Annual Report
2018
YoUr food
is Our
Passion
Cherkizovo Today
No. 1
Top-ranking
Russian meat
producer1
No. 1
Leading poultry
producer in 20182
No. 2
Second largest
pork producer
in Russia in 20183
No. 3
Third largest
turkey producer4
B1
MOODY’S rating
The Group’s shares are quoted
on the Moscow Exchange (MOEX)
MOEX ticker: GCHE
Cherkizovo Group is the largest meat
producer in Russia committed to quality
and product excellence.
The Group is among the top three leading
manufacturers of poultry, pork and meat
processing products.
We know everything there is to know
about meat. We had our start in meat
processing and have since become
the country’s largest meat producer,
controlling the entire production
chain from growing and producing
crops to delivering the end product.
For us, it is all about our consumers:
we carefully monitor changes
in their preferences in order to meet
and even exceed expectations.
Following the market trend, we seek
to offer more healthy diet options
by developing new product lines.
ABOUT THE REPORT
The annual report contains
information on the activities
of Public Joint Stock Company
“Cherkizovo Group” (“Cherkizovo
Group”, “Cherkizovo”, the Group,
the Company) in the period from
1 January to 31 December of 2018.
The report discloses financial and
non-financial performance, details on
the Group’s strategy, and information
on the corporate governance
framework. It also covers the key
results of the Company’s corporate
social responsibility performance.
For the first time,
the Company
has prepared
the report with
reference to the GRI
Sustainability
Reporting Standards.
For further details on
the report and GRI Standards compliance,
see page 208-209
1
According to Agroinvestor ranking.
2
According to the Russian Union of Poultry Producers.
3
According to the ranking by the National Union of Swine Breeders.
4
According to Agrifoods rating. Company’s JV Tambov Turkey is ranked in the rating.
Our Values
Content
Producing delicious and safe
meat products is our priority
We are responsible for the results
of our work to the consumers,
employees and partners.
Our focus rests precisely
on consumer needs and the highest
meat quality for our products.
By developing our business,
we contribute to the agricultural
potential of the nation
We apply state-of-the-art technologies
in agriculture, engage highly qualified
experts, and develop both our existing
employees and young talent.
We are open to innovation
We are committed to developing
new ideas, solutions, technologies
and recipes, and adopting best global
practices, innovations and scientific
findings.
We are passionate about
what we do
We seek to maintain our success
by building on our strengths,
achieve excellence in what we do,
and deliver quality meat products
to our consumers.
We are a team of experts
in meat processing
We employ specialists with
a high level of professionalism
and expertise in their fields.
02
02
04
08
10
22
23
24
26
26
30
34
38
40
42
45
46
48
52
52
56
60
66
70
74
80
96
98
104
108
110
110
127
ABOUT COMPANY
Key Performance Indicators
Segment Overview
Geography
Your Food is Our Passion
Core Strengths
History
Key Events
STRATEGIC REPORT
Message from the Chairman
Message from the CEO
Market Overview
Strategy
Business Model
Supply Chain
Investment Program
Quality Management System
Innovations and R&D
Operating Results
Poultry
Pork
Meat Processing
Grain and Feed
Turkey
Product Strategy
Financial Results
Sustainable Development
Our Employees
Health, Safety and the Environment
Community Relations
CORPORATE GOVERNANCE
Corporate Governance System
Shareholder and Investor Highlights
130
CONSOLIDATED FINANCIAL STATEMENTS
206
207
208
210
211
212
APPENDIX
About the Report
GRI Content Index
Glossary
Supplementary Information on Staff
Contact Information
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FINANCIAL STATEMENTS
APPENDIX
Key Performance
Indicators
OPERATING HIGHLIGHTS
Poultry sales,
’000 tonnes
+4% y-o-y
522
500
544
Pork sales,
’000 tonnes
+18% y-o-y
200
185
237
For further details see:
Poultry 52
For further details see:
Pork 56
2016
2017
2018
2016
2017
2018
Meat Processing sales,
’000 tonnes
+12% y-o-y
218
204
230
Turkey sales1,
’000 tonnes
+49% y-o-y
26
39
For further details see:
Meat Processing 60
For further details see:
Turkey 70
2016
2017
2018
2017
2018
Grain sales,
’000 tonnes
+54% y-o-y
453
339
696
For further details see:
Grain 66
2016
2017
2018
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CHERKIZOVO GROUP
1
Turkey data represents sales of turkey meat produced
by Tambov Turkey JV through the Group’s distribution network.
2
Headcount is indicated without regard of Tambov Turkey JV
and companies acquired in 2018.
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APPENDIX
3
Estimated as accrued dividends divided by net income adjusted for net change in fair value
of biological assets. On 16 May 2018, Cherkizovo Board of Directors approved dividend payout
of not less than 50% of IFRS net income subject to leverage (mid-term net debt/EBITDA <2.5x)
and ability to finance existing operations and development (incl. M&A).
FINANCIAL HIGHLIGHTS
Revenue,
RUB billion
+13.5% y-o-y
90.5
82.4
Net profit,
RUB billion
+107% y-o-y
Dividends,
RUB billion
102.6
102.6
12.0
12.0
67%
5.4
53%
46%
3.3
5.8
2016
2017
2018
2016
2017
2018
2016
2017
2018
1.9
0,6
Payout Ratio3, %
RUB million / %
Revenue
Gross profit
Operating expenses
Adjusted EBITDA
Adjusted EBITDA margin
Operating profit
Profit before tax
Net profit
Net cash flow from operating activities
2016
82,417
17,855
(12,798)
9,484
11.5%
5,056
1,960
1,919
9,369
2017
90,465
23,559
(13,612)
14,643
16.2%
9,726
5,956
5,800
13,016
Net debt
36,949
48,669
2018
Year-on-year, %
102,639
31,923
(16,311)
20,416
19.9%
15,555
11,793
12,004
14,177
58,559
13.5%
35.5%
19.8%
39.4%
3.7 pp
59.9%
98.0%
107%
8.9%
20.3%
NON-FINANCIAL HIGHLIGHTS
Headcount2,
‘000 employees
+1.5% y-o-y
22.8
23.2
25.5
23.5
LTIFR,
+33% y-o-y
1.80
1.50
1.99
For further details see:
Our Employees 98
For further details see:
Health, Safety and the Environment 104
2016
2017
2018
2016
2017
2018
CHERKIZOVO GROUP
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Annual report 2018
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APPENDIX
Segment
Overview
The Group is structured into the product
segments of Poultry, Pork, Meat Processing
and Grain and Feed. We also make turkey meat
products as part of our joint venture with Grupo
Fuertes.
Revenue by segment,
Meat sales by segment,
%
%
5%
5%
30%
42%
4%
22%
22%
18%
Poultry
Pork
Meat Processing
Turkey
Grain
RUB bln
53.8
23.6
38.4
5.8
7.0
Poultry
Pork
Meat Processing
Turkey1
52%
th tonnes
544.2
236.9
229.5
39.2
The bulk of the products is sold
through retail networks and
the HoReCa segment. The Group’s
centralized logistics infrastructure
enables us to achieve the fastest
delivery times.
Cherkizovo keeps a close watch
on and caters to consumer
preferences. We regularly conduct
large-scale marketing surveys, review
feedback, and test the key and new
products. This fuels market demand
for Cherkizovo’s products.
The vertically integrated business model
covers the entire production chain from growing
grain and feed production to end products,
which guarantees the highest quality
standards.
For further details see:
Business Model 40
1
Turkey represents operations related to purchase and subsequent resale of turkey meat produced by Tambov Turkey JV through the Group’s
distribution network. Turkey is not an operating segment of the Group.
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APPENDIX
POULTRY
The Poultry segment focuses
on chicken products and by-products,
as well as an extended mix of
branded products. We also have
a separate HoReCa product line.
Cherkizovo’s flagship brands
in the Poultry segment:
Core product categories:
chicken products:
whole chickens
cuts
chilled
and frozen meat
ready-to-cook products
by-products
Key facilities:
Mosselprom,
Moscow region,
Petelinskaya Poultry Factory,
Moscow region,
Vasilyevskaya poultry farm,
Penza region,
Lisko Broiler,
Voronezh region,
Kurinoe Tsarstvo,
Bryansk and Lipetsk regions.
Benefits
for the consumer:
M chilled and frozen meat
and ready-to-cook products
N guaranteed freshness
and quality
O wide assortment of ready-
to-cook products
Year’s highlights:
M purchase of Altaisky Broiler, which
gives the Group an entry point
to the Siberian Federal District
market;
N acquisition of claims under
the loan and security agreements
of Belaya Ptitsa Kursk.
2018 performance:
Sales
544 +4%
th tonnes
y-o-y
Revenue
RUB 53.8 +13.5%
billion
y-o-y
Please see page 52 for details
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APPENDIX
PORK
MEAT PROCESSING
The Pork segment embraces breeding
of market hogs and their sale to both
the Group’s entities and third parties.
In 2018, 87% of market hogs was
sold to the Meat Processing segment
to make end products. The rest were
shipped to third parties.
Cherkizovo’s Meat Processing
segment comprises two core product
categories, namely sausages and
meat products from pork, poultry
and turkey. Our products are sold
under several brands across different
price categories.
Core product category:
Leading brands:
market hogs
Core geographies:
Penza region
Lipetsk region
Voronezh region
Tambov region
Orel region.
Year’s highlight:
7new wean-
to-finish sites
launched in the Lipetsk, Voronezh
and Penza regions
Core product categories:
higher value added products:
a variety of sausages,
smoked meat, deli meats,
cold cuts
lower value added products:
raw meat, ready-to-cook foods
and minced meat
Key facilities:
slaughter facilities: Dankov, Penza;
meat processing plants:
Otechestvenny Product
(Kaliningrad), Cherkizovo-Kashira,
Cherkizovo MPP in Moscow and its
offshoots in Penza and Ulyanovsk
Year’s highlights:
M launch of a fully automated meat
processing plant in Kashira.
N purchase of a 75% stake
in Samson, set to strengthen
Cherkizovo’s position
in St. Petersburg and
Leningrad region1
1
Under the terms of identical shareholders’ agreements, operational management, including the
appointment of the General Director, remains within the authority of the seller until the final sale
of the residual 25% stake.
2018 performance:
Sales
237 +18%
th tonnes
y-o-y
Revenue
RUB 23.6 +26.2%
billion
y-o-y
Benefits
for the consumer:
M a large mix of high-quality
sausages, deli meats and ready-
to-cook products
N unique and consistent product
characteristics: taste, texture,
packaging
O strict quality control at all
production stages
2018 performance:
Sales
230 +12%
th tonnes
y-o-y
Revenue
RUB 38.4 +13%
billion
y-o-y
Please see page 56 for details
Please see page 60 for details
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GRAIN AND FEED
TURKEY
The Grain segment’s crops are sold
to third parties or used by the Group
to produce feed at in-house mills.
Core product categories:
Cherkizovo makes turkey products
at Tambov Turkey, its joint venture
with Grupo Fuertes. The full-cycle
process covers the entire production
chain – feed production, breeding,
slaughtering and processing.
crops (wheat, soy, sunflower,
corn, barley)
Brand
feeds
Core geographies:
Voronezh region
Lipetsk region
Moscow region
Orel region
Penza region
Bryansk region
Tambov region
Core product categories:
Turkey meat:
whole turkey
Core facility:
Tambov Turkey,
Tambov region
cuts (fillet, diced meat, steaks,
thighs, wings)
Important milestone:
we completed the soil
improvement and balanced plant
nutrition program.
ready-to-cook products
by-products
Year’s highlight:
Pava-Pava became Russia's
third
largest turkey brand1
2018 performance:
Sales
696 +54%
th tonnes
y-o-y
Revenue
RUB 7.0 +115.7%
billion
y-o-y
Please see page 66 for details
Benefits
for the consumer:
M chilled turkey meat and
ready-to-cook products from
the greenest region in Russia
N high-quality and low-calorie
fresh meat for people who
lead a healthy lifestyle
1
According to Agrifoods ranking.
2018 performance:
Sales
+49%
y-o-y
39
th tonnes
Revenue
RUB 5.8 +49.2%
billion
y-o-y
Please see page 70 for details
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APPENDIX
Geography
Cherkizovo Group’s production assets are located
in the most densely populated part of Russia –
Central Federal District, which is also characterized
by the highest purchasing power in the country.
The geography of our production sites enables
us to cater to over 80% of Russia’s population.
The purchase of new assets at the tail end of 2018
helped us to expand our sales geography in the
Siberian Federal District.
+1
Samson – Food Products
Kaliningrad
St. Petersburg
Vologda
Moscow
Bryansk
Kursk
Tula
Orel
Lipetsk
Tambov
Belgorod
Voronezh
Penza
Ulyanovsk
Samara
Rostov-on-Don
+1
Belaya Ptitsa Kursk1
+2
Belaya Ptitsa Belgorod 1
Krasnoyaruzhsky Broiler
1
Cherkizovo will begin to operate
Belaya Ptitsa assets pursuant to
a lease agreement in 2019.
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APPENDIX
Kaliningrad
St. Petersburg
Vologda
Moscow
Bryansk
Kursk
Tula
Orel
Lipetsk
Tambov
Belgorod
Voronezh
Penza
Ulyanovsk
Samara
Rostov-on-Don
7
poultry farms
9
feed mills
1
turkey JV
16
pig farms
12
grain elevators
19
warehouses
own and 11 leased
8
meat processing
and slaughter
facilities
~290
th ha
total land bank
+1
Altaisky Broiler
Barnaul
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APPENDIX
Your Food is
Our Passion
Food is not only our business – making the nation’s best
meat products is our passion and mission.
Our brands enjoy the highest recognition rates
in the Russian meat products market. We work continuously
to upgrade the design and packaging of our product lines
and to expand the offering to fully meet consumer needs.
TOP BRANDS BY AWARENESS1
Cherkizovo is
No. 1
brand
in Russia’s
sausage and pork
products market
Petelinka is
No. 1
brand
in Russia’s
poultry market
Pava-Pava is
No. 2
brand
in Russia’s
turkey market
Awareness rate
65.3%
Awareness rate
39.2%
Awareness rate
57.0%
1
2018 data, source: Ipsos Comcon.
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The high quality of our products is
recognized not only by our consumers,
but also by industry experts.
The Turkey Carpaccio
and Turkey Basturma
are the winners of Prodexpo-2018
Innovative Product award
The Product of the Year3
award winner
in the Chicken Meat category
The Product of the Year
award winner
in the Eco-friendly Meat category
The Po-Cherkizovsky hot dogs
and Balykovaya Po-Cherkizovsky
sausage have won
the Retailers' Choice award
at Prodexpo-2018
The Domashniye cutlets and
meatballs received
the Quality Guarantee 20182
gold medal
Chicken and turkey fillet cutlets
won the gold medal
at the Quality Guarantee 2018
competition
Chopped turkey cutlets
won the gold medal
at the Quality Guarantee 2018
competition
2
Quality Guarantee is an international competition held by the Gorbatov Food Systems Research Center in cooperation with the Agrarian
and Food Policy and Environmental Management Committee of the Federation Council of the Russian Federal Assembly.
3
The Product of the Year award is given to the most popular FMCG products. It is supported by the National Trade Association,
Moscow International Business Association, Chamber of Commerce and Industry of the Russian Federation, and the Moscow Government.
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>40 years
we have been
producing
high-quality
sausages
and deli meats
Consumers and profound understanding
of their needs are the top priorities
for Cherkizovo.
We maintain an ongoing dialogue with
our customers and partners, including
by leveraging the most advanced
formats and channels
of communication.
Hence,
we know all
the ins and outs
of delivering
truly tasty
meat products
For more details on
Cherkizovo products and recipes,
please see our web site at
www.cherkizovo.ru
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Your food is
our passion
Brothers Petya and Kostya like to quickly fill up on Cherkizovo’s juicy
Viennesehot dogs before school.
The hot dogs with a slightly smoked flavour are an ideal choice
for a nutritious snack which will fill you up with energy for the rest
of the school day.
Our
24 hour
delivery system
ensures the high
quality and freshness
of the products
on offer
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APPENDIX
For those, who
value their time
Natalia is a fan of delicious foods produced to original recipes.
As she lives and works in a big city, Natalia does not always have
enough time to cook. This is why she often buys ready-to-cook
Cherkizovo products, for example, pork loin for roasting.
Strict quality control
across the production
chain guarantees
a consistently high
quality and freshness
of our products in full
compliance with
all the applicable
regulations
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APPENDIX
Cherkizovo Group
uses only high-quality natural and fresh
ingredients for its products, with
a substantial part of processed
pork coming from the Group’s
own pig farms.
We use
only natural
food additives,
such as salt,
pepper and spices
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Accommodating
a wide variety of tastes
Maxim is a king of BBQ parties. He lovingly cooks Cherkizovo
branded pork escalopes on a grill and serves them to his friends.
Cherkizovo products come in handy for any occasion,
be it a regular lunch at home or a festive get-together with friends.
>100
items in our product
range, including a wide
variety of sausages,
ham, sliced meat,
smoked meat and pâtés
For more details on
Cherkizovo products and recipes,
please see our web site at
www.cherkizovo.ru
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Accommodating
a wide variety of tastes
Cherkizovo
is one of the leading brands
in the Russian meat market.
Before launching a new product,
we never fail to test it with our
customers and consult with
restaurateurs and nutritionists
to choose the most
delicious recipe.
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Turkeys for the Pava-Pava brand are
grown in the Tambov Region known
for its green spaces. Special care and
the right environment contribute
to the top quality
of our products.
Convenient
packaging
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Healt hy
eating
Maria is keen on keeping fit and puts great emphasis
on the dietary profile and calorie count of consumed products.
Pava-Pava turkey contains two times less fat than similar
products. This hypoallergenic and easy-to-digest product is
an ideal ingredient for baby or diet foods.
50%
less fat
The wide
Pava-Pava product
range includes
whole turkeys, turkey
thighs and wings,
medallions, diced meat,
thinly cut meat, steaks,
turkey by-products
For more details on
Pava-Pava products and turkey recipes,
please see our web site at
http://pava-pava.com
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Quality
and safety
assurance across
the production
chain
Petelinka
is a popular Russian chilled poultry
meat brand.
All Petelinka brands are produced
in strict compliance with the process
requirements, which guarantees
their strong survivability, high
quality, freshness and
excellent meat flavour.
Own-produced feeds,
in-house incubation,
diligent growth and
fattening of chickens
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APPENDIX
Products to satisfy
the pickiest palate
Natalia likes to cook for the whole family as she feels responsible
for the health of her loved ones. She puts great emphasis
on a balanced and varied diet, which will be able to accommodate
everyone’s taste.
Natalia opts for the Petelinka-branded chicken products, as they
do not contain any growth hormones, antibiotics or food additives.
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21
For more details on Petelinka
products and chicken recipes,
please see our web site at
https://petelinka.ru
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Core
Strengths
Vertically integrated business model
Cherkizovo Group boasts a strong vertically
integrated business model and has evolved into
a diversified protein producer for a sustainable
and resilient future.
Robust growth and solid financial position
The Group's financial performance has been steadily
improving. In 2018, our revenue rose by 13.5% to RUB
102.6 billion, adjusted EBITDA rose by 39.4% to RUB 20.4
billion, net profit rose by 107% to RUB 12.0 billion, and ROIC
rose by 3 p.p to 12%, with dividends increasing by 35%.
This growth is driven by business expansion as Cherkizovo
develops its existing assets and acquires new ones, while also
managing to maintain a stable financial position.
Please see page 40 for details
Please see page 80 for details
Combination of organic growth and M&As
Distribution and logistics
The Group pursues a strategy that combines
organic growth, driven by investments in new production
capacities, and acquisition of operating businesses well
suited for integration into the Group's business model.
In 2018, production growth was fueled by the launch
of new facilities, including the sausage plant in Kashira,
seven nursery and finisher sites, and the Tambov Turkey
joint venture, which reached full capacity in late 2017.
At the end of 2018, Cherkizovo acquired Altaisky Broiler
and Krasnoyaruzhsky Broiler, bought out Belaya Ptitsa’s
debt and purchased 75% of Samson – Food Products.
The Company controls all elements of the value
chain, which enables synergies in production and logistics,
reduces costs, and enhances quality control across
the production chain. A well-developed logistics
system allows Cherkizovo to guarantee prompt delivery
of refrigerated products to consumers across the regions
where the Company operates. The Group continues
to solidify its competitive edge in logistics, in particular
by developing the supply chain and centralizing its
logistics operations.
Please see page 38 for details
Please see page 42 for details
Strong brands
Our team
Cherkizovo Group continues to strengthen its brand
portfolio, which includes the highly recognizable
and popular brands of Cherkizovo and Petelinka. In just
two years, the Company’s new Pava-Pava brand has
become the second largest in the turkey meat market.
Our people are our key competitive advantage.
At Cherkizovo Group, we have a strong team led
by outstanding industry professionals. The Company's
executives have significant track record working in major
Russian and international companies and have been
repeatedly ranked among the Top 1,000 Russian Managers.
Please see page 74 for details
Please see page 98 for details
Quality excellence
The Group continues to put quality, safety
and taste first. We implement stringent quality assurance
and biosafety standards to ensure a consistently high
product quality for our consumers. Cherkizovo develops
its product offering in line with consumer preferences
and latest market trends.
Technology and innovation
All of our production sites were designed to meet
the latest efficiency and veterinary safety requirements.
In 2018, the Group launched the cutting-edge sausage
plant in Kashira that fully complies with the Industry
4.0 vision. Relying on our in-house R&D expertise,
we make sure all Cherkizovo products are covered
by comprehensive food quality and safety control.
We also have a large-scale research program in place.
Please see page 74 for details
Please see page 46 for details
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CHERKIZOVO GROUP
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FINANCIAL STATEMENTS
APPENDIX
History
1974
Cherkizovsky Meat
Processing Plant opens
in Moscow
Today
8
meat
processing plants
1995
Cherkizovo Group taps
into the pork market
by acquiring
the Kuznetsovsky pig farm
16
pork
production facilities
230
th tonnes
237
th tonnes
of pork
1998
The Group enters
the poultry market
after acquiring
the Petelinskaya poultry
production facilities
7
poultry farms
544
th tonnes
of poultry
No. 1
in Russia
by meat production
No. 2
in Russia
by pork production
No. 1
in Russia
by poultry production
2012
Cherkizovo taps into
the crop farming market 290
th hectares
hectares of land
696
th tonnes
of crops
2016
Cherkizovo Group
launches export
operations
2017
Tambov Turkey reaches
full production capacity
exports its products to markets across
the CIS
and South-East Asia
By the end of 2018
Tambov Turkey
No. 2
in Russia
by sales volume and Pava-Pava brand awareness
CHERKIZOVO GROUP
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Annual report 2018
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APPENDIX
Key
Events
15 January
11 May
17 July
Cherkizovo Group opens
a unique robotized meat
processing plant in Kashira
Cherkizovo Group launched
a robotized dry sausage
plant near Kashira. The new
plant is expected to produce
up to 30,000 tonnes of
finished products per annum.
With the facility put into
operation, Cherkizovo Group
will account for 30% of all dry
sausages produced domestically.
7 September
Petelinka gets a new design
Cherkizovo Group changed
packaging for the entire range
of Petelinka-branded cutlets.
The move followed the launch
of the Clean Label advertising
campaign to market Petelinka
products as natural and healthy
food without any dangerous
additives.
18 September
Cherkizovo Lab named
top 10 laboratory in Europe
Cherkizovo Lab ranked 9th
in interlaboratory comparative
tests organized by Fapas
(UK) and GD Animal Health
(Netherlands). This remarkable
achievement confirmed
the strong expertise
of Cherkizovo Lab's team.
Cherkizovo officers meet
with university students
Cherkizovo held a meeting
with students and professors
of the Moscow State University
of Food Production. The Group
runs a special purpose Youth
program aimed at attracting
young talents. During the year,
Cherkizovo staged a number
of dedicated events, including
an open day at Cherkizovo Lab
and meetings at the Russian
State Agrarian University –
Moscow Timiryazev Agricultural
Academy, Razumovsky Moscow
State University of Technologies
and Management and Moscovia
College.
16 May
Board of Directors approves
new dividend policy
The amended version
of the Dividend Policy sets
the minimum dividend payout
ratio at 50% of net profit adjusted
for net change in fair value of
biological assets.
2 July
Group relaunches
Cherkizovo brand
Po-Cherkizovsky became
the flagship product range
for the Cherkizovo brand.
4 July
Petelinka wins acclaim at
Loyalty Awards Russia 2018
Petelinka’s loyalty program was
recognized as the Best FMCG
Brand Loyalty Program and
won a prize for its Efficient Use
of Mobile Technology in Loyalty
Program.
New nursery and finisher
site opens
Cherkizovo Group launched
a new nursery and finisher site
in Gryzlovo, Lipetsk Region, with
a total capacity of 5,100 tonnes
of live-weight pork per annum.
Later in the year, another six pork
facilities were opened.
31 January
Company launches
a new turkey product
Cherkizovo Group launched
a new turkey product – Herbes
de Provence legs. The Company
is committed to continuously
expanding its product range.
In 2018, Pava-Pava became
Russia's second largest brand
in terms of turkey sales volumes.
1 March
Cherkizovo products win
prizes at Prodexpo
Four Cherkizovo-branded
products won the Innovative
Product and Retailers' Choice
awards at Prodexpo 2018.
The Innovations in Technology
prize is awarded to goods
boasting improved consumer
properties thanks to the use
of new production technologies.
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CHERKIZOVO GROUP
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APPENDIX
29 October
29 November
25 December (continue)
Cherkizovo Group publishes
its Industrial Meat Supply Index
Based on data from the Federal
State Statistic Service, Federal
Customs Service and Eurasian
Economic Commission,
the index is one of the few
leading indicators giving an idea
of the up-and-coming market
trends and reflecting changes
in meat supply in Russia.
31 October
Cherkizovo Group completes
harvesting campaign
The Company achieves high
yields through the systematic use
of intensive farming technologies,
organic and non-organic fertilizers
and high-yielding heirloom and
hybrid seeds.
19 November
Petelinka and Pava-Pava win
Product of the Year awards
Petelinka picked up another
win in the Chicken Meat
category, while Pava-Pava
came in at No. 1 in the Eco-
friendly Meat nomination.
Cherkizovo participates
in the first meeting
of the FoodNet task force
Cherkizovo stressed
the importance of engaging
large agricultural companies
to implement the FoodNet
initiative. FoodNet aims to create
a food market of the future
by using the smart farming,
accelerated breeding and
personalized nutrition techniques.
4 December
Cherkizovo Group completes
acquisition of Altaisky Broiler
The Group closed a deal to buy
Altaisky Broiler for a total cash
consideration of RUB 4.6 billion.
Altaisky Broiler is one of
the largest poultry producing
companies in the Siberian
Federal District. The acquisition
will boost the Company’s share
in the Russian poultry market
to 12% and open up access
to the Siberian market.
25 December
Cherkizovo Group buys
out Belaya Ptitsa’s debt
The Group acquired Russian
Agricultural Bank’s rights to claim
a total of RUB 6.5 billion from
Belaya Ptitsa Kursk, Belaya Ptitsa
Belgorod and Zagorye
under their loan and security
agreements.
Belaya Ptitsa Group is a
chicken meat manufacturer.
Belaya Ptitsa Kursk can produce
up to 120,000 tonnes of meat
per annum. In 2017, its market
share stood at 5% in volume
terms.
26 December
Cherkizovo Group closes
the deal to buy a 75% stake
in St. Petersburg-based Samson –
Food Products
The strategic partnership struck
between the two companies
after the deal will strengthen
Cherkizovo’s position in
St. Petersburg and the North-
Western Federal District.
Samson – Food Products is
known as a producer of low-fat
chilled meat goods. According
to the company's own data,
its share in the minced meat
and meat processing market
segment of St. Petersburg and
the Leningrad region totals 41%.
Under the terms of identical
shareholders’ agreements, we
have agreed that operational
management, including the
appointment of the General
Director, remains within the
authority of the seller until the
final sale of the residual 25%
stake.
Events after the reporting date
29 March
Based on Cherkizovo Group's performance in 2018, the Annual General Meeting of Shareholders has resolved
to pay out dividends on its ordinary shares in the total amount of RUB 4.5 billion.
CHERKIZOVO GROUP
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Annual report 2018 ABOUT COMPANY
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APPENDIX
Message
from the Chairman
2018 saw Cherkizovo Group hit an all-time high
in operational and financial performance,
with sales boosted across all key areas, a 13.5%
increase in revenue, and a 107% rise in net profit
year-on-year.
We achieved these strong results
in a relatively tough market
environment. Although primarily
driven by one-time factors, GDP
growth also increased by 2.3%.
Household final consumption
expenditure was up 2.2% from
last year’s 3.2%, while real
disposable income was 0.2%
down1. Despite the fairly flat
consumption profile in the market,
the Group managed to push sales
up and strengthen its foothold in key
segments.
1
Ministry of Economic Development of the Russian Federation.
Economy picture, January 2019.
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CHERKIZOVO GROUP
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APPENDIX
Revenue
RUB 102.6 +13.5%
billion
y-o-y
Net profit
RUB 12.0 +107%
billion
y-o-y
We continue to invest
in upgrades for our
facilities, optimize our
business processes
using the latest digital
technologies.
The meat product market is now
up against some stiff competition.
In recent years, the industry has
made marked progress, driven
in part by the government’s import
substitution policy. Subsidies
granted to poultry manufacturers
enabled them to step up
poultry meat production, while
the government ceased its support
at just the right time to balance
the market. A period of lower
poultry prices due to oversupply
forced some of the smaller and less
efficient producers to withdraw,
bringing about a stabilizing effect
on the market.
The government also provided
considerable support to pork
producers through subsidized
interest rates for the industry’s
investment projects, and a zero
tax rate on income from product
sales. Over the next two to three
years, new capacities are set to be
commissioned, but the import
substitution itself is coming
to an end. This means the need for
further state support is expected
to dwindle and manufacturers
will now seek to prioritize
improvements in efficiency over
volume.
To maintain growth and balanced
development in this changing
environment, Cherkizovo Group will
be focusing on high value-added
products, as well as developing and
promoting food which is natural,
tasty, and convenient. Our aim is to
be a leading FMCG company in the
meat product market.
IMPLEMENTING STRATEGY
The Group’s strategy is centered
on developing a successful and
sustainable business, maintaining
revenue and profit growth,
reducing revenue volatility, and
driving shareholder returns.
Our vertically-integrated structure
helps us to control costs and reduce
our OPEX. We are now focused
on evolving our offering and
promoting our products, while also
continuing to enhance operational
efficiency. To this end, we continue
to invest in upgrades for our facilities,
optimize our business processes
using the latest digital technologies,
and offer our employees and
managers more opportunities for
further professional development.
We plan to focus our investments
on processing, including higher value-
added poultry meat products and
sausage production. These projects
will help us to maintain our balanced,
organic growth and pursue
a reasonable dividend policy, while
also remaining open to opportunities
for expansion through M&As.
The Group is committed to
strengthening its brands and
increasing the selection of branded
products in the sales mix. We plan
to expand our range of ready-to-eat
and ready-to-cook categories and
to produce more natural and healthy
products, including chicken and
turkey meat, and products that are
free of antibiotics, E-numbers, and
preservatives. We are committed to
bringing all of our customers best-in-
class products, which are high-quality,
tasty, and competitively-priced.
CHERKIZOVO GROUP
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Annual report 2018 ABOUT COMPANY
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APPENDIX
In 2018,
our general
HoReCa sales
grew by by 50%
One of our greatest achievements in 2018
was the launch of a new fully automated
sausage factory in Kashira
capacity of
30,000
tonnes per year
We will also continue to adjust our
portfolio where necessary to respond
to changes in market trends and
consumer preferences.
Nationwide retail chains, including
X5 Retail Group and Magnit, are
the key sales channel for our
products: our sales through retailers
were up 15% in 2018. At the same
time, we are building on our
relationships with fast food chains.
In 2018, we became KFC’s largest
supplier, increased our sales to Burger
King significantly, and raised our
general HoReCa sales by 50%.
To strengthen our market
position even further, the Group
is implementing a strategy
for acquiring assets, provided that
they meet the Company’s strategic
priorities, such as reinforcing vertical
integration, expanding our capacity
to manufacture low-volatility, high
value-added products. We made
several deals of this kind in 2018,
including the acquisition of 75%
in Samson – Food Products, Altaisky
Broiler, and a number of other deals
in the Poultry segment to strengthen
the Group’s positions in key regions
where we operate.
Although we are prioritizing
the domestic market, we also
plan to increase our exports.
As a major food producer,
Cherkizovo Group plays an active
role in the joint efforts of public
and private sectors to expand
Russian exports. As per Russia and
China’s agreement on the supply
of poultry meat, by-products, and
dairy products in November 2018,
Cherkizovo Group has been listed
as one of the companies authorized
to export products to China.
This opens new doors to increase our
sales. We also see new opportunities
to market our products abroad as
part of our work with the HoReCa
segment.
Restaurant chains continue
to strengthen their foothold
in the Russian market and we are
responding to this trend in our
strategy. We plan to start supplying
McDonald’s restaurants in 2019.
Last year, we made all the necessary
preparations and obtained the
required approvals to this end.
One of our greatest achievements
in 2018 was the launch of a new fully
automated sausage factory in Kashira.
With a capacity of 30,000 tonnes
per year, the factory is one
of the largest of its kind in the world.
The Group is now positioned
to meet over 30% of Russia’s dry
sausage market. But we are not
stopping there. Over the next few
years, the Group will be implementing
Kashira 2, a project to build a meat
processing facility, which will increase
the Company’s capacity to 60 tonnes
of meat products and 100 tonnes
of cold cuts per day.
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CHERKIZOVO GROUP
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APPENDIX
ENGAGING STAKEHOLDERS
Cherkizovo Group recognizes its
responsibility to its stakeholders and
actively works with suppliers and
consumers, shareholders, employees
and local communities.
We are dedicated to catering
to the tastes and preferences
of the people who purchase our
meat products. When expanding
our product range, our focus is
on the needs and expectations of our
customers. Following the current
trends, we have focused on highest
quality healthy products (e.g. low-fat
turkey) and ready-to-eat food free
of additives and antibiotics.
The Group’s key partners include
federal retail chains and HoReCa
companies. Our work with such
large customers imposing stringent
requirements on meat freshness and
taste is evidence of the quality and
safety of our products. The Group
promotes cooperation with its
suppliers, consistently strengthens
its supply chain, and improves its
logistics infrastructure.
The Group is committed to delivering
higher shareholder value and
maintaining a stable dividend
level to secure investor interest.
2018 saw a significant increase
in Cherkizovo Group’s revenues,
and we plan to maintain our growth
through our existing strategy. For our
shareholders, we have introduced
a new Dividend Policy, which raises
the target dividend payout from 20%
to at least 50% of consolidated net
profit for the reporting period1.
RUB 3.3 billion in dividends was
distributed for the 2017 reporting
year with a dividend per share of
RUB 75.07. RUB 900 million was
distributed as interim dividends for
1H 2018 with a dividend per share
of RUB 20.48. The Group’s Board
recommended distributing RUB 4.5
billion as dividends for 2018. The total
shareholder return amounts to 8.4%
(including dividends paid in 2018).
IMPROVING CORPORATE
GOVERNANCE
In its operations, the Company
actively deploys the best corporate
governance practices. The members
of the Board are highly skilled
professionals with vast experience
in management, strategy, finance,
marketing, and agriculture. Last year,
the number of independent
directors increased to three.
The Board’s key committees –
the Audit Committee and Personnel
and Remuneration Committee –
are currently made up entirely of
independent directors. 2018 also saw
us continue refining our approach
to governance and best practices.
Innovations of note include the four
newly-established subcommittees
in the Board’s Investment and
Strategic Planning Committee.
In conclusion, I would like to extend
my gratitude to the Board members,
the Company’s management, and our
employees for their efforts towards
achieving the Group’s strategic goals.
I believe that combining our efforts
is the only way for us to ensure that
we will continue to develop our
Company, strengthen our leadership
in the Russian market, and deliver
on the targets we have set ourselves.
Evgeny Mikhaylov
Chairman of the Board of Directors
1
Consolidated net profit for the purposes of calculating the dividend may be adjusted for net
change in fair value of biological assets and agricultural produce and for incidental profit (loss) not
related to current operations.
Annual report 2018
CHERKIZOVO GROUP
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ABOUT COMPANY
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APPENDIX
Message
from the CEO
In 2018, Cherkizovo Group's continued focus on
its strategic goals produced impressive results.
Annual sales exceeded 1 mt for the first time
in the Company’s history, with the Pork,
Meat Processing and Poultry divisions adding
18%, 12% and 4% to their respective figures.
Our relatively new Tambov Turkey joint venture
enjoyed a spike of 49%. We managed to bolster
our positions in the market of meat and poultry
products, placing first in poultry, second
in pork and third in turkey.
The Group’s strong operating and financial
performance was mostly driven by greater efficiency
and expanded production capacities, including a
new sausage factory in Kashira and seven pig sites.
Our investment program is focused on processing
and product range expansion projects.
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CHERKIZOVO GROUP
CHERKIZOVO GROUP
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Adapting to consumer needs,
expectations and preferences
are our priority. We offer meat
and poultry products for any
occasion, from a regular lunch
at home to a festive get-together
with friends, and cover all income
brackets. Our marketing strategy
is aimed at expanding the branded
portfolio of value-added consumer
goods and developing our key
brands, including Cherkizovo,
Petelinka and Pava-Pava.
We are committed to streamlining
our processes to facilitate
cooperation with key accounts.
The Group’s competitive
advantages include a supply chain
built in line with the world's best
practices and overseen by a team
of professionals with experience
at leading FMCG companies.
Handling around 100,000 supplies
monthly, we ensure that our chilled
products are delivered to a wide
range of customers across our
footprint right on time. We always
seek to purchase goods produced
in Russia and support local
suppliers.
The Group strictly adheres to HSE
standards and puts humane animal
rearing and slaughtering at the
forefront of its agenda. We embrace
advanced technologies to maintain
perfect conditions, balanced diets
and continuous veterinary care
for all animals. In 2018, Cherkizovo
Group adopted an HSE strategy
to develop its health, safety and
environment system in the next
few years.
OUR PERFORMANCE
In 2018, sales across the Group’s key
segments increased a lot, while the
average sales price grew mostly on
the back of a higher share of value-
added products. Our revenue rose by
13.5% to RUB 102.6 bln, with EBITDA
reaching RUB 20.4 bln (up 39.4%
year-on-year). Stronger revenue
and EBITDA contributed to a 3 p.p.
surge in ROIC pushing it up to 12%. In
February 2019, the Board of Directors
recommended paying RUB 4.5 billion
in dividends, which represents a 35%
increase from a year ago.
In 2018, the Poultry division
expanded its sales by 4%
to 544.2 kt, while the average
sales price added 9% to reach
RUB 96.9 per kg mostly owing to
a higher share of branded products.
Its key brand, Petelinka has earned
a reputation for its range of high-
quality natural chicken products.
In 2018, the revenue from Petelinka
climbed up by 35%. Its leadership
in Moscow and St. Petersburg is
attested by strong brand awareness
at 82% and 66%, respectively.
As healthy lifestyles gain traction,
our Clean Label range has been
offering products that are free
of antibiotics, food additives, or
preservatives.
At the end of 2018, Cherkizovo
Group acquired Altaisky Broiler
to expand into the Siberian
Federal District market.
Around the same time, we bought
out debt of Belaya Ptitsa, a chicken
meat manufacturer. Since the
Central Federal District is the
brand's key region, we hope to gain
an ever stronger foothold in its
market for poultry products.
The Pork division also performed
well, with four new nursery and
finisher sites driving production
and sales up by 17% to 247.3 kt and
by 18% to 236.9 kt, respectively.
The average sales price increased
by 7% to RUB 98.2 per kg.
Excellent results were shown
in terms of costs and production
efficiency. In 2018, we became
a top 10 pork producer by
efficiency, meeting a target set
several years before. Our extensive
efforts included a genetic program
to ensure self-sufficiency in high-
quality genetic material.
In 2018, we put into operation
seven pig sites in the Lipetsk,
Penza and Voronezh regions to add
some 180,000 head to our annual
capacity in the segment. In 2019,
we plan to complete the pork farm
of a new type by launching a few
more similar nursery and finisher
sites in the Penza Region.
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In the Meat Processing division,
sales rose by 12% to 229.5 kt
mostly on the back of expanded
production capacities, including
the launch in Kashira. The
average sales price was almost
flat at RUB 169.6 per kg. In 2018,
we secured a leading position
in the steadily growing dry sausage
segment, which boasts great
potential amid a shift in consumer
perception driving the deli product
into the FMCG category.
Cherkizovo – our flagship
brand in the pork and sausage
categories – offers a wide range
of high-quality products. In 2018, it
was restructured to focus on mid-
and high-end markets for dry and
semi-smoked sausages and hams.
In 2018, we launched a fully
automated sausage factory in
Kashira, one of the world’s largest
factories of the kind, to satisfy
the growing demand for our meat
processing products. Cutting-edge
technology introduced to embrace
the Industry 4.0 vision has enabled
its production robots and ERP
system to interact directly via AI,
eliminating the need for human
involvement, reducing production
costs and ensuring the highest
quality and safety of products.
The launch in Kashira was
an important step to further our
strategy centered around branded
value-added products.
In a move to expand its value-
added portfolio, the Group
acquired a 75% stake in
St. Petersburg-based Samson –
Food Products. As Samson is
a well-known premium brand in
the local market, the acquisition
will bolster our position in both
the North-Western Federal District
and St. Petersburg.
In 2018, the Grain division
increased its sales by 54% to
696.1 kt, with grain harvested
in 2017 as the main driver. Yields
shrank by 24% to 479.7 kt due
to smaller crop areas for wheat and
corn. The average sales price added
41% to reach RUB 9.9 per kg.
One of the performance highlights
was the division's higher margin.
More intensive farming, as well as
further improvements in operational
efficiency and yields, are some of
our key priorities for the segment.
As at the year-end, the
Group’s land bank totalled
290 thousand ha, unchanged from
the previous reporting period.
Going forward, we plan to consider
using organic and non-organic
growth opportunities to expand our
land bank amid larger production
and sales.
The recent years have been marked
by a shift to healthier lifestyles.
In 2017, Cherkizovo Group leveraged
this trend by entering the turkey
market with Pava-Pava. A low in
calories type of meat, turkey is
an ideal choice for diet enthusiasts.
We grow our turkeys in the Tambov
Region, which is known for its green
spaces, to make products that
contain two times less fat than their
alternatives.
In 2018, turkey meat sales
significantly grew by 49%, to
39.2 kt and the average sales price
rising by 2% to RUB 147.9 per kg.
Most turkey was sold in Moscow and
St. Petersburg, where Pava-Pava
holds the second place.
As convenient food gains traction,
the demand for ready-to-cook
and ready-to-eat products grows,
prompting us to build up our
high-quality value-added offering.
For example, we plan to include
ready-to-eat and sausage products in
our Pava-Pava and Petelinka ranges.
32
|
CHERKIZOVO GROUP
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STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
QUALITY ASSURANCE
At every stage of the production
cycle, we are strongly committed
to quality and biosafety, making them
our priorities from farm to store.
The Group always seeks to improve its
quality assurance system and invest
in voluntary control methods, where
Cherkizovo Lab with its own solutions
is seen as a major contributor.
Trainings help our employees stay up
to speed on food safety.
In 2018, the government
stepped up its regulatory efforts
in respect of the products subject
to veterinary control. In July,
the Federal Service for Veterinary
and Phytosanitary Surveillance of
Russia (Rosselkhoznadzor) launched
Mercury, a nation-wide information
system that tracks animal source
products at each stage of their
life cycle. Cherkizovo Group fully
complies with the Mercury-related
requirements.
In 2018, we completed the roll-out
of the Hazard Analysis and Critical
Control Points (HACCP) system
and now look forward to obtaining
a certificate verifying our compliance
with the applicable standard.
The Group also started implementing
a new cooling technology to evaluate
finished products and identify
the stages with potential flaws.
Once in place, it will extend
the shelf lives of meat processing
and pork products. A similar
technology has already driven
a twofold increase in the poultry
shelf lives (from 5–6 days
to 12 days).
FURTHER DEVELOPMENT
In 2019 and the medium term,
we will continue to expand our
portfolio of high-quality pork,
chicken and turkey products
while implementing projects to
strengthen our key brands and
improve operational efficiency
across the board.
As we look to focus more on
the branded products, the share
of our valued-added offering is set
to grow from 60% to 80% in the
medium term, markedly boosting
revenue and profit per kg.
Strengthening and expanding
cooperation with our key
customers – federal retail chains
and fast food restaurants –
is another strategic priority.
In the medium term, we expect
our high-quality and competitively
priced products and robust
customer service to drive
the HoReCa segment’s share of
supplies from 5% to 15–20%.
Over the same period, our solid
relationships with retail chains and
current focus on the domestic
market will see the Group secure
a stronger foothold in such
regions as the Urals, Siberia and
northwestern Russia. In the longer
term, we also plan to expand
into new markets, including
those of Asian countries. The
Group’s strategic goal is to attain
leadership in Russia and become
one of the world’s most efficient
agricultural producers.
Our competitive advantages
include vertical integration, a wide
range of products catering to every
taste, a well-defined strategy, loyal
and highly qualified employees and
the trust of consumers and our key
customers – retail and restaurant
chains. I am convinced that all these
factors will help us achieve our
long-term strategic goals on time.
In 2018, our accomplishments were
largely attributable to seamless
teamwork, and I would like to
thank all the employees, managers
and directors for their role in our
collective success.
Sergey Mikhailov
CEO of Cherkizovo Group
Annual report 2018
CHERKIZOVO GROUP
|
33
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STRATEGIC REPORT
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APPENDIX
Market
Overview
Supply trends
In 2018, Cherkizovo Group
presented and began publishing its
Industrial Meat Supply (IMS) Index
on a monthly basis.
Based on data from the Federal State Statistic
Service, Federal Customs Service and Eurasian
Economic Commission, the index reflects changes
in meat supply in Russia and gives an idea of
meat consumption based on the relative stability
of inventories. The composite index includes
individual poultry, pork and beef supply indices.
The IMS Index remained almost flat (y-o-y) in January–December 2018 and was driven by the following key factors:
1
Relatively high level of supply
in 2017 (high base effect).
2
Higher production costs
largely driven by a significant
increase in the cost of grain and
soybean meal, which account for
up to 70% of the cost of pig and
poultry rearing.
3
Changes in the structure
of meat imports by country.
This factor influenced pork
supplies, with shipments from
Brazil banned in late 2017 due
to the use of ractopamine
(a growth promoter and
a possible carcinogen) by Brazilian
producers. Supplies resumed
on November 1, 2018, however
the volumes shipped in December
turned out to be insignificant
and had no material impact
on the market.
34
|
CHERKIZOVO GROUP
Prices for grain,
RUB per kg
Prices for soybean meal,
RUB per kg
15
15
12
12
9
9
6
6
3
3
8
1
n
a
J
8
1
n
a
J
8
1
b
e
F
8
1
b
e
F
8
1
8
1
r
a
M
r
a
M
8
1
8
1
r
p
A
r
p
A
8
1
y
a
M
8
1
y
a
M
8
1
n
u
J
8
1
n
u
J
8
1
8
1
l
l
u
J
u
J
45
45
35
35
25
25
15
15
5
5
8
1
g
u
A
8
1
g
u
A
8
1
p
e
S
8
1
p
e
S
8
1
8
1
t
c
O
t
c
O
8
1
v
o
N
8
1
v
o
N
8
1
c
e
D
8
1
c
e
D
8
1
n
a
J
8
1
n
a
J
8
1
b
e
F
8
1
b
e
F
8
1
8
1
r
a
M
r
a
M
8
1
8
1
r
p
A
r
p
A
8
1
y
a
M
8
1
y
a
M
8
1
n
u
J
8
1
n
u
J
8
1
8
1
l
l
u
J
u
J
8
1
g
u
A
8
1
g
u
A
8
1
p
e
S
8
1
p
e
S
8
1
8
1
t
c
O
t
c
O
8
1
v
o
N
8
1
v
o
N
8
1
c
e
D
8
1
c
e
D
Source: Institute for Agricultural Market Studies (IKAR).
4
Challenging epizootic
environment: forced culling
of livestock and poultry due
to African swine fever (ASF) and
avian influenza. With increased
outbreaks of avian flu and
reduced number of ASF incidents,
a number of large facilities
of leading pork and poultry
producers have been affected.
Number of outbreaks
188
109
82
2018
31
2017
ASF
Avian influenza
Source: World Organization for Animal Health
(OIE).
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APPENDIX
The Industrial Meat Supply Index
(composite)
The IMS Index remained almost flat (y-o-y)
in January–December 20181
1,000
900
800
700
600
8
1
n
a
J
8
1
b
e
F
8
1
r
a
M
8
1
r
p
A
8
1
y
a
M
8
1
n
u
J
8
1
l
u
J
8
1
g
u
A
8
1
p
e
S
8
1
t
c
O
8
1
v
o
N
8
1
c
e
D
The Industrial Meat Supply Index
of poultry
The Industrial Meat Supply Index
of pork
The Industrial Meat Supply Index
of beef
500
450
400
350
300
300
275
250
225
200
100
90
80
70
60
8
1
n
a
J
8
1
b
e
F
8
1
r
a
M
8
1
r
p
A
8
1
y
a
M
8
1
n
u
J
8
1
l
u
J
8
1
g
u
A
8
1
p
e
S
8
1
t
c
O
8
1
v
o
N
8
1
c
e
D
8
1
n
a
J
8
1
b
e
F
8
1
r
a
M
8
1
r
p
A
8
1
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a
M
8
1
n
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J
8
1
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8
1
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A
8
1
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S
8
1
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O
8
1
v
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N
8
1
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e
D
8
1
n
a
J
8
1
b
e
F
8
1
r
a
M
8
1
r
p
A
8
1
y
a
M
8
1
n
u
J
8
1
l
u
J
8
1
g
u
A
8
1
p
e
S
8
1
t
c
O
8
1
v
o
N
8
1
c
e
D
The Industrial Meat Supply Index
of poultry was up 1% in January–
December 2018, with a 4% increase
posted in December. The index
does not trace poultry statistics
broken down by turkey and broilers.
We estimate that the supply of
turkey increased in 2018, while
the supply of chicken meat remained
flat or declined marginally. In 2019,
we expect a slight increase in
the supply of chicken meat.
The Industrial Meat Supply Index
of pork went down by 1% in January–
December 2018. We estimate that
the index dynamics will be positive
in 2019.
The Industrial Meat Supply Index
of beef remained flat in January–
December 2018, with an 8% drop
posted in December. Import volumes
decreased, while the production
volumes remained unchanged.
In 2018, beef production increased
both in farm businesses and farm
households, picking up from
the negative growth posted earlier.
1
Here and throughout this report, changes are measured against the same time period last year.
CHERKIZOVO GROUP
| 35
Annual report 2018
ABOUT COMPANY
STRATEGIC REPORT
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APPENDIX
Demand trends
2018 saw the real disposable income
of Russian households stabilize, with
the annual decline of only -0.2%,
which is close to the statistical error.
According to Bloomberg's estimates,
GDP rose by 1.6% and the household
expenditure (a GDP component)
continued to grow. Retail prices
for pork and chicken meat
increased by 1% and 1% respectively.
In 2018, food inflation for many
products was primarily driven
by a rise in production costs due
to a weaker rouble and declining grain
harvests in the 2017–2018 season.
Importantly, since 2014 meat prices
in Russia have been growing much
slower than inflation, which signals
that the industry has developed high
efficiency and strong competition.
Changes in food prices,
%
Chicken eggs,
10 pack
26%
Chicken
(chilled and frozen)
20%
Chicken quarters
11%
Pork (excl.
boneless meat)
8%
Wiener
sausage
Potatoes
7%
7%
Bologna sausage
6%
Bananas
6%
Chopped meat
5%
Fish
(fresh and chilled)
Cheese
Bread
5%
5%
5%
Canned meat,
350 g
4%
Beef (excl.
boneless meat)
3%
Sunflower oil
Milk
Pasta
1%
1%
1%
-3%
Apples
-5%
Cucumbers
-10%
Tomatoes
-16%
Buckwheat
Change in disposable household income y-o-y,
%
Jan 18
Feb 18 Mar 18 Apr 18
May 18
Jun 18
Jul 18 Aug 18
Sep 18 Oct 18 Nov 18 Dec 18
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
-8.0%
Change in GDP and household
expenditures,
%
2016
2017
2018
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
-8.0%
-10.0%
GDP
Household expenditures
Source: Bloomberg.
36
|
CHERKIZOVO GROUP
Retail prices for pork
and chicken meat,
RUB
300
280
260
240
220
200
180
160
140
120
100
8
1
n
a
J
8
1
b
e
F
8
1
r
a
M
8
1
r
p
A
8
1
y
a
M
8
1
n
u
J
8
1
l
u
J
8
1
g
u
A
8
1
p
e
S
8
1
t
c
O
8
1
v
o
N
8
1
c
e
D
Pork
Chicken meat
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APPENDIX
Cherkizovo Group's ranking
in industry ratings
Cherkizovo Group is the leading meat
producer in Russia, with a share of
6.3%1. In 2018, the Company increased
its share in the total industrial pork
production by 0.6 p.p. to 6.1% and
remained second in the rating of
Russia’s largest pork producers,
narrowing the gap with the leader.
The increase in the Сompany's output
was driven by the implementation
of the program to improve parent
stock genetics.
Cherkizovo Group is the largest poultry producer
(including chicken and turkey) in Russia
with market share equal to 10.1%. In addition
to ramping up poultry production at its key
facilities, the Company acquired Altaisky Broiler
in December 2018.
Russian poultry market in 2018
Russian pork market in 2018
Ranking Company
Share in the total industrial
poultry production in Russia
Ranking Company
Share in the total industrial
pork production in Russia
1
2
3
4
5
Cherkizovo Group
Resurs
Prioskolye
FA Tkacheva
Belgrankorm
Other
10.1%
9.9%
8.2%
4.7%
4.5%
62.6%
1
2
3
4
5
Miratorg
Cherkizovo Group
Agro-Belogorye
RosAgro
Velikoluksky
Other
Source: the National Union of Swine Breeders.
10.2%
6.1%
5.3%
5.3%
5.2%
67.9%
Russian processed meat market in 2018
Russian turkey market in 2018
Ranking Company
1
2
3
4
5
Ostankino
ABI Product
Cherkizovo
Talina
Prodo
Other
Share in the total industrial
poultry production in Russia
Ranking Company
Share in the total industrial
poultry production in Russia
6.2%
4.8%
4.2%
3.9%
3.6%
77.3%
1
2
3
4
5
Damate
Evrodon*
Cherkizovo
Krasnobor
Other
*Ceased operations 2H 2018.
32.6%
16.6%
13.9%
9.1%
27.8%
1
According to Agroinvestor Magazine.
CHERKIZOVO GROUP
| 37
Annual report 2018
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APPENDIX
Our Strategy
Cherkizovo Group is the largest vertically
integrated consumer-driven meat producer in
Russia. Our strategy focuses on ensuring long-
term success and sustainability of our business,
supporting revenue and profit growth, and
delivering higher shareholder returns, which will
help cement our leadership in the Russian meat
market.
The Group seeks to respond to
consumer needs and preferences
by producing high-quality and
healthy foods.
We increasingly rely on advanced
technologies to secure the quality
of our products. In particular, we
leverage lean and Industry 4.0
techniques to minimize human
involvement and deliver
consistently high quality of end
products. Additionally, product
quality is monitored by our
corporate R&D center.
The Company’s facilities adhere
to the best available biosafety
practices, including rigid hygiene
standards for employees with
access to animals. The Group
operates its own logistics network
to ensure full control over the
vehicles and product safety
throughout the production cycle.
Committed to continuous growth,
we works tirelessly to upgrade
technologies, quality and safety of
our meat products.
38
|
CHERKIZOVO GROUP
PLANS FOR 2019
AND THE MEDIUM TERM
M Launching new pig farms
N Designing a project to construct
an oil extraction plant
O Strengthening positions in the
poultry and meat processing
markets, among other things,
through selective acquisitions
boosting shareholder value
P Developing the supply chain,
streamlining logistics and
supplier management
Q Expanding footprint, including
export geographies
R Our acquisition of Rosselkhozbank's
receivables from Belaya Ptitsa is
intended to be the first step in
our pending acquisition of Belaya
Ptitsa assets, through the recovery
of the underlying collateral under
the aforementioned security
agreements. We currently operate
these assets pursuant to a lease
agreement.
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APPENDIX
STRATEGIC PRIORITIES
1
Strengthening market
leadership
2
Increasing the share
of branded products
3
Ranking among top
quartile performers
globally
4
Deepening vertical
integration
STRATEGIC GOALS
Sustainable
development for the
benefit of consumers
and other stakeholders
Facilitating the overall
growth of the meat
industry
Achieving economies
of scale, among
other things, by
implementing new IT
solutions
Strengthening
competitive edge with
a focus on advanced
technologies and rigid
quality control
IMPORTANT MILESTONES
Higher revenue per
kilo of live weight and
gross profit
Strict cost discipline
in the short and long
term
Lower profit exposure
to FX rates and feed
ingredient prices
Lower gross revenue
dependence on
feedstock prices and
closer correlation
between revenue
and higher consumer
spending
Continuous
improvement at early
production stages to
boost competitiveness
both domestically and
abroad
Sustainably high
quality and biosafety
of end products
through direct control
along the entire
production chain
Retaining the market
share despite a strong
price competition
Carefully timed
product delivery and
supply from farm
to fork
Creating value
to shareholders
regardless of the
market environment
Buy-out of
Belaya Ptitsa
Kursk’s debt
Acquisition
of Altaisky
Broiler and
Krasnoyaruzhsky
Broiler
Launch of
Antibiotic-Free
Meat project
in the Poultry
segment
Construction
of seven new
nursery and
finisher sites
Acquisition of
Samson – Food
Products
Launch of the
Kashira plant
CHERKIZOVO GROUP
| 39
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APPENDIX
Our Strategy
Business model
RESOURCES
OUR BUSINESS
Investment in expansion and modernization
of production facilities
Cherkizovo Group uses a vertically integrated
business model
RUB 15.3 billion
CAPEX in 2018
8
new
production facilities launched in 2018
fertilizer
Key acquisitions in 2018
MEAT PRODUCTION
Altaisky Broiler,
one of the
largest chicken
producing
companies in the
Siberian Federal
District
Samson –
Food Products,
a leading minced
and processed
meat producer
in St. Petersburg
and the Leningrad
Region
Acquired
rights to claim
obligations from
Belaya Ptitsa
Kursk under their
loan and security
agreements
New assets will be integrated in our business model in 2019.
7
POULTRY
16
PORK
Highly qualified employees
23,496
1
TURKEY
GRAIN
204
th ha
grain
9
FEED
feed
544544544
544
544
th tonnes
237237237237
237
th tonnes
39
39
th tonnes
Research and development
Marketing research, consumer opinion polls
Own
R&D
center
1,500 sq m of unique
laboratory facilities
1,000 complex tests
for the agriculture, food industry
and medicine
RUB 102.6
billion
Revenue
2.9x
Net debt / EBITDA
40
|
CHERKIZOVO GROUP
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APPENDIX
9
Number of assets
External sales
Internal sales
OUR BUSINESS
PERFORMANCE
Our vertically-integrated business model offers
the following advantages:
High-quality, tasty and healthy foods
204
th ha
544
th tonnes
M control throughout the production cycle,
N adaptability to market conditions,
O economies of scale.
meat for processing
8
MEAT PROCESSING
High level of key brand awareness
in Russia
65%
57%
Cherkizovo
Pava-Pava
Recognition
of high-quality
products, including
the certification
of Petelinka and
Pava-Pava with
the Russian quality
mark
39%
Petelinka
Dividends
26%
Kurinoe
Tsarstvo
The Group paid dividends following 2018 results
RUB 5.4 billion
or RUB 122.11 per ordinary share
230230230230230230230230
230230230
230
th tonnes
th tonnes
Youth programs
Dual education programs
at 4
universities
74
students
enrolled in 2018
Sustainable growth underpinned by strong financial
position
Benefits for local communities
RUB 20.4
billion
EBITDA
Annual report 2018
19.9%
EBITDA margin
The Group is a large
taxpayer and creates
new jobs in the regions
of operation
The Group regularly runs
various sponsorship and
charitable projects to support
vulnerable social groups
RUB 900 million
~ RUB 10 million
CHERKIZOVO GROUP
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APPENDIX
Strategy
Supply chain
Our robust supply chain built in line with the best
international practices is a major competitive advantage
and the key to successful implementation of the Group’s
development strategy. Its smooth operation is ensured by
a team of highly qualified experts with extensive experience
working in leading international FMCG companies.
SUPPLY CHAIN STRUCTURE
Grain and Feed segments
The Group’s vertically integrated
supply chain starts with the Grain
segment. To meet the Group’s annual
production plans, we purchase
seeds, fertilizers and plant protection
products, with the bulk of harvested
crops sold in-house to our own feed
mills.
Our mills source feed ingredients both
within the Group and from third-party
suppliers. The purchases mostly
include soybean meal, grain and fats.
The Group manufactures some 6,000
tonnes of feed per day, all of which
is supplied to our own breeding
facilities.
Poultry and Pork segments
and the Tambov Turkey joint
venture
Our poultry and pork facilities procure
feed from the Group's feed mills
entirely. Tambov Turkey joint venture
produces its own feed.
In the Pork segment, animals are
first delivered to slaughter facilities
in Penza and Dankov. A part of pork
carcasses is then sold to third parties,
while the remaining portion is shipped
to the Group's meat processing
plants. Our goal is to increase the
share of pork supplied to in-house
production facilities. Currently,
approximately 250,000 tonnes of
half-carcasses are shipped annually.
In the Poultry segment, including the
Tambov Turkey joint venture, birds are
delivered to slaughter facilities, where
they are processed and then sold to
retailers. If there are no orders, the
Company has the capacity to store
some of the products in freezers.
Annually, some 600,000 tonnes of
birds are transported to slaughter
facilities.
Meat Processing segment
The Meat Processing segment is the
final element of our supply chain. It
involves the production of finished
products, including sausages and
ready-to-cook items, from the
components produced by our
animal breeding segments. The meat
processing products are supplied to
retailers and other customers.
OUR VEHICLE FLEET
We use our own vehicle fleet to
transport animals and products
between the Company's facilities.
This way we are able to ensure the
highest biosafety standards, as all our
shipments are closely monitored and
controlled by veterinarians to prevent
any potential biological hazards from
spreading across the supply chain.
We are also committed to humane
treatment of animals and make sure
that they are properly transported to
avoid any injuries. When needed, we
also rent third-party vehicles to deliver
our products to customers. Our
responsible transportation practices
help ensure superior product quality.
42
|
CHERKIZOVO GROUP
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IMPLEMENTATION OF MERCURY
INFORMATION SYSTEM
PROCUREMENT
In 2018, the government launched
Mercury, an electronic veterinary
certification system, mandating
industry players to obtain electronic
shipment certificates to enable animal
product tracking from farm to shelf.
Cherkizovo Group has successfully
implemented the system in its
supply chain. Mercury has improved
transparency in Russia’s meat supply
sector, enabling Cherkizovo Group to
further strengthen its market position
as a responsible producer and
supplier of animal products.
SALES
Cherkizovo Group is a leading
market player selling chicken, turkey
and processed meat products to
customers across Russia. Major
orders are shipped directly from
our meat processing plants. Smaller
orders are assembled at the BIKOM
distribution center in Moscow
and at the Company's subsidiaries
in St. Petersburg, Krasnodar,
Yekaterinburg, Ulyanovsk and Penza.
The BIKOM center and the Krasnodar
subsidiary have recently implemented
the SAP system to enable joint
shipments of chicken, turkey and
ready-to-cook products in the region.
See p. 78 for more sales information.
Cherkizovo Group procures feedstock
to meet production needs across
its value chain. We always seek to
purchase directly from manufacturers
to avoid the services of middlemen
and make the procurement process
more transparent and efficient. Our
annual procurement plans are drawn
up in a way to purchase the necessary
products at the lowest price.
All major feedstock and production
components are centrally procured
through the Group’s single
trading company accounting for
approximately 80% of all purchases
in financial terms. In the reporting
year, the Company switched to the
TenderPro electronic tender platform
for its procurement needs.
We work continuously to improve
our supply chain efficiency by
always comparing the products we
purchase with available alternatives.
If the latter are less costly and do not
compromise end-product quality, we
start using them in our production. A
more efficient procurement process
also helps reduce the Company’s
environmental footprint by limiting
the use of packaging materials.
The Company works exclusively
with reliable trusted partners and
maintains a register of responsible
suppliers. We verify supplier
certificates and conduct on-site
audits if necessary.
In the Grain segment, Cherkizovo
Group develops annual cultivation
plans based on its feed production
needs and the crop margins. The
Group has sufficient capacity to
store a seven-month supply of
grain for in-house needs. We seek
to purchase grain immediately
after the harvest when prices
are at their lowest. To free up
additional storage space for the
purchased grain, we dry and
preserve some of our own crop
right in the field.
Whenever possible, we seek to
purchase Russian-made products.
The company supports local suppliers
by purchasing feed grain from local
producers. Our experts travel to
the farms to assess the quality and
arrange for grain delivery to feed mills.
.
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APPENDIX
THE MAIN EXTERNAL PROCUREMENT CATEGORIES BY SEGMENT
PLANS FOR 2019
In 2019, we will continue working
on reducing our logistics costs,
streamlining warehouse and transport
logistics and enhancing procurement
planning. One of our major priorities
is to integrate the assets acquired in
late 2018 into the Company’s supply
chain.
In early 2019, we expect to complete
the expansion of the BIKOM
distribution center in Moscow,
which will almost double its storage
capacity with 4,000 additional pallet
positions and help further consolidate
shipments.
The project is estimated to cost
RUB 322 million.
Segment
Category
Grain and Feed segments
Seeds
Fertilizers
Plant protection products
Agricultural machinery and repair parts
Feed ingredients (including soybean meal
and fats)
Poultry segment
Veterinary drugs
Equipment and components
Genetic material
Tambov Turkey joint venture
Pork segment
Genetic material
Veterinary drugs
Equipment and repair parts
Feed ingredients
Genetic material
Veterinary drugs
Equipment and repair parts
Meat Processing segment
Ingredients for end-product manufacturing
Packaging
RUB 48.6 billion
worth of products was procured in 2018,
96% of which from local suppliers.
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APPENDIX
Strategy
Investment program
Cherkizovo Group has been implementing a large-scale
investment program, with some RUB 90 billion invested
in business development over the past decade, including
construction of new facilities, improving operational efficiency,
and introducing stringent quality control and biosafety
assurance mechanisms. These investments contributed
not only to our own business development, but also to
the growth of the industry at large. Most of the investment
projects were implemented in the Moscow, Lipetsk, and
Penza regions.
Today, major investments in pork
and poultry production facilities
are nearing their completion. Going
forward, we are planning to focus on
processing facilities, and specifically
on increasing production efficiency
and expanding high value-added
product lines as our core investment
priorities.
In 2018, our investments totalled
RUB 10.6 billion1, of which
RUB 4.9 billion were invested
in the construction and launch
of new facilities. The year saw the
opening of a unique fully automated
smoked sausage plant in Kashira, a
groundbreaking event for the Group.
In addition, we put into operation
seven nursery and finisher sites
in the Pork segment.
Apart from production facilities,
the Group invests in personnel
development, logistics optimization,
and efficiency improvement projects.
One of the priority investment
areas in 2018 was to finance the
standardization of the production
process and construction materials.
In addition, we continued investing
in development of our vehicle fleet,
including leasing new and replacing
old vehicles.
Our investment program mostly relies
on the Group’s own resources and
borrowings.
Investments in production projects by
segment are described in the operating
results sections on page 52.
Information on the meat processing plant
Information on personnel development is
in Kashira is provided on page 64.
provided on page 98.
Share of investments in main
segments,
%
19.8%
20.8%
3.8%
18.9%
36.8%
Poultry
Pork
Meat processing
Grain
Other investments
1
Figures that relate to investments on this page
are based on management accounts.
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APPENDIX
Quality Management
System
At the core of Cherkizovo Group's operations
is the “Quality from farm to fork” approach,
which enables us to offer products that comply
with all quality and biosafety requirements.
In order to ensure centralized
control and adherence to biosafety
standards, the Group enhances its
quality assurance system at every
stage of production, investing
in additional voluntary control
methods, improving its internal
quality standards, and implementing
cutting-edge technologies (that
includes Cherkizovo Lab's solutions).
The Group has made a big
investment in an innovative cooling
and temperature compliance
system for the poultry supply chain
(Poultry segment), stabilizing the key
organoleptic and safety properties
of its products and achieving
a twofold increase in the poultry
shelf lives (from 5–6 days to 12 days).
In 2018, Cherkizovo Group started
implementing this technology in its
Meat Processing segment to extend
the shelf lives of finished pork
products.
Marking a milestone for the year,
the Group completed the roll-out
of the Hazard Analysis and Critical
Control Points (HACCP) system.
In 2019, all facilities in the Meat
Processing segment are expected
to undergo international certification
to verify HACCP compliance.
All slaughterhouses in the Poultry
segment have been certified against
the Food Safety System Certification
(FSSC) international standard.
Three facilities in the Poultry segment
have received an international
Animal Welfare certificate for
compliance with the Humane
Husbandry standard. This kind
of certification is completely new
for Russia, but mandatory when it
comes to the EU and leading global
companies. Designed to minimize
losses and improve meat quality,
the standard is outlined to cover
animal treatment at every stage from
farm to processing. Following its
adoption, we saw an increase
in the output of AA (premium
quality) products. Cherkizovo Group
plans further improvements in this
area and expects to reconfirm
the certificate in 2019.
The quality management system
relies on the expertise and experience
of our employees, who regularly
attend professional training sessions
and study new methods of managing
food safety risks.
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The Group uses effective and safe
detergents and disinfectants,
and its equipment and production
facilities comply with the sanitary
and hygienic requirements of good
manufacturing practices (GMP).
Cherkizovo Group has been
certified under the following
international quality standards:
GOST R ISO 9001 – 2008 (ISO 9001)
for Meat Processing plants
and FSSC 22000 for Poultry facilities.
The new dry sausages plant in Kashira
is expected to undergo Food Safety
System Certification in Q1 2019.
The Group’s products comply with
the EU, UAE, Egyptian, Tanzanian,
Angolan, Beninese and Chinese
standards.
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APPENDIX
Quality Management
System
Elements of the Quality Management System
Element
Description
2018 results
Hazard Analysis
and Critical Control
Points (HACCP)
HACCP is a systematic preventive approach
to ensuring food safety and addressing biological,
chemical and physical hazards in production
processes.
Cherkizovo Group completed the implementation
of the necessary system elements.
Mercury
Mercury is a government system for tracking
animal source products to enhance veterinary
and biological safety and combat counterfeits.
Starting 1 July 2018, the use of the Mercury system
became mandatory.
Cherkizovo Group strictly adheres to the requirements
for the roll-out of the Mercury government information
system. The system tracks the Group's products
at each stage of their life cycle on the way from farm
to fork.
Laboratory
control
All stages of the production process feature
laboratory studies on an ongoing basis to ensure
regulatory compliance.
Control activities are performed regularly and comply
with all applicable requirements. In addition
to mandatory control procedures, the Company has
a voluntary product control system in place that makes
use of Cherkizovo Lab’s research.
Pest
control
Pest control is a complex system that includes
humane methods of preventing potential
contamination of foods by rodents, insects
and birds.
In 2018, the system operated as usual.
Employee
training
Regular food safety trainings for everyone to make
sure that the highest health and safety standards
are met.
Cherkizovo Group performs a knowledge
and qualification assessment for each employee
to identify any gaps, and organises educational
programs on a regular basis.
During the year, the Group arranged a series of quality
assurance and product safety trainings.
Requirements
for contractors
and supplier
management
Contractors may start working at the Group’s
facilities only subject to their full compliance with
the Group's quality and safety requirements.
In 2018, the Group continued to improve its supplier
management system, performing regular quality
and safety audits of supplied products and training
new contractors.
Consumer
feedback
management
The Group has two hotlines for clients and makes
sure that every complaint is investigated and dealt
with. Health-related complaints are looked into
within 24 hours, and other complaints are reviewed
within a seven-day period. The quality assurance
department and heads of segments receive daily
reports on all quality-related complaints.
In 2018, Cherkizovo Group continued working
to improve its consumer feedback management.
In particular, the Group developed and implemented
new procedures for receiving complaints,
and centralized the complaint handling process.
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FINANCIAL STATEMENTS
APPENDIX
APPENDIX
Innovations
and R&D
Cherkizovo Group seeks to innovate all
along its production chain. We rely on state-
of-the-art technologies to enhance the quality
and taste of our products and make them
more competitive.
R&D management
In 2018, the Group’s research
efforts reached a new milestone
as we set up a centralized R&D
function – Department of Research
and Development aligned with
international standards. The R&D1
management framework capitalizes
on the expertise of international
majors while also giving attention
to the business structure and legacy
of Cherkizovo Group.
The R&D function is in charge
of cross-functional project interaction
between the core divisions
of the Group – marketing, production,
procurement, financial control,
and quality assurance functions.
In order to effectively roll out R&D
projects, we cooperate with research
institutes: Gorbatov’s All-Russian
Meat Research Institute (VNIIMP),
the Scientific Research Institute
of Nutrition at the Russian Academy
of Medical Sciences, and the All-
Russian Research and Development
Institute of Poultry Processing
Industry (VNIIPP). The Group also
engages international experts from
Italy, Spain, Austria, and the US.
We operate two pilot facilities at
the sites of Cherkizovsky Meat
Processing Plant and Mosselprom
specifically for R&D purposes.
The facilities are equipped to simulate
any process flow in product
development.
Production innovations
Cherkizovo Group’s research
initiatives focus on tangible benefits,
mainly by ensuring best-in-class
quality of products.
Key R&D projects of 2018:
1
Removal of E number food
additives from Petelinka products,
which enabled the Group
to nearly double the sales
of cutlet products.
2
Process support for the launch
of a fully automated sausage plant
in Kashira. The R&D team has
fine-tuned the plant's processes,
and implemented and adjusted
the manufacturing of Cherkizovo
Group’s existing and new products
at the entirely automated facility.
1
R&D (Research and Development) : activities that give rise to launching a new product
into production, from academic research to manufacturing of prototypes.
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APPENDIX
APPENDIX
In 2018, students majoring
in Technology of Animal Products
were engaged by Cherkizovo’s R&D
function under the dual education
program. On top of skill development,
students also had an opportunity
to learn more about the R&D function,
its key focus areas and projects.
In 2019, the Group is planning
an additional round of recruitment
to bring in students for practical R&D
training and dual education.
R&D talent pool
We know from experience that
the Russian meat processing
industry has a shortage of skilled
R&D professionals. To source
human capital in R&D, Cherkizovo
engages graduate students and runs
mentoring and training programs.
One of Cherkizovo Group’s key
formats of cooperation with
educational facilities is its dual
education program. It combines
theoretical classes at a university
or college with hands-on workplace
experience. This helps young
professionals to improve the quality
of their education and competencies,
and to start working after graduation
without any additional onboarding
or extensive retraining.
3
Expansion of the Pava-Pava
product line with the introduction
of seasonal products for roasting
(turkey, rolls and spiced ham),
chopped ready-to-cook products
with stuffing (cutlets with paprika
or cheese), and steaks ready
for frying.
4
Launch of Cherkizovo chopped
bacon that pioneered L-board
packaging in the Russian market.
The solution helps make
the process flow more automated.
Also, with L-shaped cardboard,
removing bacon from the package
is easy – a feature that matters
for the end user.
For further details see:
Our Employees 98
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APPENDIX
Cherkizovo Lab
The R&D unit's strategic partner is
Cherkizovo Lab, an innovative in-
house R&D center. This experimental
laboratory is engaged in the analysis
of food products, feeds, packaging
and soil, and uses top-class, highly
efficient equipment unrivalled
in the Russian agricultural sector.
Cherkizovo Lab teams up with more
than 70 regular external customers.
It also holds dedicated training
sessions on a paid basis. Since
2017, Cherkizovo Lab has had an
educational licence that authorizes
it to run training programs for
the agricultural sector, and to award
official diplomas.
Cherkizovo Lab’s mission is
to control the quality of food
and feeds in line with applicable
standards. The center also conducts
independent analysis of products for
third parties (government agencies
and agricultural market players).
Cherkizovo Lab’s cutting-edge
equipment enables more than
a thousand types of laboratory
tests for all agricultural needs
ranging from soil analysis
to the quality control of finished
products and packaging materials.
The center conducts research
in biotechnology, genomics, molecular
biology, veterinary and sanitary
examination, and medicine.
To control product quality, the Lab
combines instrumental methods
of assessment and control,
and independent biosensor evaluation
of samples. This helps to track even
the slightest fluctuations in product
quality and effectively handle them.
The center enables Cherkizovo Group
to ensure high quality across its
production chain – from farm to fork.
2018 highlights
Feed and animal source products
quality control center
The center was one of the first
in Russia to successfully test
a method for analyzing enzyme
activity of beta-mannanase in feed
additives, premix compounds
and compound feeds, and implement
a method for in-vitro assessment
of feed and feed component
digestibility.
Also in 2018, a set of laboratory
methods to identify counterfeit
feeds and feed components was put
in place. For the first time in Russia,
three rounds of interlaboratory
comparative tests were organized
to focus on vitamin A and E levels
in premix compounds and amino acid
profiles of compound feeds.
http://cherkizovolab.ru/labs/food/
(only available in Russian)
Veterinary and sanitary
examination center
Food products from eight
of the Group’s poultry and meat
processing plants are monitored
daily in the veterinary and sanitary
examination laboratories.
In 2018, the center developed
and implemented methods for
the polymerase chain reaction (PCR)
detection of Salmonella species
and Listeria monocytogenes, which
resulted in a considerably higher
number of examined samples.
The year also saw a more than
fivefold increase in the total number
of microbiological tests at the center.
http://cherkizovolab.ru/labs/
veterinary/
(only available in Russian)
Genomics and molecular
biology center
The center was first in Russia
to develop and implement a method
for precise PCR typing to distinguish
between three Salmonella types.
In 2018, the facility developed
and implemented a method
for sequencing agents of chicken
infections, and successfully tested
molecular methods to identify disease
agents in potatoes.
http://cherkizovolab.ru/labs/
genomics/
(only available in Russian)
Taste tests
(for professionals and consumers)
http://cherkizovolab.com/labs/tasting
(only available in Russian)
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APPENDIX
In 2018, the number of tests
run by Cherkizovo Lab almost
doubled, exceeding
250 th tests
Cherkizovo Lab has been
implementing joint initiatives with
Skolkovo, RUSNANO and Sechenov
First Moscow State Medical University.
With an average age of 30,
the team consists of more than
30 talented Russian scientists.
Trained to international standards,
who regularly improve their
skills through international work
placements and workshops.
One of Cherkizovo Lab’s strategic
priorities is to create a platform
harnessing intellectual potential
for measurement methodologies
and modern technologies for
agriculture. Pursuing this aim,
the center has been arranging regular
training sessions and workshops
with world-class experts from Russia
and other countries, including the US,
Spain, and Germany.
Automation and digitalization
of laboratories
In July 2018, Cherkizovo Lab
implemented a laboratory information
management system (LIMS) offering
an integrated information space
to all customers and enabling real-
time process monitoring. Improving
research efficiency and credibility,
this solution can become a standard
for laboratories across the agricultural
sector.
In 2018, Cherkizovo Lab implemented
a Russian-made telemetry
and climate control system,
which had not been done by any
of the country’s laboratories before
that. This will ensure compliance with
the world's most stringent standards
for laboratories.
Transparency and audit
With trust from customers
and laboratory institutions as its
priority, Cherkizovo Lab is committed
to information transparency
and strong technical competencies.
Cherkizovo Lab is a top 10
laboratory, having ranked
9th overall in interlaboratory
comparative tests among more
than 90 leading European
providers and coming
in as the leader in a range
of categories, including determining
mass fractions of moisture,
crude fiber, fat-soluble vitamins
and micronutrients in feeds,
compound feeds and compound
feed components.
In 2018, it launched a series
of open laboratory audits for its
counterparties, with a representative
of Biovet, a key Cherkizovo Lab
customer, becoming the first
auditor. Biovet is a subsidiary
of Huvepharma, a large Bulgarian
pharmaceutical company with a focus
on manufacturing human and animal
health products.
Industry leadership
In 2018, Cherkizovo Lab enhanced
its leadership in laboratory tests,
research, diagnostics and examination
for the agricultural and food sectors.
The center participated in a number
of interlaboratory comparative tests
related to molecular and biological
detection of animal diseases
and chemical composition of feeds
and premix compounds, as well
as microbiological tests. This helped
to confirm technical competencies
of the center's personnel in all
of the areas above.
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Operational results
Poultry
The Poultry segment delivered an
impressive performance in 2018, with the
sales gaining 4% to reach 544 th tonnes
vs. 523 th tonnes in 2017.
2018 PERFORMANCE
The Poultry segment delivered
an impressive performance in
2018, with the sales gaining 4% to
reach 544 thousands tonnes vs.
523 thousands tonnes in 2017. The
growth was driven by increased
output at the key sites and the
acquisition of Altaisky Broiler in
December 2018. The demand-and-
supply balance was influenced
by the rouble exchange rate, the
roll-out of the Mercury government
information system, lower supplies
by other producers, with some of
them even leaving the market after
a long period of low prices. The
average sales price in 2018 grew
by 9% to RUB 96.9, primarily due
to a rising share of value-added
products in the sales mix.
2016
2017
2018
Finished product sales, ‘000 tonnes
500
523
544
Total sales, RUB bln
47.7
47.4
53.8
Average sales price, RUB/kg
94.9
88.8
96.9
7
poultry farms
+4%
+9%
544
Th tonnes
Sales gaining
96.9
RUB/kg
Average sales price
New products
In 2018, Petelinka
launched a number
of new ready-to-
cook products for
roasting such as Chicken Thighs
Tabaka, Drumstick in Herbal Tomato
Sauce, Fillet in Creamy Garlic Sauce
and Barbecue Wings. Some of the
products are sold in upgraded foil
packaging with an easy to remove
sticker and aluminium tray for
baking.
On top of that, the brand launched
unique chopped chicken and turkey
cutlets containing only natural
spices. The mix used in the cutlets is
rich in protein and easily digestible.
Petelinka has also upgraded the
packaging, which is now transparent,
with an easy peel film that can be
quickly removed with one hand.
The Group will continue developing
new products under the Petelinka
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Operational performance
Indicator
Сhicks per Hen housed, units
Hatchability, %
Hatchability (hatchery), %
Broilers days on feed, days
Feed conversion rate (FCR)
Yield, %
Livability, %
Live weight, gr
Density, heads per sq m
Efficiency index (EPEF)
Finished product sales,
‘000 tonnes
2016
108.6
77.4%
77.7%
36.7
1.66
2017
118.0
78.0%
77.6%
37.4
1.63
2018
111.1
79.1%
18/17
-5.8%
1.1 p.p.
+4%
78.6%
1.0 p.p.
500
523
544
38.3
1.66
2.4%
1.8%
84.5%
85.4%
85.8%
0.4 p.p.
94.6%
95.4%
95.2%
-0.2 p.p.
2,146
20.7
332.0
2,267
20.7
353.8
2,323
20.5
347.5
2.5%
-1.0%
-1.8%
2016
2017
2018
+14.1 %
CAGR
SALES AND BRAND DEVELOPMENT
Increasing the share of branded
products is among Cherkizovo
Group’s strategic priorities. The
Poultry segment demonstrated
strong results on this front as
the revenues from Petelinka and
Kurinoe Tsarstvo grew by 35%
and 24%, respectively.
Poultry sales by channel,
%
Poultry sales by brand,
%
brand – the offering is expected to
be expanded to include sausages
and new ready-to-eat options.
The Company is also working to
expand the sales geography of
Petelinka: the brand won a bigger
market share in St. Petersburg and
the North-Western Federal District,
while acquisition of Altaisky Broiler
will drive expansion to the Siberian
Federal District.
18.7%
16.4%
2018
3.2%
56.7%
5.0%
Modern Trade
HoReCa
Export
Traditional Trade
Wholesale
1.1%
29.1%
2018
26.5%
13.2%
30.1%
Petelinka
Kurinoe Tsarstvo
Other brands
No brand
Other
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APPENDIX
NEW ASSETS
In 2018, Cherkizovo Group achieved significant growth of its Poultry segment
through new asset acquisitions.
Altaisky Broiler
Krasnoyaruzhsky Broiler
In 2018, Cherkizovo Group acquired
certain assets of Krasnoyaruzhsky
Broiler for RUB 1.8 billion. Located in the
Belgorod Region, they will improve the
Group’s own supply of hatching eggs
making it less dependent on imports, and
strengthen vertical integration for lower
production costs.
BUY-OUT OF BELAYA PTITSA’S
DEBT
The Group acquired Russian Agricultural
Bank’s rights to claim a total of RUB 5.6
billion from Belaya Ptitsa Kursk, Belaya
Ptitsa Belgorod and Zagorye under their
loan and security agreements. The Kursk-
based facility can produce up to 120,000
tonnes of finished chicken products
annually and includes an incubator, seven
growth sites and a poultry-processing
plant.
In December 2018, Cherkizovo Group
completed acquisition of Altaisky Broiler
for a total cash consideration of RUB 4.6
billion.
Altaisky Broiler is among the largest
poultry producers in Siberia with the
annual output of 58,000 tonnes of
finished products. The acquisition will
boost the sales and provide access
to the lucrative market of West Siberia,
partially through the expansion of major
retail chains, that are Cherkizovo’s
long-term partners. The region’s
population stands at about 14 million
people, including Novosibirsk, Omsk,
Krasnoyarsk, Tomsk, and Kemerovo.
The Company will focus on the
promotion of Petelinka and Kurinoe
Tsarstvo in the top and medium price
categories, respectively. This strategy
will facilitate increased production of
butchered poultry and drive up the share
of value-added products, including
ready-to-cook meals, in the Group’s
portfolio.
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Clean Label
Cherkizovo Group controls the entire
production cycle of Petelinka products.
Feed formulations are adjusted by age
and are produced from the Company's
own grain and natural components
without added hormones. Petelinka
facilities are located in ecologically clean
areas of the Moscow, Bryansk and Penza
regions.
NEW CERTIFICATES
In 2018, the Group’s Vasilyevskaya
poultry factory received a national halal
certificate from the UAE’s Emirates
Authority for Standardization and
Metrology (ESMA) authorizing it to sell
halal products in the states of the Persian
Gulf. ESMA’s experts had checked the
production process and documentation
at the factory and confirmed compliance
with the strictest requirements.
In addition, the Group worked to ensure
compliance of its production processes
with the requirements of McDonald's,
and was duly certified to work with the
iconic fast food brand. The first ready-
to-cook products will be supplied to the
chain in 2019. In 2018, the Group was
already working with such major chains
as Burger King and KFC. Over the next
3 to 5 years, the Company intends to
significantly grow its HoReCa channel
to 15–20% of the total sales mix.
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BIOSAFETY
MAJOR INVESTMENT PROJECTS
OF 2018
Cherkizovo Group works hard to
minimize epizootic risks and protect the
bird population. The Group’s products
are compliant with all applicable
pathogen standards of Russia and the
Customs Union. Cherkizovo closely
cooperates with the Federal Service for
Veterinary and Phytosanitary Supervision
(Rosselkhoznadzor) to improve the
biosafety of its products.
The Group’s facilities abide by all
oultry farming standards and biosafety
requirements, which are on many
occasions more strict than in Europe.
All employees with access to animals
pass through disinfection zones. In 2018,
the Group expanded its pig farming
practices into the Poultry segment,
including separate transportation and
improved vehicle disinfection solutions.
In 2018, a single case of avian influenza
was recorded at the Company’s facilities.
It happened on the isolated site in the
Penza Region, used for parent stock
production, with no food manufactured
on the site. The Group promptly localized
and destroyed the infection and
managed to prevent it from spreading
to other sites. The case entailed losses
of RUB 100 million.
and supply the Moscow and
neighboring regions with high-quality
domestically manufactured food.
For instance, the capacity increase
at Mosselprom included construction
of a cooling unit, doubling the products’
shelf life, and upgrade of its slaughter,
evisceration, cooling and sorting
facilities to boost productivity by 50%
to 9,000 heads per hour. The existing cut
up line had its speed increased by 20%.
New cooling system at poultry
factories
Investment:
RUB 250 million.
In 2018, the Group commissioned new
cooling systems at the slaughter lines
of some of its facilities to cool the whole
birds and prolong the shelf life.
Completion of the first stage
of a capacity increase project
at Mosselprom
Investment:
over RUB 270 million.
Cherkizovo Group consistently develops
modern capacities and high-tech
facilities in the Moscow Region, that
enable the Company to increase the
volumes of added-value products
Plans
for 2019
In 2019, the Group will continue to enhance
efficiency in the Poultry segment – the newly acquired assets
will be integrated into the Group’s vertical structure and adjusted
to meet the production requirements.
Operational excellence and biosafety will remain an important
mission for the Group as the best practices continue to be
adopted to match the world's best standards.
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FINANCIAL STATEMENTS
APPENDIX
APPENDIX
16
pig farms
237
th tonnes
Finished product sales
98.2
RUB/kg
Average sales price
+18%
y-o-y
+7%
y-o-y
In 2018, the Company kept a high
number of live born piglets per sow
per litter – 13.1 piglets, up 4.8% year-
on-year with finisher loss decreasing
by 2 p.p., to 4.6%. Another strong
result was a 14.7% increase in kg
sold per sow totaling 3,354 kg. The
improvement of animal breeding
practice contributed to Cherkizovo
Group's excellent performance.
Operational results
Pork
In 2018, the Pork segment delivered
excellent results as production volumes
grew by 17%, to 247 th tonnes.
2018 PERFORMANCE
EFFICIENCY IMPROVEMENT
The growth was largely driven by
new production capacity that is
set to step up production to 300
thousand tonnes of live-weight pork
already by 2020, and by genetic
improvement of parent stock.
Sales grew by 18%, to 237 thousand
tonnes, including products of seven
new nursery and finisher sites in
the Lipetsk, Voronezh, and Penza
regions. This made the Group second
in the segment. The Company
intends to focus on branded product
sales down the road.
The average sales price grew by 7%
in 2018 to RUB 98.2 per kg.
In 2018, the Company continued
its efficiency improvement efforts
that contributed to production cost
optimization. Over the recent years,
Cherkizovo Group has built one of
the most efficient pork production
systems in the sector, making our
costs competitive both domestically
and globally.
The Group has been running its
genetic improvement program
since 2014. Livestock is replaced
within a three-year period. Thus,
we reaped all the benefits in 2018.
The new population shows better
reproductive, nursery and fattening
performance. The program is subject
to ongoing audits and updates: a
comprehensive external audit of
the genetic program is semi-annual,
while various production phases
undergo routine inspections.
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APPENDIX
APPENDIX
Operational performance
2016
2017
2018
‘18/‘17, %
+18%
Finished product sales,
‘000 tonnes,
Productive females, units
71,148
72,375
72,928
Piglets born alive per sow per litter
Pre-weaning mortality, %
Nursery loss, %
Finisher loss, %
Average weight, kg
Kg sold per sow
Feed conversion finisher
13.1
0.8%
4.8%
237
10.2
-0.3 p.p.
2.7
4.6
0.2 p.p.
-2 p.p.
200
185
12.5
10.5
2.5
6.6
12.0
12.3
3.7
8.3
119
119.5
123.2
3.1%
2,597
2,925
3,354
14.7%
2.66
2.6
2.56
-1.5%
2016
2017
2018
+17%
247
th tonnes
Production volumes
+26.2%
CAGR
QUALITY AND SAFETY
Revenue from product sales,
RUB billion
Average sales price,
RUB/kg
The Company is committed to
highest quality and safety in all
production phases. Cherkizovo's
facilities were assigned the fourth
zoosanitary status as high safety
farms. The Group used North
American standards to develop
proprietary programs intended to
protect and improve animal health.
The Company is subject to external
audits of manufacturing practices
and biosafety at its assets on a
quarterly basis.
23.6
98.2
92.1
88.3
18.7
15.9
2016
2017
2018
2016
2017
2018
Cherkizovo's facilities were
assigned the fourth zoosanitary
status as high safety farms.
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APPENDIX
MAJOR INVESTMENT PROJECTS
OF 2018
Finisher sites in the Lipetsk
and Penza regions
In 2018, seven new pig sites were
put into operation: four in the
Voronezh and Penza regions
and three in the Lipetsk region.
New nursery and finisher sites
commissioned in 2018 are based
on a standard design identical
to that of the sites built in 2017.
Each of the sites has a capacity
of c. 45 thousand market hogs and
5.8 thousand tonnes of products.
The Group prioritizes biosafety
in constructing new sites.
All new pig farms in the Penza
region are equipped with two staff
changing facilities to meet the
stricter biosafety requirements. This
has become a standard practice for
constructing the Group's pig farms,
as it earns our sites the highest
livestock sanitary status in Russia
enabling them to be classified as
Compartment IV facilities in terms
of biosafety. The advanced design
and construction technologies help
save time and resources.
Investments
in each site:
RUB550mln
Each of the sites has
a capacity of 45 th
market hogs and 5.8 th
tonnes of products.
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Caring for animals – quality
for the consumer
Cherkizovo Group is committed
to humane treatment of animals thus
helping us secure the high quality
of our products. 2018 saw Cherkizovo
Group update its standard operating
procedures by adding animal
treatment regulations across
all production phases.
One of the year’s key health protection
initiatives was the use of the needle-free
injection system offering a number of benefits:
M painless for animals,
N lower consumption of medicines,
O no damage to muscle fiber,
P no risk that needles might penetrate products.
Plans for 2019
Cherkizovo Group will continue to expand its
production capacities, as nursery and finisher sites are
to be completed at the pig farm in the Penza Region in 2019.
Further improvement of animal breeding practices during all production phases
is one of our key priorities in the segment.
In 2019, Cherkizovo plans to consider initiatives related to the procurement of
biologically safe feed ingredients. The Company will continue maintaining the
maximum possible biosafety level at its assets. As regards animal health
protection, the Group intends to roll out the needle-free system to its
other assets.
Annual report 2018
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APPENDIX
APPENDIX
Operating Results
Meat Processing
In 2018, sales in the Meat Processing
segment increased by 12% to reach
230 th tonnes.
2018 PERFORMANCE
The rise was driven by mixed
performance of different product
categories:
The average price changes by
product category were as follows:
M sausage price increased by 6%
M sausage sales went down by 4%
to RUB 184.4 per kg,
to 107,000 tonnes,
N cuts sales dropped by 24%
to 40,000 tonnes,
O half-carcasses sales increased
by 128% to 70,000 tonnes,
P by-products sales went up by
26% to 12,000 tonnes.
The average sales price1 was
almost flat y-o-y at RUB 169.6 per
kg vs. RUB 170.1 per kg in 2017.
1
Excluding VAT.
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N cuts price rose by 2%
to RUB 205.3 per kg,
O half-carcasses price hiked by 8%
to RUB 146.7 per kg,
P by-products price dropped
by 9% to RUB 53.9 per kg.
PRODUCTION AND SALES
OF SAUSAGES
In the reporting period, Cherkizovo
Group consolidated its leadership
in the smoked and semi-
smoked sausage market. In 2018,
the sales of finished products
decreased from 111,000 tonnes
to 107,000 tonnes (down by 4%),
while the Group's average sausage
price rose by 6% to RUB 184.4 per
kg1 due to higher sales of cured and
smoked sausages, the Group's key
segments.
8
meat processing
and slaughter
facilities
230 +12%
th tonnes
y-o-y
Sales
RUB 169.6
per kg
The average sales price
The Group is committed to
increasing the share of branded
products in the sales mix.
Last year, the Cherkizovo brand
was revamped in line with the new
strategy to focus on mid- and high-
end markets, including smoked and
semi-smoked sausages and ham.
As a result, Cherkizovo's product
range no longer includes low-price
categories, mainly hot-dogs and
cooked sausages.
PRODUCTION AND SALES OF RAW
MEAT AND READY-TO-COOK
PRODUCTS
Production of meat and by-
products increased by 31%
to reach 123,000 tonnes. At the
same time, cuts sales dropped
by 24% to 40,000 tonnes, while
half-carcasses sales grew by
128% to 70,000 tonnes and by-
products sales increased by 26%
to 12,000 tonnes.
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APPENDIX
APPENDIX
Sales in the Meat Processing segment by channel,
RUB million
754 263
5,488
5,300
2017:
34,020
22,215
Modern Trade
Wholesale Trade
Traditional Trade
1,391 481
5,302
11,288
2018:
38,439
19,977
Export
HoReCa
Sales in the Meat Processing segment by brand, RUB million
Brand
Total sales
Cherkizovo
Cherkizovo Premium
Myasnaya Gubernia
ImperiyaVkusa
Other
Private labels
Non-branded products
2017
2018
33,981
38,259
15,350
13,828
1,606
876
1,005
1,686
2,457
11,001
2,287
1,685
994
1,825
1,372
16,268
IMPROVING EFFICIENCY
AND QUALITY CONTROL
In 2018, Cherkizovo Group
continued to improve its production
efficiency. All of the Group's plants
have a lean manufacturing system
in place, embracing such tools as
5C, kaizen, training within industry,
standardized work and more. Lean
technologies are being introduced
into the operating culture, with
the employees becoming self-
supervisors overseeing their
activities at all stages of production.
Another 2018 milestone was the
launch of the Total Productive
Maintenance (TPM) system at the
Cherkizovsky Meat Processing Plant
and the Dankov Meat Processing
Plant. It helped reduce downtime
by 25% throughout the entire
production chain from slaughtering
to product packaging. The TPM
system is unrivalled in the Russian
meat processing market.
+6%
sausage
The average sales price
+2%
cuts
The average sales price
+8%
half-carcasses
The average sales price
In 2018, the Group achieved
FSSC 22000 certification.
Independent auditors confirmed
that Cherkizovo Group's production
processes and employee training
programs comply with European
standards.
The Group is committed to
maintaining consistent taste and
organoleptic properties of its
products and sets up taste panels
and audits of compliance with
technological regulations on a daily
basis.
The Group's facilities have launched
a project focused on ensuring that
their raw materials and ready-
to-cook products are metal-free.
All these measures contribute to
maintaining high quality of our
products.
For further information on quality control,
see p. 46
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Stringent quality
assurance
Cherkizovo Group uses only
high-quality natural and fresh
ingredients for its products,
with a substantial part of pork
coming from the Group’s own
pig farms. Beef comes from
farms located near Moscow.
We use only natural food
additives, such as salt, pepper
and spices, to manufacture
meat products, and natural
wood chips shavings to smoke
meat.
The use of advanced
production technologies is
key to making high-quality
products as they enable
an unmatched level of control
throughout the production
cycle. The Group's facilities
rely on lean techniques
as part of a modern approach
to organising processes.
MAJOR INVESTMENT PROJECTS IN 2018
Smoked sausage plant
in Kashira
Expanding capacity at the
Cherkizovsky Meat Processing Plant
Total investments
~ RUB 7 billion
Total investments
RUB 263 million
In 2018, the construction of
a unique fully automated smoked
sausage plant was completed in the
Moscow Region’s Kashira District.
With a capacity of 30,000 tonnes
per year, the plant is one of the
largest of its kind in the world.
The Group is now positioned to
meet over 30% of Russia’s smoked
sausage market.
The Cherkizovsky Meat Processing
Plant continued to implement its
projects aimed at boosting output
and operational efficiency.
For example, a bacon slicing and
packaging line with a capacity of
600 tonnes per month reached the
pre-commissioning stage, with the
commissioning scheduled for 2019.
For further information on the project,
see p. 64
Also in 2018, the plant increased the
throughput of its plate freezers by
15 tonnes per day.
Boosting production capacity at the
Penza Branch of the Cherkizovsky
Meat Processing Plant
Launching production
for KFC
Total investments
RUB 80 million
Total investments
RUB 23 million
In 2018, the Penza branch of the
Cherkizovsky Meat Processing
Plant launched a new sow slaughter
facility with a capacity of 100 heads
per hour, which will increase the
branch's production capacity from
600 to 1,200 tonnes of semi-smoked
sausage per month.
In spring 2018, the Cherkizovsky Meat
Processing Plant launched production
of chicken hot dogs for KFC with
a capacity of 15 tonnes per day.
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Plans for 2019
The Group's priorities
for 2019 include growth and
consolidation of its market position
through enhancing control over raw materials,
all stages of production and packaging quality.
We intend to continue increasing the share
of higher value-added and high-tech
products.
The Group plans to review its
product mix following the launch
of the fully automated plant in
Kashira. New technologies at this
plant will significantly increase the
shelf life and quality of products.
In addition, the new facility will
take over a part of the load of the
Cherkizovsky Meat Processing
Plant, while the latter will focus
on unique recipes of low-volume
manufacturing.
In 2019, the Group plans to expand
its product range under the
Cherkizovo brand, by introducing
fresh products apart from sausages.
Following the acquisition of
Samson – Food Products, the
Group is set to broaden its branded
portfolio of higher value-added
products and strengthen its
foothold in St. Petersburg and the
North-Western Federal District.
Cherkizovo Group plans to
build another meat processing
plant in Kashira, and the related
investment agreement with the
Governor of the Moscow region
was signed in May 2018. The first
stage of the project includes
the construction of a meat
processing plant with a capacity
of up to 60 tonnes per day and
a slicing facility with a capacity of
up to 100 tonnes per day by 2022.
By 2025, we plan to launch a fully-
fledged cluster of meat processing
facilities in Kashira.
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APPENDIX
APPENDIX
New Plant Opens
in Kashira
In June 2018, Cherkizovo Group launched
a new meat processing plant for the production
of dry sausages in the Kashira District
of the Moscow Region.
With a 30,000 TPA capacity, the new plant is
expected to serve over 30% of the domestic
dry sausage market, becoming one
of the largest in Russia and Europe.
The plant will have
the capacity to produce
up to 30 th tonnes
of finished products
per year
INDUSTRY 4.0
The project is unrivalled both
in scale and use of Industry 4.0 –
all production processes are
controlled by an AI-powered
robotic system. Other cutting-edge
technologies used at the plant
include software-operated automated
guided vehicles (AGV), robotic arms,
automated temperature-controlled
warehouses, and automated
packaging solutions. The automation
is not limited to production, but also
extends to procurement, planning
and sales.
The system is maintained by a team
of approximately 170 IT specialists
and engineers.
Minimized human involvement helps
mitigate human errors and ensures
the best quality and biosafety
of the products. With staff teams
that are significantly compact
compared to those normally engaged
in conventional production, the plant
gives priority to highly skilled
professionals rather than cost-cutting.
The facilities have integrated
modern sustainable technologies
and state-of-the-art equipment
from Italy, Germany, Spain, Denmark,
Austria, the Czech Republic, the UK
and Switzerland. The feedstock is
supplied from the Group’s own farms.
The plant is expected to reach its
design capacity in 2019, and will
strengthen the Group’s position
in the highly lucrative dry sausage
market segment.
The introduced technologies will
help bring the quality and taste
of the products to a whole new
level, and set the trend for the meat
industry in Russia.
64
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APPENDIX
APPENDIX
Sergey Mikhaylov
CEO of Cherkizovo Group
«What makes our plant in Kashira one-of-a-kind is that it is fully automated.
The idea of automation is not new in itself; similar technologies have been used
for decades. What is much more important is that the majority of production
processes are now operated by artificial intelligence.
While, previously, robots used to be teamed up with humans, in Kashira
we minimized human presence. These technologies help increase production
reliability and product quality».
The fully robotic plant
is one of a kind in
Russia both in terms
of safety and installed
equipment.
in the project totalled
Investment
> RUB 7billion
In December 2018, the government
of the Moscow Region awarded
the meat processing plant in Kashira
with a cup and a winner certificate
for Modernization of Processing
Facilities of the Moscow Region
in 2018.
For further details see:
Operational Results 60
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APPENDIX
APPENDIX
Operating Results
Grain and Feed
Cherkizovo Group continued to gain ground
in the Grain segment. Our sales surged by 54%
to 696 th tonnes, partially due to selling crops
harvested in 2017.
696 54%
th tonnes
y-o-y
Sales
9.9 +41%
y-o-y
per kg
The average sales price
2018 PERFORMANCE
GRAIN
The average sales price rose by 41%
to RUB 9.9 per kg driven by strong
wheat and sunflower sales and a 56%
and 17% increase in wheat and corn
prices, respectively.
The Group's total land bank remained
virtually unchanged year-on-year,
totalling 290 thousand hectares.
In 2018, the Grain segment saw gross
yield go down 24% year-on-year to
480 thousand tonnes due to smaller
crop areas for wheat and corn. In
planning its sowing campaigns,
Cherkizovo Group takes into account
both the components required for
feed production and crop margins.
In the reporting year, the Company
closed its harvesting season as
early as in October. The Grain
segment leverages intensive farming
technologies, organic and non-
organic fertilizers, high-yielding
heirloom and hybrid seeds.
The Group’s key crops are wheat,
corn, pea, soybean and sunflower.
In 2018, the Company reduced the
share of sunflower in its portfolio
while also increasing the crop area
for corn. There were no noteworthy
changes to other crops.
Also, this was the first year that saw
the Company succeed in growing
high-protein soybeans, an essential
ingredient of feed that makes up
a third of its cost.
Gross yield,
‘000 tonnes
–24%
632
480
Land bank,
‘000 ha
+1.0%
287
290
2017
2018
2017
2018
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APPENDIX
Grain elevator capacity,
‘000 tonnes
+10.5%
975
882
975
Average sales price,
per kg
23.3
17.4
8.9
6.3
2016
2017
2018
2018
2017
2018
CROPS
Sales,
‘000 tonnes
25
86
173
696
350
Wheat
Corn
Sunflower
Soybean
Yield,
t/ha
4.4
4.0
7.7
7.5
The majority of
Cherkizovo Group's
assets are located in
the most fertile Central
Black Earth regions,
namely Lipetsk, Orel,
Tambov and Voronezh
regions
2017
2018
2017
2018
CHERKIZOVO GROUP
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2.3
1.8
1.8
1.6
Wheat
Corn
Sunflower
Soybean
Crop area,
‘000 ha
78
71
36
32
9
21
22
19
Wheat
Corn
Sunflower
Soybean
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In 2018, the Company kept
improving soil and balancing plant
nutrition across its land bank.
In particular, we
1
continued with our efforts to
maximize the use of our own
organic fertilizers
2
tilled 25,000 hectares as part
of our amelioration program to
increase the soil pH from 4.5 to 6
In the reporting period, the Group
worked to improve the segment's
management and operational
efficiency. One of our priorities was
to introduce standard operating
procedures (SOPs)1, a set of
step-by-step instructions seeking
to help employees carry out
complex routine operations. SOPs
will be instrumental in securing
sustainably high product quality
and strong performance across all
the Group’s assets. The Group also
kept upgrading and expanding
its fleet of agricultural machinery,
including multi-purpose tractors,
broadcast self-propelled sprayers,
and seed drills with an electronic
precision planting system.
FEED
The segment's major focus area
is feed manufacturing for internal
needs. Cherkizovo's Poultry and
Pork segments fully rely on feeds
produced in-house. This helps
control costs and manufacture
high-quality and biosafe products.
In 2018, feed output totalled
1,830,000 tonnes (+ 9.4%).
Over the year, the Group worked
to improve its performance in
a number of areas, including
personnel training, equipment
upgrade, and logistics optimization.
Cherkizovo places a special
emphasis on the quality and
well-timed delivery of feeds to its
production sites, as this is essential
for animal welfare in its other
segments.
Operational performance
Indicators
Feed mills, pcs2
Feed, ‘000 tonnes
2017
2018
‘18/‘17, %
9
9
—
1,672
1,830
9.4%
1
SOP is a set of step-by-step instructions seeking to help employees carry out complex routine operations.
2
Feed segment only.
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Full self-sufficiency in feed
Cherkizovo Group monitors feed quality
at every stage, from growing crops to
delivering feed to breeding farms.
Feed output
1,830 +9.4%
th tonnes
y-o-y
Plans for 2019
We plan to continue streamlining the segment's
processes and working on a wider application of the
best available agricultural practices and our amelioration
program.
Going forward, the Group will consider building its own
soybean processing plant in the Lipetsk Region.
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APPENDIX
APPENDIX
Operating Results
Turkey
In 2018, the project delivered the sales of
finished products at 39 th tonnes, up 49%
year-on-year.
2018 PERFORMANCE
In 2018, Cherkizovo Group
continued to gain ground in the
Turkey business with Tambov
Turkey, its joint venture with Grupo
Fuertes. Having reached its design
capacity a year before, in 2018,
the project delivered the sales of
finished products at 39 thousand
tonnes, up 49% year-on-year.
In 2018, Pava-Pava, the Group’s
brand of turkey meat products,
became the second largest in
the Russian market. The average
sales price grew by 2% in 2018 to
RUB 147.9 per kg. This increase
was driven by the extension of
the Pava-Pava product offering
in the segments of value-added
products, including ready-to-cook
products and packaged products
for roasting.
Moscow and St. Petersburg are
the biggest contributors to Pava-
Pava sales, helping the brand
rank second in these cities’ turkey
market just over one year. The
growth was driven by robust
demand for turkey products
coupled with a decline in the
market supply, as Eurodon, a
major market player, suspended
production.
Ramping up production capacities,
the Group seeks to gradually
expand sales geography in the
Volga and Central Federal Districts
going forward.
RUB 5,815
million
Revenue from the sale of finished products
+49%
y-o-y
39
th tonnes
Sales
147.9
per kg
The average sales price
+2%
y-o-y
EXTENDING THE PRODUCT RANGE
Among other focus areas in 2018,
the joint venture was committed
to launching new value-added
products, such as ready-to-cook
products and packaged products
for roasting. The reporting period
saw over ten new offerings in the
segment.
Today, the Pava-Pava product
line is complete with a variety
of products for a quick and easy
cooking experience. These include
escalopes, medallions, steaks,
cutlets, sausages, kupati, and
chilled cuts. The Group will keep
on expanding the Pava-Pava
product line.
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APPENDIX
APPENDIX
Operational performance
Finished product sales,
‘000 tonnes
Revenue from finished product sales,
RUB mln
Indicator
2017
2018
y-o-y
+49%
+49%
Meat yield from
live weight, %
Feed
conversion
rate per kg of
weight gain
Growing period,
days
Average daily
weight gain, g
73.4
74.0 0.6 p.p.
2.44
2.47
1.2%
112
116
3.6%
122
124
1.6%
Survival rate, %
92.2
91.8 -0.4 p.p.
14%
Market share
by production
26
39
5,815
3,898
2017
2018
2017
2018
In late 2018,
Cherkizovo Group offered
whole Pava-Pava turkeys
in specially designed packaging
to celebrate the New Year.
When developing new recipes, the Group focuses on best practices
from the countries featuring turkey meat as part of their traditional
cuisine and uses recipes for other types of meat to offer new turkey products and dishes.
As interest in healthy food grows, so will demand for turkey products, including dishes
where turkey substitutes other meats.
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Health awareness
A lean and hypoallergenic meat and a low-
cal source of protein, turkey is a go-to
option for everyone. It has an excellent
nutrition profile and easy digestibility.
Depending on the right cooking technique,
turkey is a great substitute for chicken,
beef, and pork.
Strict safety controls as our
key competitive advantage
Tambov Turkey is an integrated full-cycle business
meaning the manufacturer controls the entire
production chain from feed production to slaughtering
and processing, and ensures high quality of
the product at all the production stages.
SAFETY AND EFFICIENCY
IMPROVEMENTS
Tambov Turkey applies advanced
technology and European state-
of-the-art equipment that help
deliver consistently high quality
in accordance with Russian
and international standards.
Holding international certificates
of compliance with food
safety management systems
ISO 22000:2005 and FSSC 22000
standards, the facility has developed
and implemented the HACCP
program along with a number of
other initiatives to monitor poultry
health and condition.
The producer views high labor
efficiency as a clear competitive
advantage.
In 2018, the key efficiency
improvement areas included:
M ensuring product safety,
N further improving labor efficiency,
O enhancing profitability,
P increasing products' shelf life.
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Turkey meat is remarkable for its low fat
content, and Pava-Pava in particular is
the leanest turkey option unmatched by
the Russian market. We grow the Hybrid
Grade Maker turkey, which contains
50% less fat than other breeds in Russia.
Our facilities are located in the Tambov
Region, Russia’s green area.
Plans for 2019
We believe the turkey meat market
has a bright outlook. Taking advantage of
the current market share, Tambov Turkey seeks to
further strengthen its position. The key operational priorities
include ongoing improvements in labor efficiency, profitability, process
automation and product safety. Tambov Turkey is committed to expanding
the range of ready-to-cook products, sales geography, and entering new
segments, including the HoReCa market.
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Product
Strategy
Cherkizovo Group is dedicated to bringing
the highest quality products to consumers
in line with their preferences and expectations.
We have been launching new recipes, tastes
and entire product categories to update and
improve our product range according to global
and domestic market trends.
Cherkizovo offers delicious meat
products to suit any occasion, be
it a daily breakfast with kids or
a holiday feast. Pure and natural
ingredients ensure that our customers
in Russia and around the world
enjoy healthy food of top-notch
quality. Strict quality control across
the production chain guarantees
a consistently high quality and
freshness of our products in full
compliance with all the applicable
regulations.
In order to match the increasingly
hectic pace of modern life, we are
expanding production of higher value
added foods, which include ready-
to-cook and ready-to-eat products.
As healthy lifestyles gain traction,
we also focus on turkey and chicken
products with their great nutritional
properties.
All Petelinka products are free of growth
hormones, antibiotics, preservatives and
food additives. This is our way of debunking
the myth that factory-made ready-to-cook
products are unhealthy because they contain
harmful ingredients.
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Strong brands
The Group's key brands are leaders
in their respective segments, with
dry sausage, poultry and turkey
dominated by Cherkizovo, Petelinka
and Pava-Pava in the domestic
market.
In 2018, the Group continued to
develop its key brands through large-
scale marketing initiatives. We take
special care to make better-packaged
products that are also easier to cook.
Today, the majority of our
promotional activities take place
online and make use of tools like
social media and trade marketing.
In line with the Group’s strategic
priorities, our advertising campaigns
in 2018 focused on promoting such
high value added products as dry
sausage and ham.
Brand awareness,
%
In 2018
65%
5.7 p.p.
In 2018
39%
3.9 p.p.
In 2018
26%
2.0 p.p.
2017: 59%
2017: 35%
2017: 24%
Moscow: 83%
Saint Petersburg: 83%
Moscow: 82%
Saint Petersburg: 66%
Moscow: 42%
Saint Petersburg: 17%
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Brand's website
https://petelinka.ru
>3
mln visitors
No. 1
in Yandex and Google search results
for food products
Тop 10
in Google search results for recipes
Petelinka on social media
>100
th followers
>13
mln people – reach
Average engagement rate –
>1%
Petelinka is present in all the most
popular social media networks, where
we can share news and recipes,
discuss our products and collect
feedback. Over 100,000 people are
following the brand on social media.
As part of the Petelinka loyalty
program that has been in effect since
2017, buyers can enter promo codes
off product packaging on the official
website, get bonus points, and
eventually exchange them for prizes.
To facilitate this process and improve
the overall user experience, Petelinka
has its own mobile application.
At Loyalty Awards Russia 2018,
the brand's loyalty program was
recognized as the Best FMCG Brand
Loyalty Program and won a prize
for the Efficient Use of Mobile
Technology in Loyalty Program.
Relationships with consumers
and partners
For us, it is all about the consumer,
whose needs drive the development
of our product range. This is why
we work tirelessly to improve
communication with both end
consumers and partners.
The Group carries out an extensive
marketing research program that
covers focus groups, surveys, and
analysis of feedback, including
that from social networks. In 2018,
we conducted a major segmentation
study of consumer motivation.
Before launching a new product,
we never fail to test it with our
customers and consult with
professionals, restaurateurs and
nutrition experts to choose the most
delicious recipe. Key and new
products in every segment – from
sausages to fresh and ready-to-eat
food – are tested on a regular basis.
The Group is committed to bolstering
its interaction with customers
using digital channels, including
our corporate and brand-specific
websites, mobile applications, and
social media.
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Petelinka’s loyalty program
won
at Loyalty Awards
Russia 2018
1
mln codes entered
~200
th participants
>300
th contacts
Recognition
The Group has been granted
numerous awards for its products.
In 2018, four Cherkizovo-branded
products won at Prodexpo,
the largest food, beverage and food
raw materials exhibition in Russia
and Eastern Europe.
Turkey Carpaccio and Turkey
Basturma were the gold medallists
in the Innovations in Technology
category of the Innovative Product
award, while the Po-Cherkizovsky
hot dogs and Balykovaya
Po-Cherkizovsky sausage
of the Group’s flagship product range
won the Retailers' Choice award.
Petelinka and Pava-Pava received
the Product of the Year award
in the Chicken Meat and Eco-friendly
Meat categories. The award is given
to the most popular FMCG products
and supported by the National
Trade Association, Moscow
International Business Association,
Chamber of Commerce and Industry
of the Russian Federation, and
the Moscow Government.
Cherkizovo products won seven
gold and silver medals at Quality
Guarantee 2018, an international
competition held by Gorbatov’s
All-Russian Meat Research
Institute (VNIIMP) and supported
by the Federation Council
of the Russian Federal Assembly
and the Ministry of Agriculture.
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Sales
In 2018, Cherkizovo Group worked
to further increase the share
of branded high value added
products in the sales mix as their
prices boast lower volatility.
Having secured a strong presence
across the European part of Russia,
we are now focused on strengthening
our foothold beyond the Urals. Sales
geography expansion remains a
strategic priority for the Group, driven
in part by acquisitions. In 2018, we
acquired Samson – Food Products
to strengthen the Meat Processing
segment’s position in St. Petersburg
and the North-Western Federal
District, and Altaisky Broiler to open
up access to the Siberian Federal
District for the Poultry segment.
In the long term, Cherkizovo Group
plans to supply products to the
largest retail chains nationwide.
60%
of sales are
branded and
value added
1
Calculation base is RUB 95.7 billion.
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Sales channels
Most of Cherkizovo Group’s products
are sold via retail networks and its
HoReCa customers. Compared
to the previous year, the share
of products sold via retail networks in
2018 was 5% lower and stood at 71%.
Sales via retail chains increased by
6%, mostly driven by nationwide
chains.
In 2018, Cherkizovo Group expanded
its KFC supplies geography beyond
Moscow and St. Petersburg to include
the regions, leveraging expanded
production and capacities that
enabled us to freeze meat in line
with the fast food chain’s standards.
KFC restaurants source chicken meat
from our full cycle poultry production
facilities.
The Group’s key HoReCa customers
are fast food restaurants. We are one
of Burger King's largest suppliers,
and since late 2017 we have been
a strategic partner of Yum! Brands,
which operates Pizza Hut and KFC.
In 2018,
our sales via
restaurant chains
grew by 50%
Product sales by type,
%
Unbranded
(sub products,
chiken feet,
pet food, ect.)
34%
Private label (B2B) 6%
HoReCa 3%
Branded
57%
Specialized
niche brands
and other products
14%
7%
7%
27%
28%
2018 total
revenue split1
2018 branded value
added products split
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Export products
To tap into the export markets
of Islamic countries and cater
to the domestic consumers,
the Group has developed a line
of halal products under the Latifa
and Dajajti brands. Their compliance
with the standards was confirmed
by Moscow’s Halal Certification
Center. In 2018, Cherkizovo Group
became one of the first Russian
poultry exporters to obtain
a certificate from the Emirates
Authority for Standardization
and Metrology (ESMA), gaining
access to Gulf markets.
In 2019, Cherkizovo Group plans
to become a supplier to McDonald’s
under a contract signed in 2018.
We carried out preparatory
works at several of the Group's
poultry factories and confirmed
our compliance with the chain's
standards.
Our contracts with the largest
restaurant chains are a testament
to the quality and safety of our
products and their compliance
with the most stringent production
standards. The reporting year
marked a 50% increase in sales via
restaurant chains, with the channel’s
share in total sales approaching 5%.
In the medium term, we plan to bring
the share of HoReCa customers
to 15–20%.
Product sales by channel,
%
20%
22%
2%
2%
17%
2017:
RUB 90.5bln
59%
3%
3%
2018:
RUB 102.6bln
56%
16%
Exports
Wholesale
Federal retailers
Traditional retail
HoReCa
Non-consumable products
With the maximum operating and
economic efficiency as a priority,
we seek to minimize production
waste and ensure the best use of all
resources. The Group has long-term
contracts to supply by-products,
animal bones and food waste to some
of the largest producers of animal
feed. We have all the necessary
technological processes in place
to ensure compliance with
rigorous veterinary standards and
requirements for the end products.
Sales and marketing optimization
In 2018, Cherkizovo Group paid
special attention to process
automation and standardization
as a means to improve sales and
marketing performance.
We continued rolling out unified
software across our sales
departments and developing
the electronic document
management system. Sausages and
meat are sold through a single trading
company within the Group. In 2018,
we centralized our sales function
to integrate supplies, logistics,
warehousing and planning into
a single service. Another function
centralized during the year was
strategic marketing.
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APPENDIX
Financial Performance
Overview
In 2018, Cherkizovo’s performance was affected
by such macroeconomic factors as gradually
improving consumer demand, volatile grain markets,
weakening local currency and some market
supply dislocations. Despite these issues
the Group demonstrated excellent results.
For the first time in our history, meat
products sales reached 1 million
tonnes. We will continue to grow
our production and enhance
operational efficiency
in the future.
1
mln tonnes
Meat sales
80
80
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Key financial indicators in 2016–2018
Revenue, RUB bln
Gross profit, RUB bln
Gross margin
Adjusted EBITDA, RUB bln
Adjusted EBITDA margin
Net profit, RUB bln
Net profit margin
Net cash flow from operating activities, RUB bln
Net debt, RUB bln
Net debt / Adjusted EBITDA
2016
82.4
17.9
21.7%
9.5
11.5%
1.9
2.3%
9.4
36.9
3.9x
2017
90.5
23.6
26.0%
14.6
16.2%
5.6
6.4%
13.0
48.7
3.3x
2018
102.6
31.9
31.1%
20.4
19.9%
12.0
11.7%
14.2
58.6
2.9x
RUB 12.0
billion
Net profit
RUB 9.8
billion
Сapital expenditures
In 2018, Cherkizovo Group’s
consolidated revenue
increased by 13.5% year-on-
year to RUB 102.6 billion, with
adjusted EBITDA surging by
39.4% to RUB 20.4 billion and
adjusted EBITDA margin rising
to 19.9% (up from 16.2% in 2017).
Net profit more than doubled
to RUB 12.0 billion as compared
to RUB 5.6 billion in 2017, while
operating cash flow increased
by 8.9% to RUB 14.2 billion
(RUB 13.0 billion in 2017).
Net debt came in at RUB 58.6 billion
(2017: RUB 48.7 billion), with our
financials providing sufficient
comfort on all debt covenants.
In 2018, total capital expenditures
stood at RUB 9.8 billion, with
the largest part attributable
to the Pork (RUB 3.9 billion) and
Meat Processing (RUB 2.2 billion)
segments. The remaining CAPEX
was distributed among other
businesses.
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OPERATIONAL PERFORMANCE
OVERVIEW
Cherkizovo Group is the largest
meat producer in Russia. The
Group is a top-3 producer in each
of the Russian poultry, pork and
processed meat markets.
Cherkizovo Group encompasses
nine full cycle poultry production
facilities, sixteen modern pork
production facilities, eight meat
processing plants, nine feed
mills and 290 thousand hectares
of agricultural land. The Group
also includes Tambov Turkey
facility, a joint Russian-Spanish
venture. In 2018, Cherkizovo Group
produced c. 1 mn tonnes of meat
and meat products and generated
revenue of RUB 102.6 billion.
Thanks to its vertically integrated
structure, which includes grain
growing and storage, feed
production, livestock breeding,
fattening and slaughtering, and
meat processing, alongside
a distribution system. We aim
to offer to our consumers
the highest quality products
catered to their preferences.
Our success is based on the well-
known brands in our portfolio and
the loyalty of our consumers.
Cherkizovo Group shares are traded
on the Moscow Exchange (MOEX).
In 2018, Cherkizovo Group's sales
totaled 544.2 thousand tonnes
of finished products in the Poultry
segment, 229.5 thousand tonnes
in the Meat Processing segment,
236.9 thousand tonnes in the Pork
segment, and over 696.1 thousand
tonnes in the Grain segment.
The Group also produced some
1.8 million tonnes of feed to cater
for its own needs.
We aim to offer to our consumers the highest
quality products catered to their preferences.
Our success is based on the well-known
brands in our portfolio and the loyalty
of our consumers.
MARKET AND REGULATORY
OVERVIEW
FX exchange rates
In 2018, the Russian rouble
demonstrated moderate levels
of volatility against the US dollar
and the euro, ending the year
in a positive territory. According
to the Central Bank of Russia,
as at 31 December 2018,
the USD/RUB and EUR/RUB
pairs traded at 69.47 and 79.46,
respectively (2017: 57.60 and
68.87). At the end of the year, RUB-
denominated liabilities accounted
for 95% of the Group’s long-term
debt and 100% of its short-term
debt.
Cherkizovo's products are generally
priced in Russian roubles, while
many of our sourcing costs,
including certain feed ingredients
and veterinary drugs, are directly
or indirectly linked to foreign
exchange rates. On the other
hand, some other costs, such
as payroll, interest payments and
transportation, are denominated
in Russian roubles.
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Interest rates
In 2018, the Central Bank of Russia
delivered multiple rate changes,
but at the end of 2018 the key rate
ended to be 7.75%, as it was at the
end of 2017.
Tax benefits
Russian agricultural producers
have a zero corporate income tax
rate. However, no tax benefits are
provided for sales and distribution,
feed production and meat
processing. In 2018, our overall
effective tax rate was (1.6) %,
compared to 2.6% (net of penalties
and fines) in 2017. The increase
in 2018 was primarily due to a loss
carry forward.
The general income tax rate for
Russian companies was 20%.
On 1 January 2017, amendments
to the Russian Tax Code became
effective allowing the Group
to offset no more than 50%
of each subsidiary’s taxable income
against the accrued carryforward
tax losses. No time limit is set for
the use of the Group’s tax loss
carryforward. Hence, the Group
does not expect its deferred tax
position to be affected.
Loan benefits and government
subsidies for interest payments
In accordance with Russian
legislation, the Company received
certain government grants.
The largest of such government
grants relate to the reimbursement
of interest expense on qualifying
loans, which is received
directly by the Group and for
the reimbursement of interest
expense through accredited banks,
who provide loans to agricultural
producers at reduced rates
not exceeding 5% per annum
on Rouble-denominated loans.
The difference between market
rate and the reduced rate equals
the Key rate of the Bank of Russia
and is compensated by the Ministry
of Agriculture to the accredited
banks. The Group records interest
and reduced rate lending subsidies
as an offset to interest expense
during the period to which they
relate. Total government grants
for compensation of interest
expense grossed of related
interest expense amounted
to RUB 1.3 billion.
RUB 1.3
billion
Interest expense reimbursement
for subsidized loans
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APPENDIX
CONSOLIDATED RESULTS
OF CHERKIZOVO GROUP
In 2018, Cherkizovo Group’s
revenue increased by 13.5%
to RUB 102.6 billion as compared
to RUB 90.5 billion in 2017 as a result
of sales volume growth in all of our
segments, sales mix shift towards
branded and value-added products
and favorable pricing environment
for chicken and pork products
in the second half of 2018.
Gross profit increased by
35.5% to RUB 31.9 billion, (2017:
RUB 23.6 billion) driven by revenue
growth, operational efficiency
gains in Poultry and Pork segments
and associated costs savings and
increase of net change in fair value
of biological assets in Pork and
Poultry segments and net revaluation
of harvested crops in stock in Grain
segment offset by higher input prices
for Meat Processing segment. Lower
costs and higher sales helped boost
gross margin from 26.0% in 2017 to
31.1% in 2018.
Operating expenses increased
by 19.8% to RUB 16.3 billion (2017:
RUB 13.6 billion) due to higher
selling expenses, which in turn
is mostly driven by broadening
of our distribution network, and
G&A expenses largely unchanged
from previous year. As percentage
of the revenue, though, operating
expenses went down from 15.0%
in 2017 to 15.9% in 2018.
Operating profit soared by 59.9%
to RUB 15.6 billion.
As a result, adjusted EBITDA for
2018 surged by 39.4% year-on-year
to RUB 20.4 billion. Adjusted EBITDA
margin also demonstrated significant
growth spiking at 19.9% compared
to 16.2% in 2017 due to higher
revenue across segments, improved
profitability of Poultry, Pork and
Grain segments, and strict cost
control on the corporate level.
This rise showed that we can boost
profits by rolling out our operational
excellence enhancement strategy
across the Group's segments.
Interest expenses, net declined
by 10.8% y-o-y to RUB 3.3 billion.
That was mostly as a result of
increase of interest expense by
25.5% to RUB 4.6 billion (2017:
RUB 3.7 billion) compensated
by increase of government grants
for compensation of interest
expenses by 56.1% to RUB 1.5 billion
(without effect of written-
off working capital subsides
in the amount of 0.57 billion in 2017).
The Group’s total debt increased
by 37.6% to RUB 68.8 billion.
Increase of government grants
was due to share growth of loans
to agricultural producers at reduced
rates (“reduced rate lending subsidy”)
in the loan portfolio in 2018.
Net profit totaled from RUB 5.8 billion
in 2017 to RUB 12.0 billion in 2018,
while net profit margin rose from
6.4% to 11.7%. Operating cash flow
increased from RUB 13.0 billion in 2017
to RUB 14.2 billion, due to higher
net income, working capital release,
offset by higher interest payments
and lower government grants for
compensation of interest expense.
84
|
CHERKIZOVO GROUP
www.cherkizovo.com/en/ ABOUT COMPANY
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
Consolidated income statement data for the year ended 31 December 2018
(RUB ‘000)
Revenue
Net change in fair value of biological assets
Net revaluation of harvested crops in stock
Cost of sales
Gross profit
Gross profit margin
Operating expenses
Share of gain/(loss) of joint ventures and associates
Operating profit
Operating margin
Profit before income tax
Profit attributable to Cherkizovo Group
Net profit margin
Year ended
31 December 2018
Year ended
31 December 2017
Change, %
102,639,145
90,465,069
1,836,336
2,242,187
734,141
(882,259)
(74,794,308)
(66,758,340)
31,923,360
23,558,611
31.1%
26.0%
(16,311,450)
(13,611,664)
(56,778)
15,555,132
15.2%
11,793,208
12,004,027
11.7%
(221,325)
9,725,622
10.8%
5,955,675
5,800,371
6.4%
13.5%
150.1%
n.a.
12.0%
35.5%
5.1 p.p.
19.8%
(74.3%)
59.9%
4.4 p.p.
98.0%
107.0%
5.3 p.p.
n.a.
Weighted average number of shares outstanding
41,047,014
42,760,328
Earnings per share:
Profit attributable to Cherkizovo Group per share –
basic and diluted (RUB)
Consolidated adjusted EBITDA reconciliation
Profit before income tax
Adjustments for:
Interest expense, net of subsidies
Interest income
Foreign exchange (gain)/loss, net
Depreciation and amortisation
Net change in fair value of biological assets
Share of (gain)/loss of joint ventures and associates
Share of adjusted EBITDA of joint ventures and associates
Bonuses to employees under long-term incentive program
Depreciation and amortisation accumulated
in harvested crops in stock
Consolidated adjusted EBITDA
Adjusted EBITDA margin
292.45
135.65
115.6%
11,793,208
5,955,675
98.0%
3,266,694
(289,785)
829,060
6,045,330
(1,836,336)
56,778
165,415
658,391
3,663,093
(277,148)
390,426
5,153,486
(734,141)
221,325
83,448
—
(272,508)
186,900
20,416,247
14,643,064
19.9%
16.2%
(10.8%)
4.6%
(78.8%)
17.3%
150.1%
(74.3%)
98.2%
n.a.
n.a.
39.4%
3.7 p.p.
CHERKIZOVO GROUP
| 85
Annual report 2018 ABOUT COMPANY
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
Consolidated selected financial data for the year ended 31 December 2018
(RUB ‘000)
Meat processing
Poultry
Pork
Grain
Feed
Total
Corporate
Interdivision
Turkey
Combined
Total Sales
including other sales
including sales volume discount
Interdivision sales
Sales to external customers (sales)
% of total sales
Net change in fair value of biological assets
Net revaluation of harvested crops in stock
Cost of sales
Gross profit
Gross margin
Operating expenses
38,438,972
669,872
(682,375)
(179,261)
38,259,711
37.3%
—
—
(34,202,152)
4,236,820
11.0%
53,797,241
1,074,548
(709,085)
(1,877,449)
51,919,792
50.6%
1,264,368
—
(41,561,439)
13,500,170
25.1%
(4,712,174)
(6,097,666)
Share of gain/(loss) of joint ventures and associates
—
—
23,576,166
313,946
—
(20,529,684)
3,046,482
3.0%
899,056
—
(13,290,802)
11,184,420
47.4%
(769,307)
—
(475,354)
7,402,504
10,415,113
1,718,100
337,271
19,397,634
(3,505,434)
(354,396)
15,537,804
-1.2%
19,991
(121,756)
(471,451)
(1,048,570)
-2.7%
(375,528)
2,181,464
(1,048,570)
121,756
(19,991)
484,364
882,526
—
—
—
38,763
—
458,848
1.2%
13.8%
171,402
(621,387)
(52,521)
6,899,998
12.8%
88,334
2,019,862
6,899,998
621,387
(171,402)
74,279
2,056,073
(1,264,368)
—
—
171,990
—
44.2%
64,279
(588,028)
(3,165)
9,888,199
41.9%
2,471
3,882,879
9,888,199
588,028
(64,279)
10,416
1,338,876
(899,056)
—
—
40,090
—
8,387,957
10,902,274
966,513
22,979,062
(2,784,736)
(27,308)
20,167,018
249,229
20,416,247
15.6%
46.2%
32.4%
3.0%
14.9%
-359.0%
0.0%
20.8%
4.3%
19.9%
Operating income/ (loss)
Operating margin
Interest income
Interest expense, net
Other income/ (expenses), net
Division profit / (loss)
Division profit margin
Supplemental information:
Income tax expense (benefit)
Expenditure for segment property, plant and equipment
Division profit / (loss)
Add:
Interest expense, net
Interest income
Foreign exchange loss/(gain)
Depreciation and amortisation
Net change in fair value of biological assets
Share of (gain)/loss of joint ventures and associates
Share of adjusted EBITDA of joint ventures and associates
Bonuses to employees under long-term incentive program
Depreciation and amortisation accumulated in harvested crops in stock
Adjusted EBITDA
Adjusted EBITDA margin
86
|
CHERKIZOVO GROUP
reportable
segments
Total
without
turkey
6,986,006
31,738,006
154,536,391
775,725
(58,487,602)
96,824,514
5,814,631
102,639,145
86,972
527,583
2,672,921
775,725
(1,231,845)
2,216,801
—
2,216,801
—
—
(1,391,460)
(1,391,460)
(81,738)
(1,473,198)
(3,989,632)
(31,210,423)
(57,786,449)
(448,281)
58,487,602
252,872
(252,872)
—
2,996,374
527,583
96,749,942
327,444
97,077,386
5,561,759
102,639,145
2.9%
—
1,297,189
0.5%
—
—
94.3%
2,163,424
1,297,189
0.3%
0.0%
(327,088)
944,998
94.6%
1,836,336
2,242,187
5.4%
—
—
100.0%
1,836,336
2,242,187
(6,133,969)
(30,977,130)
(126,165,492)
(554,659)
57,052,214
(69,667,937)
(5,126,371)
(74,794,308)
2,149,226
760,876
31,831,512
221,066
(817,478)
31,235,100
688,260
31,923,360
30.8%
2.4%
20.6%
28.5%
1.4%
32.3%
11.8%
31.1%
(431,126)
(423,605)
(12,433,878)
(3,726,500)
463,082
(15,697,296)
(614,154)
(16,311,450)
—
—
—
—
—
(56,778)
(56,778)
24.6%
2,146
1.1%
55,380
12.6%
313,198
-451.9%
129,874
0.6%
(153,287)
16.0%
289,785
(172,516)
(870,766)
(2,374,453)
(1,045,528)
153,287
(3,266,694)
545
(276,398)
(802,990)
17,975
—
(785,015)
1,548,275
(754,513)
16,533,389
(4,403,113)
(354,396)
11,775,880
22.2%
-2.4%
10.7%
-567.6%
0.6%
12.2%
103,790
389,594
14,124
(166,809)
299,674
8,773,473
(20,282)
979,019
(187,091)
9,752,492
1,548,275
(754,513)
16,533,389
(4,403,113)
(354,396)
11,775,880
17,328
11,793,208
172,516
(2,146)
(192)
809,172
—
—
—
(272,508)
2,263,470
870,766
(55,380)
277,409
609,025
—
—
—
—
2,374,453
(313,198)
846,276
5,695,672
(2,163,424)
—
—
(272,508)
8,353
19,206
278,402
373,100
(153,287)
3,266,694
153,287
(289,785)
1,045,528
(129,874)
(17,216)
346,839
327,088
(1,836,336)
(1,836,336)
829,060
6,042,511
—
—
651,502
(272,508)
2,819
6,045,330
56,778
165,415
6,889
56,778
165,415
658,391
—
(272,508)
15,555,132
15.2%
289,785
(3,266,694)
(785,015)
11,793,208
11.5%
(187,091)
9,752,492
3,266,694
(289,785)
829,060
17,328
0.3%
17,328
0.3%
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
www.cherkizovo.com/en/ ABOUT COMPANY
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
Consolidated selected financial data for the year ended 31 December 2018
(RUB ‘000)
Meat processing
Poultry
Pork
Grain
Feed
Total
reportable
segments
Corporate
Interdivision
Total
without
turkey
Turkey
Combined
6,986,006
31,738,006
154,536,391
775,725
(58,487,602)
96,824,514
5,814,631
102,639,145
86,972
527,583
2,672,921
775,725
(1,231,845)
2,216,801
—
2,216,801
—
—
(1,391,460)
—
—
(1,391,460)
(81,738)
(1,473,198)
(3,989,632)
(31,210,423)
(57,786,449)
(448,281)
58,487,602
252,872
(252,872)
—
2,996,374
527,583
96,749,942
327,444
—
97,077,386
5,561,759
102,639,145
2.9%
—
1,297,189
0.5%
—
—
94.3%
2,163,424
1,297,189
0.3%
—
—
0.0%
(327,088)
944,998
94.6%
1,836,336
2,242,187
5.4%
—
—
100.0%
1,836,336
2,242,187
(6,133,969)
(30,977,130)
(126,165,492)
(554,659)
57,052,214
(69,667,937)
(5,126,371)
(74,794,308)
2,149,226
760,876
31,831,512
221,066
(817,478)
31,235,100
688,260
31,923,360
30.8%
2.4%
20.6%
28.5%
1.4%
32.3%
11.8%
31.1%
Share of gain/(loss) of joint ventures and associates
—
—
—
—
—
—
(56,778)
(56,778)
(4,712,174)
(6,097,666)
(431,126)
(423,605)
(12,433,878)
(3,726,500)
463,082
(15,697,296)
(614,154)
(16,311,450)
(475,354)
7,402,504
10,415,113
1,718,100
337,271
19,397,634
(3,505,434)
(354,396)
15,537,804
24.6%
2,146
1.1%
55,380
12.6%
313,198
-451.9%
129,874
0.6%
(153,287)
16.0%
289,785
(172,516)
(870,766)
(2,374,453)
(1,045,528)
153,287
(3,266,694)
545
(276,398)
(802,990)
17,975
—
(785,015)
1,548,275
(754,513)
16,533,389
(4,403,113)
(354,396)
11,775,880
22.2%
-2.4%
10.7%
-567.6%
0.6%
12.2%
17,328
0.3%
—
—
—
17,328
0.3%
15,555,132
15.2%
289,785
(3,266,694)
(785,015)
11,793,208
11.5%
103,790
389,594
14,124
(166,809)
299,674
8,773,473
(20,282)
979,019
—
—
(187,091)
9,752,492
—
—
(187,091)
9,752,492
1,548,275
(754,513)
16,533,389
(4,403,113)
(354,396)
11,775,880
17,328
11,793,208
Total Sales
including other sales
including sales volume discount
Interdivision sales
Sales to external customers (sales)
% of total sales
Net change in fair value of biological assets
Net revaluation of harvested crops in stock
Cost of sales
Gross profit
Gross margin
Operating expenses
Operating income/ (loss)
Operating margin
Interest income
Interest expense, net
Other income/ (expenses), net
Division profit / (loss)
Division profit margin
Supplemental information:
Income tax expense (benefit)
Division profit / (loss)
Add:
Interest expense, net
Interest income
Foreign exchange loss/(gain)
Depreciation and amortisation
Expenditure for segment property, plant and equipment
Net change in fair value of biological assets
Share of (gain)/loss of joint ventures and associates
Share of adjusted EBITDA of joint ventures and associates
Depreciation and amortisation accumulated in harvested crops in stock
Adjusted EBITDA
Adjusted EBITDA margin
38,438,972
669,872
(682,375)
(179,261)
38,259,711
37.3%
(34,202,152)
4,236,820
11.0%
-1.2%
19,991
(121,756)
(471,451)
(1,048,570)
-2.7%
(375,528)
2,181,464
(1,048,570)
121,756
(19,991)
484,364
882,526
—
—
—
—
—
—
—
458,848
1.2%
53,797,241
1,074,548
(709,085)
(1,877,449)
51,919,792
50.6%
1,264,368
(41,561,439)
13,500,170
25.1%
—
—
13.8%
171,402
(621,387)
(52,521)
6,899,998
12.8%
88,334
2,019,862
6,899,998
621,387
(171,402)
74,279
2,056,073
(1,264,368)
—
—
—
23,576,166
313,946
—
(20,529,684)
3,046,482
3.0%
899,056
—
(13,290,802)
11,184,420
47.4%
(769,307)
—
44.2%
64,279
(588,028)
(3,165)
9,888,199
41.9%
2,471
3,882,879
9,888,199
588,028
(64,279)
10,416
1,338,876
(899,056)
—
—
—
Bonuses to employees under long-term incentive program
38,763
171,990
40,090
8,353
19,206
278,402
373,100
172,516
(2,146)
(192)
809,172
—
—
—
870,766
(55,380)
277,409
609,025
—
—
—
2,374,453
(313,198)
846,276
5,695,672
(2,163,424)
—
—
1,045,528
(129,874)
(17,216)
346,839
—
—
—
(153,287)
3,266,694
153,287
(289,785)
—
—
829,060
6,042,511
—
—
—
3,266,694
(289,785)
829,060
2,819
6,045,330
327,088
(1,836,336)
—
(1,836,336)
—
—
—
—
—
—
651,502
(272,508)
56,778
165,415
6,889
56,778
165,415
658,391
—
(272,508)
8,387,957
10,902,274
(272,508)
2,263,470
966,513
22,979,062
(2,784,736)
(27,308)
20,167,018
249,229
20,416,247
—
(272,508)
—
15.6%
46.2%
32.4%
3.0%
14.9%
-359.0%
0.0%
20.8%
4.3%
19.9%
CHERKIZOVO GROUP
| 87
Annual report 2018 ABOUT COMPANY
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
POULTRY
In 2018, revenue increased by 13.5%
from RUB 47.4 billion in 2017
to RUB 53.8 billion, driven by a year-
on-year rise in volumes and average
sales prices. Sales volumes in 2018
increased by 4.1% to 544.2 thousand
tonnes (2017: 522.5 thousand tonnes)
due to increase the efficiency
of production of live weight.
The average selling price increased
by 9.1% y-o-y to 96.9 RUB/kg due
to growth of Petelinka and Kurinoe
Tsarstvo sales of 35% and 24% y-o-y
respectively.
(RUB ‘000)
Total sales
Interdivision sales
Sales to external customers
Net change in fair value of biological assets
Cost of sales
Gross profit
Gross margin
Operating expenses
Operating profit
Operating margin
Interest income
Interest expense, net
Gross profit soared by 29.1%
to RUB 13.5 billion (2017:
RUB 10.5 billion), on higher volumes
and sales price, operational efficiency
gains resulted in cost savings,
the change in fair value of biological
assets, offset by higher feed costs.
Gross margin rose from 22.1% in 2017
to 25.1% in 2018.
Operating expenses as a percentage
of revenue was flat year-on-year
at 11.3%. Operating profit increased
by 44.8% to RUB 7.4 billion compared
to RUB 5.1 billion a year earlier,
operating margin went up to 13.8%
from 10.8%. Adjusted EBITDA
soared by 17.8% from RUB 7.1 billion
in 2017 to RUB 8.4 billion in 2018,
with adjusted EBITDA margin rising
from 15.0% to 15.6%. Net profit came
in at RUB 6.9 billion as compared
to RUB 4.0 billion in 2017.
Year ended
December 31, 2018
Year ended
December 31, 2017
Change, %
53,797,241
(1,877,449)
51,919,792
1,264,368
(41,561,439)
13,500,170
25.1%
(6,097,666)
7,402,504
13.8%
171,402
(621,387)
(52,521)
6,899,998
12.8%
47,401,429
(1,902,802)
45,498,627
(71,239)
(36,875,483)
10,454,707
22.1%
(5,342,484)
5,112,223
10.8%
164,917
(1,112,968)
(161,815)
4,002,357
8.4%
13.5%
(1.3%)
14.1%
n.a.
12.7%
29.1%
3.0 p.p.
14.1%
44.8%
3.0 p.p.
3.9%
(44.2%)
(67.5%)
72.4%
4.4 p.p.
Other income/(expenses), net
Division profit before income tax
Division profit margin
Poultry processing division adjusted EBITDA reconciliation
Division profit before income tax
6,899,998
4,002,357
72.4%
Add:
Interest expense, net of subsidies
Interest income
Foreign exchange (gain)/loss, net
Depreciation and amortisation
Net change in fair value of biological assets
Bonuses to employees under long-term incentive program
Poultry processing division adjusted EBITDA
Adjusted EBITDA margin
88
|
CHERKIZOVO GROUP
621,387
(171,402)
74,279
2,056,073
(1,264,368)
171,990
8,387,957
15.6%
1,112,968
(164,917)
(44.2%)
3.9%
164,118
(54.7%)
1,936,437
71,239
—
7,122,202
6.2%
n.a.
n.a.
17.8%
15.0%
0.6 p.p.
www.cherkizovo.com/en/ ABOUT COMPANY
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
PORK
Revenue in the Pork segment
increased by 26.2% to RUB 23.6 billion
(2017: RUB 18.7 billion), on the back
of higher volumes and better pricing.
Sales volumes in 2018 increased
by 18.3% y-o-y, to 236.9 thousand
tonnes (2017: 200.3 thousand tonnes)
principally as a result of a shift towards
cut-up products in our sales mix,
coupled with distribution focused
on modern retail trade and a 44%
increase in the annual sales of HoReCa
products. The average selling price
of 98.2 RUB/kg, up by 6.6% y-o-y
compared to 92.1 RUB/kg a year ago.
(RUB ‘000)
Total sales
Interdivision sales
Sales to external customers
Net change in fair value of biological assets
Cost of sales
Gross profit
Gross margin
Operating expenses
Operating profit
Operating margin
Interest income
Interest expense, net
Other income/(expenses), net
Division profit before income tax
Division profit margin
Pork division adjusted EBITDA reconciliation
Division profit before income tax
Add:
Interest expense, net of subsidies
Interest income
Foreign exchange (gain)/loss, net
Depreciation and amortisation
Net change in fair value of biological assets
Bonuses to employees under long-term incentive program
Pork division adjusted EBITDA
Adjusted EBITDA margin
Gross profit increased by 61.2%
y-o-y, to RUB 11.2 billion (2017:
RUB 6.9 billion ) due to higher
sales volumes and prices, further
improvement in operational KPI’s
translated into cost savings and
a non-cash change in the fair value
of biological assets of RUB 0.9 billion.
The segment’s gross margin improved
to 47.4%, from 37.1% a year ago.
Operating expenses as a percentage
of sales amounted to 3.3%, compared
to 3.4% in 2017.
Operating income was up 65.0%
y-o-y, to RUB 10.4 billion from
RUB 6.3 billion in 2017. The segment’s
operating margin increased to 44.2%
from 33.8% a year ago. The segment’s
profit before income tax amounted
to RUB 9.9 billion compared
to the 2017 result of RUB 5.6 billion.
Adjusted EBITDA increased by 60.2%
y-o-y to RUB 10.9 billion (2017:
RUB 6.8 billion). Adjusted EBITDA
margin improved to 46.2% from 36.4%
in 2017.
Year ended
December 31, 2018
Year ended
December 31, 2017
Change, %
23,576,166
18,688,379
(20,529,684)
(14,622,070)
3,046,482
899,056
4,066,309
651,235
(13,290,802)
(12,399,563)
26.2%
40.4%
(25.1%)
38.1%
7.2%
61.2%
11,184,420
47.4%
(769,307)
10,415,113
44.2%
64,279
(588,028)
(3,165)
9,888,199
41.9%
6,940,051
37.1%
10.3 p.p.
(627,148)
6,312,903
33.8%
41,178
(713,729)
(2,514)
5,637,838
30.2%
22.7%
65.0%
10.4 p.p.
56.1%
(17.6%)
25.9%
75.4%
11.8 p.p.
9,888,199
5,637,838
75.4%
588,028
(64,279)
10,416
1,338,876
(899,056)
40,090
713,729
(41,178)
6,272
1,140,851
(651,235)
—
10,902,274
6,806,277
46.2%
36.4%
(17.6%)
56.1%
66.1%
17.4%
38.1%
n.a.
60.2%
9.8 p.p.
CHERKIZOVO GROUP
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CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
MEAT PROCESSING
The segment's revenue in 2018
rose by 13% to RUB 38.4 billion
(2017: RUB 34.0 billion). Revenue
growth was driven by higher
volumes of the carcass in the
sales mix, on the back of higher
volumes of market hogs production
in the Pork segment.
Sales volumes in 2018 increased
by 12.4% y-o-y to 229.5 thousand
tonnes (2017: 204.2 thousand
tonnes). The average selling price
was unchanged at 169.6 RUB/kg
(2017: 170.1 RUB/kg).
Gross profit declined by 28.9%
y-o-y to RUB 4.2 billion (2017:
RUB 6.0 billion). The gross margin
fell to 11.0% from 17.5% a year ago
on higher prices of input materials.
Operating expenses as a percentage
of sales amounted to 12.3%
(2017: 12.5%). Operating income
turned to negative RUB 0.5 billion
from RUB 1.7 billion in 2017.
Operating margin decreased
to negative 1.2% from 5.0% in 2017.
The segment’s loss before income
tax was RUB 1.0 billion, compared
to a profit RUB 1.4 billion a year
ago. Adjusted EBITDA declined
by 80.9% to RUB 0.5 billion from
RUB 2.4 billion in 2017.
(RUB ‘000)
Total sales
Interdivision sales
Sales to external customers
Cost of sales
Gross profit
Gross margin
Operating expenses
Operating profit/(loss)
Operating margin
Interest income
Interest expense, net
Other income/(expenses), net
Division profit/(loss) before income tax
Division profit margin
Meat processing division adjusted EBITDA reconciliation
Year ended
December 31, 2018
Year ended
December 31, 2017
Change, %
38,438,972
(179,261)
38,259,711
34,020,373
(39,539)
33,980,834
(34,202,152)
(28,058,310)
13.0%
353.4%
12.6%
21.9%
4,236,820
5,962,063
(28.9%)
11.0%
(4,712,174)
(475,354)
-1.2%
19,991
(121,756)
(471,451)
(1,048,570)
-2.7%
17.5%
(6.5 p.p.)
(4,249,598)
1,712,465
5.0%
16,845
(181,389)
(123,626)
1,424,295
4.2%
10.9%
(127.8%)
(6.3 p.p.)
18.7%
(32.9%)
281.4%
(173.6%)
(6.9 p.p)
Division profit/(loss) before income tax
(1,048,570)
1,424,295
(173.6%)
Add:
Interest expense, net of subsidies
Interest income
Foreign exchange (gain)/loss, net
Depreciation and amortisation
Bonuses to employees under long-term incentive program
Meat processing division adjusted EBITDA*
Adjusted EBITDA margin
121,756
(19,991)
484,364
882,526
38,763
458,848
1.2%
181,389
(16,845)
122,422
697,189
—
(32.9%)
18.7%
295.7%
26.6%
n.a.
2,408,450
(80.9%)
7.1%
(5.9 p.p.)
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FINANCIAL STATEMENTS
APPENDIX
GRAIN
Sales volumes in 2018
increased by 53.6% y-o-y
to 696.1 thousand tonnes (2017:
453.3 thousand tonnes) as we
shifted crop acrage towards
wheat growing. The segment’s
revenue increased by 115.7% and
reached RUB 7.0 billion (2017:
RUB 3.2 billion).
Gross profit turned positive
to RUB 2.1 billion (2017: negative
RUB 1.3 billion). The gross margin
increased to 30.8% from negative
40.8% a year ago on higher volumes
and sale price and net revaluation
of harvested crops in stock
of RUB 1.3 billion.
Operating expenses as a percentage
of sales declined to 6.2%, from
8.3% in 2017. Operating income
improved to RUB 1.7 billion from
RUB a loss of 1.6 billion in 2017.
Operating margin came to 24.6%
from negative 49.2% in 2017.
The segment’s profit before income
tax was RUB 1.5 billion, compared
to a loss of RUB 1.8 billion a year
ago. Adjusted EBITDA amounted
to RUB 2.3 billion compared
to a loss of RUB 1.1 billion in 2017.
(RUB ‘000)
Total sales
Interdivision sales
Sales to external customers
Net change in fair value of biological assets
Net revaluation of harvested crops in stock
Cost of sales
Gross profit/(loss)
Gross margin
Operating expenses
Operating profit/(loss)
Operating margin
Interest income
Interest expense, net
Other income/(expenses), net
Division profit/(loss) before income tax
Division profit margin
Grain division adjusted EBITDA reconciliation
Division profit/(loss) before income tax
Add:
Interest expense, net of subsidies
Interest income
Foreign exchange (gain)/loss, net
Depreciation and amortisation
Net change in fair value of biological assets
Depreciation and amortisation accumulated in harvested crops in stock
Bonuses to employees under long-term incentive program
Year ended
December 31, 2018
Year ended
December 31, 2017
Change, %
6,986,006
(3,989,632)
2,996,374
—
1,297,189
(6,133,969)
2,149,226
30.8%
(431,126)
1,718,100
24.6%
2,146
(172,516)
545
1,548,275
22.2%
3,238,261
(1,468,597)
1,769,664
154,145
115.7%
171.7%
69.3%
n.a.
(890,759)
(245.6%)
(3,823,384)
60.4%
(1,321,737)
(262.6%)
-40.8%
(270,124)
71.6 p.p.
59.6%
(1,591,861)
(207.9%)
-49.2%
1,649
(175,685)
1,318
(1,764,579)
-54.5%
73.8 p.p.
30.1%
(1.8%)
(58.6%)
(187.7%)
76.7 p.p.
1,548,275
(1,764,579)
(187.7%)
172,516
(2,146)
(192)
809,172
—
(272,508)
8,353
175,685
(1,649)
(859)
464,492
(154,145)
(1.8%)
30.1%
(77.6%)
74.2%
n.a.
186,900
(245.8%)
—
n.a.
(306.9)
66.2%
CHERKIZOVO GROUP
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Grain division adjusted EBITDA
Adjusted EBITDA margin
2,263,470
(1,094,155)
32.4%
-33.8%
Annual report 2018 ABOUT COMPANY
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
Debt
As at 31 December 2018, net
debt came in at RUB 58.6 billion
as compared to RUB 48.7 billion
at the end of 2017. Total debt
increased from RUB 50 billion
at the end of 2017 to
RUB 68.8 billion.
As at 31 December 2018, long- term
debt stood at RUB 44.6 billion,
or 65% of the Group's debt
portfolio, while short-term debt
of RUB 24.2 billion accounted
for 35% of the debt portfolio.
The effective cost of debt was 4.7%
as of December 31, 2018, change
from 7.3% in 2017. Subsidised loans
and credit facilities made up 40%
of the debt portfolio in 2018 (2017:
35%). As at 31 December 2018,
cash and cash equivalents totalled
RUB 9.6 billion.
Total debt structure,
RUB bln
68.8
35%
65%
50.0
39%
61%
39.0
37%
63%
2016
2017
2018
Long-term debt
Short-term debt
LIQUIDITY AND CAPITAL
Capital needs
In addition to our working capital
requirements, we require capital
to finance the following:
M capital expenditures, particularly
in connection with our Kashira-2
project and wean-to finish
pork facilities in our Pork
segment as well as development
and maintenance capital
expenditures;
N repayment of debt; and
O potential acquisitions.
We anticipate that capital
expenditures, repayment of
long-term debt and potential
acquisitions will represent the most
significant uses of funds for the
next several years.
In 2018, the major sources of our
funds were our operating cash
flows and short and long-term
borrowings. We financed our
capital expenditures primarily with
short and long-term borrowings.
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APPENDIX
CAPITAL EXPENDITURES
SUBSIDIES
In 2018 Cherkizovo Group’s total
capital expenditures, excluding
acquisitions and investments in
joint ventures and associates
amounted to RUB 9.8 billion (down
20.9% year-on year) and included:
RUB 2.2 billion invested in
the Meat Processing segment
(completion of construction
of a new meat processing
plant in Kashira, Moscow
region, the launch of new sow
slaughter facilities, acquisition
of equipment for semi-
smoked sausages and hot dog
production);
In 2018, total government grants for
compensation of interest expenses
amounted to RUB 1.3 billion
as compared to RUB 6 million
in 2017. In 2018, the share of
loans to agricultural producers
at reduced rates in the loan
portfolio increased. The decrease
in the amount of subsidies
included in the cost of qualifying
assets in 2018 as compared
to 2017 was attributable to the
completion of the construction
of new pork finisher complexes
and wean-to-finish facilities.
On December 13, 2017
the Government order was issued,
prohibiting regional bodies
of the Ministry of Agriculture
to use their 2018 subsidy limits
for settlement of 2016 liabilities.
As a result, working capital
subsidies receivable in the amount
of RUB 571 million were written-off
in 2017.
RUB 3.9 billion invested in the
Pork segment (construction
of seven new wean-to-finish
facilities in the Penza region);
Cash flows, RUB bln
The table below represents movements in our cash flows from various activities
associated with continuing operations for the two years ended December 31,
2018 and December 31, 2017, respectively:
Net cash flows from operating activities
Net cash used in investing activities
Net cash (used in) / generated from
financing activities
Net (decrease)/increase in cash
and cash equivalents
2018
14.2
(15.3)
10.1
8.9
2017
13.0
(15.7)
2.4
(0.3)
RUB 2.0 billion invested in
the Poultry segment (the
investments made for the
improvement of cooling capacity
and acquisition of equipment for
the production of value-added
products);
RUB 0.4 billion invested in
the Grain segment (construction
of a new grain drying facility).
The Group is at the end of the
capital intensive phase of the
spending and we anticipate that
going forward our focus will move
towards meat processing.
CHERKIZOVO GROUP
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APPENDIX
Operating activities
Net cash from operating
activities in 2018 increased
by 8.9% to RUB 14.2 billion
from RUB 13.0 billion in 2017.
This was primarily attributable
to the improvement in net income
affected by influence of higher
interest payments coupled with
lower government grants for
compensation of interest expense.
In 2018 working capital was almost
at the same level as in 2017 and
amounted to RUB 1.0 billion
(2017: RUB 1.1 billion).
The key factors affecting cash
outflow in working capital include
M RUB 0.8 billion increase
in biological assets due
to increase in the number
of livestock as a result
of the commissioning of
new production facilities
and improvement of key
performance indicators;
N RUB 0.7 billion increase in
inventory particularly due to the
increase in grain stocks and feed
components, increase in stocks
in connection with the launch
of production at Kashira-1 and
fertilizers in the Grain segment;
Investing activities
Use of cash in investing activities
was generally at the same level
in 2018 and 2017 (with a slight
decrease (2.3%, or RUB 368 million)
and totaled RUB 15.3 billion (2017:
15.7 billion).
Financing activities
Our net cash flows from financing
activities increased more than
fourfold to RUB 10.1 billion in 2018
as compared to RUB 2.4 billion in
2017. The change in 2018 was due
to the short-term loans issued.
O RUB 1.3 billion increase in trade
receivables primarily due to
increase in sales to national
retailers;
P RUB 1.3 billion increase in trade
payables due to the increase
in deferred payments under
contracts;
Q RUB 0.6 billion increase in other
receivables and other current
assets due to the decrease
in the recoverable VAT;
R RUB 0.5 billion increase
in advances paid due to
the decrease in advances
for soybean meal.
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APPENDIX
Liquidity
As of December 31, 2018,
we had total cash and cash
equivalents of RUB 9.6 biillion,
which were denominated largely
in Roubles. As of December
31, 2018, we had Net Current
Assets of RUB 6.3 billion, while
as of December 31, 2017 we had
negative Net Current Assets
of RUB 2.4 billion.
Our Trade Working Capital as
of December 31, 2018, which
we define as current assets less
current (excluding cash and cash
equivalents and other current
assets) less current liabilities
(excluding short-term borrowings
and payables for non-current
assets), was RUB 21.5 billion
as compared to RUB 17.7 billion
as of December 31, 2017.
In 2018 our trade receivables, net
increased to RUB 5.7 billion from
RUB 4.4 billionas of December
31, 2017. The changes in trade
receivables was largely due to
the increase in sales to national
retailers. Trade receivables
turnover averaged 20 days
as of December 31, 2018 and
18 days as of December 31, 2017.
Allowance for doubtful trade
receivables was RUB 119 million and
RUB 86 million as of December 31,
2018, 2017, respectively, due to the
additional information received
regarding insolvency of some
of the buyers.
Trade payables increased to
RUB 10.8 billion as of December
31, 2018 from RUB 9.0 billion as of
December 31, 2017. Trade payables
turnover averaged 53 days, 49 days
as of December 31, 2018, 2017,
respectively.
Advances paid, net decreased to
RUB 875 million as of December
31, 2018 from RUB 1.4 billion
as of December 31, 2017.
The decrease in advances paid
was largely due to the decrease
in advances for soybean meal.
Our inventory consists primarily
of raw materials, spare parts,
work-in-progress and finished
goods. Our inventories
were RUB 12.4 million,
RUB 10.0 as of December 31,
2018, 2017, respectively.
The increase in inventories in 2018
was largely due to the increase in
grain stocks and feed components
and in stocks in connection with the
start of production at Kashira-1 and
fertilizers in our Grain segment.
Biological assets amounted to
RUB 15.4 billion as of December
31 and RUB 11.6 billion as of
December 31, 2017. The increase
was largely due to the increase
of costs and heads in our Poultry.
Other receivables (net) increased
from RUB 837 million as of
December 31, 2017 to RUB 1.5 billion
as of December 31, 2018, largely
due to subsidies accrued on the
interest expense.
Ludmila Mikhaylova
CFO
Annual report 2018
CHERKIZOVO GROUP
|
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STRATEGIC REPORT
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FINANCIAL STATEMENTS
APPENDIX
Sustainable
Development
In every aspect of our operations, Cherkizovo
Group is committed to the principles
of sustainable development, as we seek
to ensure that today’s growth ambitions do not
compromise the ability of the future generations
to meet their own needs. We believe that business
development and commercial gain can and should
go hand in hand with efforts to maximize public
good and minimize environmental impact.
As a key element of our sustainable development strategy, Cherkizovo
is set to build balanced and harmonious relationships with a wide range
of stakeholders, including groups and entities capable of influencing
the company’s operations. Our stakeholders comprise such categories
as shareholders, customers, employees, partners, agricultural industry
players, suppliers, local and federal authorities, trade associations, non-profit
organizations, and local communities in all regions where we operate.
Shareholders
The Company is committed
to maintaining an ongoing dialogue
with shareholders and investors
in a variety of formats and ensuring
full disclosure in compliance with
applicable laws. We regularly pay out
dividends to our shareholders.
Consumers
Cherkizovo Group is a consumer-
driven company. We offer products
of superior quality, ensuring strict
quality and biosafety control across
the production chain.
Today, consumers are increasingly
focused on healthy life style, organic
products, and environmental
protection. Being aware of that,
we put sustainability at the heart
of our product strategy
and technology.
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CHERKIZOVO GROUP
Employees
Cherkizovo Group is a major employer
in the regions where it operates.
We offer competitive salary, social
benefits, and regular training
and professional development
programs for our employees.
www.cherkizovo.com/en/ ABOUT COMPANY
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FINANCIAL STATEMENTS
APPENDIX
We rely on a variety of forms of stakeholder
engagement, including research, customer
and employee surveys, public hearings,
and ongoing dialogue with government
authorities and local community representatives,
as well as meetings with partners and suppliers.
Suppliers and business-
partners
The Group seeks to engage
in effective dialogue with all business
partners, including suppliers, b2b-
customers, joint ventures, and research
organizations.
Government relations
Cherkizovo Group is among
the industry’s major taxpayers.
We work in strict compliance with
the law and cooperate with regional
authorities to implement large-
scale investment and social projects
in a variety of fields across Russia.
Local communities
We support local communities
by creating modern jobs, sponsoring
charities, and funding educational
and healthcare facilities. Our cutting-
edge production technology helps
reduce and mitigate the Company’s
environmental impact.
Cherkizovo works with a wide range
of suppliers, boasting RUB 48 billion
in annual procurement. The Group is
committed to transparent business
practices, with a strong emphasis on
tender transparency. To qualify as
a Cherkizovo contractor, potential
business partners need to meet
the Company’s stringent standards
and requirements.
Agricultural sector
By creating modern and highly efficient production facilities and introducing
advanced technologies and innovative solutions, the Group makes a strong
contribution to the development of Russia’s agricultural sector.
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APPENDIX
Our
Employees
HR POLICY
The highly skilled and effective
employees are a key driver behind
our industry leadership. We are
committed to attracting and retaining
the best talent, and creating the right
environment for everyone to unlock
their full potential. We fully comply
with the Russian labour laws with due
regard to best international practices.
Cherkizovo Group is among
the largest employers in Russia’s
agricultural and FMCG sectors.
In 2018, the Company employed
23,496 people country-wide, adding
338 employees compared with
the previous year. The increase
was primarily driven by the launch
of new production facilities and new
acquisitions.
We seek to develop human capital
and foster professional excellence.
In 2018, we focused on introducing
new systems and advanced solutions
in human resources management:
In particular, we launched
23,496
employees
Cherkizovo Group's headcount
a new leadership program for
senior managers, prepared and
implemented a plan to cooperate with
universities and engage the youth,
and continued developing employee
training and onboarding programs,
including online.
Key HR initiatives
in 2018:
Employee age,
%
Years of employment
with the Company,
%
Development program
for senior management –
Evolution@Cherkizovo.
Leaders of Change;
Distance learning system
for production and
management personnel;
The Youth project
to attracting and train
young professionals;
dual education programs
in collaboration with the leading
higher education and vocational
training institutions.
11%
11%
12%
12%
11%
12%
23%
23%
24%
27%
27%
29%
29%
28%
10%
11%
2016
2017
27%
8%
2018
Under 25 years
26–35
36–45
46–55
55+
19%
15%
17%
14%
18%
15%
29%
31%
24%
25%
27%
31%
2016
2017
2018
Less than 1 year
1–3 years
3–5 years
5–10 years
Over 10 years
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APPENDIX
RECRUITMENT
As a major employer, the Group is
hiring across the segments where
it operates as well as in sales,
marketing, R&D, and others.
In 2018, we made major changes
in our executive team. We recruited
highly qualified Russian and foreign
professionals with a strong track
record in major international FMCG
companies.
We foster sustainable development
in the regions where we operate
by working with regional authorities
and employment centers to hire
locally and contribute to economic
growth.
Cherkizovo Group strives to prevent
any discrimination by age or gender
across its operations. All recruitment
decisions are based exclusively
on the applicant's qualification.
Employees by type of employment
and non-payroll staff,
%
Headcount by gender,
%
5%
17%
2%
11%
17%
1%
17%
78%
81%
82%
45%
45%
44%
55%
55%
56%
2016
2017
2018
2016
2017
2018
Workers
Administrative personnel
Non-payroll labour
Male
Female
INDUCTION AND MENTORING
We use a wide range of programs and
tools to help new employees settle
into their roles including onboarding
meetings, guidelines, and online
courses.
In 2018, the Group introduced
Culinary Stories, an interactive online
course designed as a gamified
virtual tour across the Company’s
manufacturing facilities to help
the new hires understand our
production processes.
We have implemented a single
mentoring program across our
production sites, in an effort to
effectively adapt and train junior
talent as they master their unique
manufacturing jobs. Our mentors
take part in the recruitment process,
prepare induction plans, and train
interns.
~100
mentors
were involved in training interns and
young professionals in 2018
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APPENDIX
TRAINING AND DEVELOPMENT
Our professional development
programs include advanced training
tools, attendance of industry
conferences, and internships at
industry majors abroad.
Another major element of Evolution@
Cherkizovo is teamwork. Working
in mixed teams, participants are
able to look at the task at hand
from a different perspective
and find additional solutions
to the problem. In 2019, we plan
to extend the program to mid-level
management personnel.
In April 2018, the Group launched
Evolution@Cherkizovo. Leaders
of Change, a long-term (18-month
long) professional development
program for senior management.
The program is based on advanced
research and practical approaches
to the development of human
capital and fostering leadership.
Each participant is assigned
an individual project through which
he or she learns to apply new
approaches and deliver new results.
We annually conduct employee
competency assessment, based
on which individual development
plans and training programs are
designed, including various projects,
training courses, and self-education
opportunities. Since 2017, we have
a centralized program in place
to assess and develop management
teams based on the Corporate
Management Competency Model.
In 2018, 850 employees were
assessed under this program.
850
employees
were assessed in 2018
Across our production sites,
we provide training for various
groups of operational staff, placing
particular emphasis on biosecurity,
occupational safety, labour
productivity, and work quality.
Since 2017, we have been holding
Days of Learning and Development,
with open workshops and master
classes in many fields. We continue
improving our corporate online
library that we created jointly with
the Alpina, a publishing house.
At some of the Group’s facilities,
we offer English language classes
and English club sessions to help
our employees practise their foreign
language skills.
Distance learning
The Group seeks to use the latest
technologies and approaches
to learning. Our employees can
access training courses through
Cherkizovo WORLD, a dedicated
distance learning system.
In the reporting period, we continued
developing our online learning
capabilities by upgrading the existing
and designing new online courses
for production staff that, among
other areas, covered soft skills and
the Group's internal processes.
In 2018, we started involving our
employees in workshops to share
with colleagues their knowledge
of the Company’s internal processes,
initiatives and regulations.
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COOPERATION WITH
EDUCATIONAL INSTITUTIONS
Career opportunities
for young talent
Our major priorities in human
resources management include hiring
highly qualified young professionals,
building an effective succession
system, and raising the prestige
of employment in the agricultural
sector among young people. In 2018,
we created a youth engagement
center within our HR Department
to develop and run programs
set to attract and train young
professionals from as early as their
student years. As part of the program,
over 100 young professionals joined
the Group in 2018.
We hold regular events and
presentations at leading agricultural
universities and take part in job fairs
to tell students and recent graduates
trained in agriculture about career
and professional growth opportunities
at the Group.
Cherkizovo Group has entered
into cooperation agreements
with major national and
regional agricultural universities.
>100
young
professionals
joined the Group in 2018
as part of the program
We actively cooperate with
the Voronezh State Agrarian
University, the largest agricultural
university in Russia's Black Earth
region, and the Penza State Agrarian
University.
In 2018, we took part in the job fair
at the Moskovia vocational school
in Kashira, following which the first
group of students was selected
to pursue internship at Cherkizovo
Group.
Specifically, we are the main industry
partner of Razumovsky Moscow
State University of Technologies
and Management (First Cossack
University) in a project to train
engineering professionals. In 2018,
we held a corporate presentation
at the university for over 320 students
to highlight career opportunities
at the Group.
In 2018, Cherkizovo Group signed
a cooperation agreement with
the Russian State Agrarian
University – Moscow Timiryazev
Agricultural Academy.
Under the agreement, new training
programs in industrial automation
will be launched with the Company
serving as the major employer for
the graduates.
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COMPENSATION AND BENEFITS
We are committed to providing a fair
and competitive remuneration to our
staff in line with the local labor market
environment. Salary is commensurate
with the employee’s position,
qualification, and performance.
For management personnel, there
is an annual bonus framework
in place, based on the performance
of individual and corporate targets.
Uniform criteria for the establishment
and assessment of annual targets
provide an objective procedure
to assess employee performance
and offers a transparent and clear
mechanism to calculate the variable
part of remuneration (annual bonus).
This approach helps to ensure that
people are trained not only for
the headquarters, but also locally,
to factor in the needs of specific
production sites. In the reporting
period, we extended the program
to the Poultry and Grain segments
and educational institutions in
the Kaliningrad and Lipetsk regions.
In 2018, there were 90 participating
students.
Doors Open Day
In 2018, Cherkizovo Lab joined
the Industrial Open Week,
a nationwide event to promote
career choice for schoolchildren and
let them see how real-life industrial
facilities operate. The event was
held by Dr. Sergey Shapovalov, Lab
Director, who gave the pupils a tour
of the facility. Following the event,
the schoolchildren were able to enjoy
Cherkizovo products during a food
tasting session.
Continuous education cluster
In 2017, Cherkizovo Group signed
an agreement with Razumovsky
Moscow State University
of Technologies and Management
to create a continuous education
cluster, the first such cluster
in Russia’s meat processing industry.
The project covers initiatives
to develop educational programs for
secondary schools, vocational training
institutions, and universities, as well as
skills improvement and professional
development programs, competitions,
and contests. The cluster will boost
the prestige of the agricultural
sector among young people,
increase the number of those whose
employment matches their training,
and provide Cherkizovo Group with
qualified personnel.
At the heart of the project is the
dual education program enabling
students to obtain hands-on
production experience in addition
to academic training. The program
runs in the regions that are home
to the university’s branches and
the Group’s production facilities.
90
students
became participants
of the dual education program in 2018
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Employee remuneration
Payroll, including bonuses and remuneration,
RUB million
2016
2017
2018
RUB 55,030
12,538
13,534
15,515
Average monthly salary
Average monthly salary, RUB ’000
45,877
48,700
55,030
The remuneration structure
of the non-managerial staff
and workers varies depending
on the type of position and its
impact on the bottom line. In most
cases, there is a variable part of
remuneration (bonus) provided that
the position has a direct impact on
certain performance metrics.
In 2018, payroll, including bonuses
and remuneration, increased by
14% to RUB 15,516 million, while the
average monthly salary rose by 13%,
to RUB 55,030.
SOCIAL BENEFITS
Ensuring our employees’ social
security is a key element of
the Group’s human resources
policy. We offer an attractive work
environment and social benefits
to our staff. In addition to the social
benefits mandated by the Russian
laws and regulations, the Group
provides corporate perks and
incentives to attract and retain
qualified employees and help them
cope with difficult situations.
Our fringe benefits include additional
paid holiday allowance, vouchers
to health resorts and summer camps
for employees and their families,
financial assistance due to personal
circumstances or emergencies.
Most of our assets have corporate
cafeteria, and there are on-site health
centers at some of the facilities.
We also offer corporate health
insurance plans for our employees.
CORPORATE CULTURE
At Cherkizovo Group, we are
convinced that teamwork and
a friendly working environment are
essential for successful business
development. We appreciate
the contribution of each and
every one of our staff members
and support an ongoing dialogue
between executives and employees.
We seek to create new channels for
employee feedback and other means
of communication to enhance their
engagement in the Company life.
In 2018, we launched a recognition
program called Thank You
on the Company’s intranet site.
Our employees can use it to post
"thank you" messages to their
colleagues. The rating of employees
with the biggest number of "thank
you" notes is open for all staff
to see. Every quarter, the top three
of them are awarded by the Group.
The Thank You program cultivates
a culture of gratitude, helping
to create an environment of support
and mutual assistance.
For foreign nationals employed
at Cherkizovo Group we run a cross-
cultural program to help them learn
our corporate culture, operations,
and the Russian agricultural sector
in general.
We intend to further cultivate our corporate
culture and promote the Group’s visibility
as an employer.
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Health, Safety
and the Environment
Cherkizovo Group seeks to be No. 1
in the industry in terms of health, safety
and the environment (HSE). The reporting year
saw us centralize our HSE efforts. We approved
an HSE strategy set to consistently develop
the HSE management framework further
for the next few years.
Occupational health and safety
Occupational safety is among
Cherkizovo Group’s top priorities.
We are well aware that the health
and safety of our people are
key to the Company’s success
and sustainable development
in the long run.
Our facilities monitor compliance
with all statutory health and safety
requirements, and provide relevant
training to their employees. In line
with the HSE strategy, the Group
seeks to bring incident rates
to the best level countrywide
and improve health and safety
awareness of the management team
and personnel.
The Group focuses on the best global
HSE practices and seeks to roll them
out internally. Personnel training
and increasing of their involvement
in health and safety matters,
improving working conditions,
and identifying the causes of injuries
are among the key initiatives.
The Group seeks to completely
eliminate fatalities across all of its
assets.
To assess occupational safety
performance, the Company employs
a number of key indicators, including
the lost time injury frequency rate
(LTIFR).
Number of injuries in 2016–2018
3
3
2
6
3
6
65
57
80
2016
2017
2018
Minor
Major
Fatal
LTIFR
1.99
1.80
1.50
2016
2017
2018
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year-on-year
RUB 283.6 +72%
million
of occupational health and safety
expenses across the Group
Our occupational
safety principles
M Health and safety are our
priority in delivering strong
operating and financial
performance.
N No reasons are acceptable
to justify any breach
of occupational health
and safety requirements.
O Creating safe and healthy
working conditions for
employees is the direct
responsibility of management
at all levels.
Occupational health
and safety expenses,
RUB mln
283.6
164.8
98.9
2016
2017
2018
In 2019, we are planning to introduce
a framework to assess risks
and monitor reports from employees,
and to streamline the enterprise
control system. We intend to run
safety awareness campaigns across
all Group assets, further enhance
prevention education and the visual
impact of relevant initiatives, improve
the HSE training system, instructions,
and safety briefings, and launch
an electronic system to assess
safety awareness. We will also hold
a corporate safety competition
among our employees.
Cherkizovo Group investigates
causes of accidents and invests
consistent efforts to mitigate the risk
of their recurrence. On top of that,
we raise employee awareness
of industrial safety measures
at dedicated training events.
Despite all efforts made, we still had
fatalities in 2018: three employees
died due to violations of health
and safety rules. The Company held
an internal investigation to identify
the root causes of the accidents
and took measures to eliminate
similar tragedies in the future, while
also providing aid and support
to the families of those employees.
In 2018, we introduced milestone
innovations – a Groupwide risk-
oriented approach, and HSE audit
and review. All in all, we held
65 audits across our assets.
Occupational safety assessment
at our facilities stands at 60%.
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APPENDIX
Key results
of the Pork division in 2018
Fully implementing standard
operating procedures (SOPs)
to improve the well-being
of animals throughout their entire
life cycle.
Completing the first stage
of the Needle Free technology
project. Compared to needle
systems, needle free injections
enable less painful vaccination,
while at the same time improving
meat quality and food safety.
We expect to roll out the system
across all our assets in 2019.
Conducting a series of tests related
to breeding, feeding, genetics
and animal health. We are planning
to streamline our R&D framework
in order to conduct research
that will have an official status
and confirm the use of the best
practices.
Our priorities for 2019 also include
ensuring quality assurance
and biosafety in the procurement
of ingredients and feedstock, along
with control at slaughterhouses.
Humane treatment of animals
Cherkizovo Group is actively
introducing humane animal
treatment practices, such as
caring for animals throughout
their life and using the most
humane methods of slaughter.
In rearing and slaughtering animals,
the Pork division seeks to adhere
to the US National Pork Board's
Pork Quality Assurance Plus (PAQ+)
and ensure humane treatment.
We maintain optimal conditions
for all animals by controlling
temperature, air circulation,
lighting, and humidity. Food for our
animals features a well-balanced
mix of proteins, microelements,
vitamins and amino acids. All animals
are under constant veterinary
care, including regular clinical
examinations, blood tests, and timely
vaccination.
We run comprehensive programs
to minimize our environmental
footprint and reduce consumption
of energy and natural resources at
our assets. We continue to monitor
the state of the environment at our
production sites, regularly assess
the situation, and do everything
needed to prevent emergencies.
Cherkizovo Group seeks
to mitigate its negative impact
on the environment fully in line
with regulatory requirements
and the best practices. We implement
the latest eco-friendly technologies
and management systems, pay
great attention to the efficient
use of natural resources, and run
environmental initiatives. All facilities
monitor wastewater discharge, air
pollution and energy consumption.
The Company liaises with government
agencies, business partners, experts
from NGOs, and broad industry
community: Cherkizovo Group is
a member of the National Meat
Association and the National Union
of Swine Breeders.
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Our facilities are well-equipped
to mitigate the industry-specific
biological risks. To prevent
the spreading of infections, all
production stages are located
in separate areas, segregated
by buffer zones of at least 5 km.
Each facility accommodates
animals of the same generation;
production sites are carefully cleaned
and disinfected in the intervals
between production processes.
We have stringent access control
at our production sites and limit
the number of visitors.
The Group seeks to maintain efficient
waste management. In order
to completely eliminate manure
penetration into the soil, our nursery
and finisher sites employ monolithic
seamless flooring, which is unrivalled
in pig farming and is commonly used
in runway construction.
All environmental projects are subject
to state expert review, confirming
that the Company meets regulatory
requirements.
For further details see:
New Plant Opens in Kashira 64
As the new meat processing plant
in Kashira is located next to the forest, minimizing
negative environmental impact was an important
prerequisite for the project. Hence, even before
the construction phase, waste treatment facilities
were designed to meet all environmental standards:
they are located in a separate building and perform
the entire required cleaning cycle, with all industry-
specific factors taken into account.
In 2019,
the construction
of full-cycle treatment
facilities will kick off
in Penza, Dankov
(Lipetsk Region),
and Liski (Voronezh
Region).
Key environmental projects
in 2015–2018
M Construction of composting
facilities at production sites in
the Penza and Bryansk regions.
N Installation of sound attenuators
and blockers in ventilation systems
at Moscow facilities.
O Construction of full-cycle
treatment facilities in Kashira
and Tambov, with.
> RUB 450
million
investments exceeding
Annual report 2018
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APPENDIX
Community
Relations
At Cherkizovo Group, we seek to benefit
our regions of operations by creating jobs
and making timely tax payments to the federal
and regional budgets, which support local
communities.
Traditionally, we have been
providing aid to enable educational
and healthcare facilities to purchase
equipment and make repairs,
and sponsoring cultural events
across our footprint. In particular,
the reporting year saw us allocate
some RUB 2 million to various
projects to support local residents.
Our employees take an active
part in events associated
with Children’s Day (1 June),
and on Knowledge Day
(1 September) we present
orphanages with school supplies,
textbooks, and uniforms.
Some of the charitable projects are
initiated by our team and funded
by their personal contributions.
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APPENDIX
APPENDIX
Priority support areas
Education
We pay special attention
to supporting education. In 2018,
we contributed to a 50/50 program
targeting vulnerable population
groups, with financing split equally
between regional budgets and private
investors.
The Group extended aid to schools
in the Semiluksky District
(Voronezh Region) covering, among
other things, school repairs in
Gremyachy Kolodez, Novosilskoye
and Nizhnedevitsk.
Support of social projects
As part of our ongoing effort
to make a difference across our
geographies, we continued to provide
assistance to local authorities
by funding maintenance and repairs
of social infrastructure, such as
medical and obstetric stations
and boiler facilities, and World
War II monuments and memorials,
and hosting Victory Day (9 May)
celebrations.
Support of vulnerable groups
We contribute to dedicated programs
and provide targeted aid to those
in need. The reporting year saw us
continue sponsoring social protection
organizations that help children from
low-income families and disabled kids.
As patrons of an orphanage in
Ozherelie (Kashira District, Moscow
Region), our employees pay regular
visits, hold celebrations and hand out
gifts to its residents.
In June 2018, we took part in Kursk’s
World of Childhood charity marathon,
with proceeds distributed among
local children in need and multi-child
families.
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APPENDIX
APPENDIX
Corporate
Governance
Robust corporate governance enables us
to create sustainable value for the benefit
of our shareholders, employees, local
communities and other stakeholders.
DIRECTORS’ STATEMENT
CORPORATE GOVERNANCE
FRAMEWORK
Cherkizovo Group maintains
its corporate governance
framework in line with Russian laws
and the Corporate Governance Code
(2014) as approved by the Bank
of Russia’s Board of Directors.
Corporate governance framework
development in 2018
In 2018, Cherkizovo Group
maintained an effective corporate
governance framework conducive
to its sustainable development
and achievement of its strategic
goals. Throughout the reporting
period, the Group's corporate
governance bodies continued their
efforts to enhance the governance
approaches and practices, and, in
particular, amended four internal
regulations.
Four subcommittees have been
set up to bolster the performance
of the Board of Directors’ Investment
and Strategic Planning Committee.
The Company’s Board of Directors
and management are pleased
to present this annual report
and the Group’s audited financial
statements for the year ended on
31 December 2018 and reiterate their
strong commitment to meeting all
regulatory requirements and following
the best corporate governance
practices.
For further details see:
Financial Statements 130
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CHERKIZOVO GROUP
The Company’s activities are governed
by its Articles of Association
and internal regulations, including:
the Regulations on General Meeting
of Shareholders,
the Regulations on the Board
of Directors,
the Regulations on the Board
of Directors Audit Committee,
the Regulations on Personnel
and Remunerations Committee
(amended in 2018),
the Regulations on Remunerations
and Compensations Paid
to the Members of the Board
of Directors (amended in 2018),
the Regulations on the Investment
and Strategic Planning Committee
(amended in 2018),
the Regulations on the Management
Board,
the Regulations on the General
Director,
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APPENDIX
APPENDIX
Corporate
Governance
the Regulations on the Internal
Audit,
the Regulations on the Revision
Committee,
the Regulations on the Corporate
Secretary,
the Regulations on the Dividend
Policy (amended in 2018),
the Regulations on Insider
Information,
the Regulations on Information
Policy in Disclosure and Delivery
of Information,
the Regulations on Liquidation
Commission.
The Articles of Association and internal
regulations are available on Cherkizovo
Group’s website in the Corporate
Governance section at
http://cherkizovo.com/en/company/
corporate-governance/documents/
Shares and GDRs
Cherkizovo Group has been
a public company since its IPO in
2006. Its ordinary shares are listed
on the Moscow Exchange (MOEX).
In 2018, MOEX decided to relegate
the Company’s stock from the Level 1
List to the Level 3 List as its free
float had remained below 7.5% for
six consecutive months. The Group
plans to bring its free float back
to the level required for its re-inclusion
in the top list.
No changes have been made
to the Group's corporate governance
framework following the move down
from the Level 1 to Level 3 listing
segment. The Group continues,
and will continue, to maintain the high
corporate governance standards set
for the Level 1 List issuers.
Cherkizovo Group’s global depositary
receipts (GDRs) had been listed
on the London Stock Exchange
(LSE) since 2006, with three GDRs
representing two ordinary shares.
For further details see:
Members of the Board of Directors 116
For further details see:
Members of the Management Board 121
In November 2017, a decision was
made to remove its GDRs from
the Official List of the United
Kingdom Listing Authority and cancel
their listing on the Main Market
of the LSE. Another reason was
limited trading liquidity of the Group's
GDRs on the LSE. The GDRs
were last traded in London on
14 February 2018, with the GDR
program to remain effective over
a limited period of time and be
terminated at the Company’s
discretion.
For further details see:
Shareholder and Investor Highlights 127
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CORPORATE GOVERNANCE STRUCTURE 1
The General Meeting of Shareholders is the supreme
governing body of Cherkizovo Group. The corporate
governance structure also includes the Board of Directors,
the Management Board led by the Chairman who is the Chief
Executive Officer, and the Revision Commission.
There are three standing Board
Committees:
M the Audit Committee,
N the Personnel and Remuneration
Committees,
O the Investment and Strategic
Planning Committee.
1
All data is presented as of 31 December 2018.
Corporate Governance Structure
Reports to
Appoints/Elects
Recommends
General Shareholders Meeting
Revision Commission
Board Committees
Investment and Strategic
Planning Committee
Personnel and Remuneration
Committee
Audit Committee
Independent Auditor
Internal Audit Service
Corporate Secretary
Board
of Directors
Chief Executive Officer
and Chairman of the Management Board
Management Board
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In accordance with the decision
made at the Annual General Meeting
of Shareholders on 23 March 2018
and taking into account the Group’s
2017 performance, the total dividend
payout for the year amounted
to RUB 3.3 billion, with dividend per
share of RUB 75.07.
The Extraordinary General Meeting
of Shareholders of Cherkizovo
Group held on 27 September
2018 in the form of absentee
voting, resolved to distribute net
profit for 1H 2018 in the amount
of RUB 0.9 billion, with a dividend
per share of RUB 20.48.
GOING CONCERN
There are four Subcommittees
in the structure of the Investment
and Strategic Planning Committee
of the Board:
M the Cost Visibility and Data
Capabilities Subcommittee,
The Board of Directors is satisfied
that the Company’s financial
statements have been prepared
on a going concern basis and that
the same principle is assumed
in the preparation of the Company’s
2019 budget and long-term plans.
N the Turkey, HoReCa and New
Channels Subcommittee,
DIVIDENDS
In 2018, the Board of Directors
approved the amended
Dividend Policy. Cherkizovo
Group’s dividend policy is based
on the principle of rational distribution
of profits balancing shareholders’
interests with the Group’s need for
investment to fund its future growth.
The dividend payment is considered
by the Board of Directors assisted by
the Investment and Strategic Planning
Committee, taking into account
the Group’s current financial standing
and the proposed distribution
amount. The amended Dividend
Policy provides for an increase
in the targeted dividend payout from
20% to at least 50% of consolidated
net profit for the reporting period1.
The final decision on approval
of the dividend payout is made by
the General Meeting of Shareholders.
At its meeting on 14 February 2018,
the Company’s Board of Directors
recommended that the Annual
General Meeting of Shareholders held
on 23 March 2018 resolve to distribute
the Company’s net profit for the 2017
reporting year, with RUB 75.07 per
ordinary share to be paid in dividends.
O the Strategy and M&A
Subcommittee,
P the Marketing and R&D
Subcommittee.
Subcommittees
of the Investment and Strategic
Planning Committee
Cost Visibility and Data Capabilities
Subcommittee
Turkey, HoReCa and New Channels
Subcommittee
Strategy and M&A Subcommittee
Marketing and R&D Subcommittee
Cherkizovo Group annually conducts
an independent external audit of its
financial (accounting) statements
prepared in accordance with Russian
and international standards.
1
Consolidated net profit for the purposes of calculating the dividend adjusted for net change in fair value of biological assets.
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GENERAL MEETING
OF SHAREHOLDERS
Cherkizovo Group holds the Annual
General Meeting of Shareholders
(AGM) on an annual basis.
The agenda of the AGM always
includes such items as:
approval of Cherkizovo Group's
annual report and annual
accounting statements,
approval of profit and loss
distribution,
election of the Board of Directors
members,
election of the Revision
Commission members,
appointment of the Company’s
auditor.
The agenda of the AGM can be
expanded to include other matters
in accordance with the established
procedure.
The Company’s Board of Directors
may resolve to convene Extraordinary
General Meetings of Shareholders
(EGMs) to seek approvals for
the matters within the competence
of the General Meeting
of Shareholders.
In 2018, the AGM was held
on 23 March. In accordance with
the agenda, the shareholders:
approved Cherkizovo Group’s
2017 annual report and annual
accounting (financial) statements
for 2017 prepared in accordance
with the Russian Accounting
Standards,
BOARD OF DIRECTORS
The Board of Directors is
the collective governing body
of Cherkizovo Group responsible for
its overall management. The Board’s
terms of reference are determined
by Russian laws and the Company's
Articles of Association. The key
responsibilities of the Board
of Directors include:
resolved to pay the recommended
dividend,
performing strategic management,
elected the Board of Directors
and the Revision Commission
members,
reappointed Deloitte & Touche CIS
as Cherkizovo Group’s auditor for
2018.
In 2018, the Group convened one
Extraordinary General Meeting
of Shareholders which was held
on 27 September in the form
of an absentee meeting. The EGM
resolved to pay dividends for 1H 2018
and to approve the amended
Regulations on Remunerations
and Compensations Paid
to the Members of the Board
of Directors.
approving the Group's internal
risk management procedures,
assessing their effectiveness
and ensuring they are complied
with,
forming the Group's executive
bodies,
approving plans and budgets,
making recommendations
on profit and loss distribution.
In performing its role, the Board
of Directors is guided by the following
principles:
M decision-making based on reliable
information about the Company's
operations,
N ensuring no limitation
of shareholders’ rights
to participate in the management
of the Company, and receive
dividend payouts and information
about Cherkizovo Group,
O balancing the interests of various
groups of shareholders
and ensuring unbiased decision-
making for the benefit of all
shareholders.
23 March 2018
Annual General Meeting of Shareholders
27 September 2018
Extraordinary General Meeting of Shareholders
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APPENDIX
According to the Articles
of Association, the Board resolutions
are adopted by a majority
vote of the directors present
at the meeting. Pursuant to Russian
laws, certain decisions require
more than a simple majority vote.
These include:
major transactions (require
approval by a unanimous vote),
interested-party transactions
(decision to be taken by a majority
vote of the directors who have
no interest in the transaction,
and in compliance with the legal
requirements).
Meetings of the Board are considered
duly convened if the majority
of the directors are present.
MEMBERS OF THE BOARD
OF DIRECTORS
At the AGM held in March 2018,
the following members
of the Board were re-elected:
Sergey Igorevich Mikhaylov,
Evgeny Igorevich Mikhaylov,
Emin Tofik oglu Mammadov,
Richard Paul Sobel,
Rafael Fuertes Quintanilla,
Elliot Brinton Jones. In addition,
Filip Kegels was elected a member
of the Board.
At the first meeting of the Board
following the AGM, Evgeny Mikhaylov
was re-elected as Board Chairman
and Richard Paul Sobel as Deputy
Chairman.
The independent directors chair
the Audit Committee (Elliot Jones)
and the Personnel and Remuneration
Committee (Emin Mammadov)
and are also members and chairmen
of the following subcommittees:
the Cost Visibility and Data
Capabilities Subcommittee
(chaired by Elliot Jones),
the Turkey, HoReCa and New
Channels Subcommittee
(chaired by Emin Mammadov),
the Marketing and R&D
Subcommittee
(chaired by Filip Kegels),
the Strategy and M&A
Subcommittee
(chaired by Elliot Jones).
Information on independent and non-executive directors,
shares in the authorized capital and share ownership
Member
of the Board
of Directors
Elliot Brinton
Jones
Rafael
Fuertes
Quintanilla
Richard Paul
Sobel
Emin
Mammadov
Evgeny
Mikhaylov
Sergey
Mikhaylov
Filip Kegels
Independent
director
Non-executive
director
+
—
—
+
—
—
+
+
+
+
+
—
—
+
Share in the
authorized
capital
—
Grupo Fuertes
8.01%
—
—
Share
ownership
—
–
—
—
26.27%
26.27%
26.27%
26.27%
—
—
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In 2018, the Board of Directors
of Cherkizovo Group held
8
meetings
with all the directors present in person
Annual report 2018 ABOUT COMPANY
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APPENDIX
Evgeny Mikhaylov
Chairman of the Board of Directors
Evgeny Mikhaylov is the Chairman
of the Board of Directors of Cherkizovo
Sergey Mikhaylov
CEO of Cherkizovo Group,
Chairman of the Investment
and Strategic Planning Committee
Members of the Board Of Directors
1. Evgeny Mikhaylov
2. Sergey Mikhaylov
3. Emin Mammadov
Group. From 2006 to 2014, he was
Sergey Mikhaylov has been Chief
the Head of Investment Projects
Executive Officer of Cherkizovo
at Cherkizovo Group overseeing
Group since 2006. He is responsible
strategic business development,
for the general management
investment coordination and decision-
of the Company, its sustainable
making on the Group’s expansion into
development and strategy.
new markets.
In 2006, Mr. Mikhaylov steered
Since 2016, he is also the Head
Cherkizovo Group to become Russia's
of Business Development.
first agricultural company to successfully
go public on the LSE. Under his
Prior to joining Cherkizovo Group
leadership, the Company grew into
in 2004 as First Deputy CEO of AIC
Russia's largest meat and feed producer.
Mikhailovsky, he was an assistant
to the Vice President at aTelo, Inc,
In 2001, Sergey Mikhaylov was
a US telecommunications company,
appointed Marketing Director
in Washington DC (2001) and worked
of Cherkizovsky Meat Processing Plant.
as a financial analyst at Morgan Stanley
He was promoted to the new role
in 2002.
of Deputy CEO for marketing and sales
in 2002, and in 2003 he became CEO
He graduated from the University
of AIC Cherkizovsky.
of California (Los Angeles) in 2004 with
a degree in Business Economics.
In 1998, he interned as a financial
1.
2.
3.
Emin Mammadov
Independent director,
Chairman of the Personnel
and Remuneration Committee,
member of the Audit Committee
and member of the Investment
and Strategic Planning Committee
analyst at Goldman Sachs, and in 1999 –
at Morgan Stanley. In 1998, he
Emin Mammadov has broad experience
founded and headed aTelo, Inc.,
in food retail and consumer brand
a telecommunications company based
development across emerging markets.
in Washington, USA.
Sergey Mikhaylov graduated from
Foodservice at The Kraft Heinz
Georgetown University (USA)
Company.
He is the President of Global
in 2000 with a degree in Finance
and Economics.
Prior to that, he led the Heinz Company
divisions in India, South Africa, China
and Middle East.
Emin graduated from Baku Institute
of Social Management and Political
Science, Azerbaijan, with a degree
in International Relations.
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APPENDIX
4. Richard Sobel
5. Rafael Fuertes
6. Elliot Jones
7. Filip Kegels
Rafael Fuertes
Non-executive director,
member of the Investment
and Strategic Planning Committee
4.
5.
Rafael Fuertes has extensive experience
in the agricultural industry, in particular
Filip Kegels
Independent director,
member of the Audit Committee,
the Personal and Remuneration
Committee, and the Investment
and Strategic Committee
in animal breeding, meat processing
Filip Kegels is an experienced expert
and crop farming.
in food production and consumer
brand development in European, Asian
He is the Chairman of the Board
and emerging markets. For many years,
of Directors of Grupo Fuertes, a leading
Filip headed international operations
Spanish agricultural holding company,
of Danone Group. He served as Vice-
which is the partner of Cherkizovo Group
President and Non-Executive Chairman
in the Tambov Turkey JV and a minority
of Group Danone China and Japan
shareholder in Cherkizovo Group owning
(Asia-Pacific, India and Middle East),
8.0065% of its issued shares.
and Vice-President of Danone Africa,
Middle East and Asia-Pacific. He has
He graduated from the University
successful experience of doing business
of Murcia, Spain.
Elliot Jones
Independent director,
Chairman of the Audit Committee,
member of the Personnel
and Remuneration Committee
and member of the Investment
and Strategic Planning Committee
in Russia as member of the Board
and CEO of Danone Unimilk Russia.
He is the founder of BTF Solutions.
Filip Kegels has a broad experience
of board service at leading international
food companies. Earlier Mr. Kegels
chaired the boards of Danone Murray
Goulburn, Australia, and Centrale
Laitiere, Morrocco, and served as Vice
6.
7.
Richard Sobel
Deputy Chairman of the Board,
non-executive director,
member of the Investment
and Strategic Planning Committee
Richard Sobel has a wealth of experience
in direct investments.
Elliot Jones has a strong track record
Chairman of the boards of Al Safi
As one of the pioneers of the Russian
in the agricultural industry. Over the last
Danone, Saudi Arabia, and Pulmuone
private equity industry, Mr. Sobel was
17 years, he has been leading Jones
Danone, South Korea. He also served
a senior fund manager at Baring Asset
and Jones Consulting, a firm providing
on the boards of Strauss Health, Israel,
Management and Alfa Capital Partners
consulting advice on strategic
Mengniu Group, China, Brookeside,
in the 1990s and early 2000s. He is
development to poultry producers
Kenia, and Fanmilk Sub-Saharan Africa,
the founder and manager of Altai
in the USA and other countries.
Luxemburg, Yakult (Japan).
Advisors, a consulting company which
specializes in providing advice on potential
Prior to that, he worked for a number
He graduated from the Catholic
investment opportunities in Russia, CIS,
of US poultry and turkey production
University of Antwerp (Master
Europe and the USA.
companies, including Foster Farms,
in Economics) and the University
Zacky Farms, Swift Dairy and Poultry
of Brussels (MBA).
Previously, he was a consultant
Company, over 20 years.
at Bain & Company in Boston,
USA, and an investment manager
He graduated from the University
at Batterymarch Financial Management,
of San Francisco, USA.
the European Bank for Reconstruction
and Development and CIBC Oppenheimer.
Richard graduated from Stanford
University, USA, and holds an MBA from
Harvard Business School, USA.
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APPENDIX
BOARD COMMITTEES
There are three standing Board
Committees in Cherkizovo Group:
M the Audit Committee,
N the Personnel and Remuneration
Committee,
O the Investment and Strategic
Planning Committee.
The committees serve as consulting
and advisory bodies. The functions
and tasks of each Committee are
defined by the respective committee
regulations1.
In 2018, the Company approved
the following updated committee
regulations:
the regulations on the Investment
and Strategic Planning Committee,
the regulations on the Personnel
and Remuneration Committee.
All Committee members have
the skills, experience and resources
required to efficiently perform
their duties and may engage
external consultants to provide
advice and recommendations.
Each Committee makes
recommendations to the Board
of Directors within its terms
of reference.
The Committees meet as
appropriate, with a minimum
of five meetings a year for
the Personnel and Remuneration
Committee and the Investment
and Strategic Planning Committee,
and four meetings a year for
the Audit Committee, respectively.
The Committee meetings are held
separately from those of the Board
of Directors. Each Committee
makes decisions by a majority
of votes of the members present
at the meeting, with each member
having one vote. The Chairman
of each Committee reports the results
of the Committee meeting at the next
meeting of the Board of Directors.
In May 2018, the Board of Directors
approved the members and Chairmen
of all three Committees.
Four subcommittees were established
in the structure of the Investment
and Strategic Planning Committee
in 2018:
M the Cost Visibility and Data
Capabilities Subcommittee,
N the Turkey, HoReCa and New
Channels Subcommittee,
O the Strategy and M&A
Subcommittee,
P the Marketing and R&D
Subcommittee.
Attendance of the Board
of Directors and Committee
meetings
The Company rates the
attendance as good. In 2018,
five members of the Board
of Directors took part in all Board
meetings held during their term
in office. Two members attended
six out of eight Board meetings.
All members of the Board
Committees participated in every
committee meeting held during
their term.
1
The regulations are available on Cherkizovo
Group’s website in the Corporate Documents
section at
http://cherkizovo.com/en/company/
corporate-governance/documents/
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3
committees
at the Board of Directors
4
subcommittees
were established in the structure
of the Investment and Strategic Planning
Committee in 2018
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APPENDIX
Audit Committee
Personnel and Remuneration
Committee
Investment and Strategic Planning
Committee
(operating since 2006)
(operating since 2010)
(operating since 2012)
Key functions
Key functions
Key functions
to review the proposals submitted
to the Board of Directors with
regard to setting the Company's
business priorities, development
strategy and investment policy.
The Committee includes only
independent directors:
Sergey Mikhaylov (Сhairman),
Richard Sobel,
Emin Mammadov,
Elliot Jones,
Rafael Fuertes,
Filip Kegels.
Subsequent events:
Current Сhairman is Emin
Mammadov.
to monitor completeness, accuracy
and reliability of the Company's
financial statements,
to monitor reliability and efficiency
of the risk management
and internal control system,
to ensure that the Company's
internal and external audits are
independent and unbiased,
to monitor the efficiency
of the Company's whistleblowing
system.
The Committee includes only
independent directors:
Elliot Jones (Chairman),
Emin Mammadov,
Filip Kegels.
to develop and regularly review
the Company's policy on
remuneration of the Board directors,
members of the Management
Board, the Chief Executive Officer
and other key executives,
to carry out preliminary assessment
of the executive management's
performance,
to develop a list of the executive
management's KPIs,
to perform a detailed formalized
annual self-assessment or arrange
a third-party assessment of the
efficiency of the Board of Directors,
to evaluate the Board's composition
by way of assessing its members'
professional skills, experience,
independence and involvement in
the work of the Board of Directors,
to perform other tasks in line
with the Regulations on the Audit
Committee and the Regulations on
the Personnel and Remuneration
Committee.
The Committee includes only
independent directors:
Emin Mammadov (Chairman),
Elliot Jones,
Filip Kegels.
Subsequent events:
Current Сhairman is Filip Kegels.
Meetings held in 2018
Meetings held in 2018
Meetings held in 2018
4
8
7
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APPENDIX
REMUNERATION
OF THE BOARD OF DIRECTORS
MANAGEMENT
BOARD
MEMBERS
OF THE MANAGEMENT BOARD
The Management Board is
a collective executive governing
body of Cherkizovo Group, managing
its operations and accountable
to the Board of Directors.
The Management Board is
authorized:
to approve strategic plans
and business priorities
of Cherkizovo Group, its
subsidiaries and affiliates,
As of 31 December 2018,
the Management Board consisted
of 11 members. The Management
Board is chaired by Sergey Mikhaylov,
Cherkizovo Group's CEO.
In 2018, the Board saw the following
changes:
in March, the Board of Directors
excluded Andrey Cholokyan from
the Management Board,
to review the business
in May, the Board of Directors
performance of the Group’s
subsidiaries,
excluded Sergey Polyakov from
the Management Board.
to approve the staff incentive
framework for Cherkizovo Group,
its subsidiaries and affiliates,
to review and make decisions
on signing collective bargaining
agreements and contracts
by the Group, its subsidiaries
and affiliates.
The Management Board is led by
the Chairman of the Management
Board, who also acts as Cherkizovo
Group's Chief Executive Officer
(CEO). The CEO’s mission is to:
M ensure Cherkizovo Group's
profitability and competitive
performance, its financial
and economic sustainability,
N oversee the observance
of shareholders' rights, and
O ensure the provision of employee
benefits to Cherkizovo Group's
personnel.
As of 31 December 2018,
the Management Board consisted of
11 members
The Board directors are remunerated
in line with the Regulations on
Remunerations and Compensations
Paid to the Members of the Board
of Directors. The revised Regulations
were approved in 2018, providing for
an increase in the base remuneration
and amending the annual bonus
calculation procedure.
According to the Regulations,
the Board directors are paid a fixed
annual remuneration for their
work in the Board of Directors.
The remuneration levels currently
offered by the Company to the Board
directors are sufficient to incentivize
their effective performance.
The Regulations on Remunerations
determine the base annual
remuneration, set out a transparent
procedure for the calculation
of the variable part of remuneration
(the annual bonus) and detail
the list of reimbursable expenses
and the service level the Board
directors are eligible to.
Additionally, the Company maintains
liability insurance for all its Board
directors for their full term in office
as recommended by the Personnel
and Remuneration Committee.
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APPENDIX
Sergey Mikhaylov
Chief Executive Officer,
Chairman of the Management Board
Ludmila Mikhaylova
Chief Financial Officer,
Member of the Management Board
Sergey Mikhaylov has been CEO of Cherkizovo Group
since 2006. He is responsible for the general management
of the Company, its sustainable development and strategy.
In 2006, Mr. Mikhaylov steered Cherkizovo Group
to become the first Russian agricultural company
to successfully go public on the LSE. Under his leadership,
the Company grew into Russia's largest meat and feed
producer.
In 2001, Sergey Mikhaylov was appointed Marketing
Director of Cherkizovsky Meat Processing Plant. He was
promoted Deputy CEO for marketing and sales in 2002,
and in 2003 he became CEO of AIC Cherkizovsky.
In 1998, he interned as a financial analyst at Goldman
Sachs, and in 1999 – at Morgan Stanley.
In 1998, he founded and headed aTelo, Inc.,
a telecommunications company based in Washington,
USA.
Ludmila Mikhaylova has been CFO of Cherkizovo Group
since 2006. Her responsibilities include setting the Group's
financial policy, managing internal and external financial
reporting, budgeting, and sourcing funds for the effective
development of the Group.
Between 2001 and 2004, Ludmila Mikhaylova worked as
a financial analyst at McFarlane Gordon, Inc. (Canada),
General Mills Co (Canada) and ING Barings (UK). She then
held a various managerial positions at Cherkizovo Group
and AIC Cherkizovsky.
A number of major transactions were implemented under
Ludmila Mikhaylova’s supervision, enabling the Group
to consolidate approximately 13% of Russia’s poultry
market. In 2006, the Сompany successfully carried out
its IPO on the London Stock Exchange, raising over
USD 250 million.
Ludmila Mikhaylova ranks among the Top 1,000 Russian
Managers.
Mr. Mikhaylov ranks among the Top 1,000 Russian
Managers, leading the charge in the in agricultural industry
category.
She graduated from the Financial Academy
of the Government of the Russian Federation and holds
an MBA from York University (Canada).
He graduated from Georgetown University (USA) in 2000
with a degree in Finance and Economics.
Share in the Company’s authorized capital: 0.39%.
Share in the Company's common stock: 0.39%.
Share in the Company’s authorized capital: 26.27%.
Share in the Company's common stock: 26.27%.
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APPENDIX
Alexey Skorobogatov
Head of Procurement and Logistics,
Member of the Management Board
Maksim Zudin
CEO of Poultry
Management Company,
Member of the Management Board
Andrey Khizhnyak
Head of Sales
and Marketing Strategy,
Member of the Management Board
Alexey Skorobogatov has been Head
of Procurement and Logistics at
Cherkizovo Group since 2011. He is
responsible for the development
and coordination of procurement
activities, building efficient supply
chains and managing stock flows
in a cost-effective manner.
Between 2006 and 2009, he was
Head of Procurement at Wimm-
Bill-Dann Foods OJSC. From 2009
to 2011, he was regional Head
of Procurement at Danone Nutricia
Baby Food (Eastern Europe)
and worked at Mobile TeleSystems
OJSC, where he set up and headed
the procurement and logistics
department, which was later merged
into a single logistics department.
He graduated from Pyatigorsk State
Linguistic University.
Maksim Zudin was appointed CEO
of Poultry Management Company
in 2017.
Between 2015 and 2018, he was Head
of the Agro Division of Cherkizovo
Group responsible for the strategic
development of the Pork, Feed
and Grain segments. Prior to joining
Cherkizovo Group, Maksim was Head
of Oil Production at Solnechnye
Produkty.
Between 2003 and 2013, he was
Head of the Agro Division as well
as a member of the Management
Board at Razgulay Group, where he
was responsible for the East branch
and led the Krupa project.
He graduated from the Faculty
of Mechanics and Mathematics
of Moscow State University.
He holds no stake in the Group's
authorized capital or common stock.
He holds no stake in the Group's
authorized capital or common stock.
Andrey Khizhnyak has been Head
of Sales and Marketing Strategy
at Cherkizovo Group since 2013. He is
responsible for strategic planning
and allocation of the Company’s
marketing budget to ensure
sales growth across all segments
and oversees the marketing program
execution within Cherkizovo Group.
Between 2001 and 2004, he was
Head of Marketing at Cherkizovsky
Meat Processing Plant.
From 2004 to 2007, he was Marketing
Director at Exima Agricultural
Holding, which incorporates more
than 26 enterprises, including
Mikoyanovskiy Meet Processing Plant.
Between 2010 and 2012, he was
Commercial Director at United
Confectioners. Prior to joining
the Group, he worked for a range
of companies, including OST Group
and Betalink.
Mr. Khizhnyak ranks among the Top
1,000 Russian Managers.
He graduated from Moscow State
University of Law.
He holds no stake in the Group's
authorized capital or common stock.
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Vladislav Belyaev
Head of IT,
Member of the Management Board
Leonid Izmailov
Head of Investment Projects,
Member of the Management Board
Yury Dyachuk
Head of Legal Support and Real
Estate Operations, Member
of the Management Board
Yury Dyachuk has worked
at Cherkizovo Group for over
20 years. Since 2006, he has
been overseeing legal support
at Cherkizovo Group, litigation
involving the Company, and its
regulatory compliance.
Vladislav Belyaev has been Head
of IT at Cherkizovo Group since 2012.
He is responsible for developing
the Group's IT strategy, overseeing its
in-house IT projects and the ongoing
improvements of the regional
IT infrastructure.
He worked as part of the legal team
at Cherkizovsky Meat Processing
Plant from 1995 to 1996 and was Head
of its Legal Department between
1996 and 2000.
Between 2008 and 2012, he was
Head of the Management Systems
Department at VimpelCom.
Prior to this, he held senior
management positions at CafeMax
and Moscow Industrial Bank.
In 2005, he was Senior Counsel
advising on the restructuring
of Cherkizovo Group.
He graduated from Moscow State
University of Law.
Share in the Company’s authorized
capital: 0.086%.
Share in the Company's common
stock: 0.086%.
Vladislav has led the implementation
of a SAP ERP system launched
in 2013.
In 2015, he oversaw the roll-
out of the electronic document
management system (EDMS)
across the Group and the creation
of the unique modern data processing
center.
He graduated from Moscow Institute
of Radio Engineering, Electronics
and Automation and Moscow State
University.
He holds no stake in the Group's
authorized capital or common stock.
Leonid Izmailov has been Head
of Investment Projects at Cherkizovo
Group since 2014. He is responsible
for managing construction as part
of major investment projects.
Prior to joining the Group, Leonid was
Technical Director and Operational
Cluster Director at AgroTerra for four
years. Prior to this, he held a number
of senior management positions
across a range of companies,
including Russian Oils, Bunge, Unilever
and Nestle Food.
Leonid graduated from Moscow State
University with a degree in Chemistry.
He holds no stake in the Group's
authorized capital or common stock.
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Alexander Gusakov
Security Director,
Member of the Management Board
Violetta Shimkevich
HR Director,
Member of the Management Board
John Ross
Chief Operating Officer,
Member of the Management Board
Alexander Gusakov has been Security
Director of Cherkizovo Group since
February 2016. He is responsible
for developing and overseeing
safety standards and procedures,
maintaining the Group's economic,
information and physical security,
as well as the coordination
and interaction with government
authorities at both national
and regional levels.
Alexander has over ten years
of experience in corporate security
management at international
companies. Prior to joining the Group,
he worked for Henkel Rus, Zurich
Insurance Company and Gazprom.
Between 1981 and 2005, he worked
in the state security services.
Violetta has worked at Cherkizovo
Group since 2012, and was
appointed its HR Director in 2013.
She is responsible for implementing
the HR policy across the Group,
supervising employee recruitment
and development, and ensuring
the effective management of human
resources at all levels.
From 2007 to 2010, she was
HR Business Partner at Danone's
Dairy Products division, moving
into the role of the Compensation
and Benefits Manager at the Baby
Food (Nutrition) division in 2010.
Violetta began her career at Metro
Cash & Carry, moving up from
an HR Specialist to an HR Manager
of the Shopping Center Division.
He graduated from The Higher School
of the KGB with a degree in law.
Violetta graduated from the Russian
State University of Trade
and Economics.
He holds no stake in the Group's
authorized capital or common stock.
She holds no stake in the Group's
authorized capital or common stock.
John Ross has been the Chief
Operating Officer of Cherkizovo
Group since October 2016. He reports
directly to Sergey Mikhaylov, CEO
of the Group.
He is responsible for production
functions across all business
segments of the Cherkizovo Group,
coordinates activities of main assets
and conducts unified management of
Grain, Poultry, Pork, Meat Processing
segments and Turkey joint venture.
Prior to joining Cherkizovo Group
John led a number of large
enterprises, and served as a member
of management teams at major
international agricultural holding
companies in the poultry business
for 25 years.
Prior to joining the Cherkizovo
Group, John held the position of
President at Arasco Food (Saudi
Arabia). Before that he worked at
Zacky Farms, USA, for over 20 years,
joining the company as an Operations
Manager and going on to become the
President of the Company.
His career began in the agricultural
holding company, Cargill. He is a
graduate of Kansas State University
with a degree in Agriculture
Mechanization.
He holds no stake in the Group's
authorized capital or common stock.
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APPENDIX
CORPORATE SECRETARY
The Corporate Secretary role
has been present at Cherkizovo
Group since 2012. The Corporate
Secretary is a Company officer
who ensures effective ongoing
communication with the Group
shareholders, overviews
the protection of the shareholders’
rights and interests, supports
operations of the Board of Directors
and coordinates the activity
of the Board subcommittees.
The Corporate Secretary operates
in accordance with the Regulations
on the Corporate Secretary.
Anastasia Bakhmacheva has
been serving as the Corporate
Secretary of the Company
since November 2016, following
the resolution of the Board
of Directors.
Anastasia Bakhmacheva
Corporate Secretary
INTERNAL CONTROL
AND RISK MANAGEMENT
The Board of Directors has the overall
responsibility for maintaining
a sound internal control and risk
management system at Cherkizovo
Group and ensuring its effectiveness.
Internal control is also exercised
by the Revision Committee
in compliance with the Articles
of Association and the Regulations
on the Revision Committee.
The Revision Committee coordinates
financial and business audits
at Cherkizovo Group. Its members
are elected by the General Meeting
of Shareholders for a one-year term.
In March 2018, the AGM elected
the Revision Committee consisting
of Elena Kozhukalova, Nina Erkovich
and Boris Tivilev.
Anastasia has been in the field
of corporate governance for more
than 16 years. Prior to joining
Cherkizovo Group, she served
as the Deputy Head of Legal
Department at BLAGOSOSTOYANIE
non-state pension fund from 2014
to 2016 and held the position
of Director at VTB Bank from
2011 to 2014 overseeing corporate
governance across the VTB Group.
During 2009–2011, Anastasia was
Corporate Secretary at Bashneft, after
heading the corporate governance
team at VimpelCom (a former NYSE-
listed company) from 2003 to 2008.
Anastasia graduated from
the International Law Institute under
Ministry of Justice of the Russian
Federation with a degree in Civil Law
and the Higher School of Economics,
having completed its Business Law
program.
She is a certified financial market
specialist and a member of the
National Union of Corporate
Secretaries. In 2018, Anastasia was
rated among 25 best corporate
governance executives of Director
of the Year award.
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FINANCIAL STATEMENTS
APPENDIX
DISCLOSURE OF INSIDER
INFORMATION
To protect insider information,
the Company approved
the Regulations on Insider Information
and the List of Insider information.
The Company also maintains a list
of insiders. The Group informs
the insiders about the start of lock-up
periods for trading in stocks, GDRs
and exchange-traded bonds.
Given that the amendments
to Federal Law No. 224-FZ
On Countering the Illegal Use
of Insider Information and Market
Manipulation and on Amendments
to Certain Legislative Acts
of the Russian Federation dated
on 27 July 2010 will be enacted
on 1 May 2019, the Company plans
to make relevant changes to its
internal regulations governing the use
of insider information.
DISCLOSURE
Cherkizovo Group’s disclosure goals,
targets and principles are set out
in its Regulations on Information
Policy in Disclosure and Delivery
of Information approved by the Board
of Directors in December 2017.
In 2018, the disclosure requirements
imposed by the Russian laws
did not see any major changes.
Although following its delisting
from the London Stock Exchange
the Group no longer makes LSE
disclosures, it is still committed
to disclosing full information about its
operations to all stakeholders.
As outlined in the Regulations,
the Information Policy has
the following goals:
M to ensure stakeholders' right
to information they need for
decision-making on investment,
management and other matters,
N to promote openness
and transparency, enhancing the
Group's overall corporate image.
The Group’s disclosers are in line with:
the laws of the Russian Federation,
the regulations of the Bank
of Russia,
the Moscow Exchange Listing
Rules,
the basic principles of disclosure
and provision of information by
public joint-stock companies
recommended by the Corporate
Governance Code.
The key principles of Cherkizovo
Group’s Information Policy are
regularity, consistency, promptness,
timeliness, accessibility, reliability,
completeness, comparability,
neutrality, equitable access and ease
of control.
Cherkizovo Group discloses
information:
on the corporate website,
via the Interfax news agency,
at meetings with stakeholders,
by other means stipulated
the by laws and internal
regulations of the Group.
While still reporting its financial
performance in 2018 on a quarterly
basis as before, the Group switched
from quarterly to monthly releases
of operating results to ensure
improved timeliness of reporting on
its performance to the stakeholders.
DISCLOSURE TO AUDITORS
As far as each of the directors is
aware, there is no material information
undisclosed to Cherkizovo Group’s
auditors. Each of the directors has
taken all the necessary steps to obtain
all material information and provide it
to the Group’s auditors.
Cherkizovo Group’s current auditors,
Deloitte & Touche CIS, were
appointed in March 2018 and are due
for reappointment in 2019.
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CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
Shareholder
and Investor Highlights
ORDINARY SHARES
Cherkizovo Group’s ordinary shares
are quoted on the Moscow Exchange
(MOEX) (MOEX ticker: GCHE).
As at the beginning of 2018,
the Group’s global depositary
receipts (GDRs) had been listed
on the London Stock Exchange
(LSE) (LSE ticker: CHE), with three
GDRs representing two ordinary
shares. In 2017, the Company
decided to remove its GDRs from
the Official List of the UK Listing
Authority and cancel their listing
on the Main Market of the London
Stock Exchange. The GDRs were last
traded in London on 14 February
2018, with the GDR program
to remain effective over a limited
period of time and be terminated at
the Company’s discretion.
In 2018, MOEX decided to relegate
the Company’s stock from the Level
1 List to the Level 3 List as its free
float had remained below 7.5% for
six consecutive months.
As at the end of 2018, the share
price remained almost flat at
RUB 1,118 per share.
return amounted to
Total shareholder
8.4%
(including dividends paid in 2018)
Ordinary share price performance in 2018, RUB
As at 31 December 2017
12M high
12M low
As at 31 December 2018
Average 12M closing price
12M ADTV, shares
Source: Moscow Exchange.
Source: Bloomberg
1,117
1,328
1,035
1,118
1,117
804
Source: Moscow Exchange.
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APPENDIX
Cherkizovo Group’s ordinary share price performance in 2018
1,350
1,300
1,250
1,200
1,150
1,100
1,050
1,000
5 m
2.5 m
0
Jan’18
Feb’18
Mar’18
Apr’18
May’18
Jun’18
Jul’18
Aug’18
Sep’18
Oct’18
Nov’18
Dec’18
Jan’19
Shareholding structure
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.
In the reporting year, no such shares
were issued.
2018 saw material changes
to Cherkizovo Group’s shareholding
structure as the Company moved
to the Russian jurisdiction.
In particular, Lidiya, Sergey
and Evgeny Mikhaylov bought out
the Group’s shares held by MB Capital
Europe Ltd.
0.5%
6.6%
8.0%
2.8%
29.6%
26.3%
26.3%
Lidiya Mikhaylova
Evgeny Mikhaylov
Sergey Mikhaylov
29.6%
26.3%
26.3%
Grupo Corporativo Fuertes, S.L.
8.0%
AIC Mikhailovsky
Management
Shares in free float
6.6%
0.5%
2.8%
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STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
SHAREHOLDER ACCESS
TO INFORMATION
The Group employs a variety
of channels to provide timely
disclosure of material information.
News releases are available
on our website at:
http://cherkizovo.com/en/press/
company-news/
Information for shareholders
and investors is available
on our website at:
http://cherkizovo.com/en/investors/
Corporate action notices and other
mandatory disclosures are
published on the Group’s website
and the Corporate Disclosure Centre’s
website at:
http://www.e-disclosure.ru/portal/
company.aspx?id=6652
BONDS
Cherkizovo Group’s BO-001P-01
series bonds (registration number
4B02-01-10797-A-001P) with
an annual coupon of 12.5% are
listed on the Moscow Exchange.
Issued in October 2015, the Group’s
RUB 5 billion bonds have a maturity
period of 5 years.
INVESTOR RELATIONS
Cherkizovo Group places a special
emphasis on the transparency
of its operations. The Company
seeks to attract new investment
and is committed to maintaining
an ongoing dialogue with
shareholders and investors through
a variety of formats. These include
press releases on its operational
and financial performance, conference
calls, personal meetings and other
special events.
The Group’s website features
a dedicated investor section with
reports, presentations, information
about securities and other useful data.
The investor calendar for 2019
is available at:
http://cherkizovo.com/en/investors/
calendar/
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APPENDIX
Consolidated
Financial Statements
ABOUT COMPANY
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
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 2018
Consolidated statement of profit or loss
and other comprehensive income
Consolidated statement of financial position
Consolidated statement of changes in equity
Consolidated statement of cash flows
110
111
117
6
7
9
10
Notes to the consolidated financial statements
1.
2.
3.
Nature of the business
Significant accounting policies
New and revised International financial reporting
standards
Key sources of estimation uncertainty
Income tax
Investment property
Investments in joint ventures and assosiates
4.
5. Operating segments
Cost of sales
6.
Selling, general and administrative expenses
7.
Interest expense, net
8.
9. Other expenses, net
10.
11. Property, plant and equipment
12.
13. Goodwill
Intangible assets
14.
15. Biological assets
16.
17. Long-term deposits in banks
18.
19. Taxes recoverable and prepaid
20. Trade receivables, net
21. Other receivables, net
22. Cash and cash equivalents
23. Other current assets
24. Shareholder’s equity
25. Non-controlling interests
26. Borrowings
27. Tax related liabilities
28. Financial instruments
29. Related parties
30. Acquisitions
31. Commitments and contingencies
32. Subsequent events
Inventories
124
124
125
140
146
151
156
156
157
157
158
160
162
163
164
166
169
170
170
170
170
171
171
171
172
173
175
178
179
183
185
187
189
Annual Report 2018
PJSC Cherkizovo Group
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ABOUT COMPANY
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
Statement of management responsibilities for the preparation
and approval of the consolidated financial statements
for the year ended 31 december 2018
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 2018,
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 2018 were approved by Management
on 14 February 2019.
On behalf of the Management:
_________________________________
_________________________________
Sergei Mikhailov
Chief Executive Officer
Ludmila Mikhailova
Chief Financial Officer
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ABOUT COMPANY
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
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 2018,
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 2018, 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 2018, and its consolidated financial performance and its consolidated
cash flows for 2018 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.
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APPENDIX
Independent
auditor’s report
WHY THE MATTER WAS DETERMINED
A KEY AUDIT MATTER?
VALUATION OF BIOLOGICAL ASSETS
HOW THE MATTER WAS ADDRESSED IN THE AUDIT
At 31 December 2018 the carrying values of current
and non-current biological assets related
to pork segment were RUB 7,628,296 thousand
and RUB 2,637,746 thousand respectively (2017:
RUB 6,100,813 thousand and RUB 2,259,409 thousand)
and the carrying value of current biological assets
related to poultry segment was RUB 6,003,621 thousand
(2017: RUB 3,897,572 thousand).
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:
Biological assets are stated at fair value less estimated
costs to sell. At 31 December 2018 the effect of fair value
adjustment on the carrying value of biological assets was
RUB 6,583,555 thousand (2017: RUB 4,457,066 thousand).
Future selling prices; and
The projected cost per head/ kg.
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 as well as the projected costs,
and because the valuation is particularly sensitive to these
assumptions.
We challenged management’s assumptions
in the models with reference to historical data and,
where applicable, external/ independent sources, 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
in market conditions had occurred after the testing had
been performed, which can affect the assumptions used
in the models.
We tested the accuracy of the models and 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.
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CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
OTHER INFORMATION
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.
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FINANCIAL STATEMENTS
APPENDIX
Independent
auditor’s report
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;
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; and
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.
Srbuhi Hakobyan,
Engagement partner
14 February 2019
The Entity: PJSC Cherkizovo Group
Audit Firm: AO “Deloitte & Touche CIS”
Primary State Registration Number: 1057748318473
Certificate of state registration № 018.482, issued by the Moscow
Certificate of registration in the Unified State Register №
Registration Chamber on 30.10.1992.
1057748318473 of 22.09.2005, issued by Moscow Interdistrict
Primary State Registration Number: 1027700425444
Inspectorate of the Russian Ministry of Taxation № 46.
Certificate of registration in the Unified State Register
Address: 5B, Lesnaya street, Moscow, Russian Federation, 125047
№ 77 004840299 of 13.11.2002, issued by Moscow Interdistrict
Inspectorate of the Russian Ministry of Taxation № 39.
Member of Self-regulated organization of auditors “Russian Union
of auditors” (Association), ORNZ 11603080484.
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CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
Consolidated statement of profit or loss
and other comprehensive income
For the year ended 31 December 2018
(in thousands of Russian rubles, unless otherwise indicated)
Revenue
Net change in fair value of biological assets
Net revaluation of harvested crops in stock
Cost of sales
GROSS PROFIT
Selling, general and administrative expenses
Other operating income, net
Share of loss of joint ventures and associates
OPERATING PROFIT
Interest income
Interest expense, net
Other expenses, net
PROFIT BEFORE INCOME TAX
Income tax benefit (expense)
Profit for the year and total comprehensive income
PROFIT AND TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE
TO:
Cherkizovo Group
Non-controlling interests
EARNINGS PER SHARE
Notes
2018
2017*
5
15
15
6
7
16
8
9
10
102,639,145
90,465,069
1,836,336
2,242,187
734,141
(882,259)
(74,794,308)
(66,758,340)
31,923,360
23,558,611
(16,549,987)
(13,936,562)
238,537
(56,778)
324,898
(221,325)
15,555,132
9,725,622
289,785
(3,266,694)
(785,015)
277,148
(3,663,093)
(384,002)
11,793,208
5,955,675
187,091
(307,600)
11,980,299
5,648,075
12,004,027
(23,728)
5,800,371
(152,296)
Weighted average number of shares outstanding – basic and diluted:
41,047,014
42,760,328
Net income attributable to Cherkizovo Group per share – basic and diluted
(in Russian rubles):
292.45
135.65
* The Group has re-presented comparative information for the year ended 31 December 2017 due to the change in presentation of Net change in fair value of biological
assets and agricultural produce line (Note 2).
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FINANCIAL STATEMENTS
APPENDIX
Consolidated statement of financial position
As at 31 December 2018
(in thousands of Russian rubles, unless otherwise indicated)
ASSETS
Non-current assets
Property, plant and equipment
Investment property
Goodwill
Intangible assets
Non-current biological assets
Notes receivable, net
Investments in joint ventures and associates
Long-term deposits in banks
Restricted cash
Deferred tax assets
Rights to claim debt
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
Notes
31 December 2018
31 December 2017
11
12
13
14
15
16
17
11
10
30
29
15
18
19
20
21
22
23
82,766,158
75,318,770
594,858
1,254,572
2,143,865
2,673,452
—
3,518,031
641,365
108,762
1,073,214
4,685,209
678,405
589,411
1,254,572
2,014,358
2,288,524
310,000
2,185,147
641,365
740,848
754,192
—
804,322
100,137,891
86,901,509
15,394,856
12,429,008
1,908,669
5,732,868
875,156
1,523,442
9,612,582
563,192
11,566,300
9,971,811
2,264,482
4,448,735
1,415,099
836,563
704,676
535,087
48,039,773
31,742,753
148,177,664
118,644,262
The accompanying notes form an integral part of these consolidated financial statements.
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FINANCIAL STATEMENTS
APPENDIX
EQUITY AND LIABILITIES
Equity
Share capital
Treasury shares
Additional paid-in capital
Retained earnings
Total shareholder’s equity
Non-controlling interests
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
Notes
31 December 2018
31 December 2017
24
24
24
25
26
10
26
27
440
(3,724,561)
5,611,444
57,931,797
440
(3,724,561)
5,588,320
49,849,812
59,819,120
51,714,011
989,986
1,065,846
60,809,106
52,779,857
44,643,317
30,603,110
—
995,521
363
58,131
1,064,814
3,272
45,639,201
31,729,327
24,169,639
10,830,231
576,025
1,216,255
1,324,720
2,707,145
905,342
41,729,357
87,368,558
19,411,621
9,018,376
616,371
1,912,620
964,123
1,816,396
395,571
34,135,078
65,864,405
148,177,664
118,644,262
The accompanying notes form an integral part of these consolidated financial statements.
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Consolidated statement of changes in equity
For the year ended 31 December 2018
(in thousands of Russian rubles, unless otherwise indicated)
Balances at 1 January 2017
Profit for the year and total comprehensive income
Additional non-controlling interests recognized on acquisition of subsidiaries (Note 30)
Purchase of treasury shares (Note 24)
Dividends (Note 24)
Balances at 31 December 2017
Profit for the year and total comprehensive income
Purchase of non-controlling interests
Dividends (Note 24)
Balances at 31 December 2018
Share capital
Amount
Number of shares
Treasury shares
Amount
Number
of shares
Additional paid-
in capital
Retained
earnings
Non-controlling
interests
Total equity
Total
shareholder’s
equity
440
43,963,773
(78,033)
(108,183)
5,588,320
47,503,411
53,014,138
1,026,280
54,040,418
—
—
—
—
—
—
—
—
440
43,963,773
(3,724,561)
(2,916,759)
5,588,320
49,849,812
51,714,011
1,065,846
52,779,857
—
—
—
—
—
—
440
43,963,773
(3,724,561)
(2,916,759)
5,611,444
57,931,797
59,819,120
989,986
60,809,106
(3,646,528)
(2,808,576)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,800,371
5,800,371
—
—
—
(3,646,528)
(3,453,970)
(3,453,970)
(152,296)
191,862
—
—
5,648,075
191,862
(3,646,528)
(3,453,970)
12,004,027
12,004,027
23,124
—
23,124
(23,728)
(52,132)
11,980,299
(29,008)
(3,922,042)
(3,922,042)
—
(3,922,042)
The accompanying notes form an integral part of these consolidated financial statements.
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APPENDIX
Additional non-controlling interests recognized on acquisition of subsidiaries (Note 30)
Balances at 1 January 2017
Profit for the year and total comprehensive income
Profit for the year and total comprehensive income
Purchase of treasury shares (Note 24)
Dividends (Note 24)
Balances at 31 December 2017
Purchase of non-controlling interests
Dividends (Note 24)
Balances at 31 December 2018
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Share capital
Amount
Number of shares
Treasury shares
Amount
Number
of shares
Additional paid-
in capital
Retained
earnings
Total
shareholder’s
equity
Non-controlling
interests
Total equity
440
43,963,773
(78,033)
(108,183)
5,588,320
47,503,411
53,014,138
1,026,280
54,040,418
—
—
—
—
(3,646,528)
(2,808,576)
—
—
—
—
—
—
5,800,371
5,800,371
—
—
—
(3,646,528)
(3,453,970)
(3,453,970)
(152,296)
191,862
—
—
5,648,075
191,862
(3,646,528)
(3,453,970)
440
43,963,773
(3,724,561)
(2,916,759)
5,588,320
49,849,812
51,714,011
1,065,846
52,779,857
—
—
—
—
—
—
—
12,004,027
12,004,027
23,124
—
23,124
(23,728)
(52,132)
11,980,299
(29,008)
—
(3,922,042)
(3,922,042)
—
(3,922,042)
440
43,963,773
(3,724,561)
(2,916,759)
5,611,444
57,931,797
59,819,120
989,986
60,809,106
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Consolidated statement of cash flows
For the year ended 31 December 2018
(in thousands of Russian rubles, unless otherwise indicated)
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before income tax
Adjustments for:
Depreciation and amortization
Bad debt expense
Foreign exchange loss, net
Interest income
Interest expense, net
Net change in fair value of biological assets
Net revaluation of harvested crops in stock
(Gain) loss on disposal of property, plant and equipment, net
Gain on disposal of non-current biological assets, net
Share of loss of joint ventures and associates
Other adjustments, net
Operating cash flows before working capital and other changes
(Increase) decrease in inventories
Increase in biological assets
(Increase) decrease in trade receivables
Decrease (increase) in advances paid
Decrease (increase) in other receivables and other current assets
Decrease (increase) in other non-current assets
Increase in trade payables
Increase in tax related liabilities (other than income tax)
Increase 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
2018
2017*
11,793,208
5,955,675
6,045,330
5,153,486
118,281
829,060
282,148
390,426
(289,785)
(277,148)
3,266,694
3,663,093
(1,836,336)
(734,141)
(2,242,187)
(46,803)
882,259
106,321
(191,733)
(423,512)
56,778
(54,052)
221,325
(14,392)
17,448,455
15,205,540
(713,195)
1,259,252
(764,004)
(489,539)
(1,278,773)
535,979
626,480
62,331
1,321,392
507,747
617,989
384,564
(169,281)
(333,616)
(113,739)
48,691
50,889
445,491
18,364,401
16,288,252
245,414
143,745
(4,159,815)
(3,444,545)
332,891
541,187
(605,889)
(512,430)
14,177,002
13,016,209
* The Group has re-presented comparative information for the year ended 31 December 2017 due to the change in presentation of Net change in fair value of biological
assets and agricultural produce line (Note 2).
The accompanying notes form an integral part of these consolidated financial statements.
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APPENDIX
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment
Purchase of non-current biological assets
Purchase of intangible assets
Proceeds from sale of property, plant and equipment
Proceeds from disposal of non-current biological assets
Acquisitions of subsidiaries, net of cash acquired
Investments in joint ventures and acquisitions of associates
Placing of deposits and issuance of loans
Placing of notes receivable
Repayment of loans issued and notes receivable and redemption of deposits
Net cash used in investing activities
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
Purchase of treasury shares
Dividends paid
(Purchase) disposal of non-controlling interests
Net cash generated from financing activities
Net increase (decrease) 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
Non-cash transactions:
2018
2017*
(9,180,580)
(9,881,600)
(943,840)
(1,017,577)
(431,246)
(372,470)
181,217
993,047
30,880
1,028,836
(5,646,243)
(4,768,059)
(578,673)
(100,607)
—
387,500
(345,000)
(412,470)
(100,000)
150,050
(15,319,425)
(15,687,410)
30,007,072
20,542,792
(21,056,406)
(10,378,936)
22,263,112
11,555,329
(17,212,399)
(12,246,483)
—
(3,646,528)
(3,922,042)
(3,453,970)
(29,008)
1,470
10,050,329
2,373,674
8,907,906
(297,527)
704,676
1,002,203
9,612,582
704,676
In December 2018 the Group acquired Rosselkhozbank’s rights to claim debt (loans) from LLC “Belaya ptitsa-Kursk”
(further “Belaya Ptitsa Kursk”) and related security agreements (Note 30). To finance the transaction the Group
assumed a five-year rubles-denominated loan from Rosselkhozbank. No cash was received or provided with respect
to the two transactions with Rosselkhozbank, and therefore the acquisition did not impact the Group’s cash position.
the Group obtained various letters of credit in a well-known Russian bank with respect to the Group’s commitments
to certain suppliers of machinery and equipment. At the date of each letter the bank opened a credit line to the Group
and transferred an equal and opposite amount to a special restricted deposit account as a guarantee of fulfilment
of the Group’s obligations under the letters of credit (see Note 11). The transfer represents a non-cash transaction,
because the credit line and the restricted bank account were opened within the same bank and the transaction did not
impact the Group’s cash position.
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Notes to the consolidated financial statements
For the year ended 31 December 2018
(in thousands of Russian rubles, 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 ultimate controlling party of PJSC Cherkizovo Group is Mikhailov family who jointly control the Company.
At 31 December 2018 and 2017 the Group included the following principal companies:
Name of company
Legal form
Nature of business
% 31.12.2018
% 31.12.2017
JSC Cherkizovsky Meat Processing
Plant (JSC CMPP)
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
JSC Petelinskaya
JSC Vasiljevskaya
Joint Stock Company
Joint Stock Company
OJSC Kurinoe Tsarstvo
Open Joint Stock Company
JSC Kurinoe Tsarstvo Bryansk
Joint Stock Company
JSC Mosselprom
LLC Lisko Broiler
JSC Altaisky Broiler1
LLC TD Cherkizovo
(former LLC Petelino Trade House)
Joint Stock Company
Limited Liability Company
Joint Stock Company
Limited Liability Company
LLC Cherkizovo-Pork
Limited Liability Company
LLC Kuznetsovsky Kombinat
Limited Liability Company
Raising poultry2
Raising poultry
Raising poultry
Raising poultry
Raising poultry
Raising poultry
Raising poultry
Trading company:
distribution of poultry
Pig breeding
Pig breeding
LLC Cherkizovo-Grain Production
Limited Liability Company
Grain crops cultivation
LLC Agrarnaya Gruppa
Limited Liability Company
Grain crops cultivation
JSC Lipetskmyaso
Joint Stock Company
Grain crops cultivation
95%
95%
95%
88%
100%
100%
100%
100%
100%
100%
88%
100%
100%
100%
100%
100%
95%
95%
95%
88%
100%
100%
100%
100%
100%
—
88%
100%
100%
100%
100%
100%
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 eight meat processing plants, sixteen pig
production complexes, nine poultry production complexes, nine combined fodder production plants and more than
290,000 hectares of agricultural land.
The Group’s assets and distribution network is spread across European and Siberian parts of Russia.
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.
1
In 2018 the Group acquired JSC Altaisky Broiler (see Note 30). Whilst the Group also acquired production facilities of Krasnoyaruzhsky Broiler
and accounted for it as a business combination, no separate legal entity was acquired.
2
Hereinafter poultry includes only chicken.
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STRATEGIC REPORT
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APPENDIX
At 31 December 2018 and 2017 the number of staff employed by the Group approximated 23,496 and 23,158, respectively.
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 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”).
Change in presentation
The Group has changed presentation of gains and losses arising on initial recognition of harvested crops at fair value
less costs to sell in the statement of profit or loss and other comprehensive income. Pursuant to the Group’s revised
presentation policy, the Group now presents such gains and losses in a separate line “Net revaluation of harvested
crops in stock” in profit or loss. Prior to this change, they were presented in “Net change in fair value of biological assets
and agricultural produce” together with gains and losses arising on revaluation of biological assets. Consequently,
the line “Net change in fair value of biological assets and agricultural produce” was renamed to “Net change in fair value
of biological assets”. Management of the Group believes that the changed presentation introduces additional granularity
that will be useful to users of the financial statements due to different nature of gains and losses arising from change in fair
value of biological assets and gains and losses arising on initial recognition of harvested crops at fair value less costs to sell.
The Group has retrospectively applied the new presentation and, therefore, comparative information has been
retrospectively re-presented. The effect of the change in presentation on the consolidated statement of profit or loss
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and other comprehensive income and consolidated cash flow statement for the year ended 31 December 2017 was
as follows:
2017
(as previously
reported
Change
in presentation
2017
(as re-presented
Net change in fair value of biological assets and agricultural produce
(148,118)
Net change in fair value of biological assets
Net revaluation of harvested crops in stock
—
—
148,118
734,141
(882,259)
—
734,141
(882,259)
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 directly or indirectly; and
Level 3 inputs are unobservable inputs for the asset or liability.
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
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FINANCIAL STATEMENTS
APPENDIX
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; and
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; and
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
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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
Acquisitions of businesses are accounted for using the acquisition method, including acquisitions from entities under
common control. 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. For acquisitions of entities under common control, if
the consideration transferred in a business combination significantly differs from the fair value of the business acquired,
the Group recognizes the difference as a capital contribution if the fair value of the business acquired is higher than
consideration or a distribution if lower.
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
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FINANCIAL STATEMENTS
APPENDIX
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.
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 above) less accumulated impairment losses, if any.
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 ventures and associates
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.
An entity is considered an associate if the Group has significant influence over its financial and operating activities.
Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not
control or joint control over those policies.
The Group reports its interests in joint ventures and associates 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.
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 or associate of the Group, profits and losses resulting
from the transactions with the joint venture or associate are recognised in the Group’s consolidated financial statements
only to the extent of interests in the joint venture or associate that are not related to the Group.
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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
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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.
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.
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Biological assets and agricultural produce
Biological assets of the Group consist of livestock (pigs and poultry) and unharvested crops (grain crops and other
plantations).
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.
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” 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 harvested crops at fair value less costs to sell
is recognized as “Net revaluation of harvested crops in stock” in profit or loss and for items sold is presented on net
basis as a reduction of the line “Cost of sales”. A gain or loss arising on initial recognition of other agricultural produce is
recognized as “Net change in fair value of biological assets” and for items sold is presented on net basis as a reduction
of the line “Cost of sales”.
Based on the above policy, the principal groups of biological assets and agricultural produce are stated as follows:
Biological assets
(i) 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.
(ii) 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.
(iii) 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.
(iv) 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.
(v) 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
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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.
Agricultural produce
(i) Dressed poultry and pork
The fair value of dressed poultry and pork is determined by reference to market prices at the point of harvest.
(ii) 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 five main sources: sale of processed meat, poultry, pork, grain crops and feed.
Disaggregation of revenue is consistent with the revenue information that is disclosed for each reportable segment.
Revenue is recognised when control of the products has transferred, being when the products are shipped or when
the goods are delivered to the customer, it has full discretion over the channel and price to sell the products, and there is
no unfulfilled obligation that could affect the customer’s acceptance of the products.
In accordance with the Group’s standard sales terms, control is transferred upon shipment. However, on contracts
with certain large retail chains, control transfers upon delivery. Delivery occurs when the products have been shipped
to the specific location, the risks of obsolescence and loss have been transferred to the customer, and either the customer
has accepted the products in accordance with the sales contract, the acceptance provisions have lapsed, or the Group has
objective evidence that all criteria for acceptance have been satisfied.
Sales are recognised at the fair value of the consideration received or receivable, net of VAT, discounts and returns.
No element of financing is deemed present as the sales are typically made with a credit term of less than 30 days, which is
consistent with market practice.
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 typically limited
to the expiration period for the goods shipped and is not exceeding one month from the date of shipment. Returns are
accounted for as deductions to sales in the period to which sales relate. Accumulated historical experience of the Group
indicates that the share of goods returned is insignificant and that the most returns relate to chilled poultry and pork meat
with a return period of less than 10 days. Therefore, the Group does not recognise any liability related to customers’ right
to return products within the return period and does not recognise an asset related to the right to recover the product
from the customer where the customer is expected to exercise his/her right of return.
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.
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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 the reimbursement of interest expense on qualifying loans, which is
received directly by the Group (“interest subsidies”) and for the reimbursement of interest expense through accredited
banks, who provide loans to agricultural producers at reduced rates not exceeding 5% per annum on Rouble-denominated
loans (“reduced rate lending subsidy”). The difference between market rate and the reduced rate equals the Key rate
of the Bank of Russia (“the Key rate”) and is compensated by the Ministry of Agriculture to the accredited banks. If Ministry
of Agriculture will not compensate the interest expense accrued during the interest period (typically month or quarter)
due to lack of available funds or due to any other reason, than the bank can unilaterally increase the interest rate payable
by the Group by the Key rate. The Group records interest and reduced rate lending 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 has implemented a long-term employee bonus plan for its key employees according to which the amount
of bonus is determined by reference to the Group’s cumulative financial results for 2017-2018 financial years and is payable
in two tranches during 2019. To qualify for the bonus employees are required to remain in service until each payment
date. The Group starts to recognize the amount of bonus only when it is probable that the performance conditions will be
achieved and an outflow of economic benefits will be required to settle the obligation. At that date the Group recognises
the cumulative expense related to past service period and starts recognising the remaining expense over the residual
period of service, which includes the period until the payment date.
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.
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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.
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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.
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
All recognised financial assets are subsequently measured in their entirety at either amortised cost or fair value, depending
on the classification of the financial assets.
The classification depends on the entity’s business model for managing the financial assets and the contractual terms
of the cash flows. At the reporting dates, the Group had only financial assets classified as those to be measured at amortised
cost.
Amortised cost and 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) excluding expected credit losses, through the expected life of the debt instrument, or,
where appropriate, a shorter period, to the gross carrying amount of the debt instrument on initial recognition.
The amortised cost of a financial asset is the amount at which the financial asset is measured at initial recognition minus
the principal repayments, plus the cumulative amortisation using the effective interest method of any difference between
that initial amount and the maturity amount, adjusted for any loss allowance. On the other hand, the gross carrying amount
of a financial asset is the amortised cost of a financial asset before adjusting for any loss allowance.
Interest income is recognised in profit or loss using the effective interest method and is included in the “interest income”
line item.
Impairment of financial assets
The Group recognises a loss allowance for expected credit losses on investments in debt instruments that are measured
at amortised cost and trade and other receivables. The amount of expected credit losses (further “ECL”) is updated at each
reporting date to reflect changes in credit risk since initial recognition of the respective financial asset.
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The Group always recognises lifetime ECL for trade and other receivables. The expected credit losses on these financial
assets are estimated using a provision matrix based on the Group’s historical credit loss experience, adjusted for factors
that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast
direction of conditions at the reporting date, including time value of money where appropriate.
For all other financial instruments, the Group recognises lifetime ECL when there has been a significant increase
in credit risk since initial recognition. If, on the other hand, the credit risk on the financial instrument has not increased
significantly since initial recognition, the Group measures the loss allowance for that financial instrument at an amount
equal to 12m ECL. The assessment of whether lifetime ECL should be recognised is based on significant increases
in the likelihood or risk of a default occurring since initial recognition instead of on evidence of a financial asset being
credit-impaired at the reporting date or an actual default occurring. Lifetime ECL represents the expected credit losses
that will result from all possible default events over the expected life of a financial instrument. In contrast, 12m ECL
represents the portion of lifetime ECL that is expected to result from default events on a financial instrument that are
possible within 12 months after the reporting date.
The measurement of expected credit losses is a function of the probability of default, loss given default (i.e. the magnitude
of the loss if there is a default) and the exposure at default. The assessment of the probability of default and loss given
default is based on historical data adjusted by forward-looking information.
Derecognition of financial assets
The Group derecognises a financial asset only 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 measured at amortised cost, the difference between the asset’s carrying amount
and the sum of the consideration received and receivable is recognised in profit or loss.
Financial liabilities
All financial liabilities are subsequently measured at amortised cost using the effective interest method or at FVTPL.
At the reporting dates, the Group had only financial liabilities classified as those to be measured at amortised cost.
Financial liabilities subsequently measured at amortised cost
Financial liabilities that are not (1) contingent consideration of an acquirer in a business combination, (2) held-for-trading,
or (3) designated as at FVTPL, are subsequently measured at amortised cost using the effective interest method.
The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest
expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash
payments (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 financial liability, or (where appropriate) a shorter
period, to the amortised cost of a financial liability.
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, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss.
3. NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS
IFRSs and IFRIC interpretations adopted in the current year
The Group has adopted all IFRSs and Interpretations that are relevant to its operations and effective for annual reporting
periods beginning on 1 January 2018. The impact of the adoption of IFRS 9 “Financial Instruments” and IFRS 15
“Revenue from Contracts with Customers” on the Group’s results of operations and financial position is described below.
The adoption of other standards and amendments did not have an impact on the Group’s results of operations, financial
position or cash flows.
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IFRS 9 “Financial Instruments”
As the Group has only financial assets and liabilities measured at amortized cost, starting from 1 January 2018 it continues
to classify and measure them on the same bases as it was previously adopted under IAS 39.
Financial assets measured at amortised cost are now subject to the impairment provisions of IFRS 9.
The Group applied the simplified approach to recognise lifetime expected credit losses for its trade and other receivables.
The application of the expected credit loss model of IFRS 9 resulted in earlier recognition of credit losses for the respective
items and increased the amount of loss allowance recognized for financial assets. However, the increase was not
significant, as the Group holds cash and cash equivalents, notes receivable and long-term deposits in top 3 Russian banks
with high credit ratings assigned by international credit-rating agencies (from BBB- to BB+). As for the trade and other
receivables, the Group analysed history of bad debt allowances recognized as well as receivables written off directly
to profit or loss and came to a conclusion that bad debt allowance recognised as at 1 January 2018 and 31 December 2018
is sufficient, taking into account new impairment requirements of IFRS 9.
IFRS 9 was adopted without restating comparative information. The adjustments arising from the new impairment rules
were immaterial and therefore reflected in the current reporting period.
IFRS 15 “Revenue from Contracts with Customers”
As the Group recognises revenue mainly from wholesale of goods to its customers, has no loyalty programs or specific
guarantees, there was no impact on the consolidated financial position and/or financial performance of the Group
from the application of IFRS 15.
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 2019 or later
periods and which the entity has not early adopted:
Standards and Interpretations
IFRS 16 “Leases”
IFRS 17 “Insurance Contracts”
IFRIC 23 “Uncertainty Over Income Tax Treatments”
Amendments to IFRS 10 and IAS 28 –
Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
Amendments to IFRS 9 – Prepayment Features With Negative Compensation
Amendments to IAS 19 – Employee Benefits Plan Amendment, Curtailment or Settlement
Amendments to IAS 28 – Long-Term Interests in Associates and Joint Ventures
Annual Improvements to IFRSs 2015-2017 Cycle
Effective for annual periods
beginning on or after
1 January 2019
1 January 2021
1 January 2019
Date to be determined by the IASB
1 January 2019
1 January 2019
1 January 2019
1 January 2019
IFRS 16 “Leases”
General impact of application of IFRS 16 Leases
IFRS 16 introduces a comprehensive model for the identification of lease arrangements and accounting treatments
for both lessors and lessees. IFRS 16 will supersede the current lease guidance including IAS 17 Leases and the related
interpretations when it becomes effective.
IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer.
Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee
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accounting, and is replaced by a model where a right-of-use asset and a corresponding liability have to be recognised
for all leases by lessees (i.e. all on balance sheet) except for short-term leases and leases of low value assets.
The date of initial application of IFRS 16 for the Group will be 1 January 2019. According to the transition provisions
of IFRS 16, the Group will apply the modified retrospective method of transition with liabilities measured at the present
value of the remaining lease payments, discounted using incremental borrowing rate at 1 January 2019, and right-of-use
assets measured as an amount equal to the lease liabilities, adjusted by the amount of any prepaid or accrued lease
payments. In accordance with this method the Group will not restate comparative information for the previous period.
Impact of the new definition of a lease
The Group will make use of the practical expedient available on transition to IFRS 16 not to reassess whether a contract
is or contains a lease. Accordingly, the definition of a lease in accordance with IAS 17 and IFRIC 4 will continue to apply
to those leases entered or modified before 1 January 2019.
The change in definition of a lease mainly relates to the concept of control. IFRS 16 distinguishes between leases
and service contracts on the basis of whether the use of an identified asset is controlled by the customer. Control is
considered to exist if the customer has:
The right to obtain substantially all of the economic benefits from the use of an identified asset; and
The right to direct the use of that asset.
The Group will apply the definition of a lease and related guidance set out in IFRS 16 to all lease contracts entered into
or modified on or after 1 January 2019 (whether it is a lessor or a lessee in the lease contract). In preparation for the first-
time application of IFRS 16, the Group has carried out an implementation project. The project has shown that the new
definition in IFRS 16 will not change significantly the scope of contracts that meet the definition of a lease for the Group.
Impact on Lessee Accounting
Operating leases
IFRS 16 will change how the Group accounts for leases previously classified as operating leases under IAS 17, which were
off-balance sheet. On initial application of IFRS 16, for all leases (except as noted below), the Group will:
a) Recognise right-of-use assets and lease liabilities in the consolidated statement of financial position, initially measured
at the present value of the future lease payments;
b) Recognise depreciation of right-of-use assets and interest on lease liabilities in the consolidated statement of profit
or loss and other comprehensive income;
c) Separate the total amount of cash paid into a principal portion (presented within financing activities) and interest
(presented within operating activities) in the consolidated cash flow statement.
Under IFRS 16, right-of-use assets will be tested for impairment in accordance with IAS 36 Impairment of Assets. This will
replace the previous requirement to recognise a provision for onerous lease contracts.
For short-term leases (lease term of 12 months or less) and leases of low value assets (such as personal computers
and office furniture), the Group will opt to recognise a lease expense on a straight line basis as permitted by IFRS 16.
As at 31 December 2018, the Group has noncancellable operating lease commitments of 3,267,750 (Note 31). A preliminary
assessment indicates that all of these arrangements relate to leases other than short term leases and leases of low
value assets, and hence the Group will recognise a right of use asset of approximately 1,400,000 and a corresponding
lease liability in respect of all these leases. The impact on profit or loss is to decrease Selling, general and administrative
expenses by approximately 300,000, to increase depreciation by approximately 200,000 and to increase Interest expense
by approximately 100,000.
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Under IAS 17, all lease payments on operating leases are presented as part of cash flows from operating activities.
The impact of the changes under IFRS 16 would be to increase the cash generated by operating activities
by approximately 200,000 and to increase net cash used in financing activities by the same amount.
Finance leases
The main differences between IFRS 16 and IAS 17 with respect to assets formerly held under a finance lease is
the measurement of the residual value guarantees provided by the lessee to the lessor. IFRS 16 requires that the Group
recognises as part of its lease liability only the amount expected to be payable under a residual value guarantee, rather
than the maximum amount guaranteed as required by IAS 17. On initial application the Group will present equipment
previously included in property, plant and equipment within the line item for right-of-use assets and the lease liability,
previously presented within borrowing, will be presented in a separate line for lease liabilities.
Based on an analysis of the Group’s finance leases as at 31 December 2018 on the basis of the facts and circumstances
that exist at that date, the management of the Company have assessed that the impact of this change will not have
an impact on the amounts recognised in the Group’s consolidated financial statements.
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 management of the Group do not anticipate that the application of the amendments in the future will have
an impact on the Group’s consolidated financial statements.
IFRIC 23 “Uncertainty over Income Tax Treatments”
IFRIC 23 sets out how to determine the accounting tax position when there is uncertainty over income tax treatments.
The Interpretation requires an entity to:
Determine whether uncertain tax positions are assessed separately or as a group; and
Assess whether it is probable that a tax authority will accept an uncertain tax treatment used, or proposed to be used,
by an entity in its income tax filings:
If yes, the entity should determine its accounting tax position consistently with the tax treatment used or planned
to be used in its income tax filings;
If no, the entity should reflect the effect of uncertainty in determining its accounting tax position.
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FINANCIAL STATEMENTS
APPENDIX
The Interpretation is effective for annual periods beginning on or after 1 January 2019 with earlier application permitted.
Entities can apply the Interpretation either fully retrospectively (if it is possible without the use of hindsight) or to apply
modified retrospective approach without restatement of comparatives. The management of the Group do not anticipate
that the application of the amendments in the future will have an impact on the Group’s consolidated financial statements.
Amendments to IAS 28 “Long-Term Interests in Associates and Joint Ventures”
The amendments clarify that IFRS 9, including its impairment requirements, applies to long-term interests in associates
and joint ventures that form part of an entity‘s net investment in these investees. Furthermore, in applying IFRS 9
to long-term interests, an entity does not take into account adjustments to their carrying amount required by IAS 28
(i.e., adjustments to the carrying amount of long-term interests arising from the allocation of losses of the investee
or assessment of impairment in accordance with IAS 28).
The amendments are effective for annual periods beginning on or after 1 January 2019 with earlier application permitted.
Specific transition provisions apply depending on whether the first-time application of the amendments coincides
with that of IFRS 9. The management of the Group do not anticipate that the application of the amendments in the future
will have an impact on the Group’s consolidated financial statements.
Annual Improvements to IFRS Standards 2015–2017 Cycle
The Annual Improvements include amendments to four Standards.
IAS 12 Income Taxes
The amendments clarify that an entity should recognise the income tax consequences of dividends in profit or loss,
other comprehensive income or equity according to where the entity originally recognised the transactions that
generated the distributable profits. This is the case irrespective of whether different tax rates apply to distributed
and undistributed profits.
IAS 23 Borrowing Costs
The amendments clarify that if any specific borrowing remains outstanding after the related asset is ready for its intended
use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating the capitalisation
rate on general borrowings.
IFRS 3 Business Combinations
The amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, the entity
applies the requirements for a business combination achieved in stages, including remeasuring its previously held interest
(PHI) in the joint operation at fair value. The PHI to be remeasured includes any unrecognised assets, liabilities and goodwill
relating to the joint operation.
IFRS 11 Joint Arrangements
The amendments to IFRS 11 clarify that when a party that participates in, but does not have joint control of, a joint
operation that is a business obtains joint control of such a joint operation, the entity does not remeasure its PHI
in the joint operation.
All the amendments are effective for annual periods beginning on or after 1 January 2019 and generally require prospective
application. Earlier application is permitted.
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The management of the Group do not anticipate that the application of the amendments in the future will have an 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 31.
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.
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.
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FINANCIAL STATEMENTS
APPENDIX
Fair value is determined using Level 3 of fair value hierarchy and the following key unobservable inputs:
Description
Fair value as at
31 December
2018
Valuation
technique
Unobservable inputs
Average weight of one
broiler – kg
Broilers
2,909,525
Discounted cash
flows
Poultry meat price –
rubles
Projected production
costs – rubles per kg
Number of hatchery
eggs produced by one
breeder
Breeders held
for hatchery eggs
production
3,094,096
Discounted cash
flows
Hatchery egg price –
rubles
Sows
2,637,746
Discounted cash
flows
Projected production
costs of hatchery egg –
rubles
Average number
of piglets produced
by one sow
Market price of weaned
piglet – rubles
Discount rate
Average weight of one
market hog – kg
Market hogs
7,628,296
Discounted cash
flows
Pork meat price – rubles
per kg
Projected production
costs – rubles per kg
Crops yield – ton/Ha
Value
of unobservable
inputs
Relationship of unobservable
inputs to fair value
2.4
109.5
81.9
157
18.8
7.8
34.7
2,215
13.1%
124.8
95.0
68.3
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
Not applicable
for year-end
The higher the yield, the higher
the fair value
Unharvested crops
(except for year-end)
782,411
Discounted cash
flows
Selling price
Not applicable
for year-end
The higher the price, the higher
the fair value
Projected production
costs
Not applicable
for year-end
The higher the costs, the lower
the fair value
Among the unobservable inputs stated above, there are several key assumptions that the Group estimates to determine
the fair values of biological assets:
Expected selling prices;
Projected production costs and costs to sell.
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.
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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:
31 December 2018
Pork
31 December 2018
Poultry
10% increase
10% decrease
10% increase
10% decrease
Expected selling prices
Projected production costs and costs to sell
1,884,817
(1,248,396)
(1,880,581)
1,248,066
1,255,702
(774,692)
(1,258,371)
770,926
Recognition of subsidies receivable for interest expense reimbursement
The Group recognizes government grants when there is reasonable assurance that the Group will comply
with the conditions attached to them and that the grants will be received. Starting 2016, the Group recognizes only
interest subsidies on qualifying loans that are confirmed by Ministry of agriculture. The Group considers that confirmation
is received only when a portion of the subsidy relating to a qualifying loan is collected or an investment project is approved
by Ministry of agriculture and management verified that the Group complies with the conditions attached to that project.
The balance of subsidies receivable at 31 December 2018 is 985,344 and consists of only subsidies accrued in 2018
on qualifying loan agreements received for investment purposes. The collectability of these balances will depend
on Russian economic environment and availability of state financing. Based on the current legislation management
believes that it is probable that the balance will be collected.
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 2018 was 1,215,509 (31 December
2017: 1,215,509). No impairment loss was recognised during 2018 and 2017. Details are set out in Note 14.
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STRATEGIC REPORT
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FINANCIAL STATEMENTS
APPENDIX
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.
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 operations include the production of two distinctive product lines: the Sausages
product line, which comprises a wide range of processed meat products, including sausages, ham, hot dogs, etc.,
and the Pork product line, which comprises production and sales of pork meat.
The Poultry segment operations consist of breeding, raising and processing broilers, as well as sales of chilled
and frozen chicken products.
The Pork segment operations consist of breeding, raising and selling live pigs.
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 also presents separately two reconciling columns
in the table with segment information:
The Corporate column mainly include payroll and other expenses of the holding company and
The Turkey column represents operations related to purchase and subsequent resale of turkey meat produced
by the joint venture through the Group’s distribution network.
Each of Turkey and Corporate are not operating segments.
The Group evaluates segment performance based on Adjusted EBITDA, which is the primary segment profit measure
of the Group. Adjusted EBITDA 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. Segment assets and liabilities are not disclosed, as this information is not provided
to the chief operating decision maker.
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As previously reported in the interim condensed consolidated financial statements for the six months ended 30 June 2018,
starting from 1 January 2018, the Group changed the definition of Adjusted EBITDA and included the effect of unsold
harvest in calculation, which is revalued at the year-end. The main reason for the change was to align the reported
calendar year Adjusted EBITDA of the Grain segment with the agricultural year Adjusted EBITDA in order to more
accurately assess the performance of the segment.
In the fourth quarter of 2018, the Group further adjusted the definition to align management accounting policy
with IFRS accounting and now Adjusted EBITDA includes revaluation of unsold harvest at fair value less costs to sell
at the harvest date. In addition, the Group has adjusted for the bonuses to employees under long-term incentive program,
recognised for the first time in 2018.
This means that the Adjusted EBITDA is now 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, bonuses to employees under long-term incentive program and share of loss of joint ventures
and associates plus share of Adjusted EBITDA of joint ventures and associates and depreciation and amortisation
accumulated in harvested crops in stock.
Adjusted EBITDA for the year ended 31 December 2018 was calculated under the new policy and is presented in the table
below. The comparative information for the year ended 31 December 2017 has been retrospectively adjusted to reflect
the change in the segment profit measure.
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FINANCIAL STATEMENTS
APPENDIX
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Notes to the consolidated financial statements
For the year ended 31 December 2018
(in thousands of Russian rubles, unless otherwise indicated)
Segment information for the year ended at 31 December 2018 comprised:
Total sales
including other sales
including sales volume discounts
Intersegment sales
Sales to external customers
Net change in fair value of biological assets
Net revaluation of harvested crops in stock
Cost of sales
Gross profit (loss)
Operating expense1
Meat-
processing
Pork
Poultry
Grain
Feed
segments
Corporate
Intersegment
Total reportable
Total without
Turkey
Turkey
consolidated
Total
38,438,972
23,576,166
53,797,241
6,986,006
31,738,006
154,536,391
(58,487,602)
96,824,514
5,814,631
102,639,145
669,872
(682,375)
313,946
1,074,548
—
(709,085)
86,972
—
527,583
2,672,921
(1,231,845)
2,216,801
—
2,216,801
—
(1,391,460)
(1,391,460)
(81,738)
(1,473,198)
(179,261)
(20,529,684)
(1,877,449)
(3,989,632)
(31,210,423)
(57,786,449)
(448,281)
58,487,602
252,872
(252,872)
—
38,259,711
3,046,482
51,919,792
2,996,374
527,583
96,749,942
327,444
97,077,386
5,561,759
102,639,145
775,725
775,725
—
—
899,056
1,264,368
—
—
—
1,297,189
2,163,424
1,297,189
(327,088)
944,998
1,836,336
2,242,187
1,836,336
2,242,187
(34,202,152)
(13,290,802)
(41,561,439)
(6,133,969)
(30,977,130)
(126,165,492)
(554,659)
57,052,214
(69,667,937)
(5,126,371)
(74,794,308)
4,236,820
11,184,420
13,500,170
2,149,226
760,876
31,831,512
221,066
(817,478)
31,235,100
688,260
31,923,360
(4,712,174)
(769,307)
(6,097,666)
(431,126)
(423,605)
(12,433,878)
(3,726,500)
463,082
(15,697,296)
(614,154)
(16,311,450)
Share of loss of joint ventures and associates
—
—
—
—
—
—
—
(56,778)
(56,778)
Operating (loss) income
Other (expense) income, net2
Interest expense, net
(475,354)
10,415,113
7,402,504
1,718,100
337,271
19,397,634
(3,505,434)
(354,396)
15,537,804
17,328
15,555,132
(451,460)
61,114
118,881
2,691
(221,018)
(489,792)
147,849
(153,287)
(495,320)
(121,756)
(588,028)
(621,387)
(172,516)
(870,766)
(2,374,453)
(1,045,528)
153,287
(3,266,694)
(Loss) profit before income tax
(1,048,570)
9,888,199
6,899,998
1,548,275
(754,513)
16,533,389
(4,403,113)
(354,396)
11,775,880
17,328
11,793,208
Adjustments for:
Interest expense, net
Interest income
Foreign exchange loss (gain)
Depreciation and amortisation expense
Net change in fair value of biological assets
Share of loss of joint ventures and associates
Share of adjusted EBITDA of joint ventures and associates3
121,756
(19,991)
484,364
882,526
—
—
—
588,028
(64,279)
10,416
621,387
(171,402)
74,279
172,516
(2,146)
(192)
1,338,876
2,056,073
809,172
(899,056)
(1,264,368)
—
—
—
—
—
—
—
Bonuses to employees under long-term incentive program
38,763
40,090
171,990
8,353
19,206
278,402
373,100
Depreciation and amortisation accumulated in harvested crops
in stock
—
—
—
(272,508)
Adjusted EBITDA
Supplemental information:
Segment capital expenditure
Income tax (benefit) expense
458,848
10,902,274
8,387,957
2,263,470
966,513
22,979,062
(2,784,736)
(27,308)
20,167,018
249,229
20,416,247
2,181,464
3,882,879
2,019,862
(375,528)
2,471
88,334
389,594
103,790
299,674
14,124
8,773,473
(166,809)
979,019
(20,282)
—
—
—
—
—
—
—
870,766
(55,380)
277,409
609,025
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,374,453
(313,198)
846,276
5,695,672
(2,163,424)
—
—
(272,508)
(153,287)
153,287
1,045,528
(129,874)
(17,216)
346,839
327,088
(1,836,336)
3,266,694
(289,785)
829,060
6,042,511
—
—
651,502
(272,508)
9,752,492
(187,091)
—
—
—
—
—
—
—
—
—
—
—
2,819
56,778
165,415
6,889
(495,320)
(3,266,694)
3,266,694
(289,785)
829,060
6,045,330
(1,836,336)
56,778
165,415
658,391
(272,508)
9,752,492
(187,091)
1
Operating expenses include selling, general and administrative expenses and other operating income, net.
2
Other income (expense), net presents interest income and other income/expense as a combined line item.
3
Adjusted EBITDA of joint ventures and associates includes only adjusted EBITDA of Tambov Turkey JV, being the only material equity investment
of the Group. Adjusted EBITDA is calculated consistently to that of the Group and reported to the CODM as part of segment reporting.
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ABOUT COMPANY
STRATEGIC REPORT
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FINANCIAL STATEMENTS
APPENDIX
Meat-
processing
Pork
Poultry
Grain
38,438,972
23,576,166
53,797,241
6,986,006
669,872
(682,375)
313,946
1,074,548
—
(709,085)
86,972
—
Feed
Total reportable
segments
31,738,006
154,536,391
527,583
2,672,921
—
(1,391,460)
Corporate
Intersegment
Total without
Turkey
Turkey
Total
consolidated
775,725
775,725
—
(58,487,602)
96,824,514
5,814,631
102,639,145
(1,231,845)
2,216,801
—
2,216,801
—
(1,391,460)
(81,738)
(1,473,198)
(179,261)
(20,529,684)
(1,877,449)
(3,989,632)
(31,210,423)
(57,786,449)
(448,281)
58,487,602
252,872
(252,872)
—
38,259,711
3,046,482
51,919,792
2,996,374
527,583
96,749,942
327,444
—
97,077,386
5,561,759
102,639,145
—
—
899,056
1,264,368
—
—
—
1,297,189
—
—
2,163,424
1,297,189
—
—
(327,088)
944,998
1,836,336
2,242,187
—
—
1,836,336
2,242,187
(34,202,152)
(13,290,802)
(41,561,439)
(6,133,969)
(30,977,130)
(126,165,492)
(554,659)
57,052,214
(69,667,937)
(5,126,371)
(74,794,308)
4,236,820
11,184,420
13,500,170
2,149,226
760,876
31,831,512
221,066
(817,478)
31,235,100
688,260
31,923,360
(4,712,174)
(769,307)
(6,097,666)
(431,126)
(423,605)
(12,433,878)
(3,726,500)
463,082
(15,697,296)
(614,154)
(16,311,450)
Share of loss of joint ventures and associates
—
—
—
—
—
—
—
—
—
(56,778)
(56,778)
(Loss) profit before income tax
(1,048,570)
9,888,199
6,899,998
1,548,275
(754,513)
16,533,389
(4,403,113)
(354,396)
11,775,880
17,328
11,793,208
(475,354)
10,415,113
7,402,504
1,718,100
337,271
19,397,634
(3,505,434)
(354,396)
15,537,804
17,328
15,555,132
(451,460)
61,114
118,881
2,691
(221,018)
(489,792)
147,849
(153,287)
(495,320)
(121,756)
(588,028)
(621,387)
(172,516)
(870,766)
(2,374,453)
(1,045,528)
153,287
(3,266,694)
—
—
(495,320)
(3,266,694)
Segment information for the year ended at 31 December 2018 comprised:
Total sales
including other sales
including sales volume discounts
Intersegment sales
Sales to external customers
Net change in fair value of biological assets
Net revaluation of harvested crops in stock
Cost of sales
Gross profit (loss)
Operating expense1
Operating (loss) income
Other (expense) income, net2
Interest expense, net
Adjustments for:
Interest expense, net
Interest income
Foreign exchange loss (gain)
Depreciation and amortisation expense
Net change in fair value of biological assets
Share of loss of joint ventures and associates
Share of adjusted EBITDA of joint ventures and associates3
Depreciation and amortisation accumulated in harvested crops
in stock
Adjusted EBITDA
Supplemental information:
Segment capital expenditure
Income tax (benefit) expense
121,756
(19,991)
484,364
882,526
588,028
(64,279)
10,416
621,387
(171,402)
74,279
172,516
(2,146)
(192)
1,338,876
2,056,073
809,172
(899,056)
(1,264,368)
—
—
—
—
—
—
—
—
—
—
—
—
Bonuses to employees under long-term incentive program
38,763
40,090
171,990
8,353
19,206
278,402
373,100
—
(272,508)
—
(272,508)
—
870,766
(55,380)
277,409
609,025
—
—
—
2,374,453
(313,198)
846,276
5,695,672
(2,163,424)
—
—
1,045,528
(129,874)
(17,216)
346,839
—
—
—
458,848
10,902,274
8,387,957
2,263,470
966,513
22,979,062
(2,784,736)
(27,308)
20,167,018
249,229
20,416,247
2,181,464
3,882,879
2,019,862
(375,528)
2,471
88,334
389,594
103,790
299,674
14,124
8,773,473
(166,809)
979,019
(20,282)
—
—
9,752,492
(187,091)
—
—
9,752,492
(187,091)
Operating expenses include selling, general and administrative expenses and other operating income, net.
Other income (expense), net presents interest income and other income/expense as a combined line item.
1
2
3
Adjusted EBITDA of joint ventures and associates includes only adjusted EBITDA of Tambov Turkey JV, being the only material equity investment
of the Group. Adjusted EBITDA is calculated consistently to that of the Group and reported to the CODM as part of segment reporting.
CHERKIZOVO GROUP
| 169
—
—
—
2,819
—
56,778
165,415
6,889
3,266,694
(289,785)
829,060
6,045,330
(1,836,336)
56,778
165,415
658,391
(153,287)
153,287
—
—
3,266,694
(289,785)
829,060
6,042,511
327,088
(1,836,336)
(272,508)
—
(272,508)
—
—
651,502
—
—
—
—
Annual report 2018 ABOUT COMPANY
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
Notes to the consolidated financial statements
For the year ended 31 December 2018
(in thousands of Russian rubles, unless otherwise indicated)
Segment information for the year ended at 31 December 2017 comprised:
Total sales
including other sales
including sales volume discounts
Intersegment sales
Sales to external customers
Net change in fair value of biological assets
Net revaluation of harvested crops in stock
Cost of sales
Gross profit (loss)
Operating expense1
Meat-
processing
Pork
Poultry
Grain
Feed
segments
Corporate
Intersegment
Total reportable
Total without
Turkey
Turkey
consolidated
Total
34,020,373
18,688,379
47,401,429
3,238,261
28,169,777
131,518,219
(45,511,637)
86,566,589
3,898,480
90,465,069
680,431
(827,045)
235,960
901,885
—
(523,618)
75,115
—
(39,539)
(14,622,070)
(1,902,802)
(1,468,597)
(27,186,212)
(45,219,220)
(292,417)
45,511,637
—
33,980,834
4,066,309
45,498,627
1,769,664
983,565
86,298,999
267,590
86,566,589
3,898,480
90,465,069
—
—
651,235
(71,239)
154,145
—
—
(890,759)
560,007
560,007
(799,076)
1,654,322
1,654,322
(1,350,663)
(29,696)
(1,380,359)
—
—
—
8,500
734,141
(882,259)
(28,058,310)
(12,399,563)
(36,875,483)
(3,823,384)
(26,735,838)
(107,892,578)
(440,325)
45,327,432
(63,005,471)
(3,752,869)
(66,758,340)
5,962,063
6,940,051
10,454,707
(1,321,737)
1,433,939
23,469,023
119,682
(175,705)
23,413,000
145,611
23,558,611
(4,249,598)
(627,148)
(5,342,484)
(270,124)
(368,585)
(10,857,939)
(2,825,222)
283,836
(13,399,325)
(212,339)
(13,611,664)
Share of loss of joint ventures and associates
—
—
—
—
—
—
—
(221,325)
(221,325)
Operating income (loss)
Other income (expense), net2
Interest expense, net
1,712,465
6,312,903
5,112,223
(1,591,861)
1,065,354
12,611,084
(2,705,540)
108,131
10,013,675
(288,053)
9,725,622
(106,781)
38,664
3,102
2,967
(103,986)
(166,034)
156,258
(97,078)
(106,854)
(181,389)
(713,729)
(1,112,968)
(175,685)
(942,325)
(3,126,096)
(634,075)
97,078
(3,663,093)
Profit (loss) before income tax
1,424,295
5,637,838
4,002,357
(1,764,579)
19,043
9,318,954
(3,183,357)
108,131
6,243,728
(288,053)
5,955,675
Adjustments for:
Interest expense, net
Interest income
Foreign exchange loss (gain)
Depreciation and amortisation expense
Net change in fair value of biological assets
Share of loss of joint ventures and associates
Share of adjusted EBITDA of joint ventures and associates3
Depreciation and amortisation accumulated in harvested crops
in stock
Adjusted EBITDA
Supplemental information:
Segment capital expenditure
Income tax expense (benefit)
181,389
(16,845)
122,422
697,189
—
—
—
—
713,729
(41,178)
6,272
1,112,968
(164,917)
164,118
175,685
(1,649)
(859)
1,140,851
1,936,437
464,492
(651,235)
71,239
(154,145)
—
—
—
—
—
—
—
—
186,900
2,408,450
6,806,277
7,122,202
(1,094,155)
1,661,340
16,904,114
(2,385,901)
108,131
14,626,344
16,720
14,643,064
4,795,938
5,077,199
1,465,739
100,185
(19,580)
48,452
397,665
12,224
206,831
11,943,372
3,401
144,682
389,316
162,918
—
—
—
—
—
—
—
—
—
942,325
(2,567)
107,279
595,260
1,893,391
(1,350,663)
734,141
(890,759)
3,126,096
(227,156)
399,232
4,834,229
(734,141)
—
—
186,900
—
—
—
—
—
—
—
—
(97,078)
97,078
634,075
(147,070)
(8,806)
319,257
3,663,093
(277,148)
390,426
5,153,486
(734,141)
—
—
186,900
12,332,688
307,600
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
221,325
83,448
—
734,141
(882,259)
(106,854)
(3,663,093)
3,663,093
(277,148)
390,426
5,153,486
(734,141)
221,325
83,448
186,900
12,332,688
307,600
1
Operating expenses include selling, general and administrative expense and other operating income, net.
2
Other income (expense), net presents interest income and other income/expense as a combined line item.
3
Adjusted EBITDA of joint ventures and associates includes only adjusted EBITDA of Tambov Turkey JV, being the only material equity investment
of the Group. Adjusted EBITDA is calculated consistently to that of the Group and reported to the CODM as part of segment reporting.
170
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CHERKIZOVO GROUP
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ABOUT COMPANY
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
Segment information for the year ended at 31 December 2017 comprised:
Total sales
including other sales
including sales volume discounts
Intersegment sales
Sales to external customers
Net change in fair value of biological assets
Net revaluation of harvested crops in stock
Cost of sales
Gross profit (loss)
Operating expense1
Operating income (loss)
Other income (expense), net2
Interest expense, net
Adjustments for:
Interest expense, net
Interest income
Meat-
processing
Pork
Poultry
Grain
Feed
Total reportable
segments
Corporate
Intersegment
Total without
Turkey
Turkey
Total
consolidated
34,020,373
18,688,379
47,401,429
3,238,261
28,169,777
131,518,219
680,431
(827,045)
235,960
901,885
—
(523,618)
75,115
—
—
—
1,893,391
(1,350,663)
560,007
560,007
—
(45,511,637)
86,566,589
3,898,480
90,465,069
(799,076)
1,654,322
—
1,654,322
—
(1,350,663)
(29,696)
(1,380,359)
(39,539)
(14,622,070)
(1,902,802)
(1,468,597)
(27,186,212)
(45,219,220)
(292,417)
45,511,637
—
—
—
33,980,834
4,066,309
45,498,627
1,769,664
983,565
86,298,999
267,590
—
—
651,235
(71,239)
154,145
—
—
(890,759)
—
—
734,141
(890,759)
—
—
—
—
8,500
86,566,589
3,898,480
90,465,069
734,141
(882,259)
—
—
734,141
(882,259)
(28,058,310)
(12,399,563)
(36,875,483)
(3,823,384)
(26,735,838)
(107,892,578)
(440,325)
45,327,432
(63,005,471)
(3,752,869)
(66,758,340)
5,962,063
6,940,051
10,454,707
(1,321,737)
1,433,939
23,469,023
119,682
(175,705)
23,413,000
145,611
23,558,611
(4,249,598)
(627,148)
(5,342,484)
(270,124)
(368,585)
(10,857,939)
(2,825,222)
283,836
(13,399,325)
(212,339)
(13,611,664)
Share of loss of joint ventures and associates
—
—
—
—
—
—
—
—
—
(221,325)
(221,325)
Profit (loss) before income tax
1,424,295
5,637,838
4,002,357
(1,764,579)
19,043
9,318,954
(3,183,357)
108,131
6,243,728
(288,053)
5,955,675
1,712,465
6,312,903
5,112,223
(1,591,861)
1,065,354
12,611,084
(2,705,540)
108,131
10,013,675
(288,053)
9,725,622
(106,781)
38,664
3,102
2,967
(103,986)
(166,034)
156,258
(97,078)
(106,854)
(181,389)
(713,729)
(1,112,968)
(175,685)
(942,325)
(3,126,096)
(634,075)
97,078
(3,663,093)
—
—
(106,854)
(3,663,093)
942,325
(2,567)
107,279
595,260
—
—
—
—
3,126,096
(227,156)
399,232
4,834,229
(734,141)
—
—
186,900
634,075
(147,070)
(8,806)
319,257
—
—
—
—
(97,078)
97,078
—
—
—
—
—
—
3,663,093
(277,148)
390,426
5,153,486
(734,141)
—
—
—
—
—
—
—
221,325
83,448
3,663,093
(277,148)
390,426
5,153,486
(734,141)
221,325
83,448
186,900
—
186,900
2,408,450
6,806,277
7,122,202
(1,094,155)
1,661,340
16,904,114
(2,385,901)
108,131
14,626,344
16,720
14,643,064
4,795,938
5,077,199
1,465,739
100,185
(19,580)
48,452
206,831
11,943,372
3,401
144,682
389,316
162,918
—
—
12,332,688
307,600
—
—
12,332,688
307,600
Foreign exchange loss (gain)
Depreciation and amortisation expense
Net change in fair value of biological assets
Share of loss of joint ventures and associates
Share of adjusted EBITDA of joint ventures and associates3
Depreciation and amortisation accumulated in harvested crops
in stock
Adjusted EBITDA
Supplemental information:
Segment capital expenditure
Income tax expense (benefit)
181,389
(16,845)
122,422
697,189
—
—
—
—
713,729
(41,178)
6,272
1,112,968
(164,917)
164,118
1,140,851
1,936,437
464,492
(651,235)
71,239
(154,145)
—
—
—
—
—
—
175,685
(1,649)
(859)
—
—
186,900
397,665
12,224
Operating expenses include selling, general and administrative expense and other operating income, net.
Other income (expense), net presents interest income and other income/expense as a combined line item.
1
2
3
Adjusted EBITDA of joint ventures and associates includes only adjusted EBITDA of Tambov Turkey JV, being the only material equity investment
of the Group. Adjusted EBITDA is calculated consistently to that of the Group and reported to the CODM as part of segment reporting.
CHERKIZOVO GROUP
|
171
Annual report 2018 ABOUT COMPANY
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
Notes to the consolidated financial statements
For the year ended 31 December 2018
(in thousands of Russian rubles, unless otherwise indicated)
6. COST OF SALES
Cost of sales for the years ended 31 December 2018 and 2017 comprised:
Raw materials and goods for resale
Personnel (excluding pension costs)
Depreciation
Utilities
Pension costs
Other
Total cost of sales
2018
2017
50,332,407
45,698,526
9,550,062
5,414,452
3,945,140
1,959,121
3,593,126
8,475,295
4,579,762
3,724,341
1,635,641
2,644,775
74,794,308
66,758,340
Raw materials and goods for resale include as an offset subsidies received from local governments in the amount of 48,410
and 19,074 for the years ended 31 December 2018 and 2017, respectively. These subsidies were received based on square
of cultivated land and volumes of meat and eggs produced.
7. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the years ended 31 December 2018 and 2017 comprised:
Personnel (excluding pension costs)
Transportation
Advertising and marketing
Taxes (other than income tax)
Pension costs
Bonuses to employees under long-term incentive program1
Materials and supplies
Depreciation and amortization
Security services
Rent expenses
Audit, consulting and legal fees
Information technology and communication services
Utilities
Veterinary services
Insurance
Change in bad debt allowance and other write-off
Repairs and maintenance
Bank charges
Other
2018
2017
5,307,384
2,695,018
1,087,946
1,049,877
858,536
658,392
657,468
630,878
461,914
449,335
310,325
287,309
265,226
163,572
155,745
118,281
78,698
40,891
1,273,192
5,058,221
2,082,335
701,601
925,683
639,892
—
721,796
573,724
436,679
401,205
228,319
260,720
246,354
156,073
167,106
282,148
88,780
23,342
942,584
Total selling, general and administrative expenses
16,549,897
13,936,562
1
In 2017 the Group entered into long-term remuneration agreement with key employees of the Group. Under the terms of the arrangement, the Group
agreed to pay a one-time bonus in 2019 if the Group’s financial performance will achieve target level for 2017 and 2018 on cumulative basis
and employee will continue to serve the Group until the date of bonus distribution. Until the fourth quarter of 2018 the achievement of the result was
not probable based on management estimates. In the fourth quarter of 2018 the Group achieved the target due to favourable market conditions.
172
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ABOUT COMPANY
STRATEGIC REPORT
CORPORATE GOVERNANCE
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APPENDIX
8. INTEREST EXPENSE, NET
Interest expense, net for the years ended 31 December 2018 and 2017 comprised:
Interest on bank overdrafts and loans1
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 accrued1
Less: government grants written-off2
Less: amounts included in the cost of qualifying assets
Total government grants for compensation of interest expenses
2018
2017
4,853,118
4,429,247
40,524
(290,034)
4,603,608
(1,519,147)
—
182,233
(1,336,914)
55,533
(815,344)
3,669,436
(973,499)
571,087
396,069
(6,343)
Total interest expense, net
3,266,694
3,663,093
9. OTHER EXPENSES, NET
Other expenses, net for the years ended 31 December 2018 and 2017 comprised:
Foreign exchange loss
Other income, net
Total other expenses, net
10. INCOME TAX
2018
2017
(829,060)
(390,426)
44,045
6,424
(785,015)
(384,002)
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%
for generally taxed entities and 10% for other tax regimes.
The main components of income tax for the years ended 31 December 2018 and 2017 were as follows:
Current tax expense
Deferred tax benefit
Total income tax benefit (expense)
2018
(201,224)
388,315
187,091
2017
(563,511)
255,911
(307,600)
1
Starting from 1 January 2017 the Group receives government grants through accredited banks, who provide loans to agricultural producers
at reduced rates not exceeding 5% per annum on Rouble-denominated loans (“reduced rate lending subsidy”). The difference between market rate
and the reduced rate equals the Key rate of the Bank of Russia and is compensated by Ministry of Agriculture to the accredited banks. The Group
presents such subsidy in the table above gross of related interest expense in the amount of 537,386.
2
On 13 December 2017 the Government order was issued, prohibiting regional bodies of Ministry of agriculture to use their 2018 subsidy limits
for settlement of 2016 liabilities. As a result, working capital subsidies receivable in the amount of 571,087 were written-off, as shown above.
Annual report 2018
CHERKIZOVO GROUP
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173
ABOUT COMPANY
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
The income tax expense can be reconciled to the theoretical tax provision at the statutory rate for the years ended
31 December 2018 and 2017 as follows:
Profit before income tax
Profit before income tax of entities taxed at zero rates (agricultural entities)
Profit before income tax of entities taxed at 10% (other tax regimes)
Loss before income tax of generally taxed entities
Statutory income tax rate (agricultural entities)
Statutory income tax rate (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
Withholding taxes paid
Additional income tax accrued for prior years
Penalties
Other
2018
2017
11,793,208
13,860,968
281,189
5,955,675
7,969,939
—
(2,348,950)
(2,014,264)
0%
10%
20%
(441,671)
185,497
—
43,287
—
25,796
0%
0%
20%
(402,853)
178,584
161,516
97,561
150,982
121,810
Income tax (benefit) expense
(187,091)
307,600
The following amounts, determined after appropriate offsetting, are presented in the consolidated statement of financial
position as of 31 December 2018 and 2017:
Deferred tax asset
Deferred tax liability
Net deferred tax asset (liability)
31 December
2018
31 December
2017
1,073,214
754,192
(995,521)
(1,064,814)
77,693
(310,622)
The movement in the net deferred tax liability for the year ended 31 December 2018 comprised:
Property, plant and equipment and investment property
Trade receivables
Other assets and liabilities
Tax loss carry forward
(1,266,701)
(77,326)
39,533
993,872
(7,514)
11,497
(22,679)
407,011
Net deferred tax (liability) asset
(310,622)
388,315
(1,274,215)
(65,829)
16,854
1,400,883
77,693
31 December
2017
Recognised
in profit or loss
31 December
2018
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www.cherkizovo.com/en/Notes to the consolidated financial statementsFor the year ended 31 December 2018(in thousands of Russian rubles, unless otherwise indicated) ABOUT COMPANY
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FINANCIAL STATEMENTS
APPENDIX
The movement in the net deferred tax liability for the year ended 31 December 2017 comprised:
1 January 2017
Recognised
in profit or loss
Recognised
on acquisition
of subsidiaries
31 December
2017
Property, plant and equipment and investment property
(537,717)
(103,126)
(625,858)
(1,266,701)
Trade receivables
Other assets and liabilities
Tax loss carry forward
Net deferred tax (liability) asset
(98,155)
51,384
643,813
59,325
20,829
(11,851)
350,059
—
—
—
(77,326)
39,533
993,872
255,911
(625,858)
(310,622)
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). The Group expects no impact on their deferred tax position as a result.
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11. PROPERTY, PLANT AND EQUIPMENT
The following table represents movements in property, plant and equipment for the years ended 31 December 2018
and 2017:
Buildings,
infrastructure
and lease-
hold im-
provements
Land
and land
lease rights
Machinery
and
equipment
Vehicles
Other
Construc-
tion
in progress
Total
COST
Balance
as at 1 January 2017
Additions
Acquisitions
of subsidiaries
Disposals
As at 31 December
2017
Additions
Acquisitions
of subsidiaries
Disposals
As at 31 December
2018
2,748,147
44,919,931
25,737,929
4,890,487
244,401
9,224,779
87,765,674
59,567
5,370,772
3,783,735
517,190
48,833
1,108,926
10,889,023
5,023,743
(204,554)
74,149
116,906
112,599
289
2,495
5,330,181
(18,294)
(639,450)
(96,640)
(4,175)
(35,312)
(998,425)
7,626,903
50,346,558
28,999,120
5,423,636
289,348
10,300,888 102,986,453
98,024
6,419,570
5,450,294
866,988
50,205
(4,693,935)
8,191,146
3,321
3,598,086
1,496,552
82,399
326
18,074
5,198,758
(164,243)
(207,382)
(766,948)
(118,249)
(25,390)
(16,693)
(1,298,905)
7,564,005
60,156,832
35,179,018
6,254,774
314,489
5,608,334 115,077,452
ACCUMULATED DEPRECIATION OR IMPAIRMENT LOSS
Balance
as at 1 January 2017
— (9,193,688) (11,731,286)
(2,251,694)
(143,750)
— (23,320,418)
Depreciation charge
(15,061)
(1,736,809)
(2,511,834)
(645,291)
(56,221)
Eliminated on disposals
—
12,458
528,866
73,016
3,611
As at 31 December
2017
(15,061) (10,918,039) (13,714,254)
(2,823,969)
(196,360)
Depreciation charge
(19,958)
(2,015,335)
(2,806,471)
(701,583)
(53,383)
Eliminated on disposals
—
113,845
718,359
97,225
23,690
—
—
(4,965,216)
617,951
— (27,667,683)
—
—
(5,596,730)
953,119
As at 31 December
2018
CARRYING AMOUNTS
(35,019) (12,819,529) (15,802,366)
(3,428,327)
(226,053)
— (32,311,294)
At 31 December 2017
7,611,842
39,428,519
15,284,866
2,599,667
92,988 10,300,888
75,318,770
At 31 December 2018
7,528,986
47,337,303
19,376,652
2,826,447
88,436
5,608,334
82,766,158
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www.cherkizovo.com/en/Notes to the consolidated financial statementsFor the year ended 31 December 2018(in thousands of Russian rubles, unless otherwise indicated) ABOUT COMPANY
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FINANCIAL STATEMENTS
APPENDIX
Net book values of buildings, infrastructure and leasehold improvements include 40,291 and 62,247 of leased
buildings and infrastructure as of 31 December 2018 and 2017, respectively. Net book values of vehicles and machinery
and equipment include 176,981 and 314,768 of leased equipment as of 31 December 2018 and 2017, respectively.
Advances paid for acquisition and construction of property, plant and equipment are included in construction in progress
in the amount of 531,804 and 1,365,858 as at 31 December 2018 and 2017, respectively.
Starting from 2017 the Group uses special bank accounts as a guarantee for fulfilment of the Group’s obligations
under the purchase contracts with foreign suppliers of machinery and equipment. Deposits on such accounts
in the amount of 108,762 and 740,848 as at 31 December 2018 and 2017, respectively, were presented as restricted cash
in the consolidated statement of financial position, since the Group is unable to use these funds for anything other than
to fulfil their obligations with respect to the purchase contracts.
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 2018 and 2017 were
as follows:
COST
Balance as at 1 January 2017
Reconstruction and modernisation
As at 31 December 2017
Reconstruction and modernisation
As at 31 December 2018
ACCUMULATED DEPRECIATION OR IMPAIRMENT LOSS
Balance as at 1 January 2017
Depreciation charge
As at 31 December 2017
Depreciation charge
As at 31 December 2018
CARRYING AMOUNTS
At 31 December 2017
At 31 December 2018
Land
Buildings
Total
274,949
229,533
504,482
—
156,316
156,316
274,949
385,849
660,798
—
17,516
17,516
274,949
403,365
678,314
—
—
—
—
—
(60,806)
(10,581)
(60,806)
(10,581)
(71,387)
(71,387)
(12,069)
(12,069)
(83,456)
(83,456)
274,949
274,949
314,462
319,909
589,411
594,858
For disclosure purpose only, the Group determined the fair value of the buildings as at 1 January 2014 (the date
of transition to IFRS) as approximately 1 billion rubles based on the income approach. The management anticipates that
the fair value did not materially change in subsequent years.
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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 (loss) profit from investment property
13. GOODWILL
2018
192,709
(196,186)
(3,477)
2017
177,969
(159,711)
18,258
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
Poultry
Grain
Total goodwill
2018
250,247
306,944
697,381
2017
250,247
306,944
697,381
1,254,572
1,254,572
The recoverable amount of Meat-processing, Poultry and Grain cash-generating units is determined based on a value
in use calculation, which uses cash flow projections based on financial budgets approved by management covering
a five-year period. The cash flows beyond that period have been extrapolated using a steady 3.5% per annum growth rate.
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.
The key assumptions used for impairment testing of Goodwill allocated to Grain cash-generating unit are set out below.
In percent
Discount rate
Terminal value growth rate
Average annual increase in prices (average of next five years)
31 December 2018
13.1%
3.5%
1–4%
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www.cherkizovo.com/en/Notes to the consolidated financial statementsFor the year ended 31 December 2018(in thousands of Russian rubles, unless otherwise indicated) ABOUT COMPANY
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FINANCIAL STATEMENTS
APPENDIX
14. INTANGIBLE ASSETS
The following table represents movements of intangible assets for the years ended 31 December 2018 and 2017:
Computer
software
Indefinite life
trademarks
Other
intangible
assets
Total
COST
Balance at 1 January 2017
1,085,143
1,215,509
158,982
2,459,634
Additions
365,433
—
7,037
372,470
Balance at 31 December 2017
1,450,576
1,215,509
166,019
2,832,104
Additions
409,983
—
6,690
416,673
Balance at 31 December 2018
1,860,559
1,215,509
172,709
3,248,777
ACCUMULATED AMORTISATION AND IMPAIRMENT LOSS
Balance at 1 January 2017
Amortisation expense
Balance at 31 December 2017
Amortisation expense
Balance at 31 December 2018
Carrying amounts
At 31 December 2017
At 31 December 2018
(418,388)
(287,886)
(706,274)
(276,594)
(982,868)
—
—
—
—
—
(91,583)
(509,971)
(19,889)
(307,775)
(111,472)
(817,746)
(10,572)
(287,166)
(122,044)
(1,104,912)
744,302
1,215,509
54,547
2,014,358
877,691
1,215,509
50,665
2,143,865
Computer software
Software is amortised over its useful life ranging from 2 to 10 years and is mainly presented by SAP and Oracle systems
installed by the Group.
Indefinite life trademarks
Kurinoe Tsarstvo (“Куриное Царство”) trademark
The carrying value of the Kurinoe Tsarstvo trademark was 744,935 as of 31 December 2018 and 2017.
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As of 31 December 2018 and 2017, 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 3.5% per annum growth rate, which is
the projected long-term average general inflation in Russia.
The key assumptions used for impairment testing purposes are set out below
In percent
Discount rate
Terminal value growth rate
Royalty rate
Trademark revenue growth rate (average of next five years)
31 December 2018
31 December 2017
18.1%
3.5%
3.3%
4.4%
19.1%
3.5%
3.3%
4.4%
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 2018 and 2017.
As of 31 December 2018 and 2017, 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 assets
The balances of non-current biological assets were as follows:
Sows, heads
Cattle, heads
Total bearer non-current biological
assets
31 December 2018
31 December 2017
Units
Carrying amount
Units
Carrying amount
100,903
510
2,637,746
35,706
90,008
462
2,259,409
29,115
101,413
2,673,452
90,470
2,288,524
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www.cherkizovo.com/en/Notes to the consolidated financial statementsFor the year ended 31 December 2018(in thousands of Russian rubles, unless otherwise indicated) ABOUT COMPANY
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FINANCIAL STATEMENTS
APPENDIX
The following table represents movements in sows:
Balance at 1 January 2017
Increase due to purchases and breeding costs of growing livestock
Decrease due to sale
Gain arising from changes in fair value less estimated point-of-sales costs
Balance at 31 December 2017
Increase due to purchases and breeding costs of growing livestock
Decrease due to sale
Gain arising from changes in fair value less estimated point-of-sales costs
Balance at 31 December 2018
Amount
1,902,652
1,017,577
(1,028,836)
368,016
2,259,409
943,840
(993,047)
427,544
2,637,746
Current biological assets 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:
PORK
Market hogs, heads
POULTRY
Broilers, heads
Breeders, heads (bearer biological assets)
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 December 2018
31 December 2017
Units
Carrying amount
Units
Carrying amount
1,130,928
1,130,928
32,859,688
2,884,976
35,744,664
23,257,939
435
59,555
7,628,296
7,628,296
2,909,525
3,094,096
6,003,621
344,586
16,566
782,411
619,376
1,024,074
1,024,074
29,681,462
2,826,935
32,508,397
21,862,017
505
54,957
6,100,813
6,100,813
1,928,227
1,969,345
3,897,572
258,080
24,089
611,805
673,941
15,394,856
11,566,300
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The following table represents movements in the most material classes of the current biological assets:
Pork
Broilers
Breeders
Unharvested
crops
and related
WIP
Total
Balance at 1 January 2017
5,504,933
2,243,036
1,512,225
1,196,616
10,456,810
Increase due to purchases and gain arising from cost
inputs
Increase due to acquisition of subsidiaries
Transfer to consumable biological assets
12,057,936
36,006,280
1,319,673
4,620,970
54,004,859
—
—
—
—
525,035
525,035
1,165,235
(1,165,235)
—
—
Decrease due to sale or harvest of assets
(18,452,419)
(43,935,623)
—
(3,719,082)
(66,107,124)
Gain (loss) arising from changes in fair value less
estimated point-of-sales costs
6,990,363
6,449,299
302,682
(1,337,793)
12,404,551
Balance at 31 December 2017
6,100,813
1,928,227
1,969,345
1,285,746
11,284,131
Increase due to purchases and gain arising from cost
inputs
Increase due to acquisition of subsidiaries
Transfer to consumable biological assets
13,909,273
39,309,505
1,770,492
2,527,694
57,516,964
—
—
204,571
589,156
1,571,818
(1,571,818)
—
—
793,727
—
Decrease due to sale or harvest of assets
(23,262,220)
(47,699,953)
—
(4,736,000)
(75,698,173)
Gain (loss) arising from changes in fair value less
estimated point-of-sales costs
10,880,430
7,595,357
336,921
2,324,347
21,137,055
Balance at 31 December 2018
7,628,296
2,909,525
3,094,096
1,401,787
15,033,704
The reconciliations of net change in fair value of biological assets are as follows:
Fair value adjustment at the beginning of the year (biological assets transferred to inventory
and subsequently sold)
Fair value adjustment at the date of acquisition of subsidiaries (biological assets transferred
to inventory and subsequently sold)
Fair value adjustment at the end of the year (biological assets)
Net change in fair value of biological assets
The reconciliations of net revaluation of harvested crops in stock are as follows:
Fair value adjustment at the beginning of the year (agricultural produce subsequently sold)
Fair value adjustment at the end of the year (agricultural produce)
Net revaluation of harvested crops in stock
2018
2017
(4,457,066)
(3,877,070)
(290,153)
6,583,555
1,836,336
154,145
4,457,066
734,141
2018
1,113,986
2017
231,727
1,128,201
(1,113,986)
2,242,187
(882,259)
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FINANCIAL STATEMENTS
APPENDIX
The main crops of the Group’s agricultural production and output were as follows (in thousands of tonnes):
Winter wheat
Spring wheat
Sunflower
Corn
Barley
Soya bean
Pea
2018
235
73
65
61
34
33
17
The production output of pork and poultry segments of the Group were as follows (in thousands of tonnes):
Pork meat
Poultry meat
2018
247
544
2017
245
78
35
219
41
27
36
2017
212
527
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 VENTURES AND ASSOCIATES
The Group’s significant joint ventures and associates include:
LLC Tambovskaya Indeika (Tambov Turkey JV)
Samson – Food Products
LLC COBB-RUSSIA
Total investments in joint ventures and associates
Type of investment
Joint venture
Associate
Joint venture
Ownership
and vot-
ing interest
of the Group
50%
75%
50%
31 December
2018
31 December
2017
2,987,458
2,185,147
350,000
180,573
—
—
3,518,031
2,185,147
Tambov Turkey JV
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
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Notes to the consolidated financial statements
For the year ended 31 December 2018
(in thousands of Russian rubles, unless otherwise indicated)
shown in the joint venture’s financial statements prepared in accordance with IFRSs adjusted by the Group for equity
accounting purposes.
Cash and cash equivalents
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 venture1
Loss of the joint venture, allocated to carrying amount of notes receivable classified as net investment
in the joint venture
Carrying amount of the Group’s interest in the joint venture
Revenue
Operating expenses without depreciation and amortisation, foreign exchange loss (gain), net change
in fair value of biological assets
Adjusted EBITDA
Depreciation and amortisation
Interest income
Interest expense
Foreign exchange loss (gain)
Net change in fair value of biological assets
Income tax
Loss for the year and total comprehensive loss for the year
Proportion of the Group’s ownership interest in the joint venture
The Group’s share of Adjusted EBITDA
The Group’s share of loss of the joint venture
31 December
2018
31 December
2017
4,607
3,120,817
7,876,543
(546,350)
1,879
1,617,899
8,254,958
(524,676)
(1,720,368)
(1,420,143)
(136,157)
(64,670)
(3,530,990)
(8,011,269)
(93,188)
(105,084)
4,974,915
(251,106)
50%
2,487,458
50%
—
500,000
2,310,700
—
(125,553)
2,987,458
2,185,147
2018
2017
5,331,006
3,919,919
(5,000,175)
(3,753,022)
330,831
(623,898)
394
166,897
(463,999)
2,268
(201,857)
(246,184)
(37,928)
420,138
(1,236)
8,201
95,983
(5,816)
(113,556)
(442,650)
50%
50%
165,415
83,449
(56,778)
(221,325)
As of 31 December 2018, management tested the Group’s investment in Tambov Turkey for impairment and determined
that the investment was not impaired.
Samson – Food Products
On 25 December 2018 the Group acquired 75% in LLC “Myasokombinat Vsevolzhskyi” and LLC “Svezhyi Propuct”
(together “Samson – Food Products”) for cash consideration of 350,000 payable at the acquisition date and contingent
1
The Notes are considered to represent an ‘in substance’ equity interest in the joint venture. The Group, together with the second venturer, converted
most of the Notes to an equity investment in the joint venture in 2018 and expect to complete the conversion in 2019. These Notes together
with the Group’s equity interest in the joint venture are pledged as security under borrowings of the joint venture.
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consideration payable within two years after the acquisition. The contingent consideration depends on performance
of Samson – Food Products in 2019. The fair value of the contingent consideration was provisionally estimated as zero
and will be reassessed within 12 months after the acquisition date. At the acquisition date the Group also signed
a shareholders agreement with JSC “Samson-Producty Pitaniya”, being the Seller and holder of the residual 25% share.
Under the terms of this arrangement, the Group agreed that operational management, including the General Director
appointment decisions, remains the authority of the Seller until the final sale of the residual 25% share. Based on the above
considerations the Group accounted for the investment in 75% of Samson – Food Products as an investment
in an associate.
The acquisition was accounted for using historical book values of assets and liabilities acquired as provisional values since
there was no other information available at that time. The difference between consideration paid and historical book value
of the net assets acquired was preliminary allocated to goodwill.
The Group is in the process of obtaining a third party valuation report on the fair value of the assets and liabilities
acquired including obtaining third-party valuation of the property, plant and equipment and other non-current assets,
and accordingly, these amounts are preliminary and subject to change.
Preliminary purchase price allocation and summarised financial information in respect of the Group’s associate and its
reconciliation to the carrying amount of the interest in the associate are set out below. The summarised financial
information below represents amounts shown in the associate’s financial statements prepared in accordance with IFRSs
adjusted by the Group for equity accounting purposes.
Cash and cash equivalents
Other current assets
Goodwill
Property, plant and equipment
Other non-current assets
Trade and other payables
Short-term borrowings
Other current liabilities
Long-term borrowings
Other non-current liabilities
Net assets of the associate
Proportion of the Group’s ownership interest in the associate
Carrying amount of the Group’s interest in the associate
31 December 2018
1,322
640,655
244,234
265,476
541,611
(541,155)
(552,013)
(62,659)
(70,476)
(328)
466,667
75%
350,000
LLC Cobb-Russia
LLC Cobb-Russia is a joint venture with GP CY Holdings Ltd. LLC Cobb-Russia is the official distributor and producer
of “Cobb” poultry breeders in Russia. Prior to 2018 the joint venture accumulated significant losses and the Group’s
investment was written-off in full. In 2018 the Group made additional investment of 180,573 into the capital of LLC Cobb-
Russia. In 2018 the joint venture increased its operating activity and profitability and compensated previously accumulated
losses and therefore at 31 December 2018 the investment is accounted at cost.
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FINANCIAL STATEMENTS
APPENDIX
17. LONG-TERM DEPOSITS IN BANKS
Deposits in Gazprombank
RUR
8%
2022
641,365
641,365
Total long-term deposits in banks
641,365
641,365
CCY Effective rate, %
Maturity
31 December
2018
31 December
2017
18. INVENTORIES
Raw materials
Spare parts
Work in-progress
Finished goods
Total inventory
19. TAXES RECOVERABLE AND PREPAID
Value added tax
Other taxes
Total tax recoverable and prepaid
20. TRADE RECEIVABLES, NET
Trade receivables
Less: allowance for doubtful trade receivables
Total trade receivables, net
31 December
2018
31 December
2017
9,135,972
7,289,837
898,824
461,423
695,158
343,784
1,932,789
1,643,032
12,429,008
9,971,811
31 December
2018
31 December
2017
1,398,550
1,922,853
510,119
341,629
1,908,669
2,264,482
31 December
2018
31 December
2017
5,852,077
(119,209)
4,535,078
(86,343)
5,732,868
4,448,735
The following table summarizes the changes in the allowance for doubtful trade receivables for the years ended
31 December 2018 and 2017:
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
2018
86,343
58,948
(26,082)
119,209
2017
46,068
84,373
(44,098)
86,343
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www.cherkizovo.com/en/Notes to the consolidated financial statementsFor the year ended 31 December 2018(in thousands of Russian rubles, unless otherwise indicated) ABOUT COMPANY
STRATEGIC REPORT
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FINANCIAL STATEMENTS
APPENDIX
21. OTHER RECEIVABLES, NET
Subsidies receivable for interest expense reimbursement
Subsidies receivable for compensation of capital expenditure1
Subsidies receivable for purchase of fodder
Other receivables
Less: allowance for doubtful other receivables
Total other receivables, net
31 December
2018
31 December
2017
985,344
200,000
14,895
454,886
(131,683)
416,061
—
9,958
530,813
(120,269)
1,523,442
836,563
The following table summarizes the changes in the allowance for doubtful other receivables for the years ended
31 December 2018 and 2017:
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
22. CASH AND CASH EQUIVALENTS
RUR-denominated cash at banks
EURO-denominated cash at banks
USD-denominated cash at banks
Bank deposits
Cash in hand
Total
Bank deposits are denominated in rubles and have original maturity of less than 3 months.
23. OTHER CURRENT ASSETS
Prepaid expenses
Notes receivable
Loans receivable
Other assets
Total other current assets
2018
120,269
56,170
(44,756)
2017
13,412
112,650
(5,793)
131,683
120,269
31 December
2018
31 December
2017
772,615
29
77,061
8,758,826
4,051
152,168
17
64,824
483,669
3,998
9,612,582
704,676
31 December
2018
31 December
2017
178,803
310,000
45,989
28,400
203,928
300,000
30,965
194
563,192
535,087
1
these subsidies were collected in cash in January 2019 and related to compensation of certain portion of capital expenditures for construction
of Kashira meat-processing plant, which was completed in 2018.
Annual report 2018
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Notes to the consolidated financial statements
For the year ended 31 December 2018
(in thousands of Russian rubles, unless otherwise indicated)
24. SHAREHOLDER’S EQUITY
Share capital
As of 31 December 2018 and 2017, issued shares of the Company had a par value of 0.01 rubles. 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.
Treasury shares
In 2017 the Group acquired 2,808,576 ordinary shares from funds and portfolios under the management of Prosperity
Capital Management and other minority shareholders at a price of RUB 1,300 per ordinary share in the total amount
of 3,646,528.
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 February 2018 and September 2018 dividends
of approximately 75.07 Russian rubles per share (3,081,399 in total) and approximately 20.48 Russian rubles per share
(840,643 in total) were approved at the extraordinary shareholders’ meeting and have been fully paid during the year
ended 31 December 2018.
On April 2017 and October 2017 dividends of approximately 13.65 Russian rubles per share (598,580 in total)
and approximately 59.82 Russian rubles per share (2,457,907 in total) were approved at the extraordinary shareholders’
meeting and have been fully paid during the year ended 31 December 2017. In addition to that in 2017 the Group also
accrued and paid additional withholding taxes on dividends distributed in 2014-2016 in the amount of 397,483.
25. NON-CONTROLLING INTERESTS
JSC Petelinskaya
JSC CMPP
LLC PKO Otechestvennyi Product
Other non-controlling interests
Total non-controlling interests
NCI
percentage
31 December
2018
31 December
2017
11.8%
4.9%
4.0%
467,556
60,426
208,866
253,138
383,348
(71,651)
251,435
502,714
989,986
1,065,846
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APPENDIX
The following table summarises the information relating to each of the Group’s subsidiaries that has material NCI, before
any intra-group eliminations:
As at 31 December 2018 and for 2018
NCI percentage
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Net assets
Carrying amount of NCI
Revenue
Profit (loss)
Total comprehensive income (loss)
Profit (loss) allocated to NCI
Cash flows from operating activities
Cash flows from investment activities
JSC Petelinskaya
11.8%
JSC
CMPP
4.9%
LLC PKO
Otechestven-
nyi Product
4.0%
Total
2,289,032
6,015,524
379,206
8,683,762
3,674,764
4,531,458
5,319,719
13,525,940
(178,795)
(19,011)
(197,806)
(2,001,456)
(9,144,689)
(407,680)
(11,553,825)
3,962,340
1,223,498
5,272,234
10,458,072
467,556
60,426
208,866
736,848
6,945,601
38,803,470
2,735,645
48,484,716
713,632
713,632
(468,313)
(468,313)
84,209
(23,129)
(600,273)
4,799,812
230,002
230,002
9,112
28,668
475,321
475,321
70,192
4,228,207
760,257
(1,030,596)
(44,845)
(315,184)
Cash flows from financing activities (dividends to NCI: nil)
(160,000)
(183,895)
—
(343,895)
Net increase (decrease) in cash and cash equivalents
(16)
3,585,321
(16,177)
3,569,128
As at 31 December 2017 and for 2017
NCI percentage
Non-current assets
Current assets
Non-current liabilities
Current liabilities
Net assets
Carrying amount of NCI
Revenue
Profit (loss)
Total comprehensive income (loss)
Profit (loss) allocated to NCI
Cash flows from operating activities
Cash flows from investment activities
JSC Petelinskaya
11.8%
JSC
CMPP
4.9%
LLC PKO
Otechestven-
nyi Product
4.9%
Total
2,978,586
5,577,614
370,395
8,926,595
2,361,839
4,135,176
5,009,916
11,506,931
—
(265,306)
(9,023)
(274,329)
(2,091,715)
(10,898,264)
(280,269)
(13,270,248)
3,248,710
(1,450,780)
5,091,019
6,888,949
383,348
(71,651)
251,435
563,132
5,929,334
34,036,713
3,514,447
43,480,494
259,761
259,761
(467,001)
(467,001)
1,254,068
1,046,829
1,254,068
1,046,829
30,652
(23,064)
61,936
69,524
752,056
2,805,061
64,602
3,621,719
(1,228,307)
(804,875)
(39,407)
(2,072,589)
Cash flows from financing activities (dividends to NCI: nil)
474,365
(2,025,250)
—
(1,550,885)
Net increase (decrease) in cash and cash equivalents
(1,886)
(25,064)
25,195
(1,755)
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APPENDIX
Notes to the consolidated financial statements
For the year ended 31 December 2018
(in thousands of Russian rubles, 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 28. Terms and conditions of outstanding loans were as follows:
Nominal
interest rate
EIR1
Adjusted
EIR2
Year
of maturity
31 December 2018
31 December 2017
Current Non-current
Current Non-current
Bonds
12.50%
12.50%
12.50%
2020
—
5,000,000
—
5,000,000
Bank loans
1.00%-15.10%
6.64%
5.24% 2019–2026
23,708,147
39,471,585
18,452,495
25,340,952
Factoring
Other
borrowings
Interest payable
Finance lease
liabilities
Total
borrowings
0%
0%
0%
2025
—
—
—
431,297
—
6,571
8,500
371,503
—
416,762
6,571
—
10.47%-
16.62%
13.83%
13.83% 2019–2024
89,989
165,161
102,567
255,587
24,169,639
44,643,317
19,411,621
30,603,110
As of 31 December 2018, the Group’s borrowings are denominated in the following currencies: 66,417,885 in Russian
roubles and 2,395,071 in Euro. As of 31 December 2017, the Group’s borrowings are denominated in the following
currencies: 47,545,948 in Russian roubles and 2,468,783 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.
1
EIR represents the weighted average interest rate on outstanding loans.
2
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.
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APPENDIX
Bank loans
Terms and conditions of outstanding bank loans were as follows:
Sberbank of Russia
Sberbank of Russia
Alfa bank
Bank VTB
Bank VTB
Gazprombank
Gazprombank
Raiffeisenbank
Rosselkhozbank
UniCredit Bank
Total bank loans
Currency
Nominal
interest rate
Year
of maturity
31 December
2018
31 December
2017
Russian roubles
1.00%1-13.10%
2019–2024
22,348,602
19,722,386
Euro
1.50%-3.40%
2024
2,299,202
2,060,204
Russian roubles
1.00%1-9.75%
2019–2026
10,695,132
8,084,220
Russian roubles
7.55%-9.20%
2020–2023
9,645,257
1,550,000
Euro
—
—
—
219,727
Russian roubles
1.00%1-10.85%
2019–2022
6,616,762
5,532,968
Euro
Russian roubles
1.20%
7.81%
2019
2020
95,869
188,852
5,985,535
173
Russian roubles
10.03%-15.10%
2020–2023
5,456,161
1,562,917
Russian roubles
12.50%
2022
37,211
4,872,000
63,179,732
43,793,447
Unused lines of credit
The total amount of unused credit on lines of credit as of 31 December 2018 is 56,394,657. The unused credit can be
utilized from 2019 to 2026 and only for the purposes specified in the relevant loan agreements. Expiration of available
amounts varying as follows: 10,555,587 expires by 31 December 2019, 30,579,361 expires by 31 December 2020, 1,268,579
expires by 31 December 2021, 6,291,129 expires by 31 December 2022 and 7,700,000 expires by 31 December 2026.
Collateral under borrowings
Shares of and participating interests in the following Group companies are pledged as collateral under certain borrowings
as of 31 December 2018:
JSC Altaisky Broiler
LLC Cherkizovo Pork
LLC Kuznetsovsky kombinat
OJSC Kurinoe tsarstvo
JSC Cherkizovo-Kashira
31 December
2018
31 December
2017
100%
51%
—
100%
100%
—
51%
100%
100%
100%
Non-current biological assets with a carrying value of nil and 126,374 were pledged as security under certain borrowings
as of 31 December 2018 and 2017, respectively.
Current biological assets with a carrying value of nil and 204,464 were pledged as security under certain borrowings
as of 31 December 2018 and 2017, respectively.
Property, plant and equipment with a carrying value of 11,199,904 and 11,563,112 were pledged as security under loan
agreements as of 31 December 2018 and 2017, respectively, including construction in progress pledged with a carrying
value of nil and 2,407,625 as of 31 December 2018 and 2017, respectively.
1
Low interest rates relate to subsidized borrowings under new government policy effective since 2017 (Note 8).
Annual report 2018
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Notes receivable, net with a carrying value of 310,000 and 610,000 were pledged as security under loan agreements
as of 31 December 2018 and 2017, respectively.
Certain significant loan agreements with the Sberbank of Russia, Rosselkhozbank, Bank VTB, Gazprombank,
Raiffeisenbank and Alfa-bank contain financial covenants requiring maintenance of specific debt to EBITDA, net debt
to EBITDA, EBIT to Interest expense and debt service coverage ratios.
The Group was in compliance with the covenants as at 31 December 2018.
Finance leases liabilities
The Group uses certain fixed assets under leasing contracts that qualified for treatment as finance leases. Financial lease
liabilities are payable as follows:
At 31 December 2017
Future minimum lease payments
Portion related to interest
Present value of minimum lease payments
At 31 December 2018
Future minimum lease payments
Portion related to interest
Present value of minimum lease payments
Not later than
1 year
Between 1 and
5 years
Later than
5 years
143,528
40,964
102,567
117,387
27,398
89,989
291,027
59,721
231,305
186,831
31,022
155,809
26,142
1,860
24,282
9,637
285
9,352
Reconciliation of liabilities arising from financing activities
The table below details changes in the Group’s liabilities arising from financing activities, including both cash and non-
cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be,
classified in the Group’s consolidated statement of cash flows as cash flows from financing activities.
Non-cash changes
Restricted
cash (used
in investing
activities)
Acqui-
sition
of sub-
sidiaries
(Note 30)
Acqui-
sition
of debt
rights
(Note 30)
1 January
2018
Financing
cash
flows 1
Forex
adjust-
ments
Other
non-cash
changes
Interest
accruals
and
payments
31 December
2018
Borrowings,
including
finance lease
liabilities
50,014,731
14,001,379
(632,086)
338,287
4,685,209
418,647
32,048
(45,259)
68,812,956
1
Net amount of proceeds from short-term and long-term borrowings and repayments of short-term and long-term borrowings in the consolidated
statement of cash flows.
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www.cherkizovo.com/en/Notes to the consolidated financial statementsFor the year ended 31 December 2018(in thousands of Russian rubles, unless otherwise indicated) ABOUT COMPANY
STRATEGIC REPORT
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FINANCIAL STATEMENTS
APPENDIX
Non-cash changes
1 January
2017
Financing
cash
flows 1
Restricted cash
(used
in investing
activities)
Acqui-
sition
of sub-
sidiaries
(Note 30)
Forex
adjust-
ments
Other
non-cash
changes
Interest
accruals and
payments
31 December
2017
Borrowings,
including finance
lease liabilities
38,592,701
9,472,702
740,848
958,070
219,113
(86,877)
118,174
50,014,731
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
31 December
2018
31 December
2017
758,825
314,851
145,066
91,732
8,594
4,631
1,021
297,189
290,439
143,735
72,841
6,637
5,111
148,171
1,324,720
964,123
1
Net amount of proceeds from short-term and long-term borrowings and repayments of short-term and long-term borrowings in the consolidated
statement of cash flows.
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APPENDIX
Notes to the consolidated financial statements
For the year ended 31 December 2018
(in thousands of Russian rubles, unless otherwise indicated)
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, except for the rights to claim debt that are
separately disclosed in Note 30, as of 31 December 2018 and 2017 are as follows:
31 December 2018
31 December 2017
Carrying
value
Fair
value
Carrying
value
Fair
value
Financial assets not measured
at fair value
Amortised cost
Notes receivable, net
(current and non-current)
Long-term deposits in banks
Other non-current assets
Trade receivables
Other receivables
Other current assets
Restricted cash
310,000
641,365
177,069
5,732,868
1,523,442
74,647
108,762
310,000
666,513
177,069
5,732,868
1,523,442
74,647
108,762
Cash and cash equivalents
9,612,582
9,612,582
610,000
641,365
556,800
596,584
657,817
539,725
4,448,735
4,448,735
836,563
30,965
740,848
704,676
836,563
30,965
740,848
704,676
Financial liabilities not measured
at fair value
Amortised cost
Borrowings, including finance lease1
Trade payables
Payables for non-current assets
Payroll related liabilities
Other payables and accruals
18,180,735
18,205,883
8,569,952
8,555,913
68,812,956
10,830,231
1,216,255
2,707,145
905,342
67,512,690
10,830,231
1,216,255
2,707,145
905,342
50,014,731
49,270,902
9,018,376
1,912,620
1,816,396
395,571
9,018,376
1,912,620
1,816,396
395,571
84,471,929
83,171,663
63,157,694
62,413,865
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.
1
At 31 December 2018 the Group used 9.8% 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 (10.0% at 31 December 2017).
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APPENDIX
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, rights to claim debt and cash in current and deposit accounts
with banks.
The Group’s maximum exposure to credit risk arises from the following classes of financial assets (except for the rights
to claim debt that are separately disclosed in Note 30):
Long-term deposits in banks
Notes receivable, net
Other non-current assets
Trade receivables
Other receivables
Other current assets
Restricted cash
Cash and cash equivalents (except for cash in hand)
Total maximum credit risk
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
2018
31 December
2017
641,365
310,000
177,069
5,732,868
1,523,442
74,647
108,762
9,608,531
641,365
610,000
556,800
4,448,735
836,563
30,965
740,848
700,678
18,176,684
8,565,954
31 December
2018
31 December
2017
852,227
837,943
528,958
493,935
350,864
828,036
665,347
268,457
259,086
205,471
2,668,941
2,222,338
5,732,868
4,448,735
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.
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APPENDIX
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
2018
31 December
2017
4,619,297
3,689,060
942,472
148,086
23,013
—
697,045
38,373
21,586
2,671
5,732,868
4,448,735
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 6-12 months.
At 31 December 2018, the amount of subsidies receivable outstanding more than one year was nil (at 31 December 2017: nil).
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 stable 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
Standard & Poor’s
Moody’s
Fitch Ratings
—
BBB-
Ba1
BB+
—
31 December
2018
31 December
2017
8,103,356
1,118,248
189,139
197,788
457,685
190,583
14,663
37,747
9,608,531
700,678
The table below shows the rating and long-term bank deposits balances at the reporting dates:
Gazprombank
Total long-term bank deposits
Rating agency
Fitch Ratings
Rating
BB+
31 December
2018
31 December
2017
641,365
641,365
641,365
641,365
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.
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STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
The following tables detail the Group’s expected maturity for its financial assets, except for cash and cash equivalents
and rights to claim debt. 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:
At 31 December 2017
Trade and other receivables
Long-term deposits in banks
Notes receivable, net
Other non-current assets
Other current assets
Total
At 31 December 2018
Trade and other receivables
Long-term deposits in banks
Notes receivable, net
Other non-current assets
Other current assets
Total
Effective
interest rate, %
Less than
6 month
6 months-
1 year
1-4 years
More than
4 years
Total
5,285,298
8%
25,666
6.35%-9.50%
310,940
—
30,965
—
25,666
10,940
—
—
—
658,768
320,223
—
—
—
—
—
556,800
—
5,285,298
710,100
642,103
556,800
30,965
5,652,869
36,606
978,991
556,800
7,225,266
7,256,310
—
—
8%
25,666
25,666
761,433
6.35%-7.39%
156,490
163,733
—
74,647
—
—
—
—
—
—
—
—
177,069
—
7,256,310
812,765
320,223
177,069
74,647
7,513,113
189,399
761,433
177,069
8,641,014
The following are the contractual maturities of financial liabilities, including estimated interest payments:
Effective
interest rate, %
Less than
6 month
6 months-
1 year
1-4 years
More than
4 years
Total
At 31 December 2017
Borrowings, including finance lease
1%-16.62%
9,705,902
13,890,701
28,917,091
8,810,386
61,324,080
Trade and other payables
Payables for non-current assets
Payroll related liabilities
Total
At 31 December 2018
9,413,947
1,912,620
1,816,396
—
—
—
—
—
—
—
—
—
9,413,947
1,912,620
1,816,396
22,848,865 13,890,701 28,917,091
8,810,386 74,467,043
Borrowings, Including finance lease
5.2%-13.83%
9,108,246
19,645,516
41,416,819
10,808,323
80,978,904
Trade and other payables
Payables for non-current assets
Payroll related liabilities
Total
11,735,573
1,216,255
2,707,145
—
—
—
—
—
—
—
—
—
11,735,573
1,216,255
2,707,145
24,767,219 19,645,516 41,416,819 10,808,323 96,637,877
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.
Annual report 2018
CHERKIZOVO GROUP
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FINANCIAL STATEMENTS
APPENDIX
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 the Board of Directors and members of the Management
Board. The remuneration of key management personnel during the years ended 31 December 2018 and 2017 were
as follows:
Salaries and bonuses, excluding social security contributions
2018
550,099
2017
298,721
Transactions with entities under common control
Trading transactions with related parties mostly comprised the sale of sausages, raw meat and poultry to a retail chain
“Myasnov” and lease of certain production and office space to “Myasnov” and other entities under common control.
Trade receivables, trade payables and advances issued are associated with such transactions. The Group expects to settle
such balances in the normal operating cycle.
The Group also transferred certain land plots to the closed unit investment fund managed by LLC “UK Mikhailovskyi”,
an entity under common control.
Balances with companies under common control are summarized as follows:
Balances
Trade receivables
Other non-current assets
Advances paid
Other receivables
Closed unit investment fund (presented within other non-current assets)
Trade payables
Advances received
Payables for non-current assets
Other payables
31 December
2018
31 December
2017
290,559
92,134
5,985
7,129
494,220
25,169
1,320
—
—
260,718
98,587
3,604
6,502
280,596
13,376
17,522
124
173
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CHERKIZOVO GROUP
www.cherkizovo.com/en/Notes to the consolidated financial statementsFor the year ended 31 December 2018(in thousands of Russian rubles, unless otherwise indicated) ABOUT COMPANY
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
Transactions with companies under common control are summarized as follows:
Transactions
Sales
Rent income
Purchases of property, plant and equipment
Purchases of goods and other services
2018
2017
2,593,148
2,595,805
208,231
13,853
19,247
194,247
29,686
28,172
Transactions with joint ventures
The Group purchases day-old chicks from its joint venture LLC Cobb-Russia (former LLC Broiler Budushchego).
The Group also purchases turkey meat from LLC Tambovskaya Indeika for its subsequent resale through the 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. In 2017 the Group also granted a long-term loan to LLC Cobb-Russia,
which was partially repaid in 2018 and partially converted to equity investment in LLC Cobb-Russia.
Balances with joint ventures are summarized as follows:
Balances
Trade receivables
Advances paid
Other receivables
Long-term loans receivable (presented within other non-current assets)
Trade payables
Other payables
Transactions with joint ventures are summarized as follows:
Transactions
Sales
Sales of property, plant and equipment
Rent income
Purchases of goods and other services
31 December
2018
31 December
2017
83,563
8
—
—
1,056,965
139,176
2018
303,083
—
83
56,369
12,678
1,280
389,803
331,298
—
2017
839,140
1,347
722
5,935,791
4,260,303
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FINANCIAL STATEMENTS
APPENDIX
30. ACQUISITIONS
Acquisition of Altaisky Broiler
On 28 November 2018, the Group completed the acquisition of 100% of JSC “Altaisky Broiler” for cash consideration
of 4,588,000.
Altaisky Broiler is one of the leading players in the Siberian poultry market with an annual output of 67 thousand tonnes
(live weight) of poultry products (58 thousand tonnes of finished products). Today, it is a state-of-the-art poultry
production facility comprising a hatchery, a feed mill, four fattening sites, a slaughterhouse, and a meat packing plant
in Biysk. The acquisition will enable Cherkizovo Group to access the Siberian Federal District market and strengthen its
market-leading position in the domestic poultry market.
The acquisition was accounted for using historical book values of assets and liabilities acquired as provisional values since
there was no other information available at that time. The difference between consideration paid and historical book value
of the net assets acquired was preliminary allocated to property, plant and equipment based on the internal valuation
analysis done by management of the Group.
The Group is in the process of obtaining a third party valuation report on the fair value of the assets and liabilities acquired
including obtaining third-party valuation of the property, plant and equipment, and accordingly, these amounts are
preliminary and subject to change.
The provisional purchase price allocation was as follows:
Provisional values
(at the acquisition date)
Purchase price
Property, plant and equipment
Inventories and biological assets
Other current assets
Short-term loans and finance leases
Long-term loans and finance leases
Other current liabilities
Total assets acquired and liabilities assumed
Goodwill recognized on acquisition
Net outflow of cash and cash equivalents on acquisition comprised of the following:
Consideration payable to acquire Altaisky Broiler
Less: cash and cash equivalents of subsidiaries acquired
Less: consideration remained unpaid at 31 December 2018
Net outflow of cash and cash equivalents on acquisition of Altaisky Broiler
4,588,000
3,988,911
533,394
676,129
(309,976)
(28,311)
(272,147)
4,588,000
—
4,588,000
(560,378)
(200,000)
3,827,622
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CHERKIZOVO GROUP
www.cherkizovo.com/en/Notes to the consolidated financial statementsFor the year ended 31 December 2018(in thousands of Russian rubles, unless otherwise indicated) ABOUT COMPANY
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
The following pro forma financial information presents consolidated statement of profit or loss as if the acquisition
occurred as of the beginning of the reporting period. In determining pro forma amounts, all non-recurring costs were
determined to be immaterial.
Pro forma Information
Revenue
Operating profit
Profit for the year
For the year ended
31 December 2018
107,439,888
15,994,148
12,333,623
The actual results of operations of Altaisky Broiler are included in the consolidated financial statements of the Group only
from the date of acquisition and were:
Actual results of Altaisky Broiler from the date of acquisition (28 November 2018)
to 31 December 2018
Revenue
Operating income
Profit for the period
524,300
114,106
114,547
Acquisition of poultry breeder’s facilities of Krasnoyaruzhsky Broiler
On 23 October 2018, the Group acquired all tangible assets, including poultry parent stock, of four hatching eggs’
production facilities of CJSC “Krasnoyaruzhsky Broiler” (Belgorod region) and hired most of the employees working
at these sites. Total consideration amounted to 1,799,003 and was paid in cash.
The acquisition will allow the Group to supply Altaisky Broiler with hatching eggs and cover all of the Group’s needs
in hatching eggs supply.
The acquisition was accounted for using statutory book values of assets acquired as provisional values since there was no
other information available at that time. The statutory book value of assets was equal to value stated in legal documents
for acquisition of these assets. The difference between consideration paid and statutory book value of the net assets
acquired was preliminary allocated to property, plant and equipment based on the internal valuation analysis done
by management of the Group.
The Group is in the process of obtaining a third party valuation report on the fair value of the assets acquired including
obtaining third-party valuation of the property, plant and equipment, and accordingly, these amounts are preliminary
and subject to change.
The provisional purchase price allocation was as follow:
Purchase price
Property, plant and equipment
Biological assets (poultry breeders)
Total assets acquired and liabilities assumed
Goodwill recognized on acquisition
Provisional values
(at the acquisition date)
1,799,003
1,209,847
589,156
1,799,003
—
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APPENDIX
The actual results of operations of the facilities are included in the consolidated financial statements of the Group only
from the date of acquisition and were:
Actual results of the facilities from the date of acquisition (23 October 2018)
to 31 December 2018
Revenue
Operating loss
Loss for the period
131,563
(12,093)
(36,512)
The acquired facilities were part of the legal entity CJSC “Krasnoyaruzhsky Broiler” and there is no separate financial
information related to performance of these facilities prior to the acquisition date. Therefore, information about revenue
and profit or loss of the combined entity for the current reporting period as though the acquisition date for the business
combination had been as of the beginning of the annual reporting period is impracticable and is not disclosed.
Acquisition of rights to claim debt from Belaya Ptitsa Kursk
On 21 December 2018 the Group acquired Rosselkhozbank’s rights to claim debt (in the form of loans) from LLC “Belaya
ptitsa-Kursk” (further “Belaya Ptitsa Kursk”) and the related security agreements (i.e. underlying collateral) for a principal
amount of 5,639,169. The collateral included property pledge agreements for most of Belaya Ptitsa-Kursk’s property, plant
and equipment and share pledge agreements for 100% of capital of LLC “Belaya ptitsa-Kursk”.
To finance the transaction the Group obtained a five-year rubles-denominated loan from Rosselkhozbank in the principal
amount of 5,639,169 at 0% per annum during the first two years and 10% subsequently. The fair value of the loan
at inception date was 4,685,209 determined using the market interest rate of 10%.
No cash was received or provided with respect to the two transactions with Rosselkhozbank, which has been reported
as a non-cash transaction in the statement of cash flows reflecting rights to claim debt acquired and loan assumed.
At the acquisition date, the rights to claim debt from Belaya Ptitsa Kursk were accounted for at fair value, which was
determined as equal to the fair value of the loan obtained from Rosselkhozbank. Belaya Ptitsa Kursk had not been
servicing the debt for a number of months prior to the transaction and had also stopped its operating activities; therefore,
at acquisition, the Group classified the rights as purchased credit-impaired financial assets. Notwithstanding the foregoing,
the Group concluded that the fair value of the underlying collateral exceeds the fair value of the rights acquired
and therefore did not recognise a loss allowance. The Group ultimately expects to settle the rights through the recovery
of the underlying collateral once such collateral becomes the legal property of the Group. At the date of acquisition
of the rights, Belaya Ptitsa Kursk’s facilities were not operational and the Group plans to relaunch the production
in Q1 2019, using it in combination with the Group’s existing parent stock sites and feed mills to leverage the potential
synergies perceived as existing.
Acquisition of NAPKO
On 28 April 2017, the Group completed the acquisition of 100% of NAPKO, one of Russia’s leading grain producers,
for cash consideration of 4,872,000 from an entity under common control.
NAPKO’s agricultural land bank of 147,000 hectares and the related supporting production infrastructure to cultivate
the land and store grain is located in the Lipetsk, Tambov and Penza regions. In 2016, NAPKO produced 250,000 tons
of grain.
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STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
Allocation of the purchase price of NAPKO in the consolidated financial statements for the year ended 31 December 2017
was as follows:
Purchase price
Land and land lease rights
Other items of property, plant and equipment
Inventories and biological assets
Other current assets
Short-term loans and finance leases
Other current liabilities
Deferred tax liability
Non-controlling interests
Total assets acquired and liabilities assumed
Goodwill recognized on acquisition
Fair values
(at the acquisition date)
4,872,000
5,023,743
306,438
983,553
315,372
(958,070)
(678,697)
(625,858)
(191,862)
4,174,619
697,381
Goodwill arose in the acquisition of NAPKO because the consideration paid for the combination effectively included
amounts in relation to the benefit of expected synergies driven by the proximity of the acquired assets to the main
operating units of the Group and increase in vertical integration. NAPKO was one of the main grain suppliers of the Group
and therefore the acquisition will allow the Group to secure supply and better control quality of the incoming grain.
Net outflow of cash and cash equivalents on acquisition comprised of the following:
Cash paid to acquire NAPKO
Less: cash and cash equivalents of subsidiaries acquired
Net outflow of cash and cash equivalents on acquisition of NAPKO
4,872,000
(103,941)
4,768,059
The following pro forma financial information presents consolidated statement of profit or loss as if the acquisition
occurred as of the beginning of the prior annual reporting period (1 January 2017). In determining pro forma amounts,
all non-recurring costs were determined to be immaterial.
Pro forma Information
Revenue
Operating profit
Profit for the year
For the year ended 31 December 2017
90,507,188
9,710,013
5,621,432
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STRATEGIC REPORT
STRATEGIC REPORT
CORPORATE GOVERNANCE
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
APPENDIX
APPENDIX
31. COMMITMENTS AND CONTINGENCIES
Legal
As of 31 December 2018 and 2017, 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.
Recent events also suggest that the tax authorities are taking a more assertive position in their interpretation of the tax
legislation and assessments and as a result, it is possible that transactions and activities that have not been challenged
in the past may be challenged, including transfer pricing legislation. Although the transfer pricing legislation was amended
in 2012, as of now there is no established practice in place in respect of transfer pricing. Therefore the management
believes that their assessment of transfer pricing position of the Group may be challenged by authorities.
From 1 January 2015 a number of amendments into the Russian tax legislation aimed at deoffshorisation of the Russian
economy became effective, with the submission of the first documentation package in 2017. Specifically, they introduce
new rules for controlled foreign companies, a concept of beneficiary owner of income for the purposes of application
of preferential provisions of taxation treaties of the Russian Federation and a concept of tax residency for foreign
companies. The Group takes necessary steps to comply with the new requirements of the Russian tax legislation including
periodic reviews of its tax planning strategies. However, in view of the recent introduction of the above provisions
and insufficient administrative and court practice in these areas, at present the probability of claims from Russian tax
authorities and probability of favourable outcome of tax disputes (if they arise) cannot be reliably estimated.
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 2018
and 2017.
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www.cherkizovo.com/en/Notes to the consolidated financial statementsFor the year ended 31 December 2018(in thousands of Russian rubles, unless otherwise indicated) ABOUT COMPANY
ABOUT COMPANY
STRATEGIC REPORT
STRATEGIC REPORT
CORPORATE GOVERNANCE
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
APPENDIX
APPENDIX
Capital commitments
Capital commitments by each operating segments are as follows:
Commitments for the acquisition of property, plant and equipment
Meat-processing
Pork
Poultry
Feed
Total capital commitments
31 December
2018
282,747
389,870
387,453
72,734
1,132,803
At 31 December 2018, the Group had capital projects in progress at LLC Cherkizovo Pork and OJSC Kurinoe Tsarstvo.
Operating lease commitments
Obligations under non-cancellable operating lease agreements for the five years ending 31 December 2022 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
2018
389,476
1,034,379
1,843,895
3,267,750
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 2018 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.
32. SUBSEQUENT EVENTS
On 13 February 2019 the Board recommended that the General meeting of shareholders approve distribution
of the Сompany’s net profit following 2018 results in the form of the dividends in the amount of 101.63 rubles per ordinary
share of the Company. Set 9 April 2019 as the final date for the dividends payment.
CHERKIZOVO GROUP
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FINANCIAL STATEMENTS
APPENDIX
Appendix
Appendix 1. About the Report
Appendix 2. GRI Content Index
Appendix 3. Glossary
Appendix 4. Supplementary
Information on Staff
Contact Information
207
208
210
211
212
206
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CHERKIZOVO GROUP
www.cherkizovo.com/en/ ABOUT COMPANY
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
Appendix 1. About the Report
Name of the report
Cherkizovo Group’s annual report for 2018
“Your food is our passion”
Reporting cycle
Annual, 1 January 2018 – 31 December 2018
International reporting
standards
This annual report has been prepared with reference to GRI Sustainability Reporting Standards.
The list of the standards referenced in this report is shown in the GRI content index on p. 208
Russian reporting standards
Regulation on Disclosing Information by the Issuers of the Issue-Grade Securities No. 454-P
dated 30 December 2014 and approved by the Bank of Russia
Corporate Governance Code recommended by the Bank of Russia (Letter No. 06-52/2463
dated 10 April 2014)
Date of the previous report
May 2018
Reporting boundaries
The report discloses information about the operations and performance of Cherkizovo Group.
Verification
of the reported information
Reliability of the RAS1 accounting statements and IFRS2 consolidated financial statements was
confirmed by Deloitte & Touche CIS, an independent audit firm
Cherkizovo Group aims to be a transparent company and develops its public reporting in line with global best practices. The
annual report for 2018 is the Group’s first report prepared with reference to GRI Sustainability Reporting Standards.
The Company expanded the information it discloses by including details on its supply chain and adding new indicators, including
LTIFR.
While preparing the report, the Company relied on GRI reporting principles, including clarity, comparability, and timeliness. The
Company selected the most important GRI disclosures relevant to its activities, disclosing a total of 27 general and 4 topic-specific
disclosures, all available in the GRI content index.
The Company intends to continue improving its public reporting practices.
1
Auditor’s report is available on the Company’s website at
http://cherkizovo.com/company/information-disclosure/financial-statements/fin-statements/
2
Auditor’s report is available on the Company’s website at
http://cherkizovo.com/investors/reports/financial/financial-msfo/
CHERKIZOVO GROUP
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ABOUT COMPANY
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
Appendix 2. GRI Content IndexGRI
GRI Standard
Disclosure
Report section
Omissions
GRI 101 Foundation 2016 (does not include any disclosures)
GRI 102
General
Disclosures
2016
102-1 Name of the organization
About the Company, p. 02
102-2 Activities, brands, products, and services About the Company, p. 04
102-3 Location of headquarters
Moscow
102-4 Location of operations
About the Company, p. 08
102-5 Ownership and legal form
About the Company, p. 01
102-6 Markets served
102-7 Scale of the organization
102-8 Information on employees
and other workers
About the Company, p. 08
About the Company, p. 02
Business model, p. 40
Our employees, p. 98
102-9 Supply chain
Supply chain, p. 44
102-10 Significant changes to the organization
and its supply chain
About the Company, p. 110
Supply chain, p. 104
102-12 External initiatives
102-13 Membership of associations
102-14 Statement from senior decision-maker
Corporate governance, p. 110
Health, safety and environment,
p. 104
National Union of Swine Breeders,
National Meat Association
Message from the CEO, p. 26
Message from the Chairman, p. 30
102-16 Values, principles, standards, and norms
of behavior
About the Company, p. 02
102-18 Governance structure
Corporate governance, p. 110
102-40 List of stakeholder groups
Sustainable development, p. 98
102-45 Entities included in the consolidated
financial statements
Financial statements, p. 130
102-46 Defining report content
and topic Boundaries
Appendix 1. About the report,
p. 207
—
—
—
—
—
—
—
Breakdowns by gender, region
and employment contract type
are shown separately.
—
—
—
—
—
—
—
—
—
—
102-48 Restatements of information
Financial statements, p. 130
Restatements of information are
provided for the financials only.
102-49 Changes in reporting
Appendix 1. About the report, p. 207
102-50 Reporting period
Appendix 1. About the report, p. 207
102-51 Date of most recent report
Appendix 1. About the report, p. 207
102-52 Reporting cycle
Appendix 1. About the report, p. 207
102-53 Contact point for questions
regarding the report
Contacts, p. 212
102-54 Claims of reporting in accordance
with the GRI Standards
Appendix 1. About the report, p.
207
102-55 GRI content index
102-56 External assurance
—
Appendix 1. About the report, p.
207
—
—
—
—
—
—
—
—
208
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CHERKIZOVO GROUP
www.cherkizovo.com/en/ ABOUT COMPANY
STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
GRI Standard
Disclosure
Report section
Omissions
GRI 103
Management
Approach
2016
103-1 Explanation of the material topic
and its Boundary
103-2 The management approach
and its components
Provided for each separate topic.
—
—
—
103-1 Explanation of the material topic
and its Boundary
Financial performance overview,
p. 80
103-2 The management approach
and its components
Financial performance overview,
p. 80
201-1 Direct economic value generated
and distributed
Financial performance overview,
p. 80
Economic value retained is not
disclosed.
103-1 Explanation of the material topic
and its Boundary
103-2 The management approach
and its components
401-1 New employee hires
and employee turnover
Our employees, p. 98
Our employees, p. 98
Our employees, p. 98
—
—
No breakdowns by gender, age
and region are provided.
103-1 Explanation of the material topic
and its Boundary
Health, safety and environment,
p. 104
103-2 The management approach
and its components
Occupational health and safety,
p. 104
—
—
GRI 201
Economic
Performance
2016
GRI 401
Employment
2016
GRI 403
Occupational
Health and Safety
2018
403-9 Work-related injuries
Health, safety and environment,
p. 98
GRI 404
Training
and Education
2016
103-1 Explanation of the material topic
and its Boundary
103-2 The management approach
and its components
404-3 Percentage of employees receiving
regular performance and career development
reviews
Our employees, p. 98
Our employees, p. 98
Our employees, p. 98
Data is provided only for
the Company’s employees.
The rates of fatalities, high-
consequence work-related
injuries (excluding fatalities) and
recordable work-related injuries,
as well as the main types of work-
related injuries, the number of
hours worked and work-related
hazards remain undisclosed.
—
—
No breakdown by employee
category is provided.
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APPENDIX
Appendix 3. Glossary
Compartmentalization is a method used to classify pig farms
by biosafety standards. The Federal Service for Veterinary and
Phytosanitary Surveillance of Russia (Rosselkhoznadzor) has
four biosafety levels (compartments), with farms vulnerable
to biological threats assigned to Compartment I and those
boasting high biosafety standards assigned to Compartment IV.
Dual education is a system combining theoretical training in
higher education institutions and on-site apprenticeship in a
company.
technologies (cyber-physical systems, the Internet of things
and cloud computing).
ISO 22000:2005 is the first international standard specifying
requirements for the implementation and certification of food
safety management systems and focusing on reporting, system
management and control of food safety hazards.
Lean production is a production facility management concept
promoting continuous waste minimization.
Epizootic risk is a risk associated with the outbreak and spread
of infectious diseases in an animal population.
Oilseed meal is a concentrated feed obtained as a by-product
of oil extraction (extraction of oil from the seeds of oil plants,
for example, soybeans).
Full-cycle business is an enterprise controlling the entire
production chain.
FSSC 22000 is a certification standard for food safety
management systems of organizations in the food chain that
process or manufacture animal products, perishable vegetal
products, products with a long shelf life, food ingredients (such
as additives, vitamins and bio-cultures) and food packaging
materials.
Genomics is a field of molecular genetics focusing
on the genomes and genes of living organisms.
HACCP (hazard analysis and critical control points) is
asystematic preventive approach to food safety involving
ongoing identification, assessment and management
of hazards.
HoReCa is an abbreviation for a dedicated segment
of the hospitality industry (hotels and restaurants) and a sales
channel involving product consumption at the point of sale.
PCR is a laboratory diagnostics method used to detect
infectious agents in animals (PCR – polymerase chain reaction).
R&D is an abbreviation for research and development activities
that give rise to launching a new product into production and
span a wide range of operations from academic research to the
manufacturing of prototypes.
Sequencing is a name given to a variety of methods designed
to determine the nucleotide order in a DNA molecule and
detect disease agents.
ABBREVIATIONS
CMPP – Cherkizovsky Meat Processing Plant
GDR – global depositary receipt
JV – joint venture
LTIFR – lost time injury frequency rate
MPP – meat processing plant
R&D – research and development
SOP – standard operating procedure
Industry 4.0 is a new generation of solutions for managing
production facilities and value chains across the entire
product life cycle, drawing on automation and data exchange
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STRATEGIC REPORT
CORPORATE GOVERNANCE
FINANCIAL STATEMENTS
APPENDIX
Appendix 4. Supplementary Information on Staff
All Cherkizovo Group Employees operate in Russia.
Employee headcount by segment
Poultry
Pork
Meat Processing
Grain (incl. NAPKO)
Feed
Group = R&D Center1 + SSC2
Trading Company
Total
Number of employees trained internally3, man hours
Total
Classroom training
Webinars
Distance learning
Number of employees trained externally3, man hours
Total
Classroom training
Webinars
Distance learning
2016
13,509
1,607
3,993
770
1,132
570
1,149
2017
13,206
1,670
3,741
1,557
1,061
739
1,184
2018
13,223
1,844
3,951
1,458
1,057
886
1,007
22,730
23,158
23,496
2017
2018
11,567
37,955
2,154
—
9,413
2017
55,698
55,674
—
24
23,842
386
13,727
2018
9,412
9,382
30
—
1
R&D Center – research and development centre.
2
SSC – shared services centre.
3
Excluding the Tambov Turkey joint venture.
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ABOUT COMPANY
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FINANCIAL STATEMENTS
APPENDIX
Contact Information
ADDRESS AND 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
Contact point for questions about public reporting
Andrey Novikov
Email: a.novikov@cherkizovo.com
REGISTRATION NUMBER
1057748318473 of 22 September 2005
REGISTRAR
JSC Novy 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
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APPENDIX
Contact Information
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