-
-
-
-
-
8,970,666
1,061,629
1,394,940
Total
19,446,076
9,223,733
25,354,937
5,925,507
59,950,253
Other current assets
Other receivables
Trade payables
Advances received
Other payables
Long-term payables to shareholders
256,179
80,723
3,620
18,843
-
1,762
5,443
11
1,349
-
243,453
57,083
2,269
-
2,927
19,014
18,093
450
53
9,138
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Annual Report 2016 CHERKIZOVO GROUP 135
FINANCIAL STATEMENTS
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
Transactions with companies under common control are summarized as follows:
Sales
Rent income
Purchases of security services
Purchases of property, plant and equipment
Purchases of goods and other services
31 December 2016
31 December 2015
2,555,161
184,936
-
38,231
949,904
2,593,693
159,218
21,810
267,459
1,173,837
Trading transactions with joint ventures
The Group purchases day-old chicks from its joint venture Bioler Budushchego LLC. The Group also purchases turkey meat from
LLC Tambovskaya Indeika for its subsequent resale through distribution network of the Group. The Group also sells mixed fodder
to LLC Tambovskaya Indeika.
Trade receivables, trade payables and advances issued are associated with such transactions. The Group expects to settle such
balances in the normal course of business.
Balances with joint ventures are summarized as follows:
Balances
Trade receivables
Advances paid
Other receivables
Other non-current assets
Other current assets
Trade payables
Advances received
Transactions with joint ventures are summarized as follows:
Balances
Sales
Sales of property, plant and equipment
Rent income
Purchases of goods and other services
30. COMMITMENTS AND CONTINGENCIES
31 December 2016
31 December 2015
23,620
167,951
226
66,839
-
140,337
30,211
2016
337,875
-
16,471
733,654
21
135,641
-
28,293
3,400
4,557
63,722
2015
5,539
666,349
1,030
246,715
Legal
As of 31 December 2016 and 2015, 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.
From time to time and in the normal course of business, claims against the Group are received from customers and counterparties.
Management is of the opinion that no material unaccrued losses will be incurred and accordingly no provision has been made in
these consolidated financial statements.
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. The tax authorities in the Russian
Federation frequently take an assertive position in their interpretation of the legislation and assessments and as a result, it is
possible that transactions and activities 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.
In 2015, amendments were introduced into the Russian tax legislation in respect of taxation of profit of controlled foreign
companies. According to these changes, undistributed profits of the Group foreign subsidiaries, qualifying as controlled foreign
companies, should be included in the income tax base of the controlling entities in particular cases. The Group is formulating its tax
planning strategy with regard to the foreign subsidiaries.
Environmental remediation costs
The Group’s management believes that the Group 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 2016 and 2015.
Capital commitments
Capital commitments by each operating segments are as follows:
Commitments for the acquisition of property, plant and equipment
Meat-processing
Pork
Poultry
Grain
Feed
Total capital commitments
31 December 2016
125,472
1,661,874
381,740
170,316
107,649
2,447,052
At 31 December 2016, the Group had capital projects in progress at LLC Cherkizovo Pork, OJSC Kurinoe Tsarstvo and JSC
Cherkizovo-Kashira.
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FINANCIAL STATEMENTS
ABOUT COMPANY
STRATEGIC REPORT
FINANCIAL REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
Notes to the consolidated financial statements
(continued)
(For the year ended 31 December 2016)
(in thousands of Russian roubles, unless otherwise indicated)
Operating lease commitments
Obligations under non-cancellable operating lease agreements for the five years ending 31 December 2021 and thereafter
are as follows:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
Total operating lease commitments
31 December 2016
217,307
952,938
1,197,047
2,367,292
Agricultural market risk
As a rule, grain prices exhibit rather high seasonal fluctuation. As a general trend, prices tend to be lower in autumn mainly due to
the increasing in supply. Market prices of agricultural commodities are also influenced by a variety of unpredictable factors which
are beyond the control of the Group, including weather, planting intentions, government (Russian and foreign) farm programs and
policies, changes in global demand resulting from population growth and higher standards of living and global production of similar
and competitive crops.
Insurance
The Group holds insurance policies in relation to certain assets. As of 31 December 2016 the Group secured major part of its
livestock and property, plant and equipment with a number of insurance companies. The Group holds no other insurance policies
in relation to operations, or in respect of public liability or other insurable risks.
Shareholder Information
CONTACTS
PJSC Cherkizovo Group
5B Lesnaya St.,
Moscow 125047, Russia
White Square Office Centre
Tel.: +7 495 660 2440
Website: www.cherkizovo.com
Email: info@cherkizovo.com
REGISTRATION NUMBER
1057748318473 of 22 September 2005
REGISTRAR
JSC “Noviy Registrator”
30-1 Buzheninova St.
Moscow 107996, Russia
Tel.: +7 495 980 1100, +7 499 519 0262
AUDITORS
Deloitte and Touche CIS
5B Lesnaya St.,
Moscow 125047, Russia
White Square Office Centre
DEPOSITORY
The Bank of New York Mellon
1 Wall Street,
New York, NY 10286
United States
LEGAL ADVISORS
(English law)
Cleary Gottlieb Steen & Hamilton LLP,
55 Basinghall Street,
London EC2V 5EH, UK
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139