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Annual Report 2019

Plain-text annual report

Annual report 2019 Cherkizovo today Cherkizovo Group is Russia’s largest meat producer and ranks in the Top 3 in the following categories: chicken, turkey, pork and sausages. We are a consumer-oriented company committed to quality and product excellence. ABOUT THE COMPANY Cherkizovo Group has come a long The Company's success rests firmly way to build a highly successful and on our ability to cater to consumer efficient business. We started with preferences. We carefully monitor market a single meat processing plant – trends as we seek to meet and anticipate to grow into the country’s largest meat our customers’ needs. For several years manufacturer controlling the entire we have been expanding our healthy diet production chain from growing and offering by developing new product lines. producing crops to delivering the end-product. key achievements For more information visit our Corporate website: www.cherkizovo.com No.1 Top-ranking Russian meat producer * No.1 Leading poultry producer in 2019 ** No.2 Among the largest pork producers in Russia in 2019 *** Our values 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 By developing our business, we contribute to the agricultural potential of the nation We apply state-of-the-art technologies in We are open to innovation We are committed to developing new ideas, solutions, technologies and recipes, and adopting best global practices, innovations consumer needs and the highest meat agriculture, engage highly qualified experts, and scientific findings. quality for our products. and develop both our existing employees 2 and young talent. * According to the rating following the results of 2018 prepared by the Agroinvestor magazine. ** According to the Russian Union of Poultry Producers. *** According to the ranking by the National Union of Swine Breeders. 2 Annual report 2019 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPContents CHERKIZOVO TODAY About the Company About the Report Year in Numbers Segment Overview Key Brands Core Strengths Location of Operations Key Events 2 2 3 4 8 32 33 34 36 ABOUT THE REPORT The annual report contains information It also covers the key results of the MESSAGE FROM THE CHAIRMAN 38 on the activities of Public Joint Stock Company’s corporate social responsibility Company “Cherkizovo Group” (“Cherkizovo performance. MESSAGE FROM THE CEO Group”, “Cherkizovo”, the Group, the Company) for the period from 1 January The report has been prepared with STRATEGIC REPORT to 31 December of 2019. reference to GRI Sustainability Reporting Market Overview The report discloses financial and non-financial performance, details on the Group’s strategy, and information on the corporate governance framework. Standards. For further details on the report and GRI Standards compliance, see page 233. No.2 In the ranking of turkey producers * MOODY’S RATING B1 EXPERT RA RATING ruA The Group’s shares are quoted on the Moscow Exchange (MOEX) (MOEX ticker: GCHE). The Group is a member of the National Health, Safety and the Environment Union of Poultry Farmers, National Community Relations Union of Swine Breeders, National Meat Association, Association of Bona Fide Agricultural Producers, and Russian Union of Industrialists and Entrepreneurs. We are passionate about what we do We seek to maintain our success We are a team of experts in meat processing We employ specialists with a high by building on our strengths, achieve level of professionalism and expertise excellence in what we do, and deliver in their fields. quality meat products to our consumers. * According to the ranking by Agrifood Strategies. www.cherkizovo.com CORPORATE GOVERNANCE SHAREHOLDER AND INVESTOR HIGHLIGHTS CONSOLIDATED FINANCIAL STATEMENTS APPENDIX Appendix 1. About the Report Appendix 2. GRI Content Index Appendix 3. Glossary Appendix 4. Supplementary Information on Staff Contact Information Strategy Business Model Supply Chain Investment Program Quality Management System Poultry Pork Meat Processing Grain and Feed Turkey Product Strategy FINANCIAL RESULTS SUSTAINABLE DEVELOPMENT Our Employees 42 50 48 50 54 58 60 61 64 68 72 76 80 84 90 112 114 119 124 126 146 148 232 232 233 237 239 240 3 CHERKIZOVO GROUPCherkizovo unites Year in numbers Sales POULTRY SALES, ’000 tonnes PORK SALES, ’000 tonnes MEAT PROCESSING SALES, ’000 tonnes 663 275 246 2019 2018 2017 +21.8% 663.0 544.2 523.5 2019 2018 2017 +15.9% 274.6 236.9 200.3 2019 2018 2017 +7.0% 245.6 229.5 204.2 TURKEY SALES * , ’000 tonnes GRAIN SALES, ’000 tonnes SAMSON – FOOD PRODUCTS ** , ’000 tonnes 39 524 22.7 +0.3% 39.4 39.3 26.3 2019 2018 2017 (24.7%) 524.0 696.1 453.3 * Turkey data represents sales of turkey meat produced by Tambov Turkey JV through the Group’s distribution network. ** Data in this section denotes to the company Samson – Food Products, associate of the Group, where Cherkizovo Group owns 75% of the capital. 2 Annual report 2019 2019 2018 2017 4 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPFinancial highlights RUB million / % Revenue Gross profit Operating expenses Adjusted EBITDA Adjusted EBITDA margin Adjusted operating profit Profit before tax Adjusted net profit Net operating cash flow Net debt REVENUE, RUB billion 2017 90,465 23,559 (13,612) 14,643 16.2% 8,943 5,956 5,066 13,016 48,669 2018 100,422 29,182 (13,570) 20,415 20.3% 13,509 11,793 9,958 14,178 58,559 2019 120,109 27,863 (17,551) 20,617 17.2% 12,397 6,697 8,958 16,056 61,206 Year-on-year, % 19.6% (4.5%) 29.3% 1.0% (3.2 p.p.) (8.2%) (43.2%) (10.0%) 13.3% 4.5% ADJUSTED EBITDA, RUB billion ADJUSTED NET PROFIT, RUB billion 120 20.6 9 2019 2018 2017 +19.6% 120 100 90 2019 2018 2017 1.0% 20.6 20.4 14.6 2019 2018 2017 (10.0%) 9.0 10.0 5.8 Non-financial highlights HEADCOUNT, ‘000 employees 28 2019 2018 2017 LTIFR 1.7 19.6% 28.1 23.5 23.2 2019 2018 2017 (14%) 1.71 1.99 1.50 www.cherkizovo.com 5 CHERKIZOVO GROUPCherkizovo unitesA line of halal products launched under the Dajajti brand to tap into the export markets of Islamic countries. the products have been certified by the UAE’s Authority for Standardization and Metrology (ESMA). 6 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPCherkizovo exports its meat products to the Middle and Far East, Africa, and the CIS. We have been actively expanding our footprint in the FSU and non- FSU markets and plan to increase exports across all our product categories. As authorized exporters, our facilities are compliant with international trade requirements, and our products are certified under the FSSC and ISO 9001 standards. 5.7 RUB billion in export revenue +78% y-o-y 14 thousand tonnes Chicken supplies to China launched in 2019 www.cherkizovo.com 7 CHERKIZOVO GROUPCherkizovo unites Segment overview REVENUE BY SEGMENT, RUB billion MEAT SALES BY SEGMENT, % POULTRY 2019 2018 PORK 2019 2018 MEAT PROCESSING 2019 2018 TURKEY ** 2019 2018 GRAIN 2019 2018 FEED 2019 2018 3% 2% 20% 53% 22% 1,245.3 thousand tonnes Poultry Pork Meat Processing Samson – Food Products * Turkey ** thousand  tonnes 663.0 274.6 245.6 22.7 39.4 70.3 52.7 24.5 23.3 40.1 38.8 6.7 5.8 5.8 6.9 40.3 31.2 The bulk of the products are sold through retail chains to HoReCa customers and also exported. The Group’s centralized logistics infrastructure guarantees delivery within the shortest time possible. At Cherkizovo, we keep a close watch on consumer preferences by conducting regular marketing surveys, reviewing feedback, and testing our key and new products. This fuels market demand for Cherkizovo 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. Please see the Business Model section on page 54 for details * Data in this section denotes to the company Samson – Food Products, associate of the Group, where Cherkizovo Group owns 75% of the capital. ** 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. 8 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUP Segment overview CHERKIZOVO GROUP: No.1 Top-ranking Russian meat producer No.1 Leading poultry producer in 2019 The Group is structured into the product segments of Poultry, Pork, Meat Processing, Grain, and Feed. We also make turkey meat products as part of our joint venture with Grupo Fuertes. poultry pork meat processing grain turkey www.cherkizovo.com 9 CHERKIZOVO GROUPCherkizovo unites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. Core product categories Chicken products: whole chickens and cuts, chilled and frozen meat, ready-to-cook products, and by-products. For further details, see page 64 10 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUP What sets us apart Year’s highlights • HACCP system • FSSC 22000 quality standard • 24 hours from farm to fork • Advanced cooling and temperature compliance system • Acquisition of Rovensky Broiler • Relaunch and ramp-up of Belaya Ptitsa • Start of Petelinka sales in Siberia • Launch of poultry exports to China REVENUE, RUB billion 2019 2018 +33.4% 70.3 52.7 663 thousand tonnes Sales +22% y-o-y KEY FACILITIES • Petelinskaya poultry farm, Moscow region • Vasilyevskaya poultry farm, Penza region • Lisko Broiler, Voronezh region • Kurinoe Tsarstvo, Bryansk, Lipetsk and Moscow regions • Altaisky Broiler, Altai Territory • Belaya Ptitsa 1, Belgorod and Kursk regions • Rovensky Broiler, Belgorod region 1 Is currently operated by the Group pursuant to a lease agreement. www.cherkizovo.com 11 CHERKIZOVO GROUPCherkizovo unitesChicken BBQ – Indian curry wings Chicken dishes are found in all national cuisines. From the fillet you get low-fat dietary dishes that are useful for children and athletes, lovers of homemade fast food grill wings in breadcrumbs, and from the thigh you can cook a delicious broth – the one that treats colds so well. 12 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPIndian curry wings 1 COOKING Prepare your poultry farms well, add chickens and leave them fatten on homemade feeds under the supervision of a qualified team. Do not forget about 2 3 biosafety. SECRET SAUCE To bring out all nuances of taste, you will need to make your production facilities meet the requirements of international fast food chains. Humane animal treatment practices are the best choice for this purpose. SERVING The end products are served in stores as chopped or minced chicken, patties and ready-to-roast meals. the most popular are those under the Petelinka brand. YOU WILL NEED Poultry farms Hens Homemade feeds Qualified team www.cherkizovo.com 13 CHERKIZOVO GROUPCherkizovo unitespork The Pork segment embraces breeding of market hogs and their sale to both the Group companies and third parties. In 2019, 86% of market hogs was sold to the Meat Processing segment to make end products, with the rest shipped to third parties. Core product category: Market hogs. For further details, see page 68 14 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPWhat sets us apart • HACCP system • Highest biosecurity status of pig farms • Needle free injections Year's highlight • a new pig farm was launched in the Penza Region REVENUE, RUB billion 2019 2018 +5.2% 24.5 23.3 284.2 thousand tonnes Production +15% y-o-y CORE GEOGRAPHIES • Penza region • Lipetsk region • Voronezh region • Tambov region • Orel region www.cherkizovo.com 15 CHERKIZOVO GROUPCherkizovo unitesTraditional Russian Dumplings – Chinese Jiaozi Dumplings Different countries use their unique recipes for making dumplings. But an integral ingredient of this dish around the world is high-quality minced pork. 16 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPChinese Dumplings jiaozi 1 DOUGH Take a bowl and mix in full pork production complexes, pig sites with combined nursery and finisher sites, and sow farms, give them a good whisk. Add the team of professionals to the resulting batter and let it rise. 2 3 4 FILLING Pick only the best-bred sows that have proven to be highly effective, surround them with care from expert staff. Don't forget to sprinkle in high biosafety and animal welfare standards. COOKING Roll the dough out evenly between Penza, Lipetsk, Voronezh, Tambov and Orel regions, add the filling. Well done! SERVING Send in your creation to Cherkizovo Group's meat processing plants and let them do their magic. YOU WILL NEED Full pork production complexes Pig complexes with combined nursery and finisher sites Sow farms A team of professionals Strict biosafety standards www.cherkizovo.com 17 CHERKIZOVO GROUPCherkizovo unitesmeat processing The Meat Processing segment manufactures sausages and other products from pork, chicken meat and turkey. Our products are sold under several brands across different price categories. Core product categories: – Higher value added products: a variety of sausages, smoked meat, deli meats, and cold cuts; – Lower value added products: raw meat, ready-to-cook foods and minced meat, – Сooked meats products: hot dogs. For further details, see page 72 18 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPWhat sets us apart • Large mix of high-quality sausages, deli meats and ready- to-cook products • Certified to GOST R ISO 9001 – 2008 (ISO 9001) • Lean manufacturing system • FSSC 22000 quality standard Year’s highlights • Cherkizovo brand revamp • Launch of a bacon slicing line at Cherkizovsky Meat Processing Plant REVENUE, RUB billion 2019 2018 +3.4% 40.1 38.8 245.6 thousand tonnes Sales +7% y-o-y KEY FACILITIES • Slaughter facilities: Dankov and Penza • Meat processing plants: Cherkizovsky Meat Processing Plant in Moscow and its offshoots in Penza, Ulyanovsk, Kaliningrad and Kashira (Moscow region) www.cherkizovo.com 19 CHERKIZOVO GROUPCherkizovo unitesSandwiches for breakfast – English sandwich The appearance of a sandwich in its modern form can be roughly attributed to Europe of the XVII century. The very idea of wrapping in bread or putting other ingredients on it appeared long before that in various cultures. 20 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPEnglish sandwich 1 2 3 PREPARING This recipe is a perfect combination of tested traditions and advanced trends in meat processing. An ideally balanced taste is achieved by mixing the time- proven expertise of Cherkizovsky Meat Processing Plant and the latest solutions from the Kashira plant. Before cooking, do not forget to add a full range of Industry 4.0 techniques to the plant in Kashira. COOKING After you have prepared the meat processing plants, begin deliveries of in-house produced pork, chicken and turkey. Do not forget using natural spices only. Mix the above ingredients and make sausages or cold cuts. Send them to stores when ready. SERVING Cherkizovo-branded sausages and cold cuts serve to bring the entire family to the table. Especially popular are Salchichón, Salami Extra and Doktorskaya Po-Cherkizovsky. YOU WILL NEED Chilled pork Chilled chicken and turkey Several meat processing plants Advanced meat processing technology www.cherkizovo.com 21 CHERKIZOVO GROUPCherkizovo unites grain The Grain segment grows crops that the Group uses to produce feed at in-house mills or sells them to third parties. Core product categories: – Crops (wheat, soy, sunflower, corn, and barley) – Feeds. For further details, see page 76 22 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPWhat sets us apart • Most fertile Central Black Earth regions • Know-how backed by global expertise • Amelioration program Year's highlights • Land bank increased by 13 thousand hectares to 300 thousand hectares • Soil improvement and balanced plant nutrition program continued REVENUE, RUB billion 2019 2018 (15.9%) 5.8 6.9 593.0 thousand tonnes Harvest +24% y-o-y CORE GEOGRAPHIES • Voronezh region • Lipetsk region • Moscow region • Orel region • Penza region • Bryansk region • Tambov region www.cherkizovo.com 23 CHERKIZOVO GROUPCherkizovo unitesturkey 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. Core product categories: – Turkey meat (fillet, diced meat, steaks, thighs, and wings) – Ready-to-cook products – By-products. For further details, see page 80 24 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPWhat sets us apart Year’s highlight • One of Russia’s most pristine • Cherkizovo Group started areas • Certified to ISO 22000:2005 • FSSC 22000 quality standard implementing the second stage of Tambov Turkey REVENUE, RUB billion 2019 2018 +15.5% 6.7 5.8 39.4 thousand tonnes Sales CORE FACILITY Tambov Turkey, Tambov region www.cherkizovo.com 25 CHERKIZOVO GROUPCherkizovo unitesNew Year's Turkey – Thanksgiving Turkey in America Characteristic of Russian cuisine is the preparation of poultry and game whole carcasses. In American cuisine, baked turkey is also a national Thanksgiving dish. 26 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPAmerican thanksgiving turkey 1 COOKING To cook it the right way, you may need some business partners from Spain. Before cooking, take a turkey production plant and put in Tambov region, Russia's greenest area. Have it certified to ISO 22000:2005 and FSSC 22000. Mix a team of professionals with some Spanish expertise and add them to the plant. Do not forget to put in place a HACCP plan to monitor turkey health. Use homemade 100% grain feeds for the turkey to gain weight fast, then send it for processing in around 118 days. 2 SERVING Serve the turkey in stores as Pava-Pava branded fillet, minced meat or ready-to- roast meals in oven bags. the pickiest of eaters will delight in schnitzels, wieners or patties. YOU WILL NEED 100% grain feeds Hybrid Grade Maker turkey Tambov Turkey joint venture A pack of experts ISO 22000:2005 and FSSC 22000 standards HACCP program www.cherkizovo.com 27 CHERKIZOVO GROUPCherkizovo unites45 years and running Today, Cherkizovo Group is not only the country’s largest Our plans are just as far-reaching as our achievements, seeking manufacturer of meat products, with facilities spanning from to introduce more advanced meat processing technologies, ramp Kaliningrad to Altai, but also the industry’s technological leader. up production, and expand sales geography in Russia and beyond. 1974 1995 1998 Cherkizovsky Meat Processing Plant opens in Moscow Cherkizovo Group taps into the pork market by acquiring the  Kuznetsovsky pig farm The Group enters the poultry market after acquiring the Petelinskaya poultry production facilities TODAY 8 meat processing plants 246 21 combined nursery and finisher sites 275 thousand tonnes annual meat products sales thousand tonnes annual pork sales 9 poultry farms 663 thousand tonnes annual poultry sales No.1 in Russia meat production 28 No.2 in Russia pork production No.1 in Russia the Group operates 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPIn 2019, Cherkizovo turned 45. It was back in 1974 when Cherkizovsky Meat Processing Plant, now the beating heart of the Group and a flagship meat processor in Russia, was opened. 2012 2016 2018 Cherkizovo taps into the crop farming market Cherkizovo Group launches export operations Tambov Turkey reaches full production capacity Exports its products to markets across the CIS and South-East Asia 39 thousand tonnes turkey sales No.2 in Russia turkey sales 9 feed mills 300 thousand hectares of land 524 thousand tonnes the Company owns www.cherkizovo.com 29 CHERKIZOVO GROUPCherkizovo unitestonnes of pepperoni for Dodo Pizza tonnes of pepperoni for Domino's Pizza Our facilities comply with the rigorous standards of global chains. 30 CHERKIZOVO GROUP 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governancetonnes of strips for Burger King billion in food service revenue +81% y-o-y Cherkizovo Group provides restaurants with an impressive selection of chilled and frozen chicken, turkey and pork products, all of which boast great taste, structural properties and shelf lives thanks to the Group’s reliance on its own feedstock and innovative production technologies. We are looking for partnerships driven by mutual benefits and work with restaurants to create specialty products made to customers’ original recipes and specifications. Our production capacities enable us to cater to both major chains sourcing tonnes of finished products and smaller players looking for small batches. www.cherkizovo.com 31 CHERKIZOVO GROUPCherkizovo unitesKey brands No.1 on the poultry product market No.2 on the turkey market 1 51.2% Brand awareness 1* 75.0% Brand awareness * For Pava-Pava, brand awareness is based on Moscow and St. Petersburg data. One of industry leaders 1 73.9% Brand awareness 1 According to Ipsos study. 32 Quality Guarantee 2019 Product of the Year Quality Guarantee 2019 Product of the Year Consumer Rights and Service Quality Award German Design Award Quality Guarantee 2019 Taste Experience Consumer Rights and Service Quality Award 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPCore strengths VERTICALLY INTEGRATED COMBINATION OF ORGANIC TECHNOLOGY BUSINESS MODEL GROWTH AND M&AS AND INNOVATION Cherkizovo Group boasts a strong vertically The Group pursues a strategy that combines All of our production sites were designed integrated business model and has evolved organic growth, driven by investments in new to meet the latest efficiency and veterinary into a diversified protein producer for production capacities, and acquisition safety requirements. The plant in Kashira a sustainable and resilient future. of operating businesses well suited for fully complies with the Industry 4.0 vision. For further details, see page 54 integration into the Group's business model. Relying on our in-house R&D expertise, In 2019, the Company launched 5 new pig we make sure all Cherkizovo products are farms in the Penza region. Work started covered by comprehensive food quality ROBUST GROWTH AND to implement the second stage of Tambov and safety control. We also have a large- SOLID FINANCIAL POSITION Turkey. scale research program in place. In 2019, the Group’s revenue rose by 19.6% to RUB 120.1 billion, and EBITDA by 1.0% to RUB 20.6 billion, while adjusted net profit decreased by 10.0% to RUB 9.0 billion. Lower pork prices in 2H 2019 put pressure on the For further details, see page 50 For further details, see page 75 STRONG BRANDS DISTRIBUTION AND LOGISTICS Group's performance in the Pork and Meat Cherkizovo Group continues to strengthen The company controls all elements of Processing segments, but new acquisitions its brand portfolio, which includes highly the value chain, which enables synergies in the Poultry segment helped maintain recognizable and popular brands of in production and logistics, reduces costs, a stable financial position. Cherkizovo, Petelinka and Pava-Pava. and enhances quality control across the For further details, see page 90 The Company continues improving production chain. A well-developed logistics designs and recipes of its products to keep system allows Cherkizovo to guarantee QUALITY EXCELLENCE consumers engaged. For further details, see page 32 The Group continues to put quality, safety and taste first. We implement stringent OUR TEAM quality assurance and biosafety standards to ensure a consistently high product quality Our people are our key competitive for our consumers. Cherkizovo develops advantage. At Cherkizovo Group, its product offering in line with consumer we have a strong team led by outstanding 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. For further details, see page 58 preferences and latest market trends. For further details, see page 61 industry professionals. The Company's executives have impressive track record working in major Russian and international companies and have been repeatedly ranked among the Top 1,000 Russian Managers. For further details, see page 114 www.cherkizovo.com 33 CHERKIZOVO GROUPCherkizovo unitesLocation of operations KALININGRAD ST. PETERSBURG BRYANSK MOSCOW TULA OREL LIPETSK KURSK BELGOROD TAMBOV VORONEZH PENZA ULYANOVSK ROSTOV-ON-DON SAMARA 34 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUP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 Company has also expanded into the Siberian Federal District. The geography of our production sites enables us to cater to over 80%# of Russia’s population. 13 21 pork production complexes combined nursery and finisher sites 2 sow farms 9 poultry farms * 8 meat processing and slaughter facilities ** 9 feed mills 1 turkey JV 12 grain elevators 300 thousand hectares total land bank * Including Belaya Ptitsa poultry processing facility operated by the Group under the lease agreement. ** Including the meat processing plant operated by associated company Samson – Food Products. 19 own and 11 leased warehouses BARNAUL www.cherkizovo.com 35 CHERKIZOVO GROUPCherkizovo unitesKey events New capacity New associations In February, Cherkizovo initiates the foundation of the National Union of Poultry Farmers. In August, Cherkizovo Group joined the Russian Union of Industrialists and Entrepreneurs. In July, Cherkizovo took charge of the Ministry of Industry and Trade's working subgroup on import substitution in food machinery. In December, the Cherkizovsky Meat Processing Plant joined the National Union of Meat Processors. During the year, Cherkizovo Group launched 5 new pig farms in the Penza region. In October, the Company purchased Rovensky Broiler. The land bank grew by 13,000 hectares to 300 thousand hectares. 36 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPExports Food service Events after the reporting date Sales in the HoReCa segment doubled year-on-year. In June, Cherkizovo signed a 8 USD million contract for poultry deliveries to China. Emin Mammadov was appointed Deputy CEO and his director status changed from independent to executive. The Board of Directors recommends that the Annual General Meeting of Shareholders vote for allocating and paying RUB 60.92 per share in dividends for 2019. www.cherkizovo.com 37 CHERKIZOVO GROUPCherkizovo unitesMessage from Chairman 120.1 RUB billion Revenue +20% y-o-y 9 RUB billion Adjusted Net profit in 2019 38 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPIn 2019, Cherkizovo Group demonstrated excellent operational and financial results. Despite challenging market environment, we managed to increase our revenue by almost 20% to RUB 120 billion. GDP growth over the past year decreased to 1.3%, while real disposable IMPLEMENTING STRATEGY At the present time, the Group is one the Group's most recognized brands, such as Cherkizovo, Petelinka and Pava- income was up 0.8%. Household final of country’s major meat producers and Pava, have already gained widespread consumption expenditure rose by 2.5%, in the leading producer of poultry. Our future popularity amongst consumers and comparison with last year’s figure of 2.2%. growth will largely be determined by occupy a leading position in their the VAT increase, taking it to 20%, had the ability to deliver quality and taste, respective markets. a considerable impact on the consumer rather than by higher production volumes. market. In addition, production costs for Cherkizovo’s strategy is focused around To keep up with the current trends meat products grew on higher prices for key the Group's sustainable development, its in the meat product market, we now feed components and logistics. These rises financial growth and securing its position as devote special attention to our ready-to- were passed on to the consumers, with the meat market leader. retail prices for pork and broilers increasing cook and ready-to-eat product ranges. We are trying to do everything in our by 4% and 10% respectively. the Group The Group considers the development power to ensure that our products mitigated the lack of consumption growth of its product ranges and increasing its meet the healthy lifestyle needs. by tapping into new markets. offering of high value-added products to be Our specialists make sure that our its number one priority. We are constantly products contain no artificial additives investing in our production technology, or flavour enhancers, thus protecting as well as ensuring we consolidate our well known and loved original taste. the position of our key brands. the Group offers a range of low calorie chicken and turkey, which help contribute In 2019, our large scale investment in to a healthy diet. construction reached its conclusion. This led to a 20% drop in capital The fastfood market is also expenditure, down to RUB 8 billion in an increasingly important avenue for comparison to the previous year. Our key the Company. We are eagerly trying projects focus on Moscow, the Altai to increase our share of this steadily Territory, and the Moscow, Lipetsk, Penza, growing market. We already work and Tambov regions. a considerable share with a large number of restaurants, of the investment was directed towards including the market leaders. We are launching the production of new high value- open to cooperation and are adapting added products and increasing the quality our production to the recipes and and convenience of our existing products. requirements of our partners. According to our estimates, the food The Group's marketing strategy is aimed service will soon account for 20% at building brands, which will become clear leaders in their particular market segment. of the Group’s sales. We are constantly investing in our production technology, as well as ensuring we consolidate the position of our key brands www.cherkizovo.com 39 CHERKIZOVO GROUPCherkizovo unitesMessage from Chairman of the Board of Directors SUSTAINABLE DEVELOPMENT We pride ourselves on fulfilling our СORPORATE GOVERNANCE AND ENGAGING STAKEHOLDERS Cherkizovo Group places a special consumer's wishes. We carefully analyse all our customer reviews, both those on social DEVELOPMENT Cherkizovo’s corporate governance emphasis on sustainable development. media sites and those left through our framework has been constructed Cherkizovo’s priorities are, as always, official channel. These reviews, as well as in accordance with the best global the health and well-being of its our monitoring of general consumer trends, practices, taking into account employees, environmental protection help us to finalize our products. Our ready- the integrated structure of the Company. and the development of the regions to-cook chicken, turkey and sausage 2019 saw us continue refining where we operate. ranges enjoy the most popularity amongst our approach to governance and Last year, we focused on educating consumers. best practices. the Company put a particular emphasis on strengthening our employees on production safety The Group’s key partners are federal retail the Management Board’s competencies standards. As a result, we have chains and restaurants. Our production with the addition of new members that witnessed a drop in both the quantity has been accredited by major international include both the Company’s talent and severity of workplace accidents. fast food chains, confirming the excellent pool members and internationally We aim to continue this work throughout quality of our products. Cherkizovo is one experienced major industry experts. the coming year. of the few Russian producers to have implemented international standards Cherkizovo contributes to the  regarding the humane treatment of animals. development of the regions where DIVIDENDS We seek to attract new investment and find new opportunities to work alongside we operate. We create well paid job The Group is developing partnerships with stock market players. Our dividend opportunities, attract new investment, suppliers. We are devoting special attention policy is based on the principle and take an active part in community to our partnerships with local producers, of rational distribution of profits and activities. We are building new assets providing them with advice on how to reach takes into account both the interests across all segments, taking into account, our high standards. All of the Group’s of shareholders, and the Group’s need for of course, our ecological responsibilities. suppliers adhere to the principles investment. We are constantly searching for ways of openness and fair business practices. to reduce the impact we have on 2019 dividend per ordinary share the environment. In the future, Cherkizovo will continue amounted to RUB 109.71. This is made to comply with the principles of sustainable up of a RUB 48.79 semi-annual interim First and foremost, Cherkizovo's success development and increase stakeholder dividend and a RUB 60.92 full-year depends on our customer satisfaction. engagement. Therefore, it is vitally important that we cooperate with stakeholders, including suppliers, distributors, shareholders, employees and, of course, consumers. dividend, as recommended by the Board of Directors. the full-year dividends will be approved at the Annual General Meeting of Shareholders in 2020. 40 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUP109.71 RUB  dividend per ordinary share I would like to express my gratitude to the members of the Board of Directors, the management and finally, the employees of the Company. Year after year, their contributions allow us to meet our strategic objectives. Only through our mutual cooperation can we continue to develop the Company and secure its position as the food market leader. Evgeny Mikhailov Chairman of the Board of Directors www.cherkizovo.com 41 CHERKIZOVO GROUPCherkizovo unitesMessage from CEO Annual sales were mainly driven During the year, we further streamlined our by higher exports and a broader occupational health and safety processes, OUR PERFORMANCE In 2019, Cherkizovo Group’s revenue presence in the HoReCa segment. resulting in a 14% decrease LTIFR and zero rose by 20% to RUB 120.1 billion. In terms Regarding exports, a pivotal moment fatal accidents. was the opening of the Chinese market of average sales prices, only the Poultry segment saw gains, while the other for Russian poultry products, enabling Cherkizovo Group invested over segments came under pressure amid us to increase chicken meat sales. RUB 160 million in environmental a weaker pork pricing environment. Strengthening our partnerships with performance enhancement, cutting Adjusted EBITDA totaled RUB 20.6 billion, major fast food restaurant chains, such the number of administrative violations flat year-on-year. as McDonald’s, Burger King and KFC, by 13% year-on-year. we were able to more than double The Company will pay RUB 60.92 per share in dividends for 2019, cutting revenues in the HoReCa channel, As a socially responsible company, payouts in line with a lower full-year net which is set to remain a top priority. Cherkizovo continued to provide charitable income. aid across its footprint in 2019. For The Group, as Russia’s largest example, we bought school kits and vertically integrated meat producer, organized New Year celebrations for POULTRY SEGMENT In 2019, the Poultry division increased is committed to offering consumers children from low-income families Having sales by 22% to 663 thousand tonnes, a wide range of products in different embarked on a mission to support regional while the average sales price rose price brackets. With customer needs sports, we became a sponsor of a youth 9% to RUB 106 per kg mostly driven persistently evolving, one of our key football club in Kashira, Moscow Region, by a successful integration of assets priorities remains predicting changes and a men’s volleyball club from Voronezh. acquired in late 2018. Petelinka, in consumer sentiment in a correct and The Group also co-sponsored a charity Cherkizovo’s flagship poultry brand, timely manner, amid tight competition race held by SAP in Moscow to help saw a 13% increase in sales. Poultry in all markets where we are present. children in orphanages. exports and HoReCa sales grew 131% and 95%, respectively. As a result, Currently, technology is key to any In 2019, we established a partnership with the segment’s revenue soared by 33% business that seeks to remain ahead WWF Russia and supported the Earth Hour, to RUB 70.3 billion. of competition. In 2019, Cherkizovo its international environmental campaign. Group invested about RUB 1 billion Cherkizovo Group continued to lead in IT as we continued to improve Importantly, Cherkizovo joined in chicken meat production for electronic document management, the Russian Union of Industrialists and the second straight year. In 2019, Big Data, machine vision technology Entrepreneurs last year. As a union we produced 766 thousand tonnes and online individual productivity member, the Company works closely of live weight, up by 145 thousand tonnes, tracking. With these IT solutions with government agencies, business lengthening the lead over our closest in place, Cherkizovo Group is one of the most innovative companies not partners, NGO experts and a broader industry community on a wide range competitor almost twenty-fold year-on- year to 121 thousand tonnes. only in its sector, but also in the Russian of matters, including environmental and economy as a whole. agricultural regulation. Also, we became For Petelinka, 2019 marked involved in a government-sponsored the launch of production at the  regulatory guillotine project for animal Altaisky Broiler facility, which the  and crop farming. Group acquired in late 2018. 42 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPIn 2019, Cherkizovo Group continued to boost sales with their total volume increasing by 20% to 1.2 million tonnes. Specifically, the Poultry segment grew by 22%, the Pork segment by 16%, and the Meat Processing segment by 7%. the Group continued to strengthen its position in the Russian meat market, significantly lengthening its lead over its closest competitor, while also maintaining first place in chicken meat production for the second straight year. Furthermore, we became the second largest turkey producer in Russia. This meant the country’s most popular chicken brand could be rolled out in the Siberian Federal District. the launch of Petelinka at Altaisky Broiler followed a complete upgrade of the facility, bringing it up to Cherkizovo standards. In 2019, we boosted poultry sales in the Black Earth region and the south of Russia as we fully ramped up Kurinoe Tsarstvo Kursk, an asset formerly owned by Belaya Ptitsa, launching an incubator, populating growth sites and starting up a poultry-processing plant. Total investment in the upgrade was RUB 500 million. A pivotal moment of the year was the opening of the Chinese market for Russian poultry. In 2019, Cherkizovo Group signed several major chicken meat supply contracts with big Chinese retailers and restaurant chain operators as end consumers. During the year, the Company shipped 14 thousand tonnes of products to China. Given a favorable market environment, we predict a 10-fold upside potential in poultry exports. In value terms, we initially estimated Chinese export potential at USD 100 million, but we might well exceed this target already next year. PORK SEGMENT In 2019, Cherkizovo Group's pork sales rose by 16% to 274.6 thousand  tonnes driven by the launch of new nursery and finisher sites. However, the average sale price came in at RUB 89.1 per kg, down 9% year-on-year, under pressure from domestic oversupply. Revenue increased by 5% to RUB 24.5 billion. Towards the end of 2019 our pork production facilities were working close to their maximum total capacity of 300,000 tonnes in live weight. In 2019, we completed the construction of a pig farming cluster in the Penza Region. This year and over the coming years, we are going to ramp up pork capacities, launching state-of-the-art pig farms in different parts of the Black Earth region, in line with our plans to boost exports of Russian pork products. Russian swine breeders are looking forward to tapping into the Chinese market. We also see great export potential in other Southeast Asian markets. www.cherkizovo.com 43 CHERKIZOVO GROUPCherkizovo unitesMessage from CEO MEAT PROCESSING SEGMENT In Meat Processing, sales rose 7%, CROP PRODUCTION SEGMENT In 2019, harvest volumes soared by 24% TURKEY In 2019, Tambov Turkey, a joint venture drawing support from a higher output to 593 thousand tonnes, while sales between Cherkizovo Group and Spain’s of pork carcasses. Meanwhile, sausage decreased by 25% to 524 thousand tonnes. Grupo Fuertes, became the second largest sales were unchanged from 2018. Harvest gains were attributed to higher turkey producer in Russia, with the output up Although sausage prices advanced, wheat and corn growing efficiency. by 9% to 41 thousand tonnes in live weight, the average sales price for the segment Currently, Cherkizovo Group provides about while sales remained little changed year-on- decreased by 4% to RUB 163 per kg one-third of its own wheat and corn needs. year at 34.9 thousand tonnes. As a result, due to weaker pork carcass sales. revenue came in at RUB 6.7 billion, up 16%. As a result, the segment’s revenue Our land bank grew further and reached came in at RUB 40.1 billion, down 300 thousand hectares by the end Tambov Turkey’s Pava-Pava products 3% year-on-year. of the year. At the same time, we remain continued to win over consumers in 2019, focused on soil quality and continue to use delivering significant gains in popularity in The Cherkizovo brand revamp organic fertilizers. This helps us shift Moscow and St Petersburg. was one of the key developments the crop rotation towards corn and soy, in 2019. We upgraded the design improving self-sufficiency in grain. Given further sales upside potential in of our sausages, improved the recipe the Russian turkey market, the Company and the product range. We expect The highlight of the year was and its Spanish partner are investing in consumers to view these changes the Company’s decision to build its own production growth. In 2019, Cherkizovo positively, leading to an increase in soybean processing plant in the Lipetsk Group and the Tambov region signed an sausage sales, with the impact to be Region. the facility is expected to cost investment agreement aimed at boosting seen by the end of Q1 2020. RUB 7.2 billion (including VAT) and become Tambov Turkey’s capacity by 50% operational in 2022, its capacity should to 82 thousand tonnes per year. We expect In 2019, our state-of-the-art plant in reach about 2.5 tonnes per day. With its to launch the second stage of Tambov Kashira reached design capacity. It is own oilseed processing plant in place, Turkey in 2021. the most advanced smoked sausage the Company will be able to procure production facility in Russia and Europe, cheaper poultry feed. running a completely automated system from raw material input to finished product shipment. Going forward, we plan to establish a meat processing cluster in Kashira. Preparations are under way to build a second plant 'Kashira 2' which will produce cooked sausages. When the cluster is in place, Cherkizovo Group will move most of its sausage facilities to Kashira. the implementation depends on our sales growth trajectory and a broader market environment. 44 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUP1 RUB billion in IT as we continued to improve electronic document management 160 RUB million in environmental performance enhancement 14% decrease in LTIFR and zero fatal accidents. QUALITY ASSURANCE At every stage of the production cycle, OUTLOOK We believe that Cherkizovo Group’s Cherkizovo Group’s plans call for both organic growth and M&A activity. we are strongly committed to quality and sales will be primarily driven by exports biosafety. Cherkizovo Group maintains in 2020. We may have a huge window Our key competitive edge is still rigorous biosecurity standards and seeks of opportunity for overseas shipments secured by vertical integration, to improve its quality assurance system if Russian pork is cleared for exports diversified production, recognizable in line with global best practices. In 2019, to China. We are also interested in tapping brands and consumer confidence. we established a Quality Directorate that into new markets in the Southeast Asia, Moreover, the Group is a technology brought together quality management the Middle East and Africa. In early leader in the Russian food industry. functions across all divisions. the new 2020, we launched poultry shipments We have been working hard to solidify directorate will be the core of a centralized to the United Arab Emirates for HoReCa our lead and are confident that we will quality management system, responsible customers. Looking ahead, we expect reach our long-term strategic goals. for developing and implementing to establish regular supplies of our halal- improvement programs. certified products to Saudi Arabia and Looking back on the year, I would Our production facilities meet the stringent other Gulf countries. like to acknowledge the contribution of all Cherkizovo employees, from standards and requirements of major As regards the Russian market, we see support staff to senior management. global fast food chains. Two facilities have upside potential in the growing demand Our achievements result from the hard been certified for compliance with Animal for ready-to-cook and ready-to-eat work of many people. I am sure even Welfare standards that regulate humane products. We are focusing on increasing more far-reaching and high-potential husbandry practices. Only five factories sales of value-added products such as initiatives lie ahead of us. across Russia have been awarded marinated ready-to-cook products, smoked certification of this level. sausages and ready-to-serve foods. Our strategy calls not only for leadership in key We apply cutting-edge technology in meat categories, but also in high-margin quality assurance processes. In 2019, food segments. Cherkizovo Group launched a far-reaching digital platform designed to assess product Increasingly more Russian consumers quality in stores. Going forward, we will eat out or order food from cafes and continue to roll out the project based on restaurants, according to recent research. machine vision technology. So we intend to strengthen our foothold in the HoReCa segment by stepping up cooperation with our existing partners and new restaurant chain operators. Sergey Mikhailov CEO www.cherkizovo.com 45 CHERKIZOVO GROUPCherkizovo unites Market environment SUPPLY TRENDS Every month Cherkizovo Group prepares During 2019, the IMS Index increased by 2%. The main drivers were: its Industrial Meat Supply (IMS) Index, 1. Growth in production costs 4. Opening of the Chinese market based on statistics from Russia’s Federal Pig and poultry production costs rose State Statistic Service (Rosstat) and primarily due to a 23% increase in the for Russian poultry After the first poultry shipment was Federal Customs Service and the Eurasian price of feed wheat. The concurrent sent to China in late February 2019, Economic Commission. 8% drop in the price of soybean meal supplies began to gradually increase. PRICES FOR GRAIN AND SOYBEAN MEAL, RUB/t 2. Growth in pork production turned positive year-on-year, and in December, export volumes grew could not offset this factor. In June 2019, the export trend Despite more ASF outbreaks, pork 1.5 times, reaching record values. production in Russia (including farm Throughout the year, shipments households) grew by 5% in 2019, almost increased by 28% (excluding chicken maintaining the previous year's rate. feet), which reduced pressure on export positions (wings and thighs) 3. Changes in the structure of meat in the domestic market. imports by country On 1 December 2017, the 5. Record wholesale prices Federal Service for Veterinary and Phytosanitary Surveillance of Russia at the end of 2018 From late 2018 to early 2019, prices (Rosselkhoznadzor) banned shipments were at record highs in both wholesale of pork and beef from Brazil due to and retail channels. This and the use of ractopamine (a blacklisted a stagnation in real disposable income growth promoter and a possible among the population contributed carcinogen) by Brazilian producers. to a decrease in demand from end In November 2018, the ban was customers. The sustainedly high lifted, and a positive trend for non- prices led to a reduction in meat sales n a J b e F r a M r p A y a M n u J l u J g u A p e S t c O v o N c e D GRAIN n a J b e F r a M r p A y a M n u J l u J g u A p e S t c O v o N c e D SOYBEAN MEAL CIS imports was already observed in volume terms, according to panel in February 2019. In 2019, imports research by GfK. 14,000 12 000 10,000 8 000 6,000 41.000 37 500 34,000 30 500 27,000 2019 2018 Source: Institute for Agricultural Market Studies (IKAR) from non-CIS countries rose by 41%, boosting supply and pushing down prices in the domestic market in the first half of the year. 46 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceThe IMS Index describes the dynamics of supply trends and meat consumption in Russia. The composite measure includes individual poultry, pork and beef supply indices. It provides an operational summary on the industry and is an indicator for predicting future market developments. COMPOSITE INDUSTRIAL MEAT SUPPLY INDEX CHANGES IN THE COMPOSITE INDUSTRIAL MEAT SUPPLY INDEX IN 2019 VS. 2018, % 800 750 700 n a J b e F r a M r p A y a M n u J l u J g u A p e S t c O v o N c e D 6% 2% -2% n a J b e F r a M r p A y a M n u J l u J g u A p e S t c O v o N c e D THE INDUSTRIAL MEAT SUPPLY INDEX CHANGES IN THE INDUSTRIAL SUPPLY INDEX OF IN 2019 VS. 2018, % 420 400 380 360 325 300 275 250 100 80 60 POULTRY 4% n a J b e F r a M r p A y a M n u J l u J g u A p e S t c O v o N c e D 0% -4% n a J b e F r a M r p A y a M n u J l u J g u A p e S t c O v o N c e D PORK 18% 12% 6% 0% n a J b e F r a M r p A y a M n u J l u J g u A p e S t c O v o N c e D n a J b e F r a M r p A y a M n u J l u J g u A p e S t c O v o N c e D BEEF 8% 0% -8% -16% n a J b e F r a M r p A y a M n u J l u J g u A p e S t c O v o N c e D n a J b e F r a M r p A y a M n u J l u J g u A p e S t c O v o N c e D Source: Rosstat, FCS, EEC In 2019, the Industrial Meat Supply Index of poultry was flat compared with 2018. The measure includes both turkey and chicken. According to Cherkizovo's estimates, turkey production grew slightly due to the increased production at Damate, while chicken meat volumes remained at the same level as in 2018. Another reason for supply stagnation was the active export of wings and quarters to China in the second half of the year. In 2019, the Industrial Meat Supply Index of pork grew by 7%. The trend had been maintained since 2018. The main driver of pork supply throughout the year was growing production among farm businesses (up 7%). The difference between production and supply can be explained by a decline in imports and an increase in exports. According to our estimates, in 2020 the Index will continue to grow as large companies eye more production gains. In 2019, the Industrial Meat Supply Index of beef lost 4% compared with 2018. Despite the fact that beef production increased by 0.8% over the year, supply shrank due to a fall in imports from non-CIS countries and Belarus. The reduction of shipments from Belarus was associated with the Rosselkhoznadzor ban on the import of bone-in beef to Russia from countries that do not have official disease status from the World Organization for Animal Health, (effective from April to November 2019). www.cherkizovo.com 47 CHERKIZOVO GROUPCherkizovo unites№1 Cherkizovo in the Russian market of meat products REAL DISPOSABLE INCOME, % CHANGES IN FOOD PRICES IN 2019, % 10 0 -10 -20 2Q’18 3Q’18 4Q’18 2Q’19 3Q’19 4Q’19 Source: Rosstat Market environment DEMAND TRENDS In 2019, for the first time in a long period, real disposable income increased slightly (up 0.8%). According to Bloomberg, GDP grew by 1.3%, and household consumption added 2.5%. Retail prices for pork and chicken meat gained 4% and 10%, respectively. In 2019, many food products went up in price, particularly due to the increase in VAT from 18% to 20%. The upswing in chicken meat prices for consumers can be explained by the high level of wholesale prices for whole chickens since the end of 2018, which contributed to higher purchase prices for retail chains. CHANGE IN GDP AND IN REAL INCOME OF THE POPULATION Y-O-Y, % 4 2 0 -2 1Q’19 2Q’19 3Q’19 4Q’19 4 2 0 -2 2015 2016 2017 2018 2019 GDP REAL INCOME OF THE POPULATION RETAIL PRICES FOR PORK AND CHICKEN MEAT, RUB/kg (incl. VAT) 280 270 260 250 n a J b e F r a M r p A y a M n u J l u J g u A p e S t c O v o N c e D 160 140 120 n a J b e F r a M r p A y a M n u J l u J g u A p e S t c O v o N c e D PORK CHICKEN MEAT 2019 2018 Source: Rosstat 2019 2018 48 Prices for certain types of products, y-o-y Chickens (chilled and frozen) Pasta Tomatoes Cheese Chicken quarters Bread Chicken eggs, 10 pack Bananas Boiled sausages Canned meat, 350 g Fish (fresh and chilled) Hot dogs, Wiener sausages Milk Cucumbers Beef (excl. boneless meat) Buckwheat Pork (excl. boneless meat) Ground meat Sunflower oil 2019 vs. 2018 10% 10% 10% 9% 9% 9% 8% 8% 7% 7% 7% 7% 6% 6% 5% 4% 4% 4% 0% -1% -1% Potatoes Apples 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governance CHERKIZOVO GROUP'S RANKING RUSSIAN MARKET IN 2019 IN INDUSTRY RATINGS Cherkizovo Group is the leading meat producer in Russia, with a share of 6.8% * . In 2019, the Company strengthened its leading position in broiler production, increasing its share in total output by 2.3 p.p. to 12.4%. The growth was attributable to the newly acquired Altaisky Broiler and Belaya Ptitsa's assets in the Kursk Region. Cherkizovo Group remained Russia’s second largest pork producer. The launch of new pig production facilities in the Penza Region allowed Cherkizovo to narrow the gap with the leader of the ranking and increase its share by 0.4 p.p. to 6.5%. The Group moved into second place in the ranking of turkey producers, having secured a 14.2% share of total output. The main driver was Eurodon's exit from the market. POULTRY 59.7% 12.4% 10.4% 7.3% 5.6% 4.6% PORK 66,4% 9,8% 6,6% 6,1% 5,6% 5,5% thousand tonnes thousand tonnes Cherkizovo Resource Prioskolie Tkachev Agrocomplex BEZRK-Belgrankorm Other 766 645 452 346 287 3,702 Miratorg Cherkizovo Velikoluksky Rusagro Agrarnaya Gruppa Other 427 286 267 243 242 2,897 TURKEY ** PROCESSED MEAT 22.2% 45.5% 4.2% 6.6% 7.3% 14.2% 288 thousand tonnes 54.7% 14.4% 11.2% 7.9% 6.4% 5.4% Damate Cherkizovo Krasnobor Morozovskaya Eurodon Other thousand tonnes 131 41 21 19 12 64 Share in 2019 14.4 11.2 7.9 6.4 5.4 Ostankino ABI GROUP Talina Cherkizovo Velikoluksky Other Change 0.4 p.p. 2.2 p.p. (0.7) p.p. (0.8) p.p. 1.2 p.p. (2.3) p.p. * Based on Rosstat's cattle, poultry and pork production data (incl. farm households) for 2018, as well as on the Agroinvestor ranking for 2018. ** Slaughter weight. www.cherkizovo.com 49 6,198 thousand tonnes4,362 thousand tonnesCHERKIZOVO GROUPCherkizovo unites Our Strategy Strategic Factors COMPANY SOCIETY'S EXPECTATIONS Cherkizovo Group is the largest vertically integrated consumer- driven meat producer in Russia. The Company produces high quality and healthy products, focusing primarily on fulfilling the customers' demands and high expectations. We use the most advanced technologies in production and process management. The Group ensures that its facilities follow the lean manufacturing standards and that they comply with all necessary regulations regarding biosecurity. Food security program and export development Cherkizovo invests heavily in the Changing patterns of consumption The new generations of young people tend to spend less time cooking at home than their older counterparts. This has led to a growth in the popularity of ready-to-cook development of the agriculture, providing and ready-to-serve meals. In comparison food security for the Russian people. with the older generation, young people After achieving self-sufficiency in terms place more emphasis on the convenience of producing different types of meat, and quality of these products. Another the next step in developing Russia’s increasingly important criterion that young agricultural industry was increasing its people consider when choosing their exports. The Company began scaling products is “sustainability”. This category up exports to countries in The Middle includes: a responsible production East, Asia and CIS. process, no violations in the supply chain, environmental footprint, etc... A healthy way of life Nowadays, more and more people are Cherkizovo Group understands these new becoming interested in living a healthy consumption patterns and, in response, life. The majority of Russian consumers is developing ranges of ready-to-cook are now thinking about what they eat and and ready-to-serve meals. The use of drink and the impact it has on their health. smaller, more convenient packaging According to research conducted by RIA-Rating * , citizens of Moscow and Saint- Petersburg are now paying more attention will lead to an increase in consumption waste. The Company sees this challenge and, together with partners, is working to their lifestyle choices than in the to resolve it. previous year. Given the increasing trend towards healthy living, Cherkizovo Group has been developing its range of healthy Humane treatment of animals Across the entire world, there is a growing eating products. Special labels enable interest in animal welfare. This is reflected customers to pick up the Company’s in Russia, where more and more consumers products that have special dietary are paying attention to the conditions characteristics and contain no artificial in which animals are kept. Cherkizovo additives. is committed to ensuring the humane treatment of animals across all of its sites. Company staff even received training in the animal welfare program. * RIA-Rating published its 2018 survey, demonstrating which regions of Russia are more committed to living a healthy lifestylehttps://riarating.ru/ infografika/20191001/630135852.html. 50 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceChallenges and Opportunities Meat exports Exports represent a potentially promising area of development for Cherkizovo Group. In 2019, the Company managed to dramatically increase its exports, with poultry exports specifically rising by 131%. One of the main factors for such a drastic increase in exports was the expansion into the Chinese market in 2019. In addition to this, Cherkizovo continues to supply halal products to countries in the Middle East. In the future, the Company will continue to ramp up exports and expand its range of exported goods. The sanctioning of pork exports from Russia to China will present a remarkable opportunity for the Group, if ongoing negotiations between the two governments reach a desired conclusion. Climate change Climate change could aggravate unpredictable weather patterns and, in particular, lead to more frequent extreme weather conditions. This will cause crop cultivation and harvest to become more unpredictable, having a negative impact on the cost of production and price of animal feed. Changes to the epizootic environment Changes to either the international or domestic epizootic environment can dramatically affect the production and cost of meat products. Cherkizovo Group carefully maintains rigorous biosecurity standards across all its facilities and provides the maximum level of protection against the spread of disease. SUSTAINABLE DEVELOPMENT Cherkizovo group recognises its responsibilities to a wide range of stakeholders, including consumers, employees, local communities, investors and many more. The Group is working on sustainable business development by building relationships and partnerships with all stakeholders. Our Mission Food production is not just our business – making the best meat products in the country is our passion and mission. www.cherkizovo.com 51 CHERKIZOVO GROUPCherkizovo unitesOur Strategy STRATEGIC PILLARS Cherkizovo Group’s strategy is focused around the sustainable business development, maintaining its financial growth and securing its position as the meat market leader. The Company is nearing the completion of its investment phase, and will turn its focus to R&D, developing consumer brands, expanding its range of ready-to-cook and ready- to-serve meals, boosting exports and its food service channel. STRATEGIC GOALS Segments Strategic goals grain turkey pork poultry meat Processing • Increasing grain yields • Becoming one of the two main players • Increasing productivity • Becoming the Russian poultry • Developing Cherkizovo brand • Providing 40-60% of own animal feed in the turkey market • Developing the Pava-Pava brand • Growing the business by expanding production capabilities 2019 investment • Fulfilled the 2019 land amelioration • Began the construction of the second programme phase of Tambov Turkey. • Constructed five new nursery and • Began selling Petelinka finisher sites in the Penza Region in the Siberian Federal District • Increased the share of soy and corn used in crop rotation • Released four new high value-added products. 2020 and medium term plans • A project to improve productivity will be piloted in 2020. Based on its results, a decision will be taken regarding its roll-out • Ensuring the second phase of Tambov turkey is operational by 2021 and increasing output by • Corn and soy will become the main crops • The construction of an oil extraction plant 50% • Releasing new high value-added products, in particular, in the food service segment • Further expansion of production capacities Expected results • The boost in productivity and new oil extraction plant will reduce the cost of animal feed, mitigate FX risks and decrease the cost of production • An increase in production will allow us to expand our sales into new regions and increase our market share • New sites and more productive • By expanding our production • The expansion of sales will allow us breeds will allow us to increase capacities, we can increase our to increase our market share and the amount we produce sales in the Siberian Federal District. consolidate our brand • Launching two new nursery and • Ramped up production at Altaisky • Achieving a higher level of profitability finisher sites in the Penza Region Broiler to than the industry average • Developing the Petelinka and Kurinoe of meat production • Technological leadership in terms market leader Tsarstvo brands • Growth driven by M&A deals • Increased exports • Acquired Rovensky Broiler • 2019 saw the installation of new production equipment, such as a bacon slicing line and a sausage packaging machine, allowing us to produce new types of products. • Ensuring our fully automated Kashira-1 is running at full capacity. 100 000 tonnes segment • Development of the food service • Extending our key product range. • Developing new product categories • Increasing exports to the Middle East, CIS and China • Increasing exports. • Expanding sales across Russia. • Developing the food service segment • Developing new product categories. Atlaisky Broiler will become the most suitable site for exports to China. • By taking the Company into new areas and increasing exports, we can diversify our business and mitigate the FX risks. 52 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceKey Elements of Cherkizovo’s Strategy 1 Strengthening its leadership in the meat market 2 Strengthen leadership as a supplier of branded meat products to Russian retailers 3 4 Development of new sales channels – food service and export Increase the share of sales of high value-added products up to 80%. 5 6 Development of core brands Sustainable financial growth Segments Strategic goals grain turkey pork poultry meat Processing • Increasing grain yields • Becoming one of the two main players • Increasing productivity • Becoming the Russian poultry • Developing Cherkizovo brand • Providing 40-60% of own animal feed in the turkey market • Developing the Pava-Pava brand • Growing the business by expanding production capabilities market leader • Technological leadership in terms • Developing the Petelinka and Kurinoe of meat production Tsarstvo brands • Growth driven by M&A deals 2019 investment programme • Fulfilled the 2019 land amelioration • Began the construction of the second phase of Tambov Turkey. • Constructed five new nursery and finisher sites in the Penza Region • Began selling Petelinka in the Siberian Federal District • Increased the share of soy and corn • Released four new high value-added used in crop rotation products. • Increased exports • Acquired Rovensky Broiler • 2019 saw the installation of new production equipment, such as a bacon slicing line and a sausage packaging machine, allowing us to produce new types of products. 2020 and medium term plans • A project to improve productivity will • Ensuring the second phase of Tambov be piloted in 2020. Based on its results, turkey is operational by 2021 and a decision will be taken regarding increasing output by • Launching two new nursery and finisher sites in the Penza Region its roll-out • Corn and soy will become the main crops • The construction of an oil extraction plant 50% • Releasing new high value-added products, in particular, in the food service segment • Further expansion of production capacities Expected results • The boost in productivity and new oil • An increase in production will allow extraction plant will reduce the cost us to expand our sales into new of animal feed, mitigate FX risks and regions and increase our market decrease the cost of production share • New sites and more productive breeds will allow us to increase the amount we produce • Ramped up production at Altaisky • Achieving a higher level of profitability Broiler to 100 000 tonnes • Development of the food service segment • Developing new product categories than the industry average • Ensuring our fully automated Kashira-1 is running at full capacity. • Extending our key product range. • Expanding sales across Russia. • Developing the food service segment • Increasing exports to the Middle East, CIS and China • Increasing exports. • Developing new product categories. • The expansion of sales will allow us to increase our market share and consolidate our brand • By expanding our production capacities, we can increase our sales in the Siberian Federal District. Atlaisky Broiler will become the most suitable site for exports to China. • By taking the Company into new areas and increasing exports, we can diversify our business and mitigate the FX risks. www.cherkizovo.com 53 CHERKIZOVO GROUPCherkizovo unitesBusiness model Operating chart grain 593 thousand tonnes Grain 300 thousand ha Total land bank feed 2,2 mln tonnes Feed 9 feed mills meat production poultry pork turkey Fertilizers 663 thousand tonnes 9 poultry farms 275 thousand tonnes 21 combined nursery and finisher sites 39 thousand tonnes 1 turkey JV 54 54 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCherkizovo Group uses a vertically integrated business model. Our vertically integrated business model offers the following advantages: • control throughout the production cycle, • adaptability to market conditions, • economies of scale, • quality excellence. RETAIL HORECA EXPORT 63% 5% share of sales share of sales EXTERNAL SALES meat Processing 5% share of sales 246 thousand tonnes 8 plants www.cherkizovo.com 55 55 CHERKIZOVO GROUPCherkizovo unitesBusiness model Resources Investment in expansion and modernization of production facilities 8,6 RUB billion of CAPEX in 2019 5 new production facilities launched in 2019 Performance Key acquisitions in 2019: International certificates Efficient logistics Highly qualified employees Procurement R&D: Quality control system Rovensky Broiler +13 thousand ha land bank HACCP GOST R ISO 9001 – 2008 (ISO 9001) Food Safety System Certification 170 thousand orders shipped every month 28 thousand employees 52 RUB billion worth of products was procured in 2019, 96% - from the local suppliers Own R&D center 1,500 sq m of unique laboratory >500 employees |facilities in a quality control system 1,000 complex tests Sustainable growth underpinned by strong financial position Marketing research, consumer opinion polls High-quality, tasty and healthy foods Dividends Youth programs Environmental impact Benefits for local communities 120.1 RUB billion Revenue 20.6 RUB billion EBITDA 17.2% EBITDA margin 2.97 Net debt / EBITDA 56 56 High level of key brand awareness in Russia: 51% Petelinka 74% Cherkizovo 75% Pava-Pava * * For Pava-Pava, brand awareness is shown for Moscow and St. Petersburg. 32 new chicken products 4 new turkey products Rebranding Cherkizovo Recognition of high-quality products, including the certification of Petelinka and Pava-Pava with the Russian quality mark Total dividends per share based on the 2019 results: 109.71 RUB including: • RUB 48.79 per share of interim dividends announced in August 2019 • RUB 60.92 per share of dividends for 2019 recommended by the Board of Directors for approval by the General Meeting of Shareholders. 2 Annual report 2019 Dual education programs at protection projects projects to support vulnerable social groups: Invested in environmental The Group regularly runs various sponsorship and charitable 4 universities 512.4 RUB million 12.8 RUB million spent on charitable projects 119 students are covered since 2017 7.4 million tonnes of waste generated, of which 48% recycled CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governance In 2019, our business model proved its resilience and efficiency. Despite lower pork prices in 2H 2019, the Group delivered a strong performance. Key acquisitions in 2019: International certificates Efficient logistics Highly qualified employees Procurement R&D: Quality control system Rovensky Broiler +13 thousand ha land bank HACCP GOST R ISO 9001 – 2008 (ISO 9001) Food Safety System Certification 170 thousand orders shipped every month 28 thousand employees 52 RUB billion worth of products was procured in 2019, 96% - from the local suppliers Own R&D center 1,500 sq m of unique laboratory |facilities 1,000 complex tests >500 employees in a quality control system Sustainable growth underpinned Marketing research, consumer High-quality, tasty Dividends Youth programs Environmental impact Benefits for local communities by strong financial position opinion polls and healthy foods High level of key brand awareness in Russia: Dual education programs at Invested in environmental protection projects The Group regularly runs various sponsorship and charitable projects to support vulnerable social groups: 4 universities 119 students are covered since 2017 512.4 RUB million 12.8 RUB million spent on charitable projects 7.4 million tonnes of waste generated, of which 48% recycled 32 new chicken products 4 new turkey products Rebranding Cherkizovo Total dividends per share based on the 2019 results: 109.71 RUB including: • RUB 48.79 per share of interim dividends announced in August 2019 • RUB 60.92 per share of dividends for 2019 recommended by the Board of Directors for approval by the General Meeting Recognition of high-quality of Shareholders. products, including the certification of Petelinka and Pava-Pava with the Russian quality mark * For Pava-Pava, brand awareness is shown for Moscow and St. Petersburg. www.cherkizovo.com 57 57 Investment in expansion and modernization of production facilities 8,6 RUB billion of CAPEX in 2019 5 new production facilities launched in 2019 120.1 RUB billion Revenue 20.6 RUB billion EBITDA 17.2% EBITDA margin 2.97 Net debt / EBITDA CHERKIZOVO GROUPCherkizovo unites Supply chain PROCUREMENT Cherkizovo Group carries out purchases The requirements of the Charter extend to all of the Group's suppliers. LOGISTICS Cherkizovo uses an efficient logistics in accordance with all relevant Russian If it becomes known that a supplier has system to move animals and animal feed legislation. In addition, the Company stopped complying with the necessary between the Group's facilities and to participates in industry initiatives requirements, the Company ceases to deliver products to customers. On average, aimed at increasing transparency in work with them. the agricultural market. The Company 711 trucks are involved in delivery per day, 20% of which are owned by the Company. is a member of the Association of Bona Fide To ensure the transparency and The Group operates 30 warehouses, 16 of Agricultural Producers and is a signatory to competitiveness of its procurement which are owned by Cherkizovo. The Group the Agricultural Charter regulating the trade procedures, Cherkizovo Group has processes about 170 thousand orders in agricultural products. switched its procurement activities to the monthly, which corresponds to more than TABLE SUPPLIER STRUCTURE, % Tender.pro electronic trading platform. 100 thousand tonnes of transported cargo. In 2019, all sectors of the Group started GRAINS using the platform for procurement. During Together with its partners, the Group is 100 0 100 0 100 0 99 1 94 6 89 11 100 0 VEGETABLE PROTEIN SUPPLEMENTS OILS & FATS VETERINARY PACKAGING FINISHED GOODS INGREDIENTS (MEAT, SPICES, ETC) SEEDS, CROP PROTECTION AND FERTILIZERS Russian Non-Russian 58 the last year, the Company held more than working to optimize transportation costs. 7 thousand tenders, a 2.5 times increase In particular, large containers are used for compared to the previous year. transportation internally within the Group, which reduces the use of packaging Cherkizovo Group has a centralized materials and the environmental impact. procurement function in place. This is a complementary system where procurement is broken down by category Grain segment The Group’s vertically integrated supply and geographical location. The company chain starts with the Grain segment. seeks to work with local suppliers, small The Group purchases seeds, fertilizers and and medium businesses. Specifically, crop protection products in accordance the Group has established a system for with its production plans. The majority purchasing grain from regional producers. of the harvest is used for the production Cherkizovo's specialists find local of feed for the Group's livestock farms. suppliers, assess the quality of goods and organize deliveries to the Company's Our mills source feed ingredients both facilities. In 2019, 35% of all grain was within the Group and from third-party purchased in this way. suppliers. The purchases mostly include All suppliers of the Group are checked for compliance with the requirements of the Agricultural Charter. soybean meal, grain and oils. 52 RUB billion worth of products procured in 2019 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceThe Cherkizovo Group has built an efficient supply chain in line with international best practice that enables us to deliver our products to the shop shelves as quickly as possible. Its smooth operation is ensured by a team of highly qualified experts with extensive experience working in leading international FMCG companies. Poultry and Pork segments and the Tambov Turkey joint venture We use our own vehicle fleet to transport animals and products between the Company's facilities. This is an important Our poultry and pork facilities procure factor in ensuring biosafety. In 2019, feed and other resources necessary for the Group owned 1,466 vehicles. animal breeding. Transportation is closely monitored The Company sells its farmed pigs and controlled by veterinarians, which in the form of livestock (in 2019, this eliminates the risk of biological threats share was 15%). In the Pork segment, spreading along the supply chain. animals are first delivered to slaughter In addition, the Company makes sure that facilities in Penza and Dankov. A part the transportation of animals is humane, of pork carcasses is then sold to third so that they do not suffer injuries during parties, while the remaining portion transportation. is shipped to the Group's meat processing plants. The Group seeks to increase the share of pork supplied SALES Cherkizovo Group is a leading market to in-house production facilities. player selling chicken, turkey and In 2019, Cherkizovo Group successfully integrated Altaisky Broiler into its procurement and logistics system. All the business’ grain is purchased from local suppliers. All other supplies were sourced from proven Cherkizovo suppliers. processed meat products to customers SUPPLY CHAIN In the Poultry segment, including the across Russia. For major orders, we Tambov Turkey joint venture, birds are make direct deliveries straight from our delivered to slaughter facilities, where meat processing plants. Smaller orders they are processed and then sold to are packed in the BICOM distribution retailers. The company balances seasonal centre in Moscow and in the Company's fluctuations in demand for its products subsidiaries in St. Petersburg, Krasnodar, using its freezing facilities. Yekaterinburg, Ulyanovsk and Penza. Meat Processing segment The Meat Processing segment is the In 2019, the Company implemented shipments based on the SAP system in final element of our supply chain. all warehouses, and also implemented It involves the production of finished system SAP EWM (Extended Warehouse products, including sausages and ready- Management). to-cook items, from the components produced by our animal breeding segments. The meat processing products are supplied to retailers (mainly nationwide chains) and other customers. OUR VEHICLE FLEET For more sales information see page 84. DEVELOPMENT PLANS Cherkizovo Group continues to improve the logistics function and supply chain processes through better planning and automation. The Company reduces logistics costs by organizing joint shipments for its segments, by improving transport utilization and leveraging advanced warehouse management systems. As always, the function's primary focus is on ensuring on-shelf product availability, optimized costs, food safety, including cold chain management, and workforce safety and security. The Company also plans to increase procurement from local suppliers. In particular, we aim to increase the share of grain purchased from local producers to 50% of total procurement volume. www.cherkizovo.com 59 CHERKIZOVO GROUPCherkizovo unites Investment Program Cherkizovo Group is continuing to run its Apart from production facilities, the Group major investment program for business invests in company-wide IT and personnel SHARE OF INVESTMENTS IN MAIN SEGMENTS, % development, including projects to build development projects. In 2019, the new production capacities, improve Company rolled out SAP HR software at operational performance, and ensure six of the Group’s companies. The rest are proper biosafety and high product quality. scheduled to receive it in 2020. With SAP HR, we are seeking to ensure centralized Our key projects focus on Moscow, human capital management throughout the Altai Territory, and the Moscow, the Group and store information on all Lipetsk, Penza, and Tambov regions. employees a shared database. In another The program’s top priority is to increase major project, we deployed SAP Extended the output of branded and high value- Warehouse Management (SAP EWM) added products, and boost operational for better warehouse forecasting, efficiency. streamlined product delivery, and supply volume optimization. The automated meat processing plant in Kashira marks a milestone for the The Company is investing heavily in Group and Russia’s meat industry its vehicle fleet, including leasing new as a whole. and replacing old vehicles. In 2019, we purchased new agricultural machinery, In 2019, the Group's investment cycle feed trucks, and animal transporters. for the new production facilities was at Around RUB 0.6 billion was invested. its final stage, thus reducing the total spending from RUB 10.6 billion to RUB Our investment program relies on the 8.6 billion. Group’s own resources and borrowings. 8.6 RUB billion total volume investments 9.0% 21.6% 12.9% 8.4% 15.5% 32.5% Poultry Meat processing Pork Feed Grain Other % 21.6 15.5 32.5 8.4 12.9 9.0 2019 HIGHLIGHTS Pork Four nursery and finisher sites built in the Penza Region, marking the end of another production ramp-up cycle in the Pork segment Tambov Turkey JV An expansion project launched to ramp up the capacity by 50% to 82 thousand tonnes from 2021 Meat processing New bacon and sausage slicing and hot-dog packaging lines commissioned Poultry Investments in the acquired assets. 60 Investments in production projects by segment are described in the operating results sections on page 64. Information on personnel development projects is provided on page 114. 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governance Quality Management System Cherkizovo Group is committed to delivering high-quality, competitive products on par with the best international standards to meet the highest requirements 2019 HIGHLIGHTS and expectations of our customers and consumers and ensure achievement of Quality Management System In 2019, Cherkizovo Group developed Animal Welfare The Company underwent production the Company’s strategic goals. In 2019, we a comprehensive quality management certification according to McDonald’s established a centralized Quality Directorate KPI framework covering the Company’s standards and became one of Russia’s first to oversee compliance with the Group’s operations from farm to fork across all meat producers to be certified against the quality policy. It has brought together segments. We enhanced our supplier Animal Welfare standards. Currently, only the quality management functions of the management system in line with the five production facilities in Russia, including following departments: best global practices by introducing two owned by Cherkizovo, are Animal a risk-oriented approach. The Company Welfare-certified. Designed to improve • pork slaughtering and processing, launched a process to handle supply meat quality, these standards cover animal inadequacies in the Meat Processing treatment practices at every stage from • poultry and turkey slaughtering segment and at Tambov Turkey. Starting farm to processing. The certification is and processing, from Q1 2020, it will be extended to the mandatory for major global companies and • feed mills and grain elevators, our risk-oriented approach to introduce Poultry segment. In 2020, we plan to use fast food chains. • centralized certification and standardisation. quality control for incoming supplies. Our employees received extensive training in Animal Welfare and completed the Bristol In 2019, we started a project to improve Animal Welfare Assurance Program. The the quality of our logistic processes. courses were attended by 100 employees The Directorate is also responsible for During the first stage, we introduced and managers from the Poultry segment. drafting methodologies and creating centralized temperature monitoring in a centralized quality management system, warehouse logistics and invested further as well as developing and implementing to enhance our cold chain. quality improvement programs. Cherkizovo Lab is also involved in the In the reporting year, Cherkizovo also Directorate's activities. launched a large-scale project to assess product quality in stores with the help of The Directorate’s management the Chicago digital platform. In 2020, we framework capitalizes on the expertise plan to pilot machine vision for quality of international majors while also paying control at production lines. attention to the business structure and legacy of Cherkizovo Group. . ≈100 employees and managers from the Poultry segment received training under the standard Animal Welfare www.cherkizovo.com 61 CHERKIZOVO GROUPCherkizovo unites Quality Management System Laboratories Following the creation of the centralized Certificates Our main achievement in the reporting Personnel Our employees are key to delivering Quality Directorate, the Company year was successful certification by superior product quality. At Cherkizovo relaunched its network of local food industry giants – KFC, McDonald’s, Group, each employee is responsible laboratories under the auspices of Burger King, and Cargill – which have very for ensuring product quality and Cherkizovo Lab. This will expand the list stringent requirements for all production safety while also playing an active role of available tests in 2020 and significantly processes, including the humane in supporting and continuously improving reduce the associated costs, as well as treatment of animals. the waiting time for test results. Moreover, the Company’s quality and food safety management systems. In 2020, we local laboratories can now also contribute All of the Poultry segments and Tambov plan to continue enhancing our quality actively to projects aimed at improving Turkey's slaughterhouses are certified management system. We are looking cultivation and processing across the against FSSC 22000:2011. to further reorganize and strengthen our Company’s assets. Cherkizovsky Meat team and improve the expertise of our Processing Plant’s laboratory confirmed In 2019, new Group assets were certified existing personnel. The Company will its certification under GOST R / ISO to the standard, including the facilities place major emphasis on promoting 17025. The lab’s equipment and staff in Belgorod and Kursk, as well as the a production quality culture and competence received high marks from automated plant in Kashira. On top of employee training. Our continued external auditors that, all of our meat processing plants focus on enhancing the safety and are certified under GOST R ISO 9001 – quality assurance system should take 2008 (ISO 9001). the Company to the next level. The Vasilyevskaya poultry farm has In November 2019, the Group held its been repeatedly confirming its halal first Quality Day, with events taking place certification. at 19 sites across 10 regions, as well as the Company’s offices. Over 2,000 people took part in the Quality Day. >500 people work in the Quality Assurance ranging from supervisors and lab assistants to managers аs at the end of 2019 62 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceElements of the Quality Management System Element Description Hazard Analysis and Critical Control Points (HACCP) Good Manufacturing Practice (GMP) Food Safety System Certification (FSSC) HACCP is a systematic preventive approach to ensuring food safety and addressing biological, chemical and physical hazards in production processes. It has been implemented across the Group’s production facilities. Our production processes comply with good manufacturing practices. Our effective management structure provides for development of robust food safety systems as part of the overall effort to ensure product quality and food safety. Animal Welfare (Humane Husbandry) These standards require compliance with five principles of humane treatment of farm animals and birds throughout their life, helping reduce loss rates and meet the requirements of global FMCG companies. Mercury, a government system for electronic certification of animal products Laboratory control Cherkizovo Group has successfully implemented the system across its supply chain. All stages of the production process feature laboratory studies on an ongoing basis to ensure regulatory compliance. In addition to mandatory control procedures, the Company uses voluntary product control methods, including at Cherkizovo Lab. Employee training The Company offers its employees regular in-person and online training sessions in food safety and quality standards. Requirements for suppliers Consumer feedback All new and current suppliers are required to undergo regular evaluation for regulatory compliance and ability to supply products meeting the quality and food safety requirements. We have implemented an efficient consumer feedback management system. All complaints and requests are promptly reviewed by the quality management functions at our production facilities. We regularly monitor actions taken to address consumer complaints. Quality culture We make sure that employees realize the importance of quality assurance in their work. Quality is everyone’s responsibility. www.cherkizovo.com 63 CHERKIZOVO GROUPCherkizovo unitesMEAT PROCESSING POULTRY PORK TURKEY GRAIN FEED Poultry 2019 PERFORMANCE The Poultry segment showed robust EFFICIENCY IMPROVEMENT Ensuring uninterrupted business was FINISHED PRODUCT SALES, thousand tonnes growth in 2019, with sales gaining 22% a key efficiency priority for Cherkizovo in to reach 663 thousand tonnes vs. 544 2019. Around 80% of our reproduction thousand tonnes in 2018 thanks to the and rearing facilities received backup assets acquired late into the year and power sources, with the remaining 20% 2019 2018 2017 efficiency improvement initiatives. to follow suit in 2020. The average sales price increased by 9% Automated outage notifications are now to RUB 105.98 per kg, driven by a larger available throughout the segment thanks share of higher value-added products. to the newly installed control systems. REVENUE FROM FINISHED PRODUCT SALES, RUB bln In the reporting year, the Company continued standardizing technology processes across its sites. Standard operating procedures were outlined fully for the Poultry segment, and a distance learning system was made available for its on-site employees. 2019 2018 2017 AVERAGE SALES PRICE, RUB/kg The Group continued concentrating its efforts on high product quality, with the Poultry segment focusing on poultry weight improvement, production efficiency, and genetic changes in crossbreds. 2019 2018 2017 106.0 96.9 88.8 OPERATIONAL PERFORMANCE, t Indicator Сhicks per hen housed Hatchability, % Broilers days on feed Feed conversion rate (FCR) Yield, % Livability, % Live weight, gr 64 64 2017 118 2018 111 2019 19/18, % 117 3.6% 78.0% 79.1% 79.5% 0.4 p.p. 37.4 1.63 38.3 1.66 38.4 1.61 0.3% -2.8% 85.4% 85.8% 86.4% 0.7 p.p. 95.4% 95.2% 94.6% -0.7 p.p. 2,267 2,323 2,401 3.3% Thanks to the measures taken, the segment set all-time records for the feed conversion rate and average daily weight gains. 2 Annual report 2019 663 544 523 70.3 52.7 46.4 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governancepoultry farms thousand tonnes Sales volume RUB/kg Average sales price 70.3 RUB billion Revenue Revenue CAGR Sales and brand development At Сherkizovo Group, we seek to increase the share of higher value-added products in our total output. In 2019, revenues from Petelinka and Kurinoe Tsarstvo grew by 13% and 3%, respectively. Modern trade remained our primary sales channel, accounting for 45% of products sold. HoReCa and exports are also high on the Company's agenda. In the HoReCa segment, we have been working with some of the largest fast food companies, including KFC, Burger King, McDonald’s, and pizza chains. In 2019, HoReCa sales rose by 95%, reaching 7% of the Poultry segment's total revenue. We are one of the few Russian companies able to comply with the most stringent requirements set by leading foreign players in the fast food universe * – and the Group looks to strengthen its relationships with these customers. In 2019, exports added 131% to account for 5% of the segment's sales as the Group’s companies were cleared to sell in China. Looking ahead, we plan to grow our exports, with higher value-added products as one of the drivers. Cherkizovo Group seeks to improve the quality of its premium brands while also gaining a stronger foothold in export and HoReCa markets. New technologies allow us to comply with the higher production and quality requirements set by new customers. In 2019, we adopted the following to this end: • Animal Welfare principles • QA metrics for meat * For further details on how we comply with these requirements, see the #Quality Management System section, page 61. www.cherkizovo.com 65 65 CHERKIZOVO GROUPCherkizovo unites POULTRY PORK MEAT PROCESSING TURKEY GRAIN Poultry FEED POULTRY SALES, % 1% 23% 29% 24% 24% BRAND 2019 Petelinka Kurinoe Tsarstvo Other brands Non-branded products Other 50% 26% 7% 6% 11% CHANNELS 2019 Modern Trade HoReCa Export Traditional Trade Wholesale Trade 66 BIOSECURITY Cherkizovo Group is committed to ensuring biosecurity under a dedicated project covering the entire value chain, from feed mills, logistics and warehouses to reproduction, rearing and slaughter facilities. This project draws on the world-class poultry expertise of Cargill, Phytobiotics, Alltech, Kemin, Biomin, and WIC. KEY INVESTMENT PROJECTS We do our best to minimize epizootic risks and protect the bird population by ensuring compliance with regulatory Altaisky Broiler integration Altaisky Broiler has begun using a new requirements and modern biosafety crossbred and implemented new standards, strict access control, and technology procedures and practices thorough disinfection. in line with the Company's standards. Beyond upgrades, we shared our production experience by enhancing PRODUCTION IMPROVEMENTS Cherkizovo Group continued improving the team of managers and technologists, training staff, and introducing standard its production capacities in the Poultry operating procedures. The upgraded segment, with the Vasilyevskaya and Altaisky Broiler was able to produce Petelinskaya farms, Lisko Broiler and 68.3 thousand tonnes of live-weight Kurinoe Tsarstvo Bryansk, receiving poultry, beating its 2019 target by new rearing and processing equipment. a wide margin. In particular, Kurinoe Tsarstvo began producing chicken strips for Burger King. In 2019, no cases of avian influenza were reported at the Group’s facilities. 2 Annual report 2019 % 23 24 24 29 1 % 50 7 6 11 26 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governance New assets In 2019, Cherkizovo Group acquired Rovensky Broiler for RUB 1.7 billion. Located in the Belgorod Region, this facility is capable of producing 80 million hatching eggs per year, which fully covers our demand for hatching eggs following acquisitions in 2018. RUB billion Investments in the segment PLANS Cherkizovo Group looks to expand its sales in the Siberian Federal District and abroad while also increasing the share of higher value-added products in its sales to HoReCa customers. The two goals are set to be furthered through a capacity ramp-up at Altaisky Broiler. Its maximum annual output is slated to reach 100 thousand tonnes of live-weight poultry, which represents a roughly twofold increase in the output. www.cherkizovo.com 67 CHERKIZOVO GROUPCherkizovo unitesPork 2019 PERFORMANCE In 2019, Cherkizovo Group’s Pork segment EFFICIENCY IMPROVEMENT Cherkizovo has built one of the most FINISHED PRODUCT SALES, ‘000 tonnes delivered strong results. Production efficient pork production systems grew by 15% to 284.2 thousand tonnes, globally. In 2019, the Company and sales * increased by 16% to delivered all-time high results across 274.6 thousand tonnes. This growth was most key performance indicators a result of an increase in mated inventory highlighted by achieving a 90% farrow (11%) and increase in herd efficiency (5%). rate across the entire system which The difference between production and includes our multiplication system. sales is because we run an internal gilt The commercial system utilizes PCAI multiplication and development program (Post Cervical Artificial Insemination) and animals are retained instead of sold. that allows us to use less commercial semen than traditional AI (Artificial 2019 2018 2017 275 237 200 The average sales price decreased by 9% insemination). to RUB 89.14 per kg despite a growing cost REVENUE FROM PRODUCT SALES, RUB billion of key feed components. The price drop The key factor for these results is our was largely triggered by stiffer competition commitment to focus on investing in in the industry, with key players continuing genetic improvement and creating to expand their production capacities a high health system so that our animals despite stagnant purchasing power and can achieve their genetic potential so 2019 2018 2017 24.5 23.3 18.7 lack of exports. we can produce the highest quality pork possible. It takes years before seeing the results of genetic services investments on the shelf, so we feel confident that we will continue to be the market leader in providing the highest OPERATIONAL PERFORMANCE, t quality pork as we continue to make our AVERAGE SALES PRICE, RUB/kg genetic program and health services strategy as our top priority. 2017 2018 2019 18/19, % 2019 2018 2017 89.14 98.20 92.12 Productive sows, (Mated Inventory) 72,375 72,928 80,799 Piglets born alive per sow per litter Pigs weaned per sow farrowed Pigs Marketed per mated female Average weight, kg Kg sold per sow Feed conversion finisher 68 12.5 10.5 24.5 119.5 2,925 2,6 13.1 11.2 27.5 123.2 3,354 2,56 13.4 11.6 27.9 127.1 3,508 2,55 11% 2% 3.5% 1.5% 3% 5% 0% * Sales to both the Group’s entities and third parties. 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governance 13 pork production complexes 275 thousand tonnes Sales volume RUB/kg Average sales price RUB billion Revenue Revenue CAGR 21 combined nursery and finisher sites 2 sow farms In 2019, Cherkizovo Group joined Pipestone Applied Research, the world's most respected swine research organization globally. This decision ensures that we continue to challenge our own SOP practices based only on research and science so that we are always utilizing best practices. www.cherkizovo.com 69 CHERKIZOVO GROUPCherkizovo unitesPork In 2019, the number of productive sows The Group is in process of converting increased by 11% to 80,799. The number the entire system to be needle free of live born piglets per sow per litter also technology by introducing the Pulse increased to 13.4, up 2% year-on-year. needle free system to our operations. At the same time, total pigs marketed per This investment ensures that we are mated female increased by 1.5%. Another extremely accurate when it becomes solid result was a 5% growth in kg sold necessary to administer a treatment. per sow to 3,508 kg. The Pulse needle free system also QUALITY AND SAFETY Cherkizovo's pig farms boast the increases employee safety and enhances the groups health services strategy. highest livestock sanitary status in Cherkizovo uses only its own vehicle fleet Russia enabling them to be classified to transport livestock, which eliminates as Compartment IV facilities in terms potential spread of infections from third of biosafety. We maximize quality and parties. The Pork segment operates ten safety at all stages of production, as truck wash stations, where our vehicles well as during livestock transportation. are fully disinfected. Our trucks are To this end, the Group has developed properly equipped to transport livestock KEY INVESTMENT PROJECTS internal standards for the protection and their speed and routes are controlled and improvement of animal health and by GPS tracking units. regularly updates them depending on the current epizootic situation. The Group's assets are reviewed by internal and external bio-security audits. The division has a monthly bio-security committee meeting that reviews the audit results and focuses on continuously improving our bio-security program. The programs are led by the groups highly qualified leaders who are regularly asked to speak at key global events as a result of Cherkizovo’s success. For more details on Cherkizovo Group's quality management system, please see: Quality Management System, page 61. Wean to Finish sites in the Penza Region In 2019, Cherkizovo Group continued to develop its pork presence in the Penza Region. During the year, we built and commissioned 5 wean to finish sites. Construction was faster and more efficient than at previous sites, reducing our construction costs. In total, the project consists of 7 sites in the Penza region. The sites are based on a standard design maximizing the level of biosafety. Each of the sites has a capacity of c. 45 thousand market hogs and 5.8 thousand tonnes of products. 70 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governance RUB billion. Investments in the segment * All of the segment's employees are tested for the knowledge of the biosafety standards and standard operating procedures in the segment. PLANS Cherkizovo Group’s mid-term strategy for the Pork business is to boost performance by using cutting-edge production facilities and putting in place one of world’s best finisher nutrition programs. Cherkizovo Group is finishing production ramp-up cycle in the Pork segment. In 2020, the Company is considering building two more wean to finish sites in Penza Region. Further improvement of animal breeding practices during all production phases is our top priority in the segment. The Group will continue maintaining the maximum possible biosafety level at its assets. The division will continue to focus on ensuring our genetic program. By 2021, the Company plans to complete our transition to the needle- free injection system. * Excluding VAT. www.cherkizovo.com 71 CHERKIZOVO GROUPCherkizovo unitesMeat Processing CORE PRODUCT TYPES 13.2 93.0 107.7 2019 PERFORMANCE In 2019, sales in the Meat Processing segment increased by 7% reaching 245.6 thousand tonnes. The growth can mostly be attributed to a 32% rise in half- carcass sales on the back of increased pork production. The average sales price * stood at RUB 162.96 per kg, down 4% on the 2018 level of RUB 169.94 per 45.48 134.05 187.87 45.48 kg due to an increase in the sales share of half-carcasses, which offset the increase 31.8 in the price for sausages and cuts. PRODUCTION AND SALES OF FINISHED PRODUCTS In 2019, Cherkizovo Group maintained leadership in meat processing, including in the lucrative dry and smoked sausage markets. The Group also consolidated its hold on the hot-dog, boiled sausage, ham and bacon markets. SALES, ’000 tonnes AVERAGE PRICE * , RUB/kg 2019 2019 Sausages Cuts Half-carcasses By-products Year-on-year, % Year-on-year, % 1 (21) 32 8 Sausages Cuts Half-carcasses By-products 2 3 (9) (16) The Cherkizovo brand revamp was one PRODUCTION AND SALES OF In the reporting year, sales of finished of the Company’s key developments RAW MEAT AND READY-TO-COOK products stabilized and once again began in 2019. While refreshing its brand to grow. As a result, the total volume image, the Group also took the time PRODUCTS Production of meat and by-products of sales rose by 1% compared to the to make its labelling more informative, increased by 12% to reach previous year, reaching 107.7 thousand and its packaging more practical. At the 138.0 thousand tonnes. At the same tonnes. The average sausage price core of the brand are two key product time, sales of cuts dropped by 21% remained virtually unchanged in 2019, ranges: ready-to-cook and ready-to-eat. to 31.8 thousand tonnes, while rising by only 2% to RUB 187.7 per kg. These ranges are enjoying a surge in half-carcass sales grew by 32% The 2018 acquisition of a 75% stake of the Company’s plans. Going forward, sales also witnessed an 8% increase, in Samson – Food Products has been Cherkizovo Group will continue to reaching 13.2 thousand tonnes. extremely fruitful for the Company expand and develop its product ranges popularity, placing them at the forefront to 93.0 thousand tonnes. By-product allowing it to consolidate its position in the St Petersburg and North-Western regional markets. The newly launched Samson brand product range has perfectly complimented Cherkizovo’s existing ranges. * Excluding VAT. 72 Before After For more details on Cherkizovo Group's rebranding program, please see: Product Strategy, page 84. 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governance In 2019, the productivity levels of the Dankov Meat Processing Plant greatly increased due to the measures to optimise its efficiency. The average processing speed rose by 20% to 240 heads per hour, thus reducing downtime. Employee working conditions also improved after the introduction of a new staff incentive framework. slaughter and meat processing plants thousand tonnes Sales volume RUB/kg Average sales price RUB billion Revenue Sales growth www.cherkizovo.com 73 CHERKIZOVO GROUPCherkizovo unitesMeat Processing SALES IN THE MEAT PROCESSING SEGMENT BY CHANNEL, % SALES IN THE MEAT PROCESSING SEGMENT BY BRAND, % 1% 4% 13% 49% 32% 43% 41% 4% 4% 3% 4% Modern Trade Wholesale Trade Traditional Trade Export HoReCa % 49 32 13 4 1 Cherkizovo Myasnaya Gubernia Imperiya Vkusa Other Private labels Non-branded products % 43 4 3 4 4 41 QUALITY ASSURANCE All of Cherkizovo Group’s meat processing assets are certified under the FSSC 22000 scheme, which regulates food safety standards. This confirms the Group’s compliance with European standards in terms of production processes and employee training. Cherkivozo Group maintains its high quality of products by conducting daily tasting panels, employee training, and audits of compliance with technological regulations, and controlling raw materials and packaging quality. What sets the Group apart is the availability of own- produced meat such as pork sourced from its own farms to guarantee the highest quality and freshness of ingredients. EFFICIENCY IMPROVEMENT In 2019, Cherkizovo Group remained committed to improving production efficiency and ensured all of its plants have a lean manufacturing system in place. At a number of its production facilities, namely the Cherkizovsky Meat Processing Plant and the Dankov Meat Processing Plant, a Total Productive Maintenance system is in place, allowing the Company to dramatically reduce the downtime throughout the entire production chain, from slaughtering to product packaging. In 2019, the productivity levels of the Dankov Meat Processing Plant greatly increased due to the measures to optimise its efficiency. The average processing speed rose by 20% to 240 heads per hour, thus reducing downtime. Employee working conditions also improved after the introduction of a new staff incentive framework. For more details on Cherkizovo Group's quality management system, please see: Quality Management System, page 84. 74 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governance 1.3 RUB billion. Investments in the segment * KASHIRA PLANT The Kashira plant fully complies with the Industry 4.0 vision. Its high level of automation has significantly increased productivity and minimized the human factors, leading to an increase in the quality and biosafety of the products. The Company is able to guarantee such a high level of biosafety by carefully monitoring the quality of feedstock, either produced internally or sourced from third- party suppliers. The RFID system allows the Company to keep track of each and every stock unit, tracing the feedstock type, mass and temperature requirements. In 2019, the Kashira plant was highly commended by the SAP Innovation Awards. This prestigious award is presented to projects that have achieved a remarkable technological breakthrough in their industry. To lead the market, we have to make delicious products. We cannot compromise on taste. * Investments are shown net of VAT. www.cherkizovo.com KEY INVESTMENT PROJECTS Developing the capacity of the Cherkizovsky Meat Processing Plant In the reporting year, the Cherkizovsky Meat Processing Plant continued to implement projects aimed at boosting production output and increasing operational efficiency. In 2019, two slicing lines were installed at the plant – one for bacon and one for smoked sausage. In addition, a sausage packaging machine was made operational. 2019 also saw the start of Cherkizovo Group’s packaging equipment upgrade program. The new equipment will not only allow for a reduction in production costs, but also for the shrinking of the Company’s ecological footprint, due to the use of less packaging materials. The project will be completed in the first half of 2020. PLANS The Group’s 2020 priorities remain the same and include consolidating its market position and increasing the share of higher value-added products. Next year, Cherkizovo Group also plans to maximize utilization rates at the Kashira meat processing plant. 75 CHERKIZOVO GROUPCherkizovo unitesGrain and Feed GRAIN In 2019, Cherkizovo’s Grain segment In crop cultivation, the Group leverages intensive farming technologies, organic HARVEST VOLUMES, thousand tonnes performed strongly, with the Group’s land and non-organic fertilizers, high-yielding bank growing to 300 thousand hectares heirloom and hybrid seeds. thanks to land purchases in the Lipetsk and Penza regions, and farmed land reaching 217 thousand hectares. 2019 2018 TOTAL LAND BANK, ‘000 ha Gross yield added 24% to reach 593 thousand tonnes. Optimized crop rotation, higher yield levels, and a slight expansion of cultivated land resulted in increased harvests for most crops, especially wheat and corn. 2019 2018 Sales were down by 25% to 524 thousand YIELD, t/ha tonnes, while the average sales price rose by 11% to RUB 11.02 per kg. The increase was attributable to a bigger share of the high-margin sunflower in the sales mix and a surge in corn prices. WINTER WHEAT SPRING WHEAT consumed internally by the Group's other segments, and soybean and sunflower accounting for the bulk of external sales as high-margin crops. In planning its annual sowing campaigns, the Group takes into account both feed demand and CORN crop margins. SOYBEAN In 2019, we continued to expand production of all key crops, with crop areas for wheat, sunflower and soybean SUNFLOWER seeing the largest growth by 18%, 57% and 29%, respectively. At the same time, the Group stopped growing some of its non-core crops such as buckwheat, chickpea and lentil. GRAIN ELEVATOR CAPACITY, thousand tonnes 2019 2018 CROP AREA, ‘000 ha WHEAT CORN SUNFLOWER SOYBEAN +3% 300 290 4.5 4.2 3.8 3.2 8.2 7.0 1.9 1.5 3.0 2.5 2019 2018 2019 2018 +24% 593 480 977 975 84 78 12 9 33 32 25 22 76 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCherkizovo's Poultry and Pork segments fully rely on feeds produced within the Group. A third of our demand for animal feed – grains and oilseeds – is satisfied from our own harvests. 8 Feed mill 217 thousand ha Farmed land 24% Harvest volumes growth 593 th tonnes The gross yield 11.02 per kg The average sales price www.cherkizovo.com 77 CHERKIZOVO GROUPCherkizovo unitesWINTER WHEAT SPRING WHEAT CORN Grain and Feed SOYBEAN SUNFLOWER CROP SALES 24.1 6.9 37.9 277.1 83.4 94.6 2.2 mln tonnes feed production 18% grew feed production in 2019 In 2019, Cherkizovo Group continued to standardize processes across its Grain assets, completing the roll-out of standard operating procedures (SOPs) – a set of step-by-step instructions seeking to help employees carry out complex routine operations in the right way. SOPs are instrumental in securing sustainably high product quality and strong performance across all the Group’s assets. We also kept upgrading and expanding our fleet of agricultural machinery. SALES, thousand tonnes 9.02 8.76 17.09 8.62 21.58 22.60 FEED The Group's feed production capacities ensure full self-sufficiency for the Poultry KEY INVESTMENT PROJECTS Cherkizovo Group continued to further and Pork segments, with vertical integration the project focused on making its own facilitating cost control and helping us make eco-friendly fertilizers and carried on with high-quality biosafe products. We monitor the investment project to revegetate and feed quality at every stage, from growing ameliorate lands, delivering on all of its crops to delivery to breeding farms. plans and targets for 2019. The Feed segment is efficient in improving the feed quality and ensuring well-timed delivery to production sites in other segments. This helps keep our animals in good health and offer great products to our AVERAGE SALES PRICE, RUB/kg customers. Wheat Corn Sunflower Barley Soybean Other OPERATIONAL PERFORMANCE Feed mills, pcs * Feed, thousand tonnes * Excluding mills of Tambov Turkey 78 2018 2019 19/18 8 8 1,830 2,152 18% 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governance 18% grew feed production in 2019 To boost yield levels, the Company relies on a combination of the following: • using its own organic fertilizers, • ensuring optimum soil density, • amelioration, • improving pH values for soil, • precision planting. 1.8 RUB billion RUB billion Investments Investments in the segment in the segment PLANS In 2020, the Group plans to start building an oilseed processing plant in the Lipetsk Region. On top of that, this facility is expected to make oil. To supply it with feedstock, we are going to focus on soybean cultivation and increase the share of this crop in our mix. www.cherkizovo.com 79 CHERKIZOVO GROUPCherkizovo unitesTurkey 2019 PERFORMANCE ВIn 2019, Cherkizovo Group continued to The turkey meat products are sold SALES, thousand tonnes under the Pava-Pava brand positioned gain ground in the Turkey business jointly as a premium offering made from with Spain’s Grupo Fuertes. high-quality meat with no artificial food additives. Moscow and St. Petersburg are After reaching its design capacity in 2018, the biggest contributors to the Pava-Pava Tambov Turkey kept the pace, selling sales. In 2019, the Group maintained 39 thousand tonnes of products in the leadership in these regions, having won reporting year. The average sales price 42.5% and 37.8% of the Moscow and increased by 14% to RUB 169.23 per kg St. Petersburg markets, respectively. primarily due to lower supply following the This was driven by effective marketing 2019 2018 2017 39.4 39.3 26.3 shutdown of turkey operations by one of and brand development. REVENUE FROM SALES, RUB mln the Company’s competitors. At the same time, demand from retailers and hence With new production capacities to be consumers remained strong. launched going forward, the Company Going forward, Cherkizovo plans to ramp geography in the Volga and Central up production capacities and increase Federal Districts. plans to gradually expand its sales 2019 2018 2017 output. In line with this vision, we already started implementing the second stage of Tambov Turkey in 2019. 6,716 5,815 3,898 OPERATIONAL PERFORMANCE Indicator 2017 2018 2019 19/18 Meat yield from live weight, % Feed conversion rate per kg of weight gain Growing period, days Average daily weight gain, g Survival rate, % 73.4 2.44 112 122 92.2 74.0 2.47 116 124 91.8 78.1 2.52 118 115 4.1 2% 2% -7% 91.03 -0.77 p.p. In 2019, Cherkizovo Group ranked second by the volumes of turkey produced in Russia. 80 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governance1 full cycle production facility 39 thousand tonnes Sales volume 169,2 per kg Average sales price 6,7 RUB billion Revenue Revenue CAGR Healthy food Turkey is a lean and hypoallergenic meat containing much less fat compared to alternatives and offering a wide variety of useful vitamins and minerals, and so enjoys increasingly strong demand in Russia and worldwide amid growing interest in healthy lifestyles. Pava-Pava products are made from the special extra lean Hybrid Grade Maker turkey grown in the Tambov Region, one of Russia’s most pristine areas. In 2019, the Pava-Pava brand won the Product of the Year award as the best Healthy Food product in the Turkey Meat category. www.cherkizovo.com 81 CHERKIZOVO GROUPCherkizovo unitesTurkey EXTENDING THE PRODUCT RANGE The Pava-Pava product line offers a diverse range of products, including escalopes, SAFETY AND EFFICIENCY IMPROVEMENTS Tambov Turkey's competitive advantages thinly cut meat, medallions, steaks, ground include full-cycle vertical integration meat, cutlets, sausages, kupati, and chilled helping us to keep a close eye on the cuts, as well as ready-to-cook products quality of products across the production and packaged products for roasting. chain – from feed production and bird breeding to manufacturing. For a while, products that do not require much cooking time have been gaining Pava-Pava products comply with all traction. In line with this trend, Tambov applicable quality standards, both in Turkey continued to expand the range Russia and globally, with Tambov Turkey of ready-to-cook turkey products. The holding ISO 22000:2005 and FSSC 22000 four additions in 2019 were Chicken Kiev certificates for its food safety management cutlets, wings for roasting, Bavarian turkey system. A HACCP program along with KEY INVESTMENT PROJECTS Russia’s turkey market has a bright thighs, and turkey breast schnitzel for a number of other initiatives are also in outlook. Albeit rising significantly, per- roasting. When developing new turkey place to monitor bird health. capita turkey consumption in Russia offerings, the Company relies on traditional currently amounts to roughly 2 kg – recipes for other types of meat and draws Compliance is achieved through the use considerably lower than, for example, on the experience of other countries where of advanced production technologies, in the EU, where the number stands at turkey meat is highly popular. best-in-class European equipment, and 4–6 kg. It means that the Russian market providing the birds with the highest-quality is far from being saturated and will feed and clean artesian water. continue to grow. In 2019, Cherkizovo Group started implementing the second stage of Tambov Turkey. The project will involve building one nursery and three finisher sites and ramping up the incubator, slaughtering and feed mill capacities by 50%. In 2019, the Company signed an agreement with the Tambov Region administration and started building two of the sites. The new facilities are expected to be commissioned in March 2021. Once at full design capacity, Tambov Turkey will see its annual live-weight output rise by 29 thousand tonnes to over 80 thousand tonnes. 82 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceTambov Turkey takes consistent steps to improve production efficiency. In 2019, it stayed focused on the following: • ensuring product safety, • further improving labor efficiency, • enhancing profitability, • Increasing products' shelf life RUB billion Investments in the segment PLANS In 2020, our key development priority for the Turkey business will be implementing the second stage of Tambov Turkey (set to be commissioned in Q1 2021). Additional production capacities will strengthen the Company’s foothold in the turkey market and support our mid-term expansion into new regions. Cherkizovo Group will continue to further expand its turkey offering focusing on ready-to-cook and ready-to-eat options and the HoReCa segment, and will launch eight new products in 2020. www.cherkizovo.com 83 CHERKIZOVO GROUPCherkizovo unitesProduct strategy Cherkizovo Group produces pork, success of trial sales, regular purchase chicken and turkey products that are volume, and consumer loyalty. The suitable for all occasions – from snacks Company monitors the performance of to festive meals. each brand and adapts its development strategy accordingly. Given the growing pace of life, we are actively developing our production of In 2019, the Group continued to develop its ready-to-cook and ready-to-eat products. key brands, promoting them in particular via For our customers, a healthy lifestyle is digital channels – bloggers, social media becoming increasingly important, so we accounts and targeted advertising. The are focusing on producing chicken and year’s main achievement was the relaunch turkey products befitting of a healthy diet. of the Cherkizovo brand. Popular Instagram bloggers, including moms, pediatricians and celebrities, published photos and videos on their pages with delicious and healthy Pava-Pava turkey and Petelinka chicken recipes. These publications were seen by several million users. The high quality of our products is ensured by strict regulatory compliance control at all stages of production and the use of natural ingredients. In 2019, we continued to develop our range of branded and high value-added products. Cherkizovo Group’s strategic goal is to bring the share of these products in total sales to 80%. BRAND DEVELOPMENT The Group's marketing strategy is aimed at building megabrands, which will become clear leaders in their particular market segment. The Company is focused on developing the Cherkizovo, Petelinka and Pava-Pava brands, each of which already holds high positions in its respective market segment. The Group takes an individual approach to promoting each of its brands. Marketing priorities are determined by the health of the brand – a complex measure that takes into account the level of brand recognition, brand visibility, THE GROUP’S SALES BY TYPE, % Non-branded products 30% Niche brands and other products 27% Export HoReCa Private Label ( 2 ) 5% 5% 5% Pava-Pava 7% Petelinka 21% 70% Branded products 55% Kurinoe Tsarstvo 22% Cherkizovo 23% 2019 total revenue split 2019 branded value added products split 84 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCherkizovo Group’s number one priority is the quality of its products. We strive to be the very best for our customers and to do our utmost to fully take into account their taste preferences. To this end, we constantly improve our product range, develop new recipes in accordance with global and Russian trends and work to interact openly and honestly with our customers and partners. MARKET SHARE OF THE GROUP'S KEY BRANDS, % Rebranding of Cherkizovo In 2019, the Group conducted a major rebranding of its flagship brand, Cherkizovo. The changes affected not only the appearance of the product, but also its content – we improved the packaging, changed the logo and refined the recipes of our sausages and ready-to-cook pork products. The key message of the revamped brand was the constant care of customers and their families that Cherkizovo provides through its consistently high-quality products. The Cherkizovo brand's new logo is the Heart at Home. The logo emphasizes that the quality and variety of our food brings people together and creates positive emotions that can accompany any meal. Thanks to the rebranding, Cherkizovo's products have become more visible on shop shelves. RUSSIAN MARKET KURINOE TSARSTVO 2019 2018 PETELINKA 2019 2018 16.1% 14.7% 5.4% 4.9% CHERKIZOVO BRAND SAUSAGES 2019 2018 6.4% 6.8% MOSCOW AND ST. PETERSBURG MARKETS PAVA-PAVA MOSCOW 2019 2018 ST. PETERSBURG 2019 2018 CHERKIZOVO PORK MOSCOW 2019 2018 ST. PETERSBURG 2019 2018 42.8% 42.3% 38.9% 39.9% 9.0% 10.3% 20.7% 18.2% Source: Nielsen Holdings www.cherkizovo.com 85 CHERKIZOVO GROUPCherkizovo unitesProduct strategy In 2019, the R&D function contributed to the launch of 53 new products. 20 in the Meat Processing segment 33 in the Fresh segment DEVELOPMENT OF NEW PRODUCTS New products are developed by SALES The Company continued to work on In fall 2019, products from the Petelinka brand first became available Cherkizovo Group's centralized R&D function * – the Department of Research and Development aligned with increasing the share of high value-added to consumers in Russia's Siberian products in the total sales volume. Federal District. All products of the brand supplied to shops in the region international standards. Cherkizovo aims to strengthen its position are manufactured at the Altaisky Broiler in markets where its products are facilities, which became part of the The Group's R&D activities are aimed already available and gradually expand Group in December 2018. Thanks to the at ensuring the highest quality and its presence. The company supplies geographical expansion and product excellent taste of all products. We its products to virtually all regions of range optimization, the brand's sales grew operate two pilot facilities at the sites European Russia and is increasing its by 20% y-o-y. of Cherkizovsky Meat Processing Plant presence beyond the Urals. To expand its and Mosselprom specifically for R&D presence in these regions, the Group is purposes. The facilities are equipped developing partnerships with major retail to simulate any process flow in product chains. They increase the Group's product development. range and the number of stores selling its products. In order to effectively roll out R&D projects, we cooperate with research institutes and educational institutions, including the All-Russian Research and Development Institute of Poultry Processing Industry (VNIIPP), Gorbatov’s All-Russian Meat Research Institute, Razumovsky Moscow State University of Technologies and Management, Moscow State University of Food Production and the Scientific Research Institute of Nutrition at the Russian Academy of Medical Sciences. The Group also works with international experts from Italy, Spain, Austria and the US. * 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. Key R&D projects of 2019: • The launch of a range of cooked sausages: the Russkaya, the Doktorskaya and the Molochnaya as part of the Po-Cherkizovski range. • The expansion of the Cherkizovo Premium range with the launch of a line of European sausages (Capri, Verona, Milano and Fuet Extra) and sliced bacon. • The development of a range of high value-added processed products (ground meat, cutlets, sausages, steaks) under the Petelinka, Pava-Pava and Cherkizovo brands. • 20 projects related to recipe optimization, engineering, and packaging solutions. 86 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceTHE GROUP’S SALES BY CHANNEL, % SALES CHANNELS The majority of Cherkizovo Group's products are sold through retail chains and the HoReCa segment, which primarily offer high value-added products. In 2019, the share of high value-added products reached 70% of Cherkizovo's sales portfolio. The Company is actively developing priority sales areas: HoReCa and exports. At the end of the year, export sales grew by 78%, while restaurant- related sales doubled. Channels Total sales Federal retailers Traditional retail Wholesale HoReCa Export In the HoReCa segment, the Group is focused on supplying fast food SALES STRUCTURE, % restaurants and working with such chains as Burger King, Pizza Hut and KFC. Close cooperation with these major brands confirms and further guarantees the high quality of our products. Channels Total sales Branded Private label (B2B) HoReCa Export Non-branded products SALES BY BRAND, % Brand Branded sales Cherkizovo Kurinoe Tsarstvo Petelinka Pava-Pava Niche brands and other products www.cherkizovo.com RUB share in 2018 RUB share in 2019 RUB 95.7 billion RUB 115.1 billion 56% 16% 22% 3% 3% 51% 12% 28% 5% 5% Share in 2018, % Share in 2019, % RUB 95.7 billion RUB 115.1 billion 56% 6% 3% 3% 31% 55% 5% 5% 5% 30% Share in 2018, % Share in 2019, % RUB 60.1 billion RUB 74.6 billion 27% 26% 23% 6% 18% 23% 22% 21% 7% 27% 87 CHERKIZOVO GROUPCherkizovo unitesProduct strategy RELATIONSHIPS WITH CUSTOMERS AND PARTNERS Cherkizovo Group is committed to The Group is committed to further bolstering interaction with customers using digital channels, including our meeting the needs and requirements of corporate and brand-specific websites, its customers by offering them the highest mobile applications and social media quality products in convenient packaging. pages. Each of the Group's key brands has For this purpose, the Company is building a system in place to respond quickly to a mutually beneficial and transparent consumer requests. Customers can ask relationship with both end consumers and a question or submit a complaint via our business partners – large retailers and fast hotline or write to Cherkizovo on social food chains that purchase our products. networks with the confidence that their request will not be ignored. Even at the product development stage, the Company conducts tests with the involvement of customers and industry professionals, including leading restaurateurs and nutritionists. Their opinions are taken into account when determining the recipe of the final product. The Group also conducts market research and surveys, analyses feedback on social networks and as a result implements necessary improvements at any stage of production and delivery. Key positions and new products are tested across all segments. 64 million people total brand Petelinka coverage in digital communication channels in 2019 88 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governancePetelinka Digital In 2019, one of the Group's brands, Petelinka had a total brand coverage in digital communication channels of 64 million people. The brand has accounts on all popular social networking sites where it publishes news and recipes. The total number of subscribers during the year exceeded 114,000 people and the coverage on social networks exceeded 14 million people. In December 2019, Petelinka ran a promotional campaign featuring well- known Instagram bloggers, who acted as brand ambassadors in their posts and spoke about how they trust our products. The Company’s website www.petelinka.ru is extremely popular and features not only information and news about the Company, but also over 890 recipes that use chicken. In 2019, 3.2 million users visited the site. Since 2017, Petelinka has been running a loyalty program encouraging customers to register promotional codes from packaging on its website or in a mobile app. Throughout the year, about 1.5 million promo codes were registered in the loyalty program and the number of participants amounted to approximately 330,000 people. www.cherkizovo.com 89 CHERKIZOVO GROUPCherkizovo unitesFinancial Performance Overview Ludmila Mikhaylova CFO 120.1 RUB billion Cherkizovo Group’s consolidated revenue 90 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceIn 2019, Cherkizovo’s the company operated in a stable macroeconomic environment, with growing demands from our consumers and retail. Our vertically integrated business model demonstrated its competitiveness and resilience: superb performance of the chicken segment boosted by a number of strategic acquisitions in the late 2018, and buoyed by steady growth in the grain business were key drivers of our results during 2019. Price weakness in the pork market adversely impacted profits in the pork and meat processing segments. KEY FINANCIAL INDICATORS IN 2018-2019 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 2018 100.4 29.2 29.1% 20.4 20.3% 12.0 12.0% 14.2 58.6 2.9x 20.6 RUB billion Cherkizovo Group’s adjsuted EBITDA 2019 120.1 27.9 23.2% 20.6 17.2% 6.8 5.6% 16.1 61.2 3.0x In 2019, Cherkizovo Group’s consolidated OPERATIONAL PERFORMANCE The Group also includes Tambov Turkey revenue increased by 19.6% year-on- year to RUB 120.1 billion, with adjusted OVERVIEW Cherkizovo Group is the largest meat and facility, a joint Russian-Spanish venture. In 2019, Cherkizovo Group produced EBITDA up by 1.0% to RUB 20.6 billion and feed producer in Russia. The Group is c. 1 mn tonnes of meat and meat products adjusted EBITDA margin decreased to a top-3 producer in each of the Russian and generated revenue of RUB 120.1 billion. 17.2% (up from 20.3% in 2018). Net profit poultry, pork and processed meat markets. nearly halved to RUB 6.8 billion as In 2019, Cherkizovo Group’s sales totaled compared to RUB 12.0 billion in 2018, while Cherkizovo Group encompasses eight 663.0 thousand tonnes of finished products operating cash flow increased by 13.2% to meat processing plants (including meat in the poultry segment, 245.6 thousand RUB 16.1 billion (RUB 14.2 billion in 2018). processing plant operated by an equity tonnes in the Meat Processing segment, associate Samson – Food Products), 274.6 thousand tonnes in the Pork segment. Net debt came in at RUB 61.2 billion (2018: thirteen pork production complexes, The Company harvested 593.0 thousand RUB 58.6 billion), with our results providing twenty one wean-to-finish facilities and tonnes of various crops in the Grain us sufficient comfort on all debt covenants. two saw farms, nine poultry production segment, and produced some 2.2 million complexes (including the Belaya Ptitsa tonnes of feed to cater for its own needs. In 2019, total capital expenditures production complex which is currently amounted to RUB 8.6 billion, with the major operate pursuant to a lease agreement), part attributable to the pork (RUB 2.8 billion) and poultry (RUB 1.9 billion) segments. nine combined fodder production plants and more than 300,000 hectares of The remaining CAPEX was distributed agricultural land. among other businesses. www.cherkizovo.com 91 CHERKIZOVO GROUPCherkizovo unitesFinancial Performance Overview MARKET AND REGULATORY OVERVIEW Interest rates In 2019, the Central Bank of Russia delivered multiple rate cuts, lowering Loan benefits and government subsidies for interest payments In accordance with Russian legislation, FX exchange rates In 2019, the Russian rouble appreciated the key rate from 7.75% at the end of the Company received certain government 2018 to 6.25% at the end of 2019. It allowed grants. The largest of such government against both EUR and USD. According  the company to successfully refinance its grants relate to the reimbursement of to the Central Bank of Russia, as at debt portfolio and extend its maturity – in interest expense on qualifying loans, which 31 December 2019, the USD/RUB and November 2019, we placed local bonds is received directly by the Group and for EUR/RUB pairs traded at 61.91 and in the amount of 10 bn roubles with 7.5% the reimbursement of interest expense 69.34, respectively (2018: 69.47 and coupon and 3.5 tenor. 79.46). At the end of the year, RUB- denominated liabilities accounted for 95% of the Group’s long-term debt and 100% Tax benefits Russian agricultural producers have a zero through accredited banks, who provide loans to agricultural producers at reduced rates not exceeding 5% per annum on Rouble-denominated loans. The difference of its short-term debt. corporate income tax rate. However, no between market rate and the reduced tax benefits are provided for sales and rate equals the Key rate of the Bank of Cherkizovo’s products are generally distribution, feed production and meat Russia and is compensated by the Ministry priced in Russian roubles, with processing. In 2019, our overall effective tax of Agriculture to the accredited banks. the exception of the produce that we rate was 0.7%, compared to 1.6% tax benefit The Group records interest and reduced sell to the exports markets. Many of our in 2018. An increase compared to 2018 was rate lending subsidies as an offset to sourcing costs, including certain feed primarily due to a loss carry forward. interest expense during the period to which ingredients and veterinary drugs, are they relate. Total government grants for directly or indirectly linked to foreign The general income tax rate for Russian compensation of interest expense grossed exchange rates. On the other hand, some companies was 20%. On 1 January 2017, of related interest expense amounted to other costs, such as payroll, interest amendments to the Russian Tax Code RUB 1.1 billion RUB. payments and transportation, became effective allowing the Group are denominated in Russian roubles. 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. 92 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCONSOLIDATED RESULTS OF CHERKIZOVO GROUP In 2019, revenue increased by 19.6% Operating expenses increased Adjusted EBITDA of RUB 20.6 billion, in line by 29.3% y-o-y to RUB 17.6 billion, with previous year results. Adjusted EBITDA from RUB 13.6 billion a year ago. margin declined to 17.2% (2018: 20.3%) y-o-y to RUB 120.1 billion (2018: Operating expenses as a percentage of driven by softer pricing in the pork segment, RUB 100.4 billion). Revenue growth is sales increased to 14.6% (2018: 13.5%). marginal decline in profitability in meat attributed to higher volumes across processing, and offset by better results in business segments on the back of organic Adjusted operating profit of RUB 12.4 billion, the chicken business. growth and M&A, favourable pricing declined by 8.2% y-o-y from RUB 13.5 billion environment for poultry products, and a year ago. Our adjusted operating profit Net interest expense in 2019 increased offset by negative dynamics in pork prices excludes non-recurring impairment loss by 37.3% y-o-y to RUB 4.5 billion. domestically. recognized for non-operational items of property, plant and equipment in Net profit for the Group totaled Gross profit declined by 4.5% y-o-y to the amount of RUB 530 million (2018: nil), RUB 6.8 billion in 2019, down 43.8% RUB 27.9 billion (2018: RUB 29.2 billion). net change in fair value of biological assets compared to RUB 12.0 billion in 2018. Revenue growth was offset by the negative of the Group’s segments in the amount Net profit margin declined to 5.6% from net change in fair value of biological assets, of RUB 1.4 billion (2018: RUB 1.8 billion) 12.0% a year ago. and lower effect from net revaluation of and the effect of net change in fair value harvested crops in stock. Gross profit of biological assets of JVs and associates Adjusted net profit declined by 10.0% y-o-y margin declined to 23.2% (2018: 29.1%). on the Group’s share of their results in to RUB 9.0 billion, from RUB 10.0 billion the amount of RUB 298 million negative a year ago. Adjusted net profit margin (2018: RUB 210 million). amounted to 7.5%, compared to 9.9% in 2018. 9.0 RUB billion Adjusted net profit for the Group totaled www.cherkizovo.com 93 CHERKIZOVO GROUPCherkizovo unitesFinancial Performance Overview CONSOLIDATED INCOME STATEMENT DATA FOR THE YEAR ENDED 31 DECEMBER 2019 RUB mln Sales incl. Sales volume discounts incl. Sales returns Net change in fair value of biological assets Net revaluation of harvested crops in stock Cost of sales Gross profit Gross margin Operating expenses Share of loss of joint ventures and associates Operating profit Operating margin Profit before income tax Profit attributable to Cherkizovo Group Net profit margin 12 months ended 31 December 2019 12 months ended 31 December 2018 120,109 (1,779) (1,010) (1,379) 29 (90,896) 27,863 23.2% (17,551) (123) 10,189 8.5% 6,697 6,751 5.6% 100,422 (1,473) (1,091) 1,836 2,242 (75,318) 29,182 29.1% (13,570) (57) 15,555 15.5% 11,793 12,004 12.0% Change 19.6% 20.8% (7.4%) n.a. (98.7%) 20.7% (4.5%) (5.9 p.p.) 29.3% 115.8% (34.5%) (7.0 p.p.) (43.2%) (43.8%) (6.4 p.p.) Weighted average number of shares outstanding 41,047,014 41,047,014 — Earnings per share Profit attributable to Cherkizovo Group per share – basic and diluted (RUB) 164.46 292.45 (43.8%) 94 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCONSOLIDATED INCOME STATEMENT DATA FOR THE YEAR ENDED 31 DECEMBER 2019 (continued) RUB mln Consolidated Adjusted EBITDA reconciliation 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 Share of 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 12 months ended 31 December 2019 12 months ended 31 December 2018 Change 6,697 11,793 (43.2%) 4,484 (243) (676) 7,818 1,379 123 736 205 94 20,617 17.2% 3,267 (290) 829 6,045 (1,836) 57 165 658 (273) 20,415 20.3% 37.3% (16.2%) n.a. 29.3% n.a. 115.8% 346.1% (68.8%) n.a. 1.0% (3.1 p.p.) www.cherkizovo.com 95 CHERKIZOVO GROUPCherkizovo unitesFinancial Performance Overview CONSOLIDATED SELECTED FINANCIAL DATA FOR THE YEAR ENDED 31 DECEMBER 2019 RUB mln Total 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 Meat-Processing 40,056 (872) (31) 40,025 33.3% — — Poultry 70,332 (773) (1,820) 68,512 57.0% (135) — Pork 24,478 — (20,948) 3,530 2.9% (1,244) — Cost of Sales Gross profit/(loss) Gross margin Operating expenses Share of gain/(loss) of joint ventures and associates Operating income/(loss) Operating margin Interest income Interest expense, net Other income/ (expenses), net Division profit / (loss) before income tax Division profit margin Supplemental information: Income tax expense (benefit) Segment’s capital expenditure (37,035) (53,281) (17,588) 3,021 7.5% (5,033) (23) (2,035) -5.1% 17 (158) 485 (1,691) -4.2% (36) 1,337 16,916 24.1% (7,581) 15 9,350 13.3% 246 (1,504) (30) 8,062 11.5% 22 1,859 5,646 23.1% (440) — 5,206 21.3% 32 (1,025) 18 4,231 17.3% (1) 2,798 Grain 5,758 — (3,545) 2,213 1.8% — 155 (4,128) 1,785 31.0% (274) — 1,511 26.2% 1 (132) 22 1,402 24.3% 15 1,109 Feed 40,321 — (40,311) 10 0.0% — — (39,945) 376 0.9% (173) — 203 0.5% 73 (727) 313 (138) -0.3% 40 719 Total reportable segments Corporate and other adjustments without Turkey Turkey Combined Intersegment Total 180,945 (1,645) (66,655) 114,290 95.2% (1,379) 155 (151,977) 27,744 15.3% (13,501) (8) 14,235 7.9% 369 (3,546) 808 11,866 6.6% 40 7,822 0.0% — — — — — — — — 0.0% (3,990) — (3,990) - 242 (1,306) (59) (5,113) — 6 730 (67,552) — 66,801 (751) -0.6% — (126) 67,090 (588) 0.9% 653 — 65 -0.1% (368) 368 -0.1% — 65 — — 113,393 (1,645) 146 113,539 94.5% (1,379) 29 (84,887) 27,156 23.9% (16,838) (8) 10,310 9.1% 243 (4,484) 749 6,818 6.0% 46 8,552 6,716 (134) (146) 6,570 5.5% — — (6,009) 707 10.5% (713) (115) (121) -1.8% (121) -1.8% — — — — — 120,109 (1,779) — 120,109 100.0% (1,379) 29 (90,896) 27,863 23.2% (17,551) (123) 10,189 8.5% 243 (4,484) 749 6,697 5.6% 46 8,552 96 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCONSOLIDATED SELECTED FINANCIAL DATA FOR THE YEAR ENDED 31 DECEMBER 2019 RUB mln Total 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/(loss) Gross margin Operating expenses Share of gain/(loss) of joint ventures and associates Operating income/(loss) Operating margin Interest income Interest expense, net Other income/ (expenses), net Division profit margin Supplemental information: Income tax expense (benefit) Segment’s capital expenditure Division profit / (loss) before income tax (37,035) (53,281) (17,588) (39,945) 40,056 (872) (31) 40,025 33.3% — — 3,021 7.5% (5,033) (23) (2,035) -5.1% 17 (158) 485 (1,691) -4.2% (36) 1,337 Poultry 70,332 (773) (1,820) 68,512 57.0% (135) — 16,916 24.1% (7,581) 15 9,350 13.3% 246 (1,504) (30) 8,062 11.5% 22 1,859 Pork 24,478 — (20,948) 3,530 2.9% (1,244) — 5,646 23.1% (440) — 5,206 21.3% (1,025) 32 18 4,231 17.3% (1) 2,798 Grain 5,758 — (3,545) 2,213 1.8% — 155 (4,128) 1,785 31.0% (274) — 1,511 26.2% 1 (132) 22 1,402 24.3% 15 1,109 Feed 40,321 — (40,311) 10 0.0% — — 376 0.9% (173) — 203 0.5% 73 (727) 313 (138) -0.3% 40 719 Meat-Processing Total reportable segments Corporate Intersegment and other adjustments Total without Turkey Turkey Combined 180,945 (1,645) (66,655) 114,290 95.2% (1,379) 155 (151,977) 27,744 15.3% (13,501) (8) 14,235 7.9% 369 (3,546) 808 11,866 6.6% 40 7,822 — — — — 0.0% — — — — 0.0% (3,990) — (3,990) - 242 (1,306) (59) (5,113) — 6 730 (67,552) — 66,801 (751) -0.6% — (126) 67,090 (588) 0.9% 653 — 65 -0.1% (368) 368 — 65 -0.1% — — 113,393 (1,645) 146 113,539 94.5% (1,379) 29 (84,887) 27,156 23.9% (16,838) (8) 10,310 9.1% 243 (4,484) 749 6,818 6.0% 46 8,552 6,716 (134) (146) 6,570 5.5% — — (6,009) 707 10.5% (713) (115) (121) -1.8% — — — (121) -1.8% — — 120,109 (1,779) — 120,109 100.0% (1,379) 29 (90,896) 27,863 23.2% (17,551) (123) 10,189 8.5% 243 (4,484) 749 6,697 5.6% 46 8,552 www.cherkizovo.com 97 CHERKIZOVO GROUPCherkizovo unitesFinancial Performance Overview CONSOLIDATED SELECTED FINANCIAL DATA FOR THE YEAR ENDED 31 DECEMBER 2019 (continued) RUB mln Meat Processing Poultry Division profit / (loss) before income tax Add: Interest expense, net Interest income Foreign exchange loss/(gain) Depreciation and amortisation expense Net change in fair value of biological assets Share of (gain)/loss of joint ventures and accociates 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 (1,691) 8,062 158 (17) (441) 1,245 — 23 104 11 — (608) -1.5% 1,504 (246) 41 2,847 135 (15) 193 41 — 12,562 17.9% Pork 4,231 1,025 (32) (14) 1,870 1,244 — — 40 — 8,364 34.2% Grain 1,402 132 (1) (10) 510 — — — 3 94 2,130 37.0% Feed (138) 727 (73) (311) 725 — — — 7 — 937 2.3% Total reportable segments Intersegment Corporate and other adjustments Total without Turkey Turkey Combined 11,866 (5,113) 6,818 (121) 6,697 3,546 (369) (735) 7,197 1,379 8 297 102 94 23,385 12.9% 1,306 (242) 59 618 — — — — — 103 (3,269) 65 (368) 368 — — — — — — — 65 -0.1% 4,484 (243) W 7,815 1,379 8 297 205 94 20,181 17.8% — — — 3 — 115 439 — — 437 6.5% 4,484 (243) (676) 7,818 1,379 123 736 205 94 20,617 17.2% 98 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCONSOLIDATED SELECTED FINANCIAL DATA FOR THE YEAR ENDED 31 DECEMBER 2019 (continued) Division profit / (loss) before income tax Add: Interest expense, net Interest income Foreign exchange loss/(gain) Depreciation and amortisation expense Net change in fair value of biological assets accociates Share of (gain)/loss of joint ventures and 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 158 (17) (441) 1,245 — 23 104 11 — (608) -1.5% 1,504 (246) 41 2,847 135 (15) 193 41 — 12,562 17.9% Pork 4,231 1,025 (32) (14) 1,870 1,244 — — 40 — 8,364 34.2% Grain 1,402 132 (1) (10) 510 — — — 3 94 2,130 37.0% Feed (138) 727 (73) (311) 725 — — — 7 — 937 2.3% RUB mln Meat Processing Poultry Total reportable segments Corporate Intersegment and other adjustments Total without Turkey Turkey Combined (1,691) 8,062 11,866 (5,113) 3,546 (369) (735) 7,197 1,379 8 297 102 94 23,385 12.9% 1,306 (242) 59 618 — — — 103 — (3,269) — 65 (368) 368 — — — — — — — 65 -0.1% 6,818 (121) 6,697 4,484 (243) W 7,815 1,379 8 297 205 94 20,181 17.8% — — — 3 — 115 439 — — 437 6.5% 4,484 (243) (676) 7,818 1,379 123 736 205 94 20,617 17.2% www.cherkizovo.com 99 CHERKIZOVO GROUPCherkizovo unitesFinancial Performance Overview POULTRY Sales volumes in 2019 increased by Gross profit was up by 32.3% y-o-y 22% to 663.0 thousand tonnes (2018: and totaled RUB 16.9 billion, (2018: 544.2 thousand tonnes). The average RUB 12.8 billion) driven by volumes growth, selling price increased by 9% y-o-y to sales channel diversification and better 106.0 RUB/kg. We successfully integrated pricing. Gross margin declined to 24.1%, several companies that we had acquired from 24.2% in 2018. at the end of 2018, and which significantly contributed to the growth of the volumes Operating expenses as a percentage in 2019. Our sales from Petelinka branded of sales increased to 10.8% compared products, the focus brand of the segment, to 10.2% a year ago. Operating income added 13%, while exports and foodservice increased by 26.3% y-o-y to RUB 9.4 billion were the fastest-growing channels, adding (2018: RUB 7.4 billion). Operating margin 131% and 95% respectively. As a result, declined to 13.3% from 14.0% in 2018. the segment’s revenue increased by 33.4% and amounted to RUB 70.3 billion (2018: The segment’s profit before income RUB 52.7 billion). tax amounted to RUB 8.1 billion (2018: Net change in fair value of biological assets was negative RUB 135 million, compared to Adjusted EBITDA of RUB 12.6 billion, positive RUB 1.3 billion in 2018. increased by 49.8% y-o-y, while Adjusted RUB 6.9 billion). EBITDA margin increased to 17.9% from 15.9% a year ago. 70.3 RUB billion Segment’s revenue 12.6 RUB billion Segment's adjusted EBITDA 100 100 Cherkizovo Group 2 Annual Report 2019 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceRUB mln Total Sales Interdivision sales Sales to external customers Net change in fair value of biological assets Cost of sales Gross profit/(loss) Gross margin Operating expenses Share of gain/(loss) of joint ventures Operating profit/(loss) Operating margin Interest income Interest expense, net Other income/(expenses), net Division profit/(loss) before income tax Division profit margin Poultry division Adjusted EBITDA reconciliation 12 months ended 31 December 2019 12 months ended 31 December 2018 Change, % 70,332 (1,820) 68,512 (135) (53,281) 16,916 24.1% (7,581) 15 9,350 13.3% 246 (1,504) (30) 8,062 11.5% 52,723 (1,594) 51,129 1,264 (41,205) 12,782 24.2% (5,379) — 7,403 14.0% 172 (621) (53) 6,901 13.1% 33.4% 14.2% 34.0% n.a. 29.3% 32.3% (0.1 p.p.) 40.9% n.a. 26.3% (0.7 p.p.) 43.0% 142.2% (43.4%) 16.8% (1.6 p.p.) Division profit/(loss) before income tax 8,062 6,901 16.8% Add: 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 Share of adjusted EBITDA of joint ventures Bonuses to employees under long-term incentive program Poultry division Adjusted EBITDA Adjusted EBITDA Margin 1,504 (246) 41 2,847 135 (15) 193 41 12,562 17.9% 621 (172) 74 2,055 (1,264) — — 172 8,387 15.9% 142.2% 43.0% (44.6%) 38.5% n.a. n.a. n.a. (76.2%) 49.8% 2 p.p. www.cherkizovo.ru/en www.cherkizovo.com Cherkizovo Group 101 101 CHERKIZOVO GROUPCherkizovo unitesFinancial Performance Overview PORK Sales volumes in 2019 increased by 16% Gross profit of RUB 5.6 billion declined by y-o-y, to 274.6 thousand tonnes (2018: 46.7% compared to RUB 10.6 billion in 2018, 236.9 thousand tonnes), as wean-to-finish on softer price environment and 11.1% facilities launched in 2019 boosted our cost inflation in per kg pork production. production. The average selling price The segment’s gross margin declined to of 89.1 RUB/kg, declined by 9% y-o-y 23.1%, from 45.5% a year ago. compared to 98.2 RUB/kg a year ago, as pork prices were under pressure from Operating income amounted to the supply push of domestic producers. RUB 5.2 billion (2018: RUB 10.4 billion). The segment’s revenue increased by The segment’s operating margin declined 5.2% y-o-y to RUB 24.5 billion (2018: to 21.3% from 44.8% a year ago. RUB 23.3 billion). Net change in fair value of biological assets declined by 57.2% y-o-y to RUB 4.2 billion was negative RUB 1.2 billion, compared to (2018: RUB 9.9 billion). The segment’s profit before income tax positive RUB 0.9 billion a year ago. Adjusted EBITDA compressed by 23.3% y-o-y to RUB 8.4 billion (2018: RUB 10.9 billion). Adjusted EBITDA margin declined to 34.2% from 46.9% in 2018. 24.5 RUB billion Segment’s revenue 8.4 RUB billion Segment's adjusted EBITDA 102 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceRUB mln Total Sales Interdivision sales Sales to external customers Net change in fair value of biological assets 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 Pork 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 Bonuses to employees under long-term incentive program Pork division Adjusted EBITDA Adjusted EBITDA Margin 12 months ended 31 December 2019 12 months ended 31 December 2018 Change, % 24,478 (20,948) 3,530 (1,244) (17,588) 5,646 23.1% (440) 5,206 21.3% 32 (1,025) 18 4,231 17.3% 4,231 1,025 (32) (14) 1,870 1,244 40 8,364 34.2% 23,262 (20,238) 3,024 899 (13,567) 10,594 45.5% (179) 10,415 44.8% 64 (588) (3) 9,888 42.5% 5.2% 3.5% 16.7% n.a. 29.6% (46.7%) (22.4 p.p.) 145.8% (50.0%) (23.5 p.p.) (50.0%) 74.3% n.a. (57.2%) (25.2 p.p.) 9,888 (57.2%) 588 (64) 10 1,339 (899) 40 10,902 46.9% 74.3% (50.0%) n.a. 39.7% n.a. 0.0% (23.3%) (12.7 p.p.) www.cherkizovo.com 103 CHERKIZOVO GROUPCherkizovo unitesFinancial Performance Overview MEAT PROCESSING Sales volumes in 2019 increased by 7% Operating expenses increased by y-o-y to 245.6 thousand tonnes (2018: 28.5% y-o-y, and amounted to 12.6% as 229.5 thousand tonnes), as higher volumes a percentage of sales, compare with 10.1% of pork production led to higher pork in 2018. carcass sales, while sausages volumes were stable. The average selling price Operating loss amounted to RUB 2.0 billion declined by 4.0% y-o-y to 163.0 RUB/kg compared to RUB 0.5 billion loss in 2018. (2018: 169.6 RUB/kg), as price increase in sausages was offset by negative The segment’s loss before income tax dynamics in pork carcass sales. As a result was RUB 1.7 billion, compared to a loss the segment’s revenue increased by of RUB 1.1 billion a year ago. 3.3% and reached RUB 40.1 billion (2018: RUB 38.8 billion). Adjusted EBITDA turned to negative RUB 0.6 billion from RUB 0.5 billion in Gross profit declined by 12.2% y-o-y to 2018 as we invested in the prices of RUB 3.0 billion, (2018: RUB 3.4 billion). the value-added products to support The gross margin fell to 7.5% from 8.9% our sales. a year ago. 40.1 RUB billion Segment’s revenue (0.6) RUB billion Segment's adjusted EBITDA 104 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceRUB mln Total Sales Interdivision sales Sales to external customers Cost of sales Gross profit/(loss) Gross margin Operating expenses Share of gain/(loss) of associates 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 12 months ended 31 December 2019 12 months ended 31 December 2018 Change, % 40,056 (31) 40,025 (37,035) 3,021 7.5% (5,033) (23) (2,035) -5.1% 17 (158) 485 (1,691) -4.2% 38,780 (1,027) 37,753 (35,341) 3,439 8.9% (3,916) — (477) -1.2% 20 (122) (472) (1,051) -2.7% 3.3% (97.0%) 6.0% 4.8% (12.2%) (1.4 p.p.) 28.5% n.a. 326.6% (3.9 p.p.) (15.0%) 29.5% n.a. 60.9% (1.5 p.p.) Division profit/(loss) before income tax (1,691) (1,051) 60.9% Add: Interest expense, net of subsidies Interest income Foreign exchange (gain)/loss, net Depreciation and amortisation Share of (gain)/loss of associates Share of adjusted EBITDA of associates Bonuses to employees under long-term incentive program       Meat processing division Adjusted EBITDA* Adjusted EBITDA Margin 158 (17) (441) 1,245 23 104 11 (608) -1.5% 122 (20) 485 883 — — 39 458 1.2% www.cherkizovo.com 29.5% (15.0%) n.a. 41.0% (71.8%) n.a. (2.7 p.p.) 105 CHERKIZOVO GROUPCherkizovo unitesFinancial Performance Overview GRAIN Sales volumes in 2019 declined by 25% Operating expenses as a percentage y-o-y to 524.0 thousand tonnes (2018: of sales increased to 12.4% from 6.9% 696.1 thousand tonnes), while overall a year ago. harvest in the season increased by 24% y-o-y to 593.0 thousand tonnes (2018: Operating income declined to 479.7 thousand tonnes) driven by better RUB 1.5 billion from RUB 1.7 billion in 2018, results of wheat and corn cultivation. with operating margin of 26.2% compared The segment’s revenue declined by to 24.9% in 2018. 5.8 RUB billion Segment’s revenue 16.5% and reached RUB 5.8 billion (2018: RUB 6.9 billion). The segment’s profit before income tax was RUB 1.4 billion, compared to RUB 1.5 billion Net revaluation of harvested crops in a year ago. stock declined to RUB 155 million from RUB 1.3 billion in 2018. Adjusted EBITDA amounted to RUB 2.1 billion compared RUB 2.3 billion Gross profit declined by 7.2% to in 2018. RUB 1.8 billion (2018: RUB 1.9 billion). Gross margin increased to 31.0% from 27.9% a year ago. 2.1 RUB billion Segment's adjusted EBITDA 763 RUB million Consolidated EBITDA of the Group from all JVs Results of joint ventures and associates The Group’s significant joint ventures and associates include: 50% share in Tambov Turkey, a turkey producer established by the Company and its partner and shareholder Grupo Corporativo Fuertes, 75% share in Samson – Food products, a meat processor in St-Petersburg, and 50% share in Cobb-Russia. Total result in consolidated EBITDA of the Group from all JVs and associates amounted to RUB 736 million, up from RUB 165 million a year ago. 106 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceRUB mln 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 12 months ended 31 December 2019 12 months ended 31 December 2018 Change, % 5,758 (3,545) 2,213 — 155 (4,128) 1,785 31.0% (274) 1,511 26.2% 1 (132) 22 1,402 24.3% 6,899 (3,945) 2,954 — 1,297 (6,273) 1,923 27.9% (205) 1,718 24.9% 2 (173) 1 1,548 22.4% (16.5%) (10.1%) (25.1%) — (88.0%) (34.2%) (7.2%) 3.1 p.p. 33.7% (12.0%) 1.3 p.p. (50.0%) (23.7%) 2100.0% (9.4%) 1.9 p.p. Division profit/(loss) before income tax 1,402 1,548 (9.4%) Add: Interest expense, net of subsidies Interest income Foreign exchange (gain)/loss, net Depreciation and amortisation Net change in fair value of biological assets Depreciation and amortisation accumulated in harvested crops in stock Bonuses to employees under long-term incentive program Grain division Adjusted EBITDA Adjusted EBITDA Margin 132 (1) (10) 510 — 94 3 2,130 37.0% 173 (2) — 809 — (273) 8 2,263 32.8% www.cherkizovo.com (23.7%) (50%) n.a. (37.0%) — n.a. (62.5%) (5.9%) 4.2 p.p. 107 CHERKIZOVO GROUPCherkizovo unitesFinancial Performance Overview LIQUIDITY AND CAPITAL Debt As at 31 December 2019, net debt came TOTAL DEBT STRUCTURE, RUB bln Capital needs In addition to our working capital in at RUB 61.2 billion as compared to RUB 58.6 billion at the end of 2018. requirements, we require capital to finance Total debt decreased from RUB 68.8 billion 67.4% 32.6% the following: • capital expenditures, particularly at the end of 2018 to RUB 65.2 billion. in connection with development and As at 31 December 2019, long- term debt maintenance capital expenditures; stood at RUB 43.9 billion, or 67.4% of repayment of debt; and • • potential acquisitions. the Group’s debt portfolio, while short- term debt accounted for 32.6% of the debt portfolio. The effective cost of debt was We anticipate that capital expenditures, 6.9% as of 31 December 2019, change from repayment of long-term debt and potential 4.7% in 2018. Subsidised loans and credit acquisitions will represent the most facilities made up 27% of the debt portfolio significant uses of funds for the next several in 2018 (2018: 40%). As at 31 December years. 2019, cash and cash equivalents totaled RUB 3.3 billion. In 2019, 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. Long-term debt Short-term debt % 67.4 32.6 108 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governance CAPITAL EXPENDITURES In 2019 Cherkizovo Group’s total capital SUBSIDIES In 2019, total government grants for compensation of interest expenses grossed of related expenditures, excluding acquisitions and interest expense stay at the same level and amounted to RUB 1.3. investments in joint ventures and associates amounted to RUB 8.6 billion (down 12% year-on year) and included: 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 31 December 2019 and 31 December • RUB 1.3 billion invested in the Meat Processing segment (significant investments were made in 2018, respectively: the modernization of meat processing Net cash flows from operating activities facilities: slicing and packing bacon, the production of sausages in a tray, sliced smoked sausage; the Group also made significant investments in the reconstruction of treatment facilities at the slaughter plants); Net cash used in investing activities Net cash (used in) / generated from financing activities Net (decrease)/ increase in cash and cash equivalents 2019 16.1 (11.0) (11.4) (6.3) 2018 14.2 (15.3) 10.1 8.9 • RUB 2.8 billion invested in the Pork segment (construction of four new wean-to-finish facilities in the Penza region); • RUB 1.9 billion invested in the Poultry segment (the investments made in strategically significant project on a slaughter line cooling system and completed a number of projects aimed at the production of high value-added products); • RUB 1.1 billion invested in the Grain segment (construction of a new grain drying facility). www.cherkizovo.com 109 CHERKIZOVO GROUPCherkizovo unitesFinancial Performance Overview 16.1 RUB billion Net cash from operating increased Operating activities Net cash from operating activities in Investing activities Use of cash in investing activities decreased 2019 increased by 13,3% to RUB 16.1 billion to RUB 11.0 billion from RUB 15.3 billion from RUB 14.2 billion in 2018. in 2018. In 2018 the Group completed the acquisition of 100% of JSC “Altaisky In 2019, the Company showed an outflow Broiler” for cash consideration of of working capital in the amount of RUB 4.6 billion and acquisition of all tangible RUB 0.6 billion. In 2018, the inflow of assets, including poultry parent stock, of working capital amounted to RUB 0,9 billion. four hatching eggs’ production facilities of CJSC “Krasnoyaruzhsky Broiler” (Belgorod • RUB 1.1 billion increase in current region) at the amount of RUB 1.8 billion. biological assets due to increase in the number of livestock as a result of In 2019, the only acquisition was 100% the commissioning of new production of СJSC “Rovensky Broiler” for cash facilities and improvement of key consideration of RUB 1.7 billion. performance indicators; • RUB 0.5 billion increase in inventory Financing activities Our net cash flows used in financing particularly due to the increase in grain activities amounted to RUB 11.4 billion stocks and feed components, increase in 2019 compared to net cash from in stocks in connection with the launch financing activities in 2018 in the amount of of production at Kashira-1 and RUB 10.1 billion. The change in 2019 was fertilizers in the Grain segment; due to repayment of the short-term loans. • RUB 1.2 billion increase in trade payables due to the increase in deferred payments under contracts; 110 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceLiquidity As of 31 December 2019, we had total cash trade receivables was RUB 183 million and Current biological assets amounted RUB 119 million as of 31 December 2019, to RUB 16.3 billion as of 31 December and cash equivalents of RUB 3.3 biillion, 2018, respectively, due to the additional 2019 and RUB 15.4 billion as of which were denominated largely in information received regarding insolvency 31 December 2018. The increase was Roubles. As of 31 December 2019, we had of some of the buyers. largely due to increase in the number of Net Current Assets of RUB 3.9 billion (2018: livestock as a result of the commissioning of 6.3 billion). Trade payables increased to new production facilities and improvement RUB 11.6 billion as of 31 December of key performance indicators. Our Trade Working Capital as of 2019 from RUB 10.8 billion as of 31 December 2019, which we define 31 December 2018 primarily due to Other receivables, net, decreased as current assets less current liabilities the growth of business purchases. to RUB 0.2 billion as of 31 December excluding short-term loans and Trade payables turnover averaged 45 days, 2019 from RUB 1.5 billion as of current portion of long-term loans, 48 days as of 31 December 2019, 2018, 31 December 2018. The decrease in other was RUB 25.1 billion as compared to respectively. RUB 30.5 billion as of 31 December 2018. receivables in 2019 was largely due to due to receiving subsidies of the previous Our inventory consists primarily of raw periods. In 2019 our trade receivables, net slightly materials, spare parts, work-in-progress decreased by 4.5% and amounted to and finished goods. Our inventories RUB 5.5 billion from RUB 5.7 billion as of were RUB 13.2 million, RUB 12.4 as of 31 December 2018. Trade receivables 31 December 2019, 2018, respectively. turnover averaged 17 days as of The increase in inventories in 2019 was 31 December 2019 and 19 days as of largely due to the increase in wheat and 31 December 2018. Allowance for doubtful soybean stock. Ludmila Mikhaylova CFO www.cherkizovo.com 111 CHERKIZOVO GROUPCherkizovo unitesSustainable development Cherkizovo Group monitors and takes customers, employees, suppliers and Cherkizovo Group takes an active part in society’s expectations into account in partners, agricultural industry players, developing the industry and liaises with decision-making. The Company promotes local and federal authorities, trade its community. The Company is a member an effective dialogue with a broad range associations, non-profit organizations, of the National Meat Association, National of stakeholders. Our stakeholders include and local communities in all regions Union of Swine Breeders, National Union investors and shareholders, consumers, where we operate. of Meat Processors, and National Union of Poultry Farmers established in 2019. Suppliers and business partners • transparent business practices, including transparency of tenders; selection of partners who meet the Group’s high standards and requirements. • Customers (retail, HoReCa, exports) timely supplies of high-quality • products; joint projects; transparent business practices. • • Government agencies • compliance with applicable laws; timely payment of taxes; • • cooperation in investment projects and social programs. Investors and shareholders • full and timely disclosure of all required information; • approved dividend policy; • maintaining an ongoing dialogue in a variety of formats (meetings, participation in conferences, publications). Agricultural sector • introduction of innovative technologies; • application and development of humane animal treatment practices; • compliance with biosafety standards; • amelioration. Local communities • creation of jobs; • • sponsoring charities; funding educational, healthcare, and cultural facilities; • mitigation of negative environmental impact. 112 CHERKIZOVO GROUP 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPAs a major Russian food producer, Cherkizovo Group has a considerable impact on the regions where it operates. In our operations, we are committed to the concept 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 advocate responsible land use, animal management, and food production. € RSPP In 2019, Cherkizovo joined the Russian Union of Industrialists and Entrepreneurs (RSPP), an association that brings together players from the country’s key economic sectors. As part of the union, the Group plans to participate in the activities of the Commission on the Agricultural Complex and contribute to developing the industry’s consolidated position on matters such as improving access to government support for agriculture, and maximizing the export potential of Russian animal products. Last year, Cherkizovo represented by CEO Sergey Mikhailov joined a working group participating in the regulatory guillotine project for animal and crop farming. The regulatory guillotine is a mechanism designed by the Russian Government to eliminate outdated regulations, some of which date back to the USSR. Employees • competitive salaries and social benefits; • workplace safety; • training and educational programs. Consumers • product quality excellence and quality control; • addressing consumer complaints in a timely manner and taking immediate action; refining product portfolio and production technology in line with current trends such as healthy lifestyles and environmental protection. • www.cherkizovo.com 113 CHERKIZOVO GROUPCherkizovo unitesOur employees HR POLICY Highly skilled employees are essential for an efficient business. Cherkizovo Group seeks to develop human capital: we source the best professionals in the industry, run training programs and promote self-development. The Company complies with applicable Russian laws, monitors and employs international best practices in human resources management. Cherkizovo Group is among the largest employers in the Russian agricultural sector: at the end of 2019, we employed EMPLOYEE AGE, % 27 27 11 28 8 8 2019 2018 2017 Under 25 years 26–35 36–45 24 24 23 12 12 11 29 29 27 46–55 55+ over 30,000 people, up 19% year-on-year. YEARS OF EMPLOYMENT WITH THE COMPANY, % The increase was driven by the ramp-up of the Group’s operations: we acquired new poultry assets and launched new nursery and finisher sites in the Penza Region. 2019 2018 2017 37 24 14 16 8 31 24 15 27 31 14 18 17 12 11 Less than 1 year 1–3 years 3–5 years 5–10 years Over 10 years EMPLOYEE EDUCATION, % EMPLOYEES BY TYPE OF EMPLOYMENT AND NON-PAYROLL STAFF, % 20 1 2019 2018 2017 23 1 23 1 79 75 76 18 17 17 2019 2018 2017 82 0 82 1 281 Higher education Incomplete degree Secondary and vocational education Administrative personnel Workers Non-payroll labour 30 thousand employees Cherkizovo Group’s headcount 114 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUP In 2019, we continued to develop our human capital. Our key HR initiatives included: • “Evolution@Cherkizovo. Leaders of Change” program; • Training and development program for beginning managers; • Distance learning system for workers and management in the workplace; • Dual education programs implemented as part of the Youth project to attract and train young professionals; • Strategic sessions to support management teams. PERSONNEL AND NEW HIRES BY GENDER RECRUITMENT Cherkizovo Group ishiring across the INDUCTION AND MENTORING Cherkizovo seeks to make the onboarding exercise for new hires quick and easy: it holds dedicated events, trainings, and mentoring sessions. Employees who have recently joined us go on a virtual tour of the Group’s facilities, a special interactive online course designed to introduce them to production processes. This online program also introduces them to Cherkizovo Lab’s operations and food safety at production facilities. Cherkizovo is developing a mentoring system where mentors, skilled and seasoned employees, train new hires in professional skills and give them feedback. This helps newcomers to adapt EMPLOYEE HEADCOUNT BY GENDER, % segments, where it operates, as well as in to the Company’s processes more quickly IT, sales, innovation and R&D. When the and boosts productivity. 57 56 55 2019 2018 2017 43 44 45 Company decides to hire an employee, it relies exclusively on the person’s A dedicated cross-cultural induction professional skills and never discriminates program helps foreign professionals on the grounds of gender, age, nationality employed by Cherkizovo Group to learn or any other factor. more about the Russian agricultural industry, production processes and We strive to contribute to the economic corporate culture of the Company. NEW HIRES, PERSONS growth of local communities and 8,212 6,015 hire people from the regions where 6,751 4,025 6,417 3,729 we operate. Among other things, we cooperate with local authorities and employment centers. 2019 2018 2017 Male Female www.cherkizovo.com 115 CHERKIZOVO GROUPCherkizovo unitesOur employees 116 young specialists were accepted into the Company in 2019, 79 mentors took part in their training TRAINING AND DEVELOPMENT Training employees and unlocking their We provide a wide range of opportunities for development. The Company hosts potential are key to staff professionalism Days of Learning and Development twice Cooperation with educational institutions Cherkizovo Group partners directly with and loyalty, and therefore to the a year, with open workshops and master major agricultural universities, such as Company’s success. Cherkizovo Group classes in many fields. Cherkizovo has Razumovsky Moscow State University of organizes educational events, provides a corporate online library available Technologies and Management, Russian an opportunity to take part in industry to all employees. We encourage our State Agrarian University – Moscow conferences, and overseas internships. employees to learn foreign languages Timiryazev Agricultural Academy, with English language classes and Voronezh State Agricultural University, Our training programs cover all employee English club sessions offered at some of Penza State Agricultural University, teams categories. We pay particular attention the Group’s facilities to practise foreign up with Moscow State University, Bauman to biosafety and occupational safety, language skills. Moscow State Technical University, Higher increasing productivity and improving performance at work. YOUTH PROGRAMS Our priorities in human resource School of Economics, and Plekhanov Russian University of Economics. This business-academia collaboration results The Company runs Evolution@Cherkizovo. management include ensuring a in dedicated internship programs and Leaders of Change, an 2-year integral continuous supply of young talent, induction plans for young talent. leadership program. Participants building an effective succession system, implement personal and team projects, and raising the profile of the agricultural At the heart of the project is the dual where they learn to apply new approaches sector among young people. To this end, education program enabling students to and to look at challenges in a different way. the Group runs Youth, a major staffing obtain hands-on production experience program, while our HR Department in addition to academic training. This way, We conduct annual employee operates a young specialist engagement they have an opportunity to address real competency assessments, based on center. In 2019, 116 young specialists were business challenges. Dual education which individual development plans are accepted into the Company, 79 mentors programs are introduced for second and designed. In 2019, 80% of the Company’s took part in their training. third year students. They are implemented at managerial staff had development plans 10 sites in Moscow, and across the Moscow, based on personalized career paths. The Group aims to become a Top 3 Kaliningrad, Lipetsk, and Penza regions, with employer for agricultural graduates. For a total of 102 students participating. One of the technologies used by this purpose, we build up cooperation Cherkizovo Group to train employees with leading educational institutions, Young graduates who have completed is e-learning. Our employees access participate in job fairs and similar events the dual education program do not need training courses through Cherkizovo to tell students and recent graduates additional time for onboarding. Many WORLD learning and development portal, about career and professional growth of the program participants remain our a dedicated corporate platform. Webinars are also held by our employees, who tell opportunities at the Group, hold career guidance meetings and presentations at employees. It helps maintain an inflow of young talent and increases the percentage colleagues about our internal processes universities, and open days. of students whose employment matches and initiatives. their professional training. 116 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUP € Technology leaders In the reporting year, the Group’s Yours. Present. Future project ranked second in the nationwide Graduate Awards 2019, a major contest for projects targeting university graduates and young professionals, and won in the Education and Science category of Russia’s Best Social Projects 2019 Award. 119 students have participated in Cherkizovo Group's dual education program since 2017 The initiative also covers upskilling and reskilling programs, competitions, and contests, as well as work on student graduation projects based on the Company’s objectives. As part of its career guidance initiative, Cherkizovo held 32 events at universities, vocational and secondary schools, involving 3,500 people. The main activities included: • The Company days; • The University Saturdays, university- based workshops held once a year to induce school students to choose a career in agriculture; • The Choose Your Path meetings held twice a year at vocational schools to interest school students in agricultural careers; • Tours around Cherkizovo Lab and the automated plant in Kashira for university and school students. In 2019, the Company’s Center for • Discover Cherkizovo event for interns In the reporting year, the Group’s Yours. Student Programs and Youth Initiatives attended by the Company’s top Present. Future project ranked second implemented the following projects: management; in the nationwide Graduate Awards • The launch of four new Meat Technology training programs at a specialized university; • The launch of Cherkizovo Vocational 2019, a major contest for projects School project in Kashira; targeting university graduates and young • The launch of the Technology Leaders project by the Company's Research professionals, and won in the Education and Science category of Russia’s Best • Development and launch of new and Development Department; Social Projects 2019 Award. training programs covering Process • The launch of the Cherkizovo and Production Automation, Meat Champions project, with seven Technology, automation, and HACCP at a specialized university; university graduates participating; • Marketing project defence by Moscow • The launch of a series of lectures by Cherkizovo experts for Meat State University students; seven projects were presented and as a result twelve Technology and HR Management students were awarded internships. training programs; www.cherkizovo.com 117 CHERKIZOVO GROUPCherkizovo unitesOur employees 683 RUB million Cherkizovo Group’s spending on social programs and benefits, +249% COMPENSATION AND BENEFITS Well-being of employees is the Company’s In 2019, the payroll, including bonuses and remuneration, increased by 19% to RUB CORPORATE CULTURE Employee engagement and loyalty top priority that has a direct impact on 18.3 billion, while the average monthly have a direct impact on the Company’s its long-term development. This is why salary was RUB 54,357. Excluding the business performance. That is why we we provide competitive salaries to our medium-term bonus program, the average promote our corporate culture, create staff in line with the social and economic salary increased by 3.2% to RUB 53,749 in a friendly working atmosphere, and environment in the regions where we 2019 from RUB 52,082 in 2018. develop various feedback channels for operate. Salary is commensurate with the employee’s position, qualification, and performance. SOCIAL BENEFITS We offer not only a decent salary, but The Group’s corporate portal features also social security and an environment Thank You, a non-financial recognition our employees. The remuneration often includes a variable for personal and professional growth. program, where employees can publicly part (bonus). Its amount depends on post "thank you" messages to their the nature of the job and achievement On top of the social benefits mandated colleagues. The rating of employees of performance indicators the position by the Russian laws and regulations, with the biggest number of "thank you" has impact on. Managers receive annual the Group provides corporate perks and notes is open for all staff to see. Every bonuses based on the achievement of incentives, and creates a comfortable quarter, the Top 3 of them are awarded corporate and individual targets for the environment for work and leisure. Our by the Group. The Thank You program year. Uniform criteria for the establishment fringe benefits include paid holiday boosts staff engagement in the form of and assessment of annual targets provide allowance, vouchers to health resorts a game and creates a friendly working a transparent and clear mechanism to and summer camps for employees and environment. calculate the annual bonus. their families, financial assistance in EMPLOYEE REMUNERATION IN 2017–2019 PAYROLL, INCLUDING BONUSES AND REMUNERATION, RUB MILLION 18,327 15,343 13,534 54,357 54,416 48,700 2019 2018 2017 AVERAGE MONTHLY SALARY, RUB* 2019 2018 2017 118 emergencies. Most of our assets have Cherkizovo Group sites regularly host corporate cafeteria, and health centers professional skills contests, where the for employees. year’s best performers receive special In 2019, Cherkizovo Group’s spending on awards. social programs and benefits soared by The Group seeks to maintain a dialogue 249% to RUB 683.9 million. between the management team and employees. In March 2019, we held our first Town Hall, a video conferencing session where our employees had an opportunity to ask the CEO a question in person. 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPHealth, Safety and the Environment Industrial safety and environmental protection are top priorities at Cherkizovo Group. We seek to completely eliminate work- related injuries, lead the industry in health and safety performance, and minimize our environmental footprint. Our approach to occupational safety includes: • workplace safety; • systematic risk identification and management; • sound occupational health and safety management system; • effective hazard information system; • robust employee training in OHS requirements and standards; • strict employee compliance with existing OHS requirements. OCCUPATIONAL HEALTH We implement numerous initiatives To further promote personnel AND SAFETY We are well aware that the health and aimed at preventing accidents and engagement, we have set up incidents, reducing injuries, improving a Occupational Safety for employees to safety of our people are key to the workplace safety, and promoting communicate their ideas on improving Company’s strategic plan and sustainable employee well-being. occupational health and safety. development in the long run. We strictly comply with all statutory health and safety We invest continuously in enhancing We employ a number of key indicators, requirements, and make sure that our our occupational safety procedures to including the lost time injury frequency safety procedures are in line with the best safeguard the health of our employees. rate (LTIFR), to assess occupational safety international practices. In particular, we place major emphasis on performance at Cherkizovo. upgrading equipment and increasingly In 2019, Cherkizovo adopted the automating production processes to Occupational Health and Safety Policy to reduce human-related risk factors in set out our long-term goals for improving health and safety. performance in this sphere. The Group provides training for Cherkizovo Group has joined the Vision employees to increase their awareness Zero campaign sponsored by the and involvement in OHS matters. In 2019, International Social Security Association the Company trained an equivalent of (ISSA) with a relevant certificate issued to 2,071 employees in occupational health the Company at the Russian Health and Safety Week in Sochi in 2019. and safety and organised 75 workshops on corporate safety standards. www.cherkizovo.com 119 CHERKIZOVO GROUPCherkizovo unitesPAYROLL, INCLUDING BONUSES AND REMUNERATION, RUB MILLION Health, Safety and the Environment AVERAGE MONTHLY SALARY, RUB* No fatalities, no major group accidents in 2019 SEVERITY RATE * Key occupational health and safety LOST TIME INJURY FREQUENCY RATE (LTIFR) 2019 2018 2017 1.71 1.99 1.50 POULTRY PORK FEED In 2019, LTIFR was down by 14% year-on- year. Most injuries were caused by falls (28% of all accidents), stab wounds (16%), and GRAIN road accidents during the transportation of employees by third-party providers (12%). The reporting year saw no fatalities or major MEAT PROCESSING group accidents across the Company’s facilities. We thoroughly investigate all accidents to identify and localize their causes and prevent recurrence in the future. In 2019, we acted promptly to tighten safety requirements for employee transportation to curb the rise in traffic accidents involving third-party providers. TURKEY LOGISTICS 2019 2018 36.64 44.41 57 18.4 5 58 45 0 24.34 26.78 35.28 56.67 15.5 41 * SR = D/A, where D stands for the number of days lost due to workplace injury in the reporting period, while A stands for the number of accidents in the reporting period. projects in 2019: • Rolling out of the occupational risk mitigation system, where all production processes are examined in stages to identify potential risks for each stage and assess them on a special scale. Major risks are promptly tackled, while remedial measures are developed for less likely risks. Through this practice, we identified over 2,000 risk mitigation activities to be conducted in 2020. • Online tests to examine knowledge of the ten most important OHS issues by the managerial staff. Managers failing the tests are required to undergo special training and retake the tests. • Implementation of the minor injury investigation program to register all visits to first aid rooms, uses of first aid kits and sick leave notes. This initiative helps to better understand the causes of occupational accidents and tackle them proactively. In 2019, we revealed and investigated 426 minor injuries across the Group’s facilities. • Equipment assessment in buildings and structures at the Company’s production sites with repairs and replacement carried out when necessary. • Safety awareness campaigns with emphasis on prevention education and visual impact methods. 120 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUP484.6 RUB million of occupational health and safety expenses across the Group +70% year-on-year OCCUPATIONAL HEALTH AND SAFETY EXPENSES, RUB ‘000 EXPENSES FOR OCCUPATIONAL HEALTH AND SAFETY ACTIVITIES PER EMPLOYEE, RUB ‘000 2019 2018 321.5 201 EXPENSES FOR OCCUPATIONAL HEALTH AND SAFETY TRAINING OF PERSONNEL, RUB MILLION 2019 2018 25.92 16.85 OCCUPATIONAL HEALTH AND SAFETY EXPENSES, RUB ‘000 2019 2018 2017 484.6 283.6 164.8 NUMBER OF INJURIES IN 2017–2019 FATAL In 2019, Cherkizovo Group became MAJOR a partner of the Russian Health and Safety Week, displaying the Company’s OHS practices at the event. MINOR In 2020, we will work persistently to TOTAL cultivate the occupation safety culture. 2019 2018 2017 0 8 82 90 3 7 79 89 2 6 57 65 www.cherkizovo.com 121 CHERKIZOVO GROUPCherkizovo unitesHealth, Safety and the Environment Environmental safety and sustainable use of natural resources is a major priority for the Company. In implementing its environmental initiatives, Cherkizovo Group strictly complies with regulatory requirements and the best industry practices. ENVIRONMENTAL PROTECTION We invest in the most advanced (WWF). On 30 March 2019, Cherkizovo In 2019, we implemented a number Group for the first time took part in the of major projects to reduce our technology and management systems to Earth Hour, an annual international environmental footprint and decrease minimize the Company’s environmental environmental campaign to switch off consumption of natural resources at our footprint, pay great attention to the the lights for one hour to signal our facilities: efficient use of natural resources, and commitment to saving the planet. support a broad range of environmental projects. The Group was also an official partner • Renovation and upgrade of treatment facilities at the production sites in the of the event to celebrate 25 years of Lipetsk, Penza, Voronezh and Moscow All of our production facilities are WWF work in Russia. Guests at the event regions. This includes renovation of equipped to monitor wastewater were able to enjoy a wide selection of the local full cycle treatment facilities at discharge, air pollution and energy Cherkizovo products. The Company the Group's Dankov site. The project saw consumption. Through constant also sponsored a win-win charity lottery complete facility clean-up, equipment environmental monitoring and analysis with all proceeds used to support rare upgrade, treatment technology at our production sites we are able to species preservation projects in Russia. automation, and pollutant reduction in prevent accidents and take prompt the plant’s incoming flow. action to redress any potential problems. Cherkizovo Group seeks to minimize its production waste. For example, • Overhaul of wells in the Moscow and The Company closely cooperates on waste from poultry production is used Penza regions. environmental matters with government to make granular fertilizers. In pork agencies, business partners, NGO production, we use a unique monolithic experts, and broad industry community. seamless flooring technique at the • Design and construction of composting facilities and poultry manure storages in nursery and finisher sites to prevent soil the Lipetsk, Penza and Tambov regions. Last year saw the start of our partnership contamination with manure. We make with the World Wide Fund for Nature every effort to promote resource • Launching a blood processing unit in 512.4 RUB million. Investment in environmental protection projects conservation and energy efficiency the Penza Region. among our employees. To this end, we have implemented waste sorting, • Construction and upgrade of exhaust as well as collection and disposal of and ventilation systems, as well used batteries and accumulators at our as construction of lagoons and headquarters. refurbishment of manure removal pipelines in the Lipetsk Region. All environmental projects underwent state expert review to confirm compliance with regulatory requirements. 122 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUP3.4% the Group’s energy consumption down in 2019 INVESTMENT IN ENVIRONMENTAL PROTECTION PROJECTS, RUB million AIR WATER WASTE TOTAL 32.7 15.0 342.8 121.3 136.9 163.3 512.4 299.6 HAZARD CLASSES 1 TO 4 WASTE MANAGEMENT IN 2018-2019, thousand tonnes RECYCLED DECONTAMINATED LANDFILLED TRANSFERRED TO THIRD PARTIES TOTAL 3,514 808 184 123 955 1,164 2,735 1,503 7,388 3,598 KEY ENVIRONMENTAL IMPACT FACTORS In 2019, Cherkizovo Group generated PLANS In 2020, we are planning to install an additional filtration-based air 2.2 times more waste of hazard classes treatment system at Cherkizovsky 1 to 4 than in 2018. The rise was due Meat Processing Plant’s Dankov to the acquisition of new legal entities site. It uses nozzles to feed and production increase. The growth in and vaporize aromatized water, production contributed to a 30% increase in creating a wet barrier for dust and fresh water use from water sources, driving up treated wastewater discharge and odours along the plant’s perimeter. The new treatment system will pollutant emissions from stationary sources help improve living conditions by 69% and 1.1%, respectively. In 2019, in Dankov, especially for people the Group’s energy consumption per unit residing close to the plant. of output was down by 3.4% year-on-year helped by the energy efficiency initiatives. www.cherkizovo.com 123 CHERKIZOVO GROUPCherkizovo unitesCommunity relations On top of that, the Company implements targeted assistance programs across its footprint to bolster educational and healthcare institutions, sponsor cultural events and sports teams, and help public organizations and socially disadvantaged groups. Some of the charitable projects are initiated by our employees and funded by way of their personal contributions. For example, in December 2019, we sponsored a New Year’s event for children and teenagers with Down syndrome, whose holiday gift wishes were posted in advance at the Company’s Moscow office. The entire Group was able to contribute to purchasing gifts for the event. Our charitable initiatives go through a thorough vetting process, which includes discussion and approval by internal and some external stakeholders. Increasingly more regions are covered by Cherkizovo Group’s charitable projects. In 2019, we launched such projects in the Altai Territory and the Belgorod and Leningrad regions. . INVESTMENT IN CHARITABLE PROJECTS, RUB million 2019 2018 2017 12.8 5.8 2.4 INVESTMENT IN CHARITABLE PROJECTS IN 2019 BY SECTOR AND AREA 6% 3% 42% 49% Social projects Sport and healthy lifestyle District events Other Total RUB 6,280,433 5,357,000 357,000 806,890 12,801,323 12.8 RUB million invested in local community support and development in 2019 124 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUP At Cherkizovo Group, we place great emphasis on the well-being and prosperity of local communities. We contribute to economic growth and security by creating jobs and making timely tax payments to the federal and regional budgets, which support local communities. Kashira children's football team "Cherkizovo". LOCAL COMMUNITY SUPPORT The Company is committed to providing In the Penza and Lipetsk regions, we took part in Back to School charity events by equal opportunities for all community donating stationery sets to first-graders members, particularly focusing on socially from low-income and large families. vulnerable groups. We support those in need through dedicated assistance In November, Cherkizovo Group staged programmes and sponsor social festivities for a rehabilitation center institutions, paying special attention to patients in the Lipetsk Region. Children children from low-income families and enjoyed a comprehensive entertainment those with special needs and disabilities. programme and a variety of treats. Employees from our Agro Division helped In the spring of 2019, Cherkizovo Group organize the event, handing over a wide donated RUB 4 billion and three brand range of gifts to the center. new Belarus tractors to farmers in the Trans-Baikal Territory, helping them to We make every effort to promote sports recoup from devastating steppe fires, among young people. In 2019, we built which had destroyed their property and a rink for a secondary school in the agricultural machinery. Volovsky District of the Lipetsk Region and purchased hockey gear for students The Group also contributes to major spending a total of over RUB 2.2 million on charity events. In June 2019, we took part the project. in the Running Hearts Green Marathon in Moscow. The race was organized by the Cherkizovo supports the children's Naked Heart Foundation and Sberbank. football team of the same name from The funds raised during the event went Kashira: it purchases uniforms, pays for to a charity fund supporting children participation in the championship of the with special needs. In September, the Moscow Region and transfers between Company co-sponsored a charity race matches. held by SAP and Arifmetika Dobra charity foundation in Moscow's Izmaylovsky In the reporting period, Cherkizovo Park. The event helped raise over RUB Group also became the general sponsor 1.5 million to cover education fees in of Crystal, a men’s volleyball club from orphanages. Voronezh, renamed Crystal Cherkizovo. In addition, Cherkizovo Group held its own race in Penza. www.cherkizovo.com 125 CHERKIZOVO GROUPCherkizovo unitesCORPORATE GOVERNANCE In 2019, we continued to improve our corporate governance framework, with major industry experts joining the Management Board to bring in their global expertise. DIRECTORS’ STATEMENT 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 31 December 2019 and reiterate their strong commitment to meeting all regulatory requirements and following the best corporate governance practices. The Board of Directors acknowledges the key principles and recommendations set out in the Corporate Governance Code and views them as conducive to better governance and the Company's long-term sustainable development. CORPORATE GOVERNANCE FRAMEWORK Cherkizovo Group maintains its corporate governance framework in line CORPORATE GOVERNANCE FRAMEWORK Shareholder rights and equitable treatment of shareholders The Company’s Board of Directors The Company's Corporate Secretary Remuneration of the Company's directors, executives and other key managers Risk governance and internal control Disclosures and the Company's information policy Material corporate actions Complied with Partially complied with Not complied with 9 26 2 3 5 3 – 2 5 – 5 1 4 – 2 5 – 2 – 0 5 Managing sustainable development At Cherkizovo, sustainable development is managed by different functions, with HSE matters falling within the remit of a special department headed by a direct report to the Head of Business Development, who is also the Chairman of the Board of Directors. with Russian laws and the Corporate CORPORATE GOVERNANCE the Management Board’s competencies. Governance Code (2014) as approved by FRAMEWORK DEVELOPMENT Six new members joined the Management the Bank of Russia’s Board of Directors. IN 2019 In 2019, Cherkizovo Group maintained Board, including both members of the Company’s talent pool and major Underpinned by vertical integration, an effective corporate governance industry experts with global experience. it enables us to ensure that all framework conducive to its sustainable of the Group’s companies are governed development and achievement of its efficiently. 126 strategic goals. Throughout the reporting period, the Group's corporate governance bodies continued their efforts to enhance the governance approaches and practices, with a particular focus on strengthening Our full report on the Corporate Governance Code compliance is available at e-disclosure. ru/portal/company.aspx?id=6652 (only available in Russian). 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCherkizovo Group has an effective corporate governance framework compliant with regulatory requirements and global best practices. Our management seeks to ensure sustainable development of the Company by balancing the interests of shareholders, employees, local communities, and other stakeholders. KEY EVENTS AFTER THE REPORTING DATE 10 January 2020 Emin Mammadov was appointed Deputy CEO and his director status changed from independent to executive, 12 February 2020 the Board of Directors resolved to: • appoint Oleg Zakov, Armen Pogosyan and Olga Buryak to the Management Board, • • • remove Andrey Khizhnyak and Sergey Buylov from the Management Board, set the number of members of the Management Board at 16, recommend that the Annual General Meeting of Shareholders vote for allocating and paying RUB 60.92 per share in dividends for 2019. 02 March 2020 Leonid Izmailov, member of Cherkizovo Group’s Management Board, acquired shares of Cherkizovo Group. Following the acquisition, Mr. Izmailov’s share in the Company’s authorized capital and his share in the Company’s common stock was 0.00072%. On March 27th 2020, the General Shareholder Meeting elected the following members of the Board of Directors: Balay John Michael, Mikhailov Evgeny, Mikhailov Sergey, Fuertes Quintanilla Rafael, Sobel Richard Paul, Kegels Filip, Warmoth Christopher John. 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 the Personnel and Remuneration Committee, the Regulations on the Investment and Strategic Planning Committee, the Regulations on the Management Board, the Regulations on the General Director, the Regulations on Internal Audit, the Regulations on the Review Commission, the Regulations on the Corporate Secretary, the Regulations on the Dividend Policy; the Regulations on Insider Information, the Regulations on Information Policy in Disclosure and Delivery of Information, the Regulations on Remuneration and Compensation Paid to the Members of the Board of Directors, • the Regulations on the Liquidation Commission No changes were made to the Company's regulations in 2019. www.cherkizovo.com 127 CHERKIZOVO GROUPCherkizovo unitesCORPORATE GOVERNANCE CORPORATE GOVERNANCE STRUCTURE The General Meeting of Shareholders is the supreme governing body of Cherkizovo Group. the corporate The Board of Directors has three standing committees and four subcommittees. governance structure also includes the Board of Directors, Cherkizovo Group annually conducts an independent the executive tier represented by the CEO and external audit of its financial (accounting) statements the Management Board led by the CEO as Chairman, prepared in accordance with the Russian and and the Review Commission acting as a supervisory body. international standards. Board of Directors’ committees and subcommittees Review matter that fall within their remit For further details, see page 134. Audit Committee Personnel and Remuneration Committee Investment and Strategic Planning Committee Subcommittees: • for cost visibility and data capabilities • for turkey, HoReCa and new channels • for strategy and M&A • for marketing and R&D Board of Directors Oversees the Group's strategic management Directors: Independent non-executive (Mammadov * , Kegels, Jones) Non-executive (Sobel, Fuertes) Executive (Mikhailov S., Mikhailov Е.) For further details, see page 130. * Changed status to executive director 10 January 2020. Executive bodies In charge of the Group's strategy implementation For further details, see page 137. Board of Directors Chairman of the Management Board Management Board 128 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governance 27 March 2019: Annual General Meeting of Shareholders 9 April 2019, 15 May 2019, 26 September 2019: Extraordinary General Meetings of Shareholders In accordance with the decision GENERAL MEETING made at the Annual General Meeting GOING CONCERN The Board of Directors is satisfied that the Company’s financial statements have of Shareholders on 27 March 2019 and been prepared on a going concern basis taking into account the Group’s 2018 General Meeting of Shareholders (AGM) and that the same principle is assumed performance, the total dividend payout on an annual basis. the agenda of the AGM in the preparation of the Company’s 2020 for the year amounted to RUB 4.2 billion, budget and long-term plans. with dividend per share of RUB 101.63 always includes such items as: • approval of Cherkizovo Group's OF SHAREHOLDERS Cherkizovo Group holds the Annual (excluding the 2.916.759 treasury ordinary annual report and annual accounting registered shares). statements, DIVIDENDS Cherkizovo Group’s dividend policy is based • approval of profit and loss distribution, • election of the Board of Directors on the principle of rational distribution The Extraordinary General Meeting of profits balancing shareholders' interests of Shareholders of Cherkizovo Group members, with the Group’s need for investment held on 26 September 2018 in the form • election of the Review Commission to fund its future growth. of absentee voting resolved to distribute members, The dividend payment is considered of RUB 2.0 billion, with dividend per share by the Board of Directors upon of RUB 48.79 (excluding the 2.916.759 The agenda of the AGM can be expanded the recommendation of the Investment treasury ordinary registered shares). to include other matters. net profit for 1H 2019 in the amount • appointment of the Company’s auditor. and Strategic Planning Committee, taking into account the Group’s current financial standing and the proposed distribution amount. the effective Dividend Policy provides for a targeted dividend payout of at least 50% of consolidated net profit for the reporting period. The final decision on profit distribution and dividend payout is made by the General Meeting of Shareholders. Dividends are paid semiannually: for the first half and the full year. The Board of Directors may resolve to convene an Extraordinary General Meeting of Shareholders, if necessary. 2019 2018 2017 109.71* ** 122.11 134.89 2017 2018 2019 Full-year dividends Interim dividends 75.07 101.63 59.82 59.82 60.92 59.82 * On 12 February 2020, the Board of Directors resolved to recommend that the Annual General Meeting of Shareholders vote for paying RUB 60.92 per ordinary share in dividends for 2019. ** 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 www.cherkizovo.com 129 CHERKIZOVO GROUPCherkizovo unites CORPORATE GOVERNANCE In 2019, the AGM was held on 27 March. In accordance with the agenda, the shareholders: • approved Cherkizovo Group’s BOARD OF DIRECTORS The Board of Directors is the collective According to the Articles of Association, Board resolutions are adopted by a majority governing body of Cherkizovo Group vote of the directors present at the meeting. responsible for its overall management. Pursuant to Russian laws, certain decisions 2018 annual report and annual the Board’s terms of reference are require more than a simple majority vote. accounting (financial) statements for determined by Russian laws and 2018 prepared in accordance with the Company's Articles of Association. This rule applies to: • major transactions (require approval by the Russian Accounting Standards, the key responsibilities of the Board a unanimous vote), • passed a resolution on profit distribution and dividend payout, • elected the Board of Directors and the Review Commission members, • reappointed Deloitte & Touche CIS as Cherkizovo Group’s auditor for 2019. 9 April An interested-party transaction (several interrelated transactions) involving the sale of Directors include: • performing strategic management, • approving the Group's internal risk • interested-party transactions (resolved by a majority vote of the directors who have no interest in the transaction, management procedures, assessing and in compliance with the legal • • their effectiveness and ensuring they requirements). are complied with, • Meetings of the Board are considered setting up and dissolving the Group's duly convened if the majority executive bodies, of the directors are present. • approving financial plans and budgets, • making recommendations on profit BOARD ACTIVITIES In 2019, Cherkizovo Group’s Board of more than 2% of the Company’s and loss distribution. outstanding ordinary shares approved. • In performing its role, the Board of Directors held ten meetings, including nine of Directors is guided by the following with directors present in person. Key items 15 May • The Company’s address and place of business changed, the Articles principles: • decision-making based on reliable information about the Company's of Association amended accordingly. operations, • Resolutions passed to join • ensuring shareholders’ rights the Company's budget reviewed in the reporting year: • • • Risk management • Convocation of General Meetings the Company's development strategy the Russian Union of Industrialists and to participate in the management of Shareholders, and recommendations Entrepreneurs (RSPP) and the Etalon of the Company, receive dividend on dividends Labor Safety and Health Association. payouts and information about • Consents to interested-party 26 September A resolution on profit distribution and • balancing the interests of various groups of shareholders and ensuring • Reports by committee and subcommittee chairmen dividend payout for 1H 2019 passed. unbiased decision-making for Cherkizovo Group, transactions the benefit of all shareholders. The attendance of meetings held in person was 87%, which the Company rates as satisfactory. 130 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governance10 meetings held by the Board of Directors Cherkizovo Group in 2019 87% total attendance of in-person meetings of the Board of Directors INFORMATION ON INDEPENDENT AND NON-EXECUTIVE DIRECTORS, SHARES IN THE AUTHORIZED CAPITAL AND SHARE OWNERSHIP * Independent director Non-executive director Executive director + – – + – – + + + – – - - - - + + - Share in the authorized capital – Grupo Fuertes 8.01% – – 26.27% 26.27% – Share ownership – – – – 26.27% 26.27% – MEMBERS OF THE BOARD OF DIRECTORS No members left or joined the Board of Directors in 2019. Sergey Igorevich Mikhailov, Evgeny Igorevich Mikhailov, Emin Board member Tofik oglu Mammadov, Richard Paul Sobel, Elliot Jones Rafael Fuertes Quintanilla, Elliot Brinton Rafael Fuertes Jones, and Filip Kegels were all re-elected to the Board at the AGM in March 2019. At the first meeting of the Board following the AGM, Evgeny Mikhailov was re-elected as Chairman and Richard Sobel as Deputy Chairman. Richard Sobel Emin Mammadov Evgeny Mikhailov Sergey Mikhailov Filip Kegels The independent directors chair the Audit DIRECTOR EXPERIENCE Committee (Elliot Jones) and the Personnel and Remuneration Committee (Filip Kegels) AND EXPERTISE The directors have all necessary and are also members and chairmen of the following subcommittees: • the Cost Visibility and Data competencies, which cover: • insights from extensive experience in: – animal farming food manufacturing • • promotion of consumer goods in emerging markets restaurants and HoReCa • • strategic development and M&A • consumer brand marketing and • • • Capabilities Subcommittee (chaired by – poultry farming Elliot Jones), – meat processing the Marketing and R&D Subcommittee – agriculture (chaired by Filip Kegels), the Strategy and M&A Subcommittee (one of the members is Elliot Jones), the Turkey, HoReCa and New Channels Subcommittee (chaired by Emin Mammadov), * As of 31 December 2019. www.cherkizovo.com investment development • finance and audit • • management of global operations • international business consulting • investment case studies. * the table does not include the remote meeting of the Board of Directors held on 13 March 2019 (ballot voting). Only those members of the Board of Directors who were not interested in approving the interested party transaction and who met the requirements of the law for persons entitled to vote on these issues took part in it. 131 CHERKIZOVO GROUPCherkizovo unitesCORPORATE GOVERNANCE Members of the board of directors 1 2 3 4 5 6 7 Evgeny Mikhailov Sergey Mikhailov Emin Mammadov Richard Sobel Rafael Fuertes Elliot Jones Filip Kegels Evgeny Mikhailov Executive director, Chairman of the Board of Directors Sergey Mikhailov Executive director, CEO of Cherkizovo Group, Chairman of the Investment and Strategic Planning Committee Emin Mammadov Independent director, Chairman of the Investment and Strategic Planning Committee, member of the Audit Committee and member of the Personnel and Remuneration Committee Evgeny Mikhailov is the Chairman Sergey Mikhailov has been Chief Executive Emin Mammadov is a seasoned expert of the Board of Directors of PJSC Cherkizovo Officer of Cherkizovo Group since with over 20 years’ FMCG experience in Group. From 2006 to 2014, he was the Head 2006. He is responsible for the general emerging markets, including at large global of Investment Projects at Cherkizovo Group management of the Company, its sustainable companies where he headed divisions in overseeing strategic business development, development and strategy. RIMEA (Russia, India, Middle East, and investment coordination and decision- Africa) and China. making on the Group’s expansion into new In 2006, Mr. Mikhailov steered Cherkizovo markets. Group to become Russia's first agricultural Emin graduated from Baku Institute Since 2016, he is also the Head of Business the LSE. Under his leadership, the Company Science, Azerbaijan, with a degree in Development. grew into Russia's largest meat and feed International Relations. company to successfully go public on of Social Management and Political Prior to joining Cherkizovo Group in 2004 producer. as First Deputy CEO of AIC Mikhailovsky, In 2001, Sergey Mikhailov was appointed he was an assistant to the Vice President Marketing Director of Cherkizovsky Meat at aTelo, Inc, a US telecommunications Processing Plant. He was promoted company, in Washington DC (2001) and to the new role of Deputy CEO for marketing worked as a financial analyst at Morgan and sales in 2002, and in 2003 he became Stanley in 2002. CEO of AIC Cherkizovsky. He graduated from the University In 1998, he interned as a financial analyst at of California (Los Angeles) in 2004 with Goldman Sachs, and in 1999 – at Morgan a degree in Business Economics. Stanley. In 1998, he also founded and headed aTelo, Inc., a telecommunications company based in Washington, USA. Sergey Mikhailov graduated from Georgetown University (USA) in 2000 with a degree in Finance and Economics. 132 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governance1 5 2 6 3 7 4 Richard Sobel Non-executive director, Deputy Chairman of the Board of Directors, member of the Investment and Strategic Planning Committee Rafael Fuertes Non-executive director, member of the Investment and Strategic Planning Committee Filip Kegels Independent director, Chairman of the Personnel and Remuneration Committee, member of the Audit Committee and member of the Investment and Strategic Planning Committee Richard Sobel has a wealth of experience in direct investments. Rafael Fuertes has extensive experience in the agricultural industry, in particular in animal breeding, meat processing and crop farming. Filip Kegels is an experienced expert in food production and consumer brand development in European, Asian and As one of the pioneers of the Russian He is the Chairman of the Board of Directors emerging markets. For many years, Filip private equity industry, Mr. Sobel was of Grupo Fuertes, a leading Spanish agricultural headed international operations of Danone a senior fund manager at Baring Asset holding company, which is the partner Group. He served as Vice- President and Management and Alfa Capital Partners of Cherkizovo Group in the Tambov Turkey JV Non-Executive Chairman of Group Danone in the 1990s and early 2000s. He is and a minority shareholder in Cherkizovo Group China and Japan (Asia-Pacific, India and the founder and manager of Altai Advisors, owning 8.0065% of its issued shares. Middle East), and Vice-President of Danone a consulting firm which specializes in Africa, Middle East and Asia-Pacific. He has providing advice on potential investment He graduated from the University of Murcia, successful experience of doing business in opportunities in Russia, CIS, Europe and Spain. the USA. Previously, he was an adviser at Bain & Company in Boston, USA, and an investment manager at Batterymarch Financial Management, the European Bank for Reconstruction and Development and CIBC Oppenheimer. 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 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, Richard graduated from Stanford University, the agricultural industry. of Al Safi Danone, Saudi Arabia, and USA, and holds an MBA from Harvard Pulmuone Danone, South Korea. He also Business School, USA. Over the last 17 years, he has been leading served on the boards of Yakult (Japan), Elliot Jones has a strong track record in and served as Vice Chairman of the boards Jones and Jones Consulting, a firm providing Strauss Health, Israel, Mengniu Group, consulting advice on strategic development China, Brookeside, Kenia, and Fanmilk Sub- to poultry producers in the USA and other Saharan Africa, Luxemburg. countries. Prior to that, he worked for a number of US of Antwerp (Master in Economics) and poultry and turkey production companies, the University of Brussels (MBA). He graduated from the Catholic University including Foster Farms, Zacky Farms, Swift Dairy and Poultry Company, over 20 years. He graduated from the University of San Francisco, USA. www.cherkizovo.com 133 CHERKIZOVO GROUPCherkizovo unitesCORPORATE GOVERNANCE BOARD COMMITTEES There are three standing Board Committees Committee Key functions Members Attendance Key matters reviewed in 2019 Meetings held in 2019 in Cherkizovo Group: • • the Audit Committee, the Personnel and Remuneration Committee, • the Investment and Strategic Planning Committee. Audit Committee (operating since 2006) Personnel and Remuneration Committee (operating since 2010) Investment and Strategic Planning Committee (operating since 2012) The committees serve as consulting and advisory bodies. the functions and tasks of each committee are defined by the respective committee regulations * . No updates we made to the committee regulations in 2019. All Committee members have the skills, experience and resources required to efficiently perform their duties and may also engage external consultants. 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. These 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 its meeting at the next meeting of the Board of Directors. In April 2019, the Board of Directors approved the members and Chairmen of all three committees. • • • • • • • • • • • 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. 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. to review the proposals submitted to the Board of Directors with regard to setting the Company's business priorities, • development strategy and investment policy, • to assess and review strategic projects and organic growth opportunities, to consider investment and dividend policy matters. • • In 2019, the Committee included only independent directors: 4 Elliot Jones (Chairman), Emin Mammadov, Filip Kegels. In 2019, the Committee included only independent directors: Filip Kegels (Chairman), Elliot Jones, Emin Mammadov. 100% • Quarterly, semi-annual and annual financial results and press-releases • External and internal auditors reports 9 93% • Company Development Strategy • Strategic projects • M&As and integration of acquired companies • CAPEX and ROIC issues • Certain lines of business (ready-to-eat, foodservice, export, etc.) Emin Mammadov (Chairman), Richard Sobel, Sergey Mikhailov, Elliot Jones, Rafael Fuertes, Filip Kegels. 5 90% • CEO and Management • Organizational design and • Long-term incentives for key Board KPIs structure officers • Talent management • Corporate culture • Succession planning * the regulations are available on Cherkizovo Group’s website in the Corporate Documents section at https://cherkizovo.com/en/investors/#/en/company/corporate-governance/documents/ 134 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCommittee Key functions Audit Committee (operating since 2006) internal control system, to monitor completeness, accuracy and reliability of the Company's financial statements, to monitor reliability and efficiency of the risk management and to ensure that the Company's internal and external audits are independent and unbiased, to monitor the efficiency of the Company's whistleblowing system. 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. to review the proposals submitted to the Board of Directors with regard to setting the Company's business priorities, • development strategy and investment policy, to assess and review strategic projects and organic growth opportunities, to consider investment and dividend policy matters. • • • • • • • • • • • • • • Personnel and Remuneration Committee (operating since 2010) Investment and Strategic Planning Committee (operating since 2012) Members In 2019, the Committee included only independent directors: Elliot Jones (Chairman), Emin Mammadov, Filip Kegels. In 2019, the Committee included only independent directors: Filip Kegels (Chairman), Elliot Jones, Emin Mammadov. Meetings held in 2019 Attendance Key matters reviewed in 2019 and Strategic Planning Committee operated Four subcommittees of the Investments 4 100% • Quarterly, semi-annual and annual financial results and press-releases • External and internal auditors reports 9 93% • Company Development Strategy • Strategic projects • M&As and integration of acquired companies • CAPEX and ROIC issues • Certain lines of business (ready-to-eat, foodservice, export, etc.) in 2019: • the Cost Visibility and Data • • • Capabilities Subcommittee, the Turkey, HoReCa and New Channels Subcommittee, the Strategy and M&A Subcommittee, the Marketing and R&D Subcommittee. The subcommittees report the results of their work in a given year at a joint meeting of the Investment and Strategic Planning Committee and the Personnel and Remuneration Committee. the Chairmen of subcommittees report to the Board of Directors at least once a quarter. Emin Mammadov (Chairman), Richard Sobel, Sergey Mikhailov, Elliot Jones, Rafael Fuertes, Filip Kegels. 5 90% • CEO and Management Board KPIs • Organizational design and structure • Long-term incentives for key officers • Talent management • Corporate culture • Succession planning www.cherkizovo.com 135 CHERKIZOVO GROUPCherkizovo unitesCORPORATE GOVERNANCE BOARD OF DIRECTORS’ REMUNERATION OF THE BOARD effective performance. the Regulations PERFORMANCE ASSESSMENT At Cherkizovo Group, the Board of Directors OF DIRECTORS The Board directors are remunerated in line on Remunerations determine the base annual remuneration, set out a transparent conducts an annual evaluation of its work with the Regulations on Remunerations procedure for the calculation of the variable in the reporting period, which includes and Compensations Paid to the Members part of remuneration (the annual bonus) performance assessment of the Board’s of the Board of Directors. and detail the list of reimbursable expenses committees. the evaluation results are and the service level provided to the Board reviewed at a meeting of the Board held in According to the Regulations, the Board directors. person. the Board rated its performance in directors are paid an annual remuneration 2019 as successful. for their work in the Board of Directors In 2019, the Board of Directors’ remuneration comprising a fixed (base and additional totalled RUB 136.1 million. remuneration) and variable (annual bonus) part. the remuneration levels currently Additionally, the Company maintains liability offered by the Company to the Board insurance for all its Board directors for their directors are sufficient to incentivize their full term in office as recommended by the Personnel and Remuneration Committee. REMUNERATION OF THE BOARD OF DIRECTORS Base remuneration Additional remuneration Annual bonus Reimbursable expenses Calculation basis for remuneration, RUB 5,340,000 Chairman 26,700,000 Deputy Chairman 1,068,000 Committee Chairman 1,068,000 AB = BR * (EBITDAr * 0.3 + CFr * 0.3 + SCr * 0.4), but no more than 125% of BaR, where AB – annual bonus, BR – base remuneration EBITDAr – ratio of actual to target EBITDA, Subcommittee Chairman 1,068,000 CFr – ratio of actual to target Cash Flow, For each additional meeting (>6 per year) 100,000 SCr** – ratio of actual to target subcommittee KPI value roundtrip travel to the meeting venue, accommodation and meals expenses not directly related to the Board meetings, but associated with its work and approved in writing by the Board Chairman * Directors serving as chairs of two or more committees are eligible for only one additional remuneration. a similar rule applies to chairs of subcommittees. ** Applies to subcommittee members only. In case of membership in two or more subcommittees, the ratio of the subcommittee in which the member was most active applies. 136 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceMANAGEMENT BOARD The Management Board is a collective executive governing body of Cherkizovo MEMBERS OF THE MANAGEMENT BOARD As of 31 December 2019, Group, managing its operations and the Management Board consisted REMUNERATION OF THE MANAGEMENT BOARD AND BOARD OF DIRECTORS In 2019, total remuneration amounted to accountable to the Board of Directors. of 15 members. the Management Board is RUB 680.6 milion. Remuneration of the the Management Board is authorized: • to approve strategic plans and business priorities of Cherkizovo chaired by Sergey Mikhailov, Cherkizovo Board of Directors was RUB 136.1 million, Group's CEO. and remuneration of Management Board was RUB 544.5 million. Group, its subsidiaries and affiliates, In 2019, the Board saw the following • • to review the business performance of the Group’s subsidiaries, to approve the staff incentive changes: • in April, the Board of Directors removed John Ross and elected framework for Cherkizovo Group, its Sergey Buylov, Ray Cheeks, Roger subsidiaries and affiliates, • to review and make decisions Jones, Evgeny Subbotin and Alexey Kletsko to the Management Board, on signing collective bargaining • in November, the Board of Directors agreements and contracts by remobed Violetta Shimkevich the Group, its subsidiaries and affiliates. and elected Akim Tiunov to the Management Board. • The Management Board is led by the Chairman of the Management . Board, who acts as Cherkizovo Group's Chief Executive Officer (CEO). the CEO’s mission is to: • ensure Cherkizovo Group's profitability and competitive performance, its financial and economic sustainability, • oversee the observance of shareholders' rights, and • ensure the provision of employee benefits to Cherkizovo Group's personnel. 15 members of the Management Board, as of 31 December 2019 www.cherkizovo.com 137 CHERKIZOVO GROUPCherkizovo unitesCORPORATE GOVERNANCE Sergey Mikhailov Chief Executive Officer, Ludmila Mikhailova Chief Financial Officer, Chairman of the Management Board Member of the Management Board Sergey Mikhailov has been CEO of Cherkizovo Group Ludmila Mikhailova has been CFO of Cherkizovo Group since 2006. He is responsible for the general management since 2006. Her responsibilities include setting the Group's of the Company, its sustainable development and strategy. financial policy, managing internal and external financial reporting, budgeting, and sourcing funds for the effective In 2006, Mr. Mikhailov steered Cherkizovo Group development of the Group. to become the first Russian agricultural company to successfully go public on the LSE. Under his leadership, Between 2001 and 2004, Ludmila Mikhailova worked as the Company grew into Russia's largest meat and feed a financial analyst at McFarlane Gordon, Inc. (Canada), producer. General Mills Co (Canada) and ING Barings (UK). She then held various managerial positions at Cherkizovo Group and In 2001, Sergey Mikhailov was appointed Marketing AIC Cherkizovsky. Director of Cherkizovsky Meat Processing Plant. He was promoted to the new role of Deputy CEO for marketing A number of major transactions were implemented under and sales in 2002, and in 2003 he became CEO of AIC Ludmila Mikhailova’s supervision, enabling the Group Cherkizovsky. to consolidate approximately 13% of Russia’s poultry market. In 2006, the Сompany successfully carried out its In 1998, he interned as a financial analyst at Goldman IPO on the London Stock Exchange, raising over USD 250 Sachs, and in 1999 – at Morgan Stanley. million. In 1998, he founded and headed aTelo, Inc., Ludmila Mikhailova ranks among the Top 1,000 Russian a telecommunications company based in Washington, Managers. USA. Mr. Mikhailov ranks among the Top 1,000 Russian of the Government of the Russian Federation and holds an Managers, leading the charge in the agricultural industry MBA from York University (Canada). She graduated from the Financial Academy category. He graduated from Georgetown University (USA) in 2000 with a degree in Finance and Economics. Share in the Company's common stock: 0.39% Share in the Company’s authorized capital: 0.39% Share in the Company’s authorized capital: : 26.27% Share in the Company's common stock: 26.27% 138 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governance AS OF 31 DECEMBER 2019 Alexey Skorobogatov Head of Procurement and Logistics, Maksim Zudin CEO of Poultry Management Company, Yury Dyachuk Head of Legal Support and Real Estate Member of the Management Board Member of the Management Board Operations, Member of the Management Board Alexey Skorobogatov has been Head Maksim Zudin was appointed CEO Yury Dyachuk has worked at Cherkizovo of Procurement and Logistics at of Poultry Management Company in 2017. Group for over 20 years. Since 2006, he has Cherkizovo Group since 2011. He is been overseeing legal support at Cherkizovo responsible for the development and Between 2015 and 2018, he headed Group, litigation involving the Company, and coordination of procurement activities, Cherkizovo’s Agro Division and was its regulatory compliance. building efficient supply chains and responsible for the strategic development managing stock flows in a cost-effective of the Pork, Feed and Grain segments. He worked as part of the legal team at manner. Prior to joining Cherkizovo Group, Maksim Cherkizovsky Meat Processing Plant from was Head of Oil Production at Solnechnye 1995 to 1996 Between 2006 and 2009, he was Head Produkty. of Procurement at Wimm-Bill-Dann and was Head of its Legal Department Foods OJSC. From 2009 to 2011, he Between 2003 and 2013, he was Head between 1996 and 2000. was regional Head of Procurement at of the Agro Division as well as a member Danone Nutricia Baby Food (Eastern of the Management Board at Razgulay In 2005, he was Senior Counsel advising on Europe) and worked at Mobile Group, where he was responsible for the restructuring of Cherkizovo Group. TeleSystems OJSC, where he set up and the East branch and led the Krupa project. headed the procurement and logistics He graduated from Moscow State University department, which was later merged into He graduated from the Faculty of Law. a single logistics department. of Mechanics and Mathematics of Moscow State University. Share in the Company’s authorized capital: He graduated from Pyatigorsk State 0.086% Linguistic University. He holds no stake in the Group's authorized capital or common stock. Share in the Company's common stock: He holds no stake in the Group's 0.086% authorized capital or common stock. He holds no stake in the Group's authorized capital or common stock. www.cherkizovo.com 139 CHERKIZOVO GROUPCherkizovo unitesCORPORATE GOVERNANCE Vladislav Belyaev Head of IT, Member of the Management Board Leonid Izmailov Head of Investment Projects, Member of the Management Board Alexander Gusakov Security Director, Member of the Management Board Vladislav Belyaev has been Head of IT Leonid Izmailov has been Head Alexander Gusakov has been Security at Cherkizovo Group since 2012. He is of Investment Projects at Cherkizovo Director of Cherkizovo Group since responsible for developing the Group's Group since 2014. He is responsible for February 2016. He is responsible for IT strategy, overseeing its in-house IT managing construction as part of major developing and overseeing safety projects and the ongoing improvements investment projects. of the regional IT infrastructure. standards and procedures, maintaining the Group's economic, information Prior to joining the Group, Leonid was and physical security, as well as Between 2008 and 2012, he was Head Technical Director and Operational the coordination and interaction with of the Management Systems Department Cluster Director at AgroTerra for four government authorities at both national at VimpelCom. Prior to this, he held senior years. Prior to this, he held a number and regional levels. management positions at CafeMax and of senior management positions across Moscow Industrial Bank. a range of companies, including Russian Alexander has over ten years Oils, Bunge, Unilever and Nestle Food. of experience in corporate security Vladislav has led the implementation management at international companies. of a SAP ERP system launched in 2013. Leonid graduated from Moscow State Prior to joining the Group, he worked for University with a degree in Chemistry. Henkel Rus, Zurich Insurance Company In 2015, he oversaw the roll-out and Gazprom. of the electronic document management He holds no stake in the Group's system (EDMS) across the Group and authorized capital or common stock. Between 1981 and 2005, he worked in the creation of the unique modern data processing center. He graduated from the 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. the state security services. He graduated from the Higher School of the KGB with a degree in law. He holds no stake in the Group's authorized capital or common stock. 140 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceAS OF 31 DECEMBER 2019 Evgeny Subbotin Director for Logistics and Supplies, Akim Tiunov Manufacturing Director, Member Roger Jones Agrodivision Director of Operations, Member of the Management Board of the Management Board Member of the Management Board Evgeny Subbotin has served as Director His major focus is management Roger Jones has been Agrodivision for Logistics and Supplies heading of production segments of the Group, Director of Operations since late the supply chain operations of the Group production strategy planning and 2018. From 2014 to 2018, he headed since 2017. He is responsible for development, business-process the financial control team within integrating the logistics operations optimization, and modern and innovative the Finance Department. Since 2013, of the Poultry, Meat Processing and production technologies implementation. he had been holding the post of Deputy Turkey segments into a single centralized Director for Economics and Finance at structure. He also oversees the efforts Before joining Cherkizovo Group, Akim Cherkizovo Group's Pork Management to bring the planning functions of sales, was Manufacturing Vice-President at Kraft Company. production, and packaging and ingredient Heinz. From 2000 to 2007, he worked supply within a single planning unit. Mr at major international corporations, Roger is responsible for design and Subbotin is also in charge of designing including OTIS Elevators and Ford Motor implementation of the development and bringing on stream the Route Company. to Market project. strategy for the economics and finance function. In addition, he oversees efforts Akim Tiunov graduated from to streamline the planning, accounting, He has 17 years of experience in St Petersburg State University and reporting systems and supervises procurement and logistics, including of Architecture and Civil Engineering, and the segment’s financial analysis and 15 years of managing supply chains St Petersburg Polytechnic University. control processes, and project financing. and procurement in major corporations like Carlsberg Group (Vena and Baltika He holds no stake in the Group's Roger Jones graduated with honors from Breweries), Danone Group (Danone, authorized capital or common stock. Bloomsburg University of Pennsylvania Nutricia), and SC Johnson. with a degree in Accounting. He graduated from the St Petersburg State University of Architecture and Civil Engineering with a degree in Road Transportation Management and Logistics. 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. www.cherkizovo.com 141 CHERKIZOVO GROUPCherkizovo unitesCORPORATE GOVERNANCE Ray Cheeks Director of Operations at Tambov Turkey, Alexey Kletsko Director for Strategy, Member Andrey Khizhnyak Head of Sales and Marketing Strategy, Member of the Management Board of the Management Board Member of the Management Board Ray Cheeks has been Director Alexey Kletsko oversees strategy Andrey Khizhnyak has been Head of Sales of Operations at Tambov Turkey since development at Cherkizovo Group. and Marketing Strategy at Cherkizovo 2018. His responsibilities include He is responsible for M&A and asset Group since 2013. He is responsible overseeing the company’s day-to-day integration, business development, and for strategic planning and allocation operations and ongoing activities in line expert and methodological support of the Company’s marketing budget with performance targets, including for strategic development of various to ensure sales growth across all segments operational efficiency, costs, and quality. segments and functions. and oversees the marketing program execution within Cherkizovo Group. Prior to joining Cherkizovo Group, Prior to joining Cherkizovo Group, Alexey he held senior positions in a number ran strategic development projects Between 2001 and 2004, he was Head of major corporations, including Brown at major Russian and international of Marketing at Cherkizovsky Meat & Williamson Vintage Tobacco Coupons, companies, including Megapolis, Fesco, Processing Plant. KRAFT FOODS, and POSS Design Rolf, and McKinsey & Company. Limited. From 2004 to 2007, he was Marketing He graduated from the Moscow Institute Director at Exima Agricultural Holding, He graduated from Clemson University of Physics and Technology with a degree which incorporates more than 26 with a degree in Electrical Engineering. in Applied Mathematics and has an MBA enterprises, including Mikoyanovskiy Meet from HEC Paris. Processing Plant. He holds no stake in the Group's authorized capital or common stock. He holds no stake in the Group's Between 2010 and 2012, he was authorized capital or common stock. Commercial Director at United Confectioners. Prior to joining the Group, he worked for a range of companies, including OST Group and Betalink. Andrey 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. He holds no stake in the Group's authorized capital or common stock. 2 Annual report 2019 142 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceAS OF 31 DECEMBER 2019 Sergey Buylov Managing Director of the Meat CORPORATE SECRETARY The Corporate Secretary is a Company Anastasia Bakhmacheva Corporate Secretary Processing segment, Member officer who ensures effective ongoing of the Management Board communication with the Group shareholders, overviews the protection Sergey Buylov has been Managing of the shareholders’ rights and interests, Anastasia has been in corporate Director of the Meat Processing segment supports operations of the Board governance for 17 years. Prior to joining since 2019. He is responsible for of Directors and coordinates the activity Cherkizovo Group, she served as the segment’s strategic and operational of the Board sub-committees. the Deputy Head of Legal Department at planning and management. He oversees the scope of the Corporate Secretary’s Blagosostoyanie Non-State Pension Fund development and implementation role is defined in the Regulations on from 2014 to 2016. In 2011–2014, she of marketing and business strategies, the Corporate Secretary. Anastasia worked as Director at VTB Bank sales planning and assortment policy Bakhmacheva has been serving as overseeing implementation of a single across the sales channels. He also the Corporate Secretary of the Company corporate governance framework across supervises budgeting, management since November 2016, following the VTB Group. During 2009–2011, accounting, financial planning, and the resolution of the Board of Directors. Anastasia was Corporate Secretary at financial performance analysis and control. For 17 years prior to joining Cherkizovo Group, he worked for Danone in Russia, France and Belgium, holding senior management positions in various areas, including procurement and sales. Before that, he served as Commercial Director at L'Oreal Russia and CEO at Natura Siberica. Sergey graduated from the faculty of International Economic Relations of the Plekhanov Russian University of Economics with degrees in marketing and sales. He also holds degrees in international economic relations from two French universities. He holds no stake in the Group's authorized capital or common stock. 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 the Ministry of Justice of the Russian Federation with a degree in Civil Law and from 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 as part of the Director of the Year Awards. She holds no stake in the Group's authorized capital or common stock. www.cherkizovo.com 143 CHERKIZOVO GROUPCherkizovo unitesCORPORATE GOVERNANCE INTERNAL CONTROL AND RISK • to assess the appropriateness DISCLOSURE Cherkizovo Group is committed MANAGEMENT The Board of Directors is responsible for of management decisions made following audits, to identify areas for to being a transparent company open maintaining the internal control and risk efficiency improvements; to stakeholders. the Group discloses management framework at Cherkizovo Group and for ensuring its effectiveness. • • to check asset availability and safety; information pursuant to the Regulations to interact with the independent of Information Policy in Disclosure In November and December 2019, external auditor. the Board of Directors reviewed the risk and Delivery of Information and external disclosure requirements and management report and put forward The Internal Audit Service recommendations for the management monitors the implementation to improve the risk management of recommendations following audits. framework. Throughout the year, the monitoring procedure is considered the Audit Committee reviewed internal completed only if there is a report the laws of the Russian Federation, recommendations: • • • • the regulations of the Bank of Russia, the Moscow Exchange Listing Rules, the basic principles of disclosure and control and audit matters on a quarterly on the measures taken in line with provision of information by public joint- basis. the recommendations. stock companies recommended by the Corporate Governance Code. The key documents governing In 2020, the Internal Audit Service the internal control function are: • the Regulations on the Board plans to assess the reliability and In 2019, the disclosure requirements performance of the internal control imposed by the Russian laws did not see of Directors Audit Committee, framework with regard to a number any changes. • the Regulations on the Internal Audit. of key business processes of the Group The Company's Internal Audit Service approach criteria. operates in line with regulatory selected according to the risk-based The Group's information policy seeks: • to ensure stakeholders' right to information they need for decision- requirements, professional standards Internal control is also exercised by making on investment, management and and international best practices. It the Review Commission pursuant other matters, conducts centralized internal audit of all to the Articles of Association and • to promote openness and transparency, departments. Key functions of the Internal the Regulations on the Review enhancing the Group's overall corporate Audit Service: • to review, assess and monitor Commission. the Review Commission image. coordinates financial and business the reliability and effectiveness audits at Cherkizovo Group. Its The key principles of Cherkizovo of the internal control systems; members are elected by the General Group’s Information Policy are regularity, • to monitor compliance with financial and Meeting of Shareholders for a one-year consistency, promptness, timeliness, business operations procedures, internal term. regulations, including those relating to the risk of management override; In March 2019, the AGM elected the Review Commission consisting of Nina Erkovich, Aminat Shamkhalova and Nadezhda Emelyanova. accessibility, reliability, completeness, comparability, neutrality, equitable access and ease of control. 144 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCONTROL FRAMEWORK General Meeting of Shareholders Review Commission Board of Directors Internal Audit Service Audit Committee External auditor Cherkizovo Group discloses information: • on its corporate website cherkizovo.com/, MAJOR AND INTERESTED-PARTY DISCLOSURE OF INSIDER TRANSACTIONS In 2019, Cherkizovo Group entered INFORMATION To protect insider information, into one major transaction and the Company approved the Regulations • via the Interfax news agency seven interested-party transactions on Insider Information and the List e-disclosure.ru/portal/company. recognised as such under the Federal of Insider information. the Company also aspx?id=6652, Law On Joint-Stock Companies. maintains a list of insiders. the Group • at meetings with stakeholders, • by other means stipulated the by laws and internal regulations of the Group. These transactions were either informs the insiders about the start approved by the Board of Directors of lock-up periods for trading in stocks, or made following prior notification GDRs and exchange-traded bonds. of the members of the management The main landmark in 2019 was bodies stipulated in Article 81, Clause Given that the amendments to Federal the relaunch of the Company's 1.1 of the Federal Law On Joint-Stock Law No. 224-FZ On Countering the Illegal corporate website. the website address Companies without prior approval Use of Insider Information and Market remains the same – cherkizovo.com, required. while its design became more intuitive Manipulation and on Amendments to Certain Legislative Acts of the Russian and modern. It is now more convenient The Company publishes information Federation dated of 27 July 2010 were for users to find relevant information on major and interested-party enacted on 1 May 2019, the Company and follow the Company's news. transactions at e-disclosure.ru/portal/ plans to make relevant changes to its company.aspx?id=6652. internal regulations governing the use In 2019, the Group continued reporting its financial performance on a quarterly basis, and its operational results – on DISCLOSURE TO AUDITORS As far as each of the directors is a monthly basis. aware, there is no material information of insider 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 auditor, Deloitte & Touche CIS, was approved for reappointment in March 2019. The General Meeting of Shareholders annually considers external auditor approval. www.cherkizovo.com 145 CHERKIZOVO GROUPCherkizovo unitesSHAREHOLDER AND INVESTOR HIGHLIGHTS ORDINARY SHARES Cherkizovo Group’s ordinary shares are quoted on the Moscow Exchange (MOEX) (MOEX ticker: GCHE). the Group’s stocks are traded in the Level 3 List as its free float remained below 7.5% of outstanding shares for six consecutive months. the Group may ORDINARY SHARE PRICE PERFORMANCE IN 2019 * , RUB 2,500 2,000 restore the level in 2–3 years depending on 1,500 the macroeconomic environment. The Group delisted its GDRs from the London Stock Exchange (LSE) in 2018, but continues its GDR programme. It may be terminated at the Company’s discretion. As of the end of 2019, the share price grew by 55% to RUB 1,736 per share. 1,000 500 0 Jan19 Feb19 Mar19 Apr19 May19 Jun19 Jul19 Aug19 Sep19 Oct19 Nov19 Dec19 Source: Moscow Exchange CHERKIZOVO GROUP’S ORDINARY SHARE PRICE PERFORMANCE IN 2019 * As of 31 December 2018 12M high 12M low As of 31 December 2019 Average 12M closing price 12M ADTV, shares Source: Moscow Exchange 1 118 2 120 1 118 1 736 1 688 1 894 146 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governance69% Total shareholder return amounts including dividends paid in 2019 * SHAREHOLDING STRUCTURE The total number of authorized shares BONDS was 54,702,600 and the number of issued Series BО-001Р-02 BО-001Р-01 shares was 43,963,773. All issued and outstanding shares have equal voting rights. 2.8% 0.5% 6.6% 15.1% 8.0% 14.4% 26.3% 26.3% Registration number 4B02-02-10797-A-001P 4B02-01-10797-A-001P Stock exchange Annual coupon Issue date Coupon payment Issue amount Maturity Moscow Exchange Moscow Exchange 7.5 % 12.5% 28 November 2019 13 October 2015 Quarterly RUB 10 bln 3.5 years Semi-annually RUB 5 bln 5 years Boltenko Law GmbH Lidiya Mikhailova Evgeny Mikhailov Sergey Mikhailov Grupo Corporativo Fuertes, S.L. AIC Mikhailovsky Management Free float INVESTOR AND SHAREHOLDER RELATIONS % 15.1 14.4 26.3 26.3 8.0 6.6 0.5 2.8 Cherkizovo Group seeks to attract new News releases are available on our investment and actively cooperates with website at http://cherkizovo.com/en/press/ stock market players. In 2019, the Company company-news/ interacted by communicating press releases with operational and financial Information for shareholders and investors results, by holding conference calls and is available on our website at: meetings in person, and by organizing other http://cherkizovo.com/en/investors/ dedicated events. Also, the Group updated its corporate mandatory disclosures are published on Corporate action notices and other The Company’s key shareholders (in total, website in 2019. a new user-friendly section the Group’s website and the Corporate 82.1% of all shares) are Sergey Mikhailov, for investors contains the Company's Disclosure Centre’s website at: Evgeny Mikhailov, Lidiya Mikhailova, and key performance indicators, reports and http://www.e-disclosure.ru/portal/ Boltenko Law GmbH. presentations, securities information, and company.aspx?id=6652. other helpful data. the investor calendar for the current year is available at http:// cherkizovo.com/en/investors/calendar/. The Group employs a variety of channels to provide timely disclosure of material information. * Total shareholder return is a percentage calculated by dividing the closing share price adjusted for dividends paid in the period, if any, by the opening share price. www.cherkizovo.com 147 CHERKIZOVO GROUPCherkizovo unites About the Company Strategic Report Financial Results Sustainable development Corporate governance Consolidated Financial Statements PJSC Cherkizovo Group Consolidated Financial Statements for the year ended 31 December 2019 and Independent Auditor’s Report 148 CHERKIZOVO GROUP 2 Annual report 2019 Financial Statements Appendix Cherkizovo unites Contents STATEMENT OF MANAGEMENT RESPONSIBILITIES FOR the PREPARATION AND APPROVAL OF the CONSOLIDATED FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT 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 NOTES TO the CONSOLIDATED FINANCIAL STATEMENTS 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. Nature of the business Significant accounting policies New and revised International financial reporting standards Key sources of estimation uncertainty Operating segments Cost of sales Selling, general and administrative expenses Other operating (expenses) income, net Interest expense, net Other income (expenses), net Income tax Property, plant and equipment Investment property Right-of-use assets Goodwill Intangible assets Biological assets Investments in joint ventures and associates Long-term deposits in banks Inventories Taxes recoverable and prepaid Trade receivables, net Other receivables, net Cash and cash equivalents Other current assets Shareholder’s equity Non-controlling interests Borrowings Lease liabilities Tax related liabilities Financial instruments Related parties Acquisitions Commitments and contingencies Subsequent events 150 151 156 157 159 160 162 163 176 180 183 188 189 190 190 191 191 194 196 197 197 198 200 204 207 207 207 207 208 209 209 209 210 212 215 215 216 222 225 229 231 www.cherkizovo.com CHERKIZOVO GROUP 149 STATEMENT OF MANAGEMENT RESPONSIBILITIES FOR the PREPARATION AND APPROVAL OF the CONSOLIDATED FINANCIAL STATEMENTS For the Year Ended 31 December 2019 Management is responsible for the preparation of the consolidated Management is also responsible for: financial statements that present fairly the financial position of • Designing, implementing and maintaining an effective system of PJSC Cherkizovo Group (the “Company”) and its subsidiaries (the internal controls throughout the Group; “Group”) as at 31 December 2019, and the consolidated results of its • Maintaining adequate accounting records that are sufficient to operations, cash flows and changes in equity for the year then ended, show and explain the Group’s transactions and disclose with in compliance with International Financial Reporting Standards reasonable accuracy at any time the consolidated financial (“IFRS”). position of the Group, and which enable them to ensure that In preparing the consolidated financial statements, management is the consolidated financial statements of the Group comply with responsible for: IFRS; • Properly selecting and applying accounting policies; • Maintaining statutory accounting records in compliance with local • Presenting information, including accounting policies, in a manner legislation and accounting standards; that provides relevant, reliable, comparable and understandable • Taking such steps as are reasonably available to them to safeguard information; the assets of the Group; and • Providing additional disclosures when compliance with the specific • Preventing and detecting fraud and other irregularities. requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions The consolidated financial statements of the Group for the year ended on the Group’s consolidated financial position and financial 31 December 2019 were approved by Management on 13 February performance; 2020. • Making an assessment of the Group’s ability to continue as a going concern. On behalf of the Management: Sergei Mikhailov Chief Executive Officer Ludmila Mikhailova Chief Financial Officer 150 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPINDEPENDENT AUDITOR’S REPORT To the Board of Directors and Shareholders of PJSC Cherkizovo Group: BASIS FOR OPINION 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 We have audited the consolidated financial statements of the Consolidated Financial Statements section of our report. We are PJSC Cherkizovo Group (the “Company”) and its subsidiaries independent of the Group in accordance with the International Ethics (collectively – the “Group”), which comprise the consolidated Standards Board for Accountants’ Code of Ethics for Professional statement of financial position as at 31 December 2019, and Accountants (the “IESBA Code”) together with the ethical the consolidated statement of profit or loss and other comprehensive requirements that are relevant to our audit of the consolidated income, consolidated statement of changes in equity and financial statements in the Russian Federation, and we have fulfilled consolidated statement of cash flows for 2019, and notes to our other ethical responsibilities in accordance with the IESBA Code. the consolidated financial statements, including a summary of We believe that the audit evidence we have obtained is sufficient and significant accounting policies. appropriate to provide a basis for our opinion. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial KEY AUDIT MATTERS position of the Group as at 31 December 2019, and its consolidated financial performance and its consolidated cash flows for 2019 in Key audit matters are those matters that, in our professional judgment, accordance with International Financial Reporting Standards were of most significance in our audit of the consolidated financial (“IFRSs”). 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. www.cherkizovo.com 151 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unitesINDEPENDENT AUDITOR’S REPORT CONTINUED WHY the MATTER WAS DETERMINED a KEY AUDIT MATTER HOW the MATTER WAS ADDRESSED IN the AUDIT Valuation of biological assets At 31 December 2019 the carrying values of current and non-current We performed audit procedures on all valuation models relating to biological assets related to pork segment were RUB 7,390 million material types of biological assets. and RUB 2,007 million respectively (2018: RUB 7,628 million and RUB 2,638 million) and the carrying value of current biological Our audit procedures included verification of management’s assets related to poultry segment was RUB 6,749 million (2018: assumptions used in the models. RUB 6,004 million). The assumptions to which the models were most sensitive and most Biological assets are stated at fair value less estimated costs to likely to lead to material mistakes in valuation were: sell. At 31 December 2019 the effect of fair value adjustment on the carrying value of biological assets was RUB 5,204 million (2018: • Future selling prices; and RUB 6,583 million). Further details are provided in Notes 4 and 17 to the consolidated financial statements. • The projected cost per head/ kg. We challenged management’s assumptions in the models with reference to historical data and, where applicable, external/ We focused on this area as a key audit matter because independent sources, noting that the assumptions used fell within the assessment of the fair value using valuation techniques involves an acceptable independently determined range. We compared complex and significant judgements about future poultry and pork the current performance up to the date of the audit report with prices as well as the projected costs being unobservable inputs, and the forecasts to ensure no significant changes in market conditions because the valuation is particularly sensitive to these assumptions. 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. 152 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPOTHER INFORMATION RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR Management is responsible for the other information. the other THE CONSOLIDATED FINANCIAL STATEMENTS information comprises the information included in the Annual report, but does not include the consolidated financial statements and our Management is responsible for the preparation and fair presentation auditor’s report thereon. the Annual report is expected to be made of the consolidated financial statements in accordance with available to us after the date of this auditor's report. International Financial Reporting Standards (“IFRSs”), and for such internal control as management determines is necessary to enable Our opinion on the consolidated financial statements does not cover the preparation of consolidated financial statements that are free from the other information and we will not express any form of assurance material misstatement, whether due to fraud or error. conclusion thereon. In connection with our audit of the consolidated financial statements, responsible for assessing the Group’s ability to continue as a going our responsibility is to read the other information identified above concern, disclosing, as applicable, matters related to going concern when it becomes available and, in doing so, consider whether and using the going concern basis of accounting unless management the other information is materially inconsistent with the consolidated either intends to liquidate the Group or to cease operations, or has no In preparing the consolidated financial statements, management is financial statements or our knowledge obtained in the audit, or realistic alternative but to do so. otherwise appears to be materially misstated. When we read the Annual report, if we conclude that there is the Group’s financial reporting process. Those charged with governance are responsible for overseeing a material misstatement therein, we are required to communicate the matter to those charged with governance. www.cherkizovo.com 153 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unitesINDEPENDENT AUDITOR’S REPORT CONTINUED AUDITOR’S RESPONSIBILITIES FOR THE AUDIT • Evaluate the appropriateness of accounting policies used OF THE CONSOLIDATED FINANCIAL STATEMENTS and the reasonableness of accounting estimates and related disclosures made by management; Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material • Conclude on the appropriateness of management’s use of misstatement, whether due to fraud or error, and to issue an auditor’s the going concern basis of accounting and, based on the audit report that includes our opinion. Reasonable assurance is a high evidence obtained, whether a material uncertainty exists related to level of assurance, but is not a guarantee that an audit conducted events or conditions that may cast significant doubt on the Group’s in accordance with ISAs will always detect a material misstatement ability to continue as a going concern. If we conclude that when it exists. Misstatements can arise from fraud or error and are a material uncertainty exists, we are required to draw attention in considered material if, individually or in the aggregate, they could our auditor’s report to the related disclosures in the consolidated reasonably be expected to influence the economic decisions of users financial statements or, if such disclosures are inadequate, to taken on the basis of these consolidated financial statements. modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, As part of an audit in accordance with ISAs, we exercise professional future events or conditions may cause the Group to cease to judgment and maintain professional scepticism throughout the audit. continue as a going concern; and We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, including the disclosures, the consolidated financial statements, whether due to fraud or and whether the consolidated financial statements represent error, design and perform audit procedures responsive to those the underlying transactions and events in a manner that achieves • Evaluate the overall presentation, structure and content of risks, and obtain audit evidence that is sufficient and appropriate to fair presentation. provide a basis for our opinion. the risk of not detecting a material misstatement resulting from fraud is higher than for one resulting • Obtain sufficient appropriate audit evidence regarding the financial from error, as fraud may involve collusion, forgery, intentional information of the entities or business activities within the Group omissions, misrepresentations, or the override of internal control; to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance • Obtain an understanding of internal control relevant to the audit of the group audit. We remain solely responsible for our audit in order to design audit procedures that are appropriate in opinion. the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control; 154 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUP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 and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Srbuhi Hakobyan, Engagement partner 13 February 2020 The Entity: PJSC Cherkizovo Group Primary State Registration Number: 1057748318473 Certificate of registration in the Unified State Register № 1057748318473 of 22.09.2005, issued by Moscow Interdistrict Inspectorate of the Russian Ministry of Taxation № 46. Address: 1, Cherkizovskaya street, Topkanovo village, Kashira, Moscow region, Russian Federation, 142931 Audit Firm: AO “Deloitte & Touche CIS” Certificate of state registration № 018.482, issued by the Moscow Registration Chamber on 30.10.1992. Primary State Registration Number: 1027700425444 Certificate of registration in the Unified State Register № 77,004840299 of 13.11.2002, issued by Moscow Interdistrict Inspectorate of the Russian Ministry of Taxation № 39. Member of Self-regulatory organization of auditors Association “Sodruzhestvo”, ORNZ 12006020384. www.cherkizovo.com 155 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unitesConsolidated statement of profit or loss and other comprehensive income For the year ended 31 December 2019 (in millions 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 (expenses) income, net Share of loss of joint ventures and associates Operating profit Interest income Interest expense, net Other income (expenses), net Profit before income tax Income tax (expense) benefit Profit for the year and total comprehensive income Profit and total comprehensive income attributable to: Cherkizovo Group Non-controlling interests Earnings per share Notes 5 17 17 6 7 8 18 9 10 11 2019 120,109 (1,379) 29 (90,896) 27,863 (17,441) (110) (123) 10,189 243 (4,484) 749 6,697 (46) 6,651 6,751 (100) 2018 (restated) ˙*˙ 100,422 1,836 2,242 (75,318) 29,182 (14,234) 664 (57) 15,555 290 (3,267) (785) 11,793 187 11,980 12,004 (24) Weighted average number of shares outstanding – basic and diluted: 41,047,014 41,047,014 Profit attributable to Cherkizovo Group per share – basic and diluted (in Russian rubles): 164.46 292.45 ˙*˙ Comparative information for the year ended 31 December 2018 was retrospectively restated in order to reflect the change in accounting policy in relation to the presentation of general and administrative expenses incurred in production sites and related to production and the change in accounting policy in relation to the presentation of other sales related to non-core activities of the Group and related cost of sales (Note 2). The accompanying notes form an integral part of these consolidated financial statements. 156 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUP Consolidated statement of financial position For the year ended 31 December 2019 (in millions of Russian rubles, unless otherwise indicated) ASSETS Non-current assets Property, plant and equipment Investment property Right-of-use assets Goodwill Intangible assets Non-current biological assets 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 2019 31 December 2019 (restated) ˙*˙ 12 13 14 15 16 17 18 19 11 33 17 20 21 22 23 24 25 82,622 82,393 664 1,567 1,628 2,335 2,007 3,789 641 - 1,214 4,685 1,239 595 - 1,628 2,144 2,673 3,518 641 109 1,073 4,685 678 102,391 100,137 16,287 13,223 2,396 5,476 844 199 3,304 328 42,057 15,395 12,429 1,909 5,733 875 1,523 9,613 563 48,040 144,448 148,177 ˙*˙ Comparative information for the year ended 31 December 2018 has been retrospectively adjusted for the finalisation of the allocation of the purchase price of businesses acquired in 2018 (Note 33). The accompanying notes form an integral part of these consolidated financial statements. www.cherkizovo.com 157 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites   Consolidated statement of financial position CONTINUED For the year ended 31 December 2019 (in millions of Russian rubles, unless otherwise indicated) 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 Long-term lease liabilities Deferred tax liability Total non-current liabilities Current liabilities Short-term borrowings Short-term lease liabilities Trade payables Advances received Payables for non-current assets Tax related liabilities Payroll related liabilities Other payables and accruals Total current liabilities Notes 31 December 2019 31 December 2019 (restated) ˙*˙ 26 27 28 29 11 28 29 30 - (3,724) 5,622 58,507 60,405 879 61,284 43,182 759 1,023 44,964 20,790 420 11,560 893 656 1,327 2,317 237 38,200 - (3,724) 5,611 57,932 59,819 990 60,809 44,643 - 996 45,639 24,170 - 10,830 576 1,216 1,325 2,707 905 41,729 Total liabilities 83,164 87,368 TOTAL EQUITY AND LIABILITIES 144,448 148,177 ˙*˙ Comparative information for the year ended 31 December 2018 has been retrospectively adjusted for the finalisation of the allocation of the purchase price of businesses acquired in 2018 (Note 33). The accompanying notes form an integral part of these consolidated financial statements. 158 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUP   Consolidated statement of changes in equity For the year ended 31 December 2019 (in millions of Russian rubles, unless otherwise indicated) Share capital Share capital Amount Number of shares Amount Number of shares Additional paid-in capital Retained earnings Total shareholder’s equity Non- controlling interests Total equity Balances at 1 January 2018 Profit for the year and total comprehensive income Purchase of non-controlling interests Dividends (Note 26) Balances at 31 December 2018 Profit for the year and total comprehensive income Purchase of non-controlling interests Dividends (Note 26) Balances at 31 December 2019 - - - - - - - - - 43,963,773 (3,724) (2,916,759) 5,588 49,850 51,714 1,066 52,780 - - - - - - - - - - 12,004 12,004 (24) 11,980 23 - 23 (52) (29) - (3,922) (3,922) - (3,922) 43,963,773 (3,724) (2,916,759) 5,611 57,932 59,819 990 60,809 - - - - - - - - - - 6,751 6,751 (100) 6,651 11 - 11 (11) - - (6,176) (6,176) - (6,176) 43,963,773 (3,724) (2,916,759) 5,622 58,507 60,405 879 61,284 The accompanying notes form an integral part of these consolidated financial statements. www.cherkizovo.com 159 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unitesConsolidated statement of cash flows For the year ended 31 December 2019 (in millions of Russian rubles, unless otherwise indicated) CASH FLOWS FROM OPERATING ACTIVITIES Profit before income tax Adjustments for: Depreciation and amortisation Changes in allowance for expected credit losses Foreign exchange (gain) loss, net Interest income Interest expense, net Net change in fair value of biological assets Net revaluation of harvested crops in stock Loss (gain) on disposal of property, plant and equipment, net Loss (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 in inventories Increase in biological assets Decrease (increase) in trade receivables Decrease in advances paid (Increase) decrease in other receivables and other current assets Decrease in other non-current assets Increase in trade payables (Decrease) increase in tax related liabilities (other than income tax) (Decrease) 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 2019 2018 6,697 11,793 7,818 129 (676) (243) 4,484 1,379 (29) 164 60 123 (82) 19,824 (465) (1,096) 108 45 (66) 8 1,175 (19) (258) 19,256 232 (4,254) 1,282 (460) 16,056 6,045 118 829 (290) 3,267 (1,836) (2,242) (47) (192) 57 (52) 17,450 (713) (764) (1,279) 536 626 62 1,321 508 618 18,365 245 (4,159) 333 (606) 14,178 160 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPConsolidated statement of cash flows CONTINUED For the year ended 31 December 2019 (in millions of Russian rubles, unless otherwise indicated) 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 Repayment of loans issued and notes receivable and redemption of deposits 2019 2018 (8,092) (1,307) (504) 350 834 (1,658) (788) (161) 369 (9,182) (944) (431) 181 993 (5,646) (579) (101) 388 Net cash used in investing activities (10,957) (15,321) 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 Repayment of lease obligations Dividends paid Purchase of non-controlling interests Net cash (used in) generated from financing activities Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 26,295 (21,870) 35,367 (44,604) (420) (6,176) - (11,408) (6,309) 9,613 3,304 30,007 (21,056) 22,263 w - (3,922) (29) 10,051 8,908 705 9,613 Non-cash transactions: • 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 33). 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 accompanying notes form an integral part of these consolidated financial statements. www.cherkizovo.com 161 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites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 1, Cherkizovskaya st., Topkanovo village, Kashira, Moscow region, 142931, Russia. The ultimate controlling party of PJSC Cherkizovo Group is Mikhailov family who jointly control the Company. At 31 December 2019 and 2018 the Group included the following principal companies: Name of company Legal form Nature of business 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 Raising poultry ˙*˙ Joint Stock Company Raising poultry JSC Kurinoe Tsarstvo Open Joint Stock Company Raising poultry JSC Kurinoe Tsarstvo Bryansk Joint Stock Company Raising poultry JSC Mosselprom ˙**˙ LLC Lisko Broiler JSC Altaisky Broiler Joint Stock Company Raising poultry Limited Liability Company Raising poultry Joint Stock Company Raising poultry LLC Cherkizovo trade house Limited Liability Company Trading company LLC Cherkizovo-Pork Limited Liability Company 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 ˙*˙ Hereinafter poultry includes only chicken. ˙**˙ In August 2019 JSC Mosselprom was merged with JSC Kurinoe Tsarstvo. ˙***˙ In December 2019 LLC Agrarnaya Gruppa and JSC Lipetskmyaso were merged with LLC Cherkizovo-Grain Production. % 31.12.2019 % 31.12.2018 95% 95% 95% 88% 100% 100% 100% - 100% 100% 88% 100% 100% - - 95% 95% 95% 88% 100% 100% 100% 100% 100% 100% 88% 100% 100% 100% 100% 162 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)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 2. SIGNIFICANT ACCOUNTING POLICIES Statement of compliance These consolidated financial statements have been prepared in meat processing plants (including meat processing plant operated accordance with International Financial Reporting Standards (“IFRS”). by an equity associate Samson – Food Products), thirteen full pig production complexes, twenty one wean-to-finish facilities and two saw farms, nine poultry production complexes (including the Belaya Basis of preparation The entities of the Group maintain their accounting records in Ptitsa production complex which is currently operate pursuant to accordance with laws, accounting and reporting regulations of a lease agreement), nine combined fodder production plants and the jurisdictions in which they are incorporated and registered. more than 300,000 hectares of agricultural land. Accounting policies and financial reporting procedures in these jurisdictions may differ substantially from those generally accepted The Group’s assets and distribution network is spread across under IFRS. Accordingly, the consolidated financial statements, which European and Siberian parts of Russia. have been prepared from the Group’s statutory basis accounting The Group owns locally recognised brands, which include Cherkizovo to be presented in accordance with IFRS. (“Черкизово”), Pyat Zvezd (“Пять Звезд”), Petelinka (“Петелинка”), Kurinoe Tsarstvo (“Куриное Царство”) and Imperia Vkusa (“Империя The consolidated financial statements have been prepared under вкуса”) and has a diverse customer base. the historical cost convention, except for biological assets measured records, reflect adjustments necessary for such financial statements Operating environment Emerging markets such as Russia are subject to different risks than more developed markets, including economic, political and 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”). social, and legal and legislative risks. Laws and regulations affecting Historical cost is generally based on the fair value of the consideration businesses in Russia continue to change rapidly; tax and regulatory given in exchange for goods and services. frameworks are subject to varying interpretations. The future economic direction of Russia is heavily influenced by the fiscal Fair value is the price that would be received to sell an asset or and monetary policies adopted by the government, together with paid to transfer a liability in an orderly transaction between market developments in the legal, regulatory, and political environment. participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation Because Russia produces and exports large volumes of oil and gas, technique. In estimating the fair value of an asset or a liability, its economy is particularly sensitive to the price of oil and gas on the Group takes into account the characteristics of the asset or the world market. Starting from 2014, sanctions have been imposed liability if market participants would take those characteristics into in several packages by the U.S. and the E.U. on certain Russian account when pricing the asset or liability at the measurement date. officials, businessmen and companies. This led to reduced access of Fair value for measurement and/or disclosure purposes in these the Russian businesses to international capital markets. the impact consolidated financial statements is determined on such a basis, of further economic developments on future operations and financial except for leasing transactions that are within the scope of IAS 17 and position of the Group is difficult to determine at this stage IFRS 16, 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. www.cherkizovo.com 163 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED In addition, for financial reporting purposes, fair value measurements The Group continues to monitor its existing liquidity needs on an on- are categorized into Level 1, 2 or 3 based on the degree to which going basis. Management believes that the Group will have sufficient the inputs to the fair value measurements are observable and operating cash flows and borrowing capacity to continue as a going the significance of the inputs to the fair value measurement in its concern in the foreseeable future. entirety, which are described as follows: • Level 1 inputs are quoted prices (unadjusted) in active markets Basis of consolidation The consolidated financial statements incorporate the financial for identical assets or liabilities that the entity can access statements of the Company and entities controlled by the Company at the measurement date; (its subsidiaries). • Level 2 inputs are inputs, other than quoted prices included within Control is achieved when the Company: Level 1, that are observable for the asset or liability, either directly or indirectly; and • Has power over the investee; • Level 3 inputs are unobservable inputs for the asset or liability. • Is exposed, or has rights, to variable returns from its involvement Functional and presentation currency The functional currency of the Company, and each of its subsidiaries, is the Russian rouble. These consolidated financial statements are with the investee; and • Has the ability to use its power to affect its returns. also presented in Russian roubles which is the presentation currency The Company reassesses whether or not it controls an investee if used by the Group. facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. Foreign currency transactions In preparing the financial statements of each individual group entity, When the Company has less than a majority of the voting rights of transactions in currencies other than the entity’s functional currency an investee, it has power over the investee when the voting rights are (foreign currencies) are recognised at the rates of exchange prevailing sufficient to give it the practical ability to direct the relevant activities at the dates of the transactions. At the end of each reporting period, of the investee unilaterally. The Company considers all relevant facts monetary items denominated in foreign currencies are retranslated and circumstances in assessing whether or not the Company’s voting at the rates prevailing at that date. Non-monetary items that are rights in an investee are sufficient to give it power, including: measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences on monetary items are recognised in profit or • The size of the Company’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; loss in the period in which they arise. • Potential voting rights held by the Company, other vote holders or 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. other parties; • Rights arising from other contractual arrangements; and 164 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated) • Any additional facts and circumstances that indicate that At the acquisition date, the identifiable assets acquired and the Company has, or does not have, the current ability to direct the liabilities assumed are recognized at their fair value the relevant activities at the time that decisions need to be made, at the acquisition date, except for: including voting patterns at previous shareholders’ meetings. Consolidation of a subsidiary begins when the Company obtains employee benefit arrangements are recognized and measured control over the subsidiary and ceases when the Company loses in accordance with IAS 12 Income Taxes and IAS 19 Employee • Deferred tax assets or liabilities and liabilities or assets related to control of the subsidiary. Specifically, income and expenses of Benefits respectively; a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive • Liabilities or equity instruments related to share-based payment income from the date the Company gains control until the date when arrangements of the acquiree or share-based payment arrange- the Company ceases to control the subsidiary. ments of the Group entered into to replace share-based payment Profit or loss and each component of other comprehensive income IFRS 2 Share-based Payment at the acquisition date; and are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to • Assets (or disposal groups) that are classified as held for sale in the owners of the Company and to the non-controlling interests even if accordance with IFRS 5 Non-current Assets Held for Sale and this results in the non-controlling interests having a deficit balance. Discontinued Operations are measured in accordance with that arrangements of the acquiree are measured in accordance with When necessary, adjustments are made to the financial statements Standard. of subsidiaries to bring their accounting policies into line with Goodwill is measured as the excess of the sum of the consideration the Group’s accounting policies. transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held All intragroup assets and liabilities, equity, income, expenses and interest in the acquiree (if any) over the net of the acquisition-date cash flows relating to transactions between members of the Group amounts of the identifiable assets acquired and the liabilities assumed. are eliminated in full on consolidation. If, after reassessment, the net of the acquisition-date amounts of Business combinations Acquisitions of businesses are accounted for using the acquisition 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 method, including acquisitions from entities under common control. previously held interest in the acquiree (if any), the excess is The consideration transferred in a business combination is measured recognized immediately in profit and loss as a bargain purchase gain. at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred Non-controlling interests that are present ownership interests and by the Group to the former owners of the acquiree and the equity entitle their holders to a proportionate share of the entity’s net interests issued by the Group in exchange for control of the acquiree. assets in the event of liquidation may be initially measured either Acquisition-related costs are recognized in profit or loss as incurred. at fair value or at the non-controlling interests’ proportionate share For acquisitions of entities under common control, if the consideration of the recognised amounts of the acquiree’s identifiable net assets. transferred in a business combination significantly differs from the fair The choice of measurement basis is made on a transaction-by- value of the business acquired, the Group recognizes the difference transaction basis. Other types of non-controlling interests are as a capital contribution if the fair value of the business acquired is measured at fair value or, when applicable, on the basis specified in higher than consideration or a distribution if lower. another IFRS. www.cherkizovo.com 165 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, Investments in joint ventures and associates A joint venture is a joint arrangement whereby the parties that have the Group reports provisional amounts for the items for which joint control of the arrangement have rights to the net assets of the accounting is incomplete. Those provisional amounts are the joint arrangement. Joint control is the contractually agreed sharing adjusted during the measurement period, or additional assets or of control of an arrangement, which exists only when decisions about liabilities are recognized, to reflect new information obtained about the relevant activities require unanimous consent of the parties facts and circumstances that existed as of the acquisition date that, sharing control. if known, would have affected the amounts recognized as of that date. The measurement period is the period from the date of acquisition An entity is considered an associate if the Group has significant to the date the Group obtains complete information about facts and influence over its financial and operating activities. Significant circumstances that existed as of the acquisition date – and is subject influence is the power to participate in the financial and operating to a maximum of one year. policy decisions of the investee but is not control or joint control over those policies. Goodwill Goodwill arising on an acquisition of a business is carried The Group reports its interests in joint ventures and associates using at cost as established at the date of acquisition of the business the equity method of accounting, whereby an investment in an associate (see accounting policy on Business combinations above) less or a joint venture is initially recognised in the consolidated statement accumulated impairment losses, if any. of financial position at cost and adjusted thereafter to recognise the Group’s share of the profit or loss and other comprehensive income For the purposes of impairment testing, goodwill is allocated to of the associate or joint venture. When the Group’s share of losses each of the Group’s cash-generating units (or groups of cash- of an associate or a joint venture exceeds the Group’s interest in that generating units) that is expected to benefit from the synergies of associate or joint venture (which includes any long-term interests that, the combination. in substance, form part of the Group’s net investment in the associate or joint venture), the Group discontinues recognising its share of A cash-generating unit to which goodwill has been allocated is further losses. Additional losses are recognised only to the extent tested for impairment annually, or more frequently when there that the Group has incurred legal or constructive obligations or made is an indication that the unit may be impaired. If the recoverable payments on behalf of the associate or joint venture. amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount An investment in an associate or a joint venture is accounted for using of any goodwill allocated to the unit and then to the other assets the equity method from the date on which the investee becomes of the unit pro rata based on the carrying amount of each asset in an associate or a joint venture. the unit. Any impairment loss for goodwill is recognised directly in profit or loss. An impairment loss recognised for goodwill is not When necessary, the entire carrying amount of the investment reversed in subsequent periods. On disposal of the relevant cash- (including goodwill) is tested for impairment in accordance with generating unit, the attributable amount of goodwill is included in IAS 36 Impairment of Assets as a single asset by comparing its the determination of the profit or loss on disposal. 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. 166 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)When a group entity transacts with a joint venture or associate of the Group, profits and losses resulting from the transactions Depreciation Depreciation is recognized to write off the cost of assets (other with the joint venture or associate are recognised in the Group’s than freehold land and properties under construction) less their consolidated financial statements only to the extent of interests in residual values over their useful lives, using the straight-line method. the joint venture or associate that are not related to the Group. the estimated useful lives for the current and comparative periods Property, plant and equipment Owned assets Property, plant and equipment are measured at cost less accumulated are as follows: Land Buildings, infrastructure and lease hold improvements depreciation and impairment losses. Land is not depreciated. Machinery and equipment 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 Vehicles Other indefinite life 10-40 years 3-22 years 3-10 years 3-10 years for its intended use, and the costs of dismantling and removing Depreciation methods, useful lives and residual values are the items and restoring the site in which they are located. Purchased reassessed at each reporting date, with the effect of any changes software that is integral to the functionality of the related equipment is in accounting estimate recognized on a prospective basis. capitalized as part of that equipment. When parts of an item of property and equipment have different useful Investment property Investment properties represent buildings and land held to earn lives, they are accounted for as separate items (major components) of rentals and/or for capital appreciation (including property under property and equipment. Gains and losses on disposal of an item of construction for such purposes). Investment properties are measured property, plant and equipment are recognized net in other income in at cost, including transaction costs, less accumulated depreciation profit or loss. and impairment losses. Land is not depreciated. Repairs and maintenance The cost of replacing part of an item of property, plant and equipment Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives (10-40 years) of each building. is recognized in the carrying amount of the item if it is probable that future economic benefits embodied within the part will flow An investment property is derecognised upon disposal or when to the Group and its cost can be measured reliably. The carrying the investment property is permanently withdrawn from use and amount of the replaced part is derecognized. The costs of day-to-day no future economic benefits are expected from the disposal. Any servicing of property, plant and equipment are recognized in profit or gain or loss arising on derecognition of the property (calculated loss as incurred. 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. www.cherkizovo.com 167 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED Intangible assets Intangible assets represent acquired trademarks and computer An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment software. All trademarks have been determined to have an indefinite losses are recognised immediately in profit or loss. Impairment losses life. recognized in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and Intangible assets with finite useful lives are carried at cost less then to reduce the carrying amount of the other assets in the unit accumulated amortisation and accumulated impairment losses. (group of units) on a pro rata basis. Amortisation is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation When an impairment loss subsequently reverses, the carrying amount method are reviewed at the end of each reporting period, with of the asset (or a cash-generating unit) is increased to the revised the effect of any changes in estimate being accounted for on estimate of its recoverable amount, but so that the increased carrying a prospective basis. Intangible assets with indefinite useful lives are amount does not exceed the carrying amount that would have been carried at cost less accumulated impairment losses. determined had no impairment loss been recognised for the asset (or 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 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. indication exists, then the asset’s recoverable amount is estimated. The cost of inventories is based on the weighted average principle Intangible assets with indefinite useful lives and intangible assets not and includes expenditure incurred in acquiring the inventories, yet available for use are tested for impairment at least annually, and production or conversion costs and other costs included in whenever there is an indication that the asset may be impaired. bringing them to their existing location and condition. In the case The recoverable amount of an asset or cash-generating unit is an appropriate share of production overheads based on normal of manufactured inventories and work in progress cost includes the greater of its value in use and its fair value less costs to sell. operating capacity. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that Net realizable value is the estimated selling price in the ordinary course reflects current market assessments of the time value of money of business, less the estimated costs of completion and selling expenses. 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 Biological assets and agricultural produce Biological assets of the Group consist of livestock (pigs and poultry) that generates cash inflows from continuing use that are largely and unharvested crops (grain crops and other plantations). independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”). The goodwill acquired in a business The Group recognizes a biological asset or agricultural produce when combination acquisition, for the purposes of impairment testing, is the Group controls the asset as a result of past events, allocated to cash-generating units that are expected to benefit from it is probable that future economic benefits associated with the asset the synergies of the combination. will flow to the Group, and the fair value or cost of the asset can be measured reliably. 168 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)Biological assets are stated at fair value less estimated costs to (iii) Market hogs sell at both initial recognition and as of the reporting date, with any Market hogs comprise of pigs held for pork meat production. changes recognized in profit or loss. Costs to sell include all costs The fair value of broilers is determined by reference to the cash that would be necessary to sell the assets, including costs necessary flows that will be obtained from sales of finished pigs, with to get the assets to market. an allowance for costs to be incurred and risks to be faced during the remaining transformation process. The difference between fair value less costs to sell and total production costs is allocated to biological assets held in stock as of (iv) Sows each reporting date as a fair value adjustment. The change in this Sows comprise pigs held for regeneration of market hogs adjustment from one period to another is recognized as “Net change population. The fair value of sows is determined by reference to in fair value of biological assets” in profit or loss. 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 Agricultural produce harvested from biological assets is recognised during the remaining productive period. 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 (v) Unharvested crops (wheat, corn, sunflower, barley, pea and others) crops at fair value less costs to sell is recognized as “Net revaluation of At the year-end unharvested crops are carried at the accumulated harvested crops in stock” in profit or loss and for items sold is presented costs incurred, which approximate the fair value since little on net basis as a reduction of the line “Cost of sales”. A gain or loss biological transformation has taken place due to the seasonal arising on initial recognition of other agricultural produce is recognized nature of the crops. Subsequent to the year-end unharvested as “Net change in fair value of biological assets” and for items sold is crops in fields are measured at fair value, which is determined presented on net basis as a reduction of the line “Cost of sales”. by reference to the cash flows that will be obtained from sales Based on the above policy, the principal groups of biological assets at the point of sale and risks to be faced during the remaining and agricultural produce are stated as follows: transformation process. of harvested crops, with an allowance for costs to be incurred Biological assets (i) Broilers Agricultural produce (i) Dressed poultry and pork Broilers comprise poultry held for chicken meat production. The fair value of dressed poultry and pork is determined by The fair value of broilers is determined by reference to the cash reference to market prices at the point of harvest. flows that will be obtained from sales of finished chickens, with an allowance for costs to be incurred and risks to be faced during (ii) Crops the remaining transformation process. The fair value of crops is determined by reference to market prices at the point of harvest. (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. www.cherkizovo.com 169 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites 2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED The Group’s biological assets are classified into bearer and The Group offers product guarantees to its customers, providing consumable biological assets depending upon the function of them with an option to return damaged and non-conforming goods a particular group of biological assets in the Group’s production and goods of initial improper quality. The period that goods may be process. Consumable biological assets are those that are to be returned is typically limited to the expiration period for the goods harvested as agricultural produce, and include broilers, market hogs shipped and is not exceeding one month from the date of shipment. and unharvested crops. Bearer biological assets include poultry Returns are accounted for as deductions to sales in the period to 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 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. of revenue is consistent with the revenue information that is Therefore, the Group does not recognise any liability related to disclosed for each reportable segment. Revenue is recognised when customers’ right to return products within the return period and does control of the products has transferred, being when the products not recognise an asset related to the right to recover the product from are shipped or when the goods are delivered to the customer, it has the customer where the customer is expected to exercise his/her full discretion over the channel and price to sell the products, and right of return. there is no unfulfilled obligation that could affect the customer’s acceptance of the products. Borrowing costs Borrowing costs directly attributable to the acquisition, construction In accordance with the Group’s standard sales terms, control is or production of qualifying assets, which are assets that necessarily transferred upon shipment. However, on contracts with certain large take a substantial period of time to get ready for their intended retail chains, control transfers upon delivery. Delivery occurs when use or sale, are added to the cost of those assets, until such time the products have been shipped to the specific location, the risks as the assets are substantially ready for their intended use or sale. of obsolescence and loss have been transferred to the customer, and either the customer has accepted the products in accordance All other borrowing costs are recognized in profit or loss in the period with the sales contract, the acceptance provisions have lapsed, or in which they are incurred. the Group has objective evidence that all criteria for acceptance have been satisfied. Government grants In accordance with Russian legislation, enterprises engaged in Sales are recognised at the fair value of the consideration received agricultural activities receive certain government grants. Government or receivable, net of VAT, discounts and returns. No element of grants are not recognised until there is reasonable assurance that financing is deemed present as the sales are typically made with the Group will comply with the conditions attaching to them and that a credit term of less than 30 days, which is consistent with market the grants will be received. practice. The largest of such government grants relate to the reimbursement The Group grants discounts to customers primarily based on of interest expense on qualifying loans, which is received directly the volume of goods purchased. Discounts are based on monthly, by the Group (“interest subsidies”) and for the reimbursement of quarterly, or annual target sales. Discounts are offered in the meat interest expense through accredited banks, who provide loans processing segment and in the poultry segment. The discounts to agricultural producers at reduced rates not exceeding 5% per are graduated to increase when actual sales exceed target sales. annum on Rouble-denominated loans (“reduced rate lending subsidy”). the difference between market rate and the reduced 170 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)rate equals the Key rate of the Bank of Russia (“the Key rate”) and is The Group contributes to the State Pension Fund of the Russian compensated by the Ministry of Agriculture to the accredited banks. Federation. The only obligation of the Group with respect to these If Ministry of Agriculture will not compensate the interest expense defined contribution plans is to make the specified contributions accrued during the interest period (typically month or quarter) due in the period in which they arise. These contributions to the State to lack of available funds or due to any other reason, than the bank Pension Fund of the Russian Federation are recognized in can unilaterally increase the interest rate payable by the Group by the consolidated statement of profit or loss and other comprehensive the Key rate. The Group records interest and reduced rate lending income when employees have rendered services entitling them to subsidies as an offset to interest expense during the period to which the contribution. The Group does not maintain any supplemental they relate. post-retirement benefit plans for its employees. The Group also receives government grants based on square of cultivated land and volumes of meat or eggs produced and fodder Taxation Income tax expense represents the sum of the tax currently payable purchased. These grants are less systematic and therefore in general and deferred tax. the Group recognizes them only when receives the grant or it is highly probable that the grant will be received. These grants are Current tax recorded as reductions to cost of sales during the period to which The tax currently payable is based on taxable profit for the year. they relate. Taxable profit differs from ‘profit before tax’ as reported in the consolidated statement of profit or loss and other comprehensive In addition to that, from time to time the Group receives government income because of items of income or expense that are taxable grants for compensation of certain capital expenditures. These grants or deductible in other years and items that are never taxable or are non-systematic and therefore the Group recognizes them only deductible. The Group’s current tax is calculated using tax rates when receives the grant. These grants are recorded as reductions to that have been enacted or substantively enacted by the end of costs capitalized during the period to which they relate. the reporting period. Employee benefits Remuneration to employees in respect of services rendered during Deferred tax Deferred tax is recognised on temporary differences between the reporting period is recognized as an expense in that reporting the carrying amounts of assets and liabilities in the consolidated period. financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally The Group has implemented a long-term employee bonus plan recognised for all taxable temporary differences. Deferred tax assets for its key employees according to which the amount of bonus is are generally recognised for all deductible temporary differences determined by reference to the Group’s cumulative financial results to the extent that it is probable that taxable profits will be available for 2017-2018 financial years and was payable in two tranches during against which those deductible temporary differences can be 2019. To qualify for the bonus employees are required to remain utilised. Such deferred tax assets and liabilities are not recognised in service until each payment date. the Group starts to recognize if the temporary difference arises from the initial recognition the amount of bonus only when it is probable that the performance (other than in a business combination) of assets and liabilities in conditions will be achieved and an outflow of economic benefits will a transaction that affects neither the taxable profit nor the accounting be required to settle the obligation. At that date the Group recognises profit. 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. www.cherkizovo.com 171 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and Cash and cash equivalents Cash and cash equivalents represent cash on hand and in bank interests in joint ventures, except where the Group is able to control accounts and short-term highly liquid investments having original the reversal of the temporary difference and it is probable that maturities of less than three months. 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 Provisions A provision is recognized if, as a result of a past event, the Group the extent that it is probable that there will be sufficient taxable profits has a present legal or constructive obligation that can be estimated against which to utilise the benefits of the temporary differences and reliably, and it is probable that an outflow of economic benefits they are expected to reverse in the foreseeable future. will be required to settle the obligation. The amount recognised as a provision is the best estimate of the consideration required to The carrying amount of deferred tax assets is reviewed at the end of settle the present obligation at the end of the reporting period, taking each reporting period and reduced to the extent that it is no longer into account the risks and uncertainties surrounding the obligation. probable that sufficient taxable profits will be available to allow all or When a provision is measured using the cash flows estimated to part of the asset to be recovered. 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 Leases For contracts concluded after 1 January 2019, the Group assesses material). whether a contract is or contains a lease at inception of a contract. the Group recognises a right-of-use asset and a corresponding lease Share capital Ordinary shares are classified as equity and are recorded at the par liability with respect to all lease agreements (including sub-lease), value of proceeds received. Where shares are issued above par value, which conveys the right to control the use of identified assets for the proceeds in excess of par value are recorded in additional paid-in a period of time in exchange for consideration, except for short-term capital, net of direct issue costs. leases (with lease term of 12 months or less) and leases of low-value assets. For these leases, the Group recognises the lease payments as operating expense on a straight-line basis over the term of the lease. Treasury shares Where the Company or its subsidiaries purchase the Company’s equity instruments, the consideration paid, including any directly The right-of-use asset is initially measured at cost and subsequently attributable incremental costs, net of income taxes, is deducted measured at cost (subject to certain exceptions) less accumulated from equity attributable to the Company’s owners until the equity depreciation and impairment losses, adjusted for any remeasurement instruments are cancelled, reissued or disposed of. Where such of the lease liability. Right-of-use assets are depreciated on a straight- shares are subsequently sold or reissued, any consideration received, line basis over the lease term within the range from 1 to 7 years. net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to The lease liability is initially measured at the present value of the Company’s owners. the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications and remeasurements, amongst others. Variable lease payments that do not depend on an index or a rate are not included in the measurement of the lease liability and are recognised in profit or loss. 172 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)Dividends Dividends are recognized as a liability and deducted from the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral equity at the reporting date only if they are declared before or part of the effective interest rate, transaction costs and other on the reporting date by the shareholders at a general meeting. premiums or discounts) excluding expected credit losses, through Dividends are disclosed when they are proposed before the expected life of the debt instrument, or, where appropriate, the reporting date or proposed or declared after the reporting date a shorter period, to the gross carrying amount of the debt but before the consolidated financial statements are authorized for instrument on initial recognition. issue. Financial instruments Financial assets and financial liabilities are recognised when 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 a group entity becomes a party to the contractual provisions of the effective interest method of any difference between that initial the instruments. amount and the maturity amount, adjusted for any loss allowance. On the other hand, the gross carrying amount of a financial asset is Financial assets and financial liabilities are initially measured the amortised cost of a financial asset before adjusting for any loss at fair value. Transaction costs that are directly attributable to allowance. the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value Interest income is recognised in profit or loss using the effective through profit or loss) are added to or deducted from the fair interest method and is included in the “interest income” line item. value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to Financial assets at FVTPL the acquisition of financial assets or financial liabilities at fair value Financial assets at FVTPL are measured at fair value at the end of through profit or loss are recognised immediately in profit or loss. each reporting period, with any fair value gains or losses recognised Financial assets All recognised financial assets are subsequently measured in their entirety at either amortised cost or fair value, depending on in profit or loss. the net gain or loss recognised in profit or loss includes any dividend or interest earned on the financial asset (Note 33). the classification of the financial assets. Impairment of financial assets The Group recognises a loss allowance for expected credit losses on The classification depends on the entity’s business model investments in debt instruments that are measured at amortised cost for managing the financial assets and the contractual terms and trade and other receivables. the amount of expected credit losses of the cash flows. At the reporting dates, the Group had only (further “ECL”) is updated at each reporting date to reflect changes in financial assets classified as those to be measured at amortised credit risk since initial recognition of the respective financial asset. cost, except for the rights to claim debt, which were classified as financial assets measured subsequently at fair value through profit The Group always recognises lifetime ECL for trade and other or loss (FVTPL). receivables. the expected credit losses on these financial assets are estimated using a provision matrix based on the Group’s historical Amortised cost and effective interest method credit loss experience, adjusted for factors that are specific to The effective interest method is a method of calculating the debtors, general economic conditions and an assessment of the amortised cost of a debt instrument and of allocating interest both the current as well as the forecast direction of conditions at income over the relevant period. the effective interest rate is the reporting date, including time value of money where appropriate. www.cherkizovo.com 173 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites2. SIGNIFICANT ACCOUNTING POLICIES CONTINUED For all other financial instruments, the Group recognises lifetime Financial liabilities subsequently measured at amortised cost ECL when there has been a significant increase in credit risk since Financial liabilities that are not (1) contingent consideration of an initial recognition. If, on the other hand, the credit risk on the financial acquirer in a business combination, (2) held-for-trading, or instrument has not increased significantly since initial recognition, (3) designated as at FVTPL, are subsequently measured at amortised the Group measures the loss allowance for that financial instrument cost using the effective interest method. the effective interest method at an amount equal to 12m ECL. The assessment of whether lifetime is a method of calculating the amortised cost of a financial liability ECL should be recognised is based on significant increases in and of allocating interest expense over the likelihood or risk of a default occurring since initial recognition the relevant period. the effective interest rate is the rate that exactly instead of on evidence of a financial asset being credit-impaired discounts estimated future cash payments (including all fees and at the reporting date or an actual default occurring. Lifetime ECL points paid or received that form an integral part of the effective represents the expected credit losses that will result from all possible interest rate, transaction costs and other premiums or discounts) default events over the expected life of a financial instrument. In through the expected life of the financial liability, or (where contrast, 12m ECL represents the portion of lifetime ECL that is appropriate) a shorter period, to the amortised cost of expected to result from default events on a financial instrument that a financial liability. are possible within 12 months after the reporting date. Derecognition of financial liabilities The measurement of expected credit losses is a function of The Group derecognises financial liabilities when, and only when, the probability of default, loss given default (i.e. the magnitude the Group’s obligations are discharged, cancelled or they expire. of the loss if there is a default) and the exposure at default. the difference between the carrying amount of the financial liability the assessment of the probability of default and loss given default is derecognised and the consideration paid and payable, including any based on historical data adjusted by forward-looking information. non-cash assets transferred or liabilities assumed, is recognised in Derecognition of financial assets profit or loss. The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers Changes in accounting policy Starting from 1 January 2019 the Group has changed its accounting the financial asset and substantially all the risks and rewards policy in relation to the presentation of general and administrative of ownership of the asset to another party. On derecognition of expenses incurred in production sites and related to production a financial asset measured at amortised cost, the difference between (property tax, payroll costs of site managers and certain other types the asset’s carrying amount and the sum of the consideration of expenses). Pursuant to the Group’s revised policy, the Group now received and receivable is recognised in profit or loss. presents such expenses in “Cost of sales” line in the statement Financial liabilities All financial liabilities are subsequently measured at amortised cost of consolidated profit or loss and other comprehensive income. Prior to this change, they were presented in “Selling, general and administrative expenses”. Management believes that the changed using the effective interest method or at FVTPL. At the reporting presentation better reflects the substance of the reclassified dates, the Group had only financial liabilities classified as those to be expenses and therefore enhances the quality of the consolidated measured at amortised cost. financial statements by providing more relevant information about the Group’s financial performance. 174 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)Starting from 1 January 2019 the Group has also changed its the changed presentation provides a better split between core and accounting policy in relation to the presentation of other sales related non-core activities of the Group, which enhances the transparency to non-core activities of the Group (rent income, grain elevator services, of the consolidated financial statements by providing more relevant sales of by-products and others) and related cost of sales. Pursuant to information about the Group’s financial performance. the Group’s revised policy, the Group now presents such other sales and related cost of sales within “Other operating income, net” line in The Group has retrospectively applied the new accounting policy and, the statement of profit or loss and other comprehensive income. Prior therefore, comparative information has been retrospectively restated. to this change, other sales were presented in “Revenue” and related the effect of the changes in accounting policy on the consolidated cost of sales were presented in “Cost of sales”. Management believes statement of profit or loss and other comprehensive income for that these activities are not principal to the Group and therefore the year ended 31 December 2018 was as follows: Year ended 31 December 2018 As previously reported Effect of the change in accounting policy for expenses classification Effect of the change in accounting policy for presentation of other sales Revenue Cost of sales Gross profit Selling, general and administrative expenses Other operating income, net Operating profit 102,639 (74,794) 31,923 (16,550) 239 15,555 - (2,316) (2,316) 2,316 - - (2,217) 1,792 (425) - 425 - As restated 100,422 (75,318) 29,182 (14,234) 664 15,555 www.cherkizovo.com 175 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites3. NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS The Group made use of the following practical expedients: IFRSs and IFRIC interpretations adopted in the current year The Group has adopted all IFRSs and Interpretations that are relevant the lease term ends within 12 months from 1 January 2019 and recognise the lease payments associated with those leases as an to its operations and effective for annual reporting periods beginning expense on a straight-line basis over the lease term; • Permission to exclude from IFRS 16 scope leases for which on 1 January 2019. the impact of the adoption of IFRS 16 Leases on the Group’s results of operations and financial position is described • Relief from the requirement to reassess whether a contract is, or below. the adoption of other standards and amendments did not have contains the lease; an impact on the Group’s results of operations, financial position or cash flows. • Application of a single discount rate to a portfolio of leases with IFRS 16 Leases As at 1 January 2019, the Group adopted IFRS 16. reasonably similar characteristics; • Use of assessment of whether leases are onerous applying IAS 37, Provisions, Contingent Liabilities and Contingent Assets, IFRS 16 introduces a comprehensive model for the identification immediately before the date of initial application as an alternative to of lease arrangements and accounting treatments for both lessors performing an impairment review; and lessees. IFRS 16 replaced IAS 17 Leases and all related interpretations. IFRS 16 distinguishes leases and service contracts on the basis of • Permission to exclude initial direct costs from the measurement of the right-of-use asset at the date of initial application; whether an identified asset is controlled by a customer. Distinctions • Use hindsight, such as in determining the lease term if the contract between operating leases (off balance sheet) and finance leases contains options to extend or terminate the lease. (on balance sheet) is removed for lessee 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. Transition According to the transition provisions of IFRS 16, the Group selected 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 did not restate comparative information for the previous period. 176 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)Effect from the adoption As a result of adoption of IFRS 16 the Group recognised right-of-use assets of 1,668 and lease liabilities of 1,308. The result of the transition is represented as follows: Future minimum lease payments at 31 December 2018 as disclosed in the consolidated financial statements for the year-ended 31 December 2018 Reassessment of options to extend and cancel lease contracts Land lease rights with variable lease payments that do not depend on an index or a rate Impact of discounting (weighted average borrowing rate 8.4%) Add: finance lease liabilities as at 31 December 2018 Lease liabilities recognized at 1 January 2019 Future minimum lease payments at 31 December 2018 as disclosed in the consolidated financial statements for the year-ended 31 December 2018 Reassessment of options to extend and cancel lease contracts Land lease rights with variable lease payments that do not depend on an index or a rate Impact of discounting (weighted average borrowing rate 8.4%) Transfer from property, plant and equipment Right-of-use assets recognized at 1 January 2019 3,268 (523) (1,472) (220) 255 1,308 3,268 (523) (1,472) (220) 615 1,668 The table below shows the effect of application of IFRS 16 on the consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2019: Increase in depreciation within Cost of sales and Selling, general and administrative expenses Increase in Interest expenses, net Decrease in rent expenses within Cost of sales and Selling, general and administrative expenses Decrease in profit and total comprehensive income The application of IFRS 16 has an impact on the consolidated statement of cash flows of the Group. www.cherkizovo.com 2019 (454) (121) 476 (99) 177 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites3. NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS CONTINUED Under IFRS 16, lessees must present: • Under IAS 17, all lease payments on operating leases were presented as part of cash flows from operating activities. • Short-term lease payments, payments for leases of low- Consequently, the net cash generated by operating activities has value assets and variable lease payments not included in increased by 420 being the lease payments, and net cash used in the measurement of the lease liability as part of operating activities; financing activities has increased by the same amount. • Cash paid for the interest portion of a lease liability as either operating The adoption of IFRS 16 did not have an impact on net cash flows. activities or financing activities, as permitted by IAS 7 (the Group has opted to include interest paid as part of operating activities); and • Cash payments for the principal portion for a lease liability, as part of financing activities. 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 2020 or later periods and which the entity has not early adopted: Standards and Interpretations IFRS 17 Insurance Contracts Effective for annual periods beginning on or after 1 January 2021 Amendments to IFRS 10 and IAS 28 – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture Date to be determined by the IASB Amendments to IFRS 3 – Definition of a business January 2020 Annual Improvements to IFRSs (2010—2012 Cycle Amendments to IAS 1) – Classification of Liabilities as Current or Non-Current 1 January 2022 Amendments to IFRS 9, IAS 39 and IFRS 7 – Interest Rate Benchmark Reform and its Effects on Financial Reporting Amendments to IAS 1 and IAS 8 – Definition of material Amendments to References to the Conceptual Framework in IFRS Standards 1 January 2020 1 January 2020 1 January 2020 178 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)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 The amendments introduce an optional concentration test that permits a simplified assessment of whether an acquired set of activities and assets is not a business. Under the optional concentration test, the acquired set of activities and assets is not there is a sale or contribution of assets between an investor and its a business if substantially all of the fair value of the gross assets associate or joint venture. Specifically, the amendments state that acquired is concentrated in a single identifiable asset or group of gains or losses resulting from the loss of control of a subsidiary similar assets. that does not contain a business in a transaction with an associate or a joint venture that is accounted for using the equity method, The amendments are applied prospectively to all business are recognised in the parent’s profit or loss only to the extent of combinations and asset acquisitions for which the acquisition date the unrelated investors’ interests in that associate or joint venture. is on or after the first annual reporting period beginning on or after Similarly, gains and losses resulting from the remeasurement of 1 January 2020, with early application permitted. The management of investments retained in any former subsidiary (that has become the Group plans to apply the amendments for the future transactions. 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. Amendments to IAS 1 and IAS 8 Definition of material The amendments are intended to make the definition of material in IAS 1 easier to understand and are not intended to alter the underlying concept of materiality in IFRS Standards. the concept The effective date of the amendments has yet to be set by the IASB; of ‘obscuring’ material information with immaterial information has however, earlier application of the amendments is permitted. been included as part of the new definition. the management of the Group does not anticipate that the application of the amendments in the future will have an impact on the Group’s The threshold for materiality influencing users has been changed consolidated financial statements. from ‘could influence’ to ‘could reasonably be expected to influence’. Amendments to IFRS 3 Definition of a business The amendments clarify that while businesses usually have outputs, The definition of material in IAS 8 has been replaced by a reference to the definition of material in IAS 1. In addition, the IASB amended other outputs are not required for an integrated set of activities and assets Standards and the Conceptual Framework that contain a definition of to qualify as a business. To be considered a business an acquired material or refer to the term ‘material’ to ensure consistency. set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to The amendments are applied prospectively for annual periods the ability to create outputs. beginning on or after 1 January 2020, with earlier application Additional guidance is provided that helps to determine whether permitted. a substantive process has been acquired. 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. www.cherkizovo.com 179 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites3. NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS CONTINUED Annual Improvements to IFRSs (2010—2012 Cycle Amendments to IAS 1) - Classification of Liabilities as Current or Non-Current The amendments are intended to clarify that a liability is classified as 4. KEY SOURCES OF ESTIMATION UNCERTAINTY Management has made a number of judgments, estimates and assumptions relating to the reporting of assets and liabilities non-current if an entity expects, and has the discretion, to refinance and the disclosure of contingent assets and liabilities to prepare or roll over an obligation for at least twelve months after the reporting these consolidated financial statements in conformity with IFRSs. period under an existing loan facility with the same lender, on The estimates and associated assumptions are based on historical the same or similar terms. experience and other factors that are considered relevant. Actual results may differ from those estimates. Additional information relating The amendment affect only the presentation of liabilities in to contingencies and commitments is disclosed in Note 34. the statement of financial position- not the amount or timing of recognition, or the information that entities disclose about those items. The estimates and underlying assumptions are reviewed on The amendments clarify that the classification should be based in the period in which the estimate is revised if the revision affects on rights that are in existence at the end of the reporting period to only that period, or in the period of the revision and future periods if defer settlement by at least twelve months and make explicit that the revision affects both current and future periods. only rights in place “at the end of the reporting period” should affect the classification of a liability. The following are the key assumptions concerning the future, and an ongoing basis. Revisions to accounting estimates are recognized The classification is unaffected by expectations about whether an period, that may have a significant risk of causing a material entity will exercise its right to defer settlement of a liability; and that adjustment to the carrying amounts of assets and liabilities within other key sources of estimation uncertainty at the end of the reporting settlement refers to the transfer to the counterparty of cash, equity the next financial year. instruments, other assets or services. The amendments are effective for annual reporting periods beginning Biological assets Biological assets are recorded at fair values less costs to sell. Fair on or after 1 January 2022 and are to be applied retrospectively. value of the Group’s biological assets was determined by using Earlier application is permitted. valuation techniques, as there were no observable market prices near the reporting date for biological assets of the same physical conditions. The management of the Group does not anticipate that the application of the amendments in the future will have an impact Fair value is determined using Level 3 of fair value hierarchy and on the Group’s consolidated financial statements. the following key unobservable inputs: 180 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)Description Fair value as  at 31 December 2019 Valuation technique Broilers 3,525 Discounted cash flows Breeders held for hatchery eggs production 3,224 Discounted cash flows Unobservable inputs Average weight of one broiler – kg Poultry meat price – rubles Projected production costs – rubles per kg Number of hatchery eggs produced by one breeder Hatchery egg price – rubles Projected production costs of hatchery egg – rubles Average number of piglets produced by one sow Sows 2,007 Discounted cash flows Market price of weaned piglet – rubles Market hogs 7,390 Discounted cash flows Discount rate Average weight of one market hog – kg Pork meat price – rubles per kg Projected production costs – rubles per kg Value of unobservable inputs Relationship of unobservable inputs to fair value The higher the weight, the higher the fair value 2.5 105.2 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 75.2 151 17.3 The higher the costs, the lower the fair value 8.3 The higher the number, the higher the fair value 35.1 1,763 The higher the price, the higher the fair value 11.0% The higher the discount rate, the lower the fair value 127.3 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 80.8 60.4 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. www.cherkizovo.com 181 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites4. KEY SOURCES OF ESTIMATION UNCERTAINTY CONTINUED 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) with the corresponding effect to the net change in fair value of biological assets line in profit or loss by the following amounts: 31 December 2019 31 December 2019 Pork Poultry 10% increase 10% decrease 10% increase 10% decrease Expected selling prices Projected production costs and costs to sell 1,780 (835) (1,775) 830 1,451 (898) (1,451) 896 Recoverable amount of Meat-processing cash-generating unit During the year, as the result of the poor performance of Meat- The model is sensitive to the changes in assumptions above as well as to the assumptions of sales volumes and gross margin levels. Fluctuations in these assumptions in the range from 0.5 p.p. to 1 p.p processing cash-generating unit, the Group carried out a review (or from 0.5% to 1%) would result in the aggregate carrying amount of of its recoverable amount. It was determined based on a value the cash-generating unit exceeding the recoverable amount of it by in use calculation, which uses cash flow projections based on the amount in the range from 1,139 to 2,249. management’s estimations covering a five-year period. The key assumptions used are set out below. the other assumptions on which recoverable amount is based would The management believes that any reasonably possible change in In percent Discount rate Terminal value growth rate Average annual increase in prices (average of next five years) 31 December 2019 amount to exceed its recoverable amount. not cause the Meat-processing cash-generating unit’s carrying 11.6 4 0.44 182 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)5. OPERATING SEGMENTS • The Turkey column represents operations related to purchase and subsequent resale of turkey meat produced by the joint venture The Group’s operations are divided into five segments by types through the Group’s distribution network. of products produced: poultry, pork, meat processing, grain and feed. Substantially all of the Group’s operations are located Each of Turkey and Corporate are not operating segments. within the Russian Federation. All segments have different segment managers responsible for the segments’ operations. The Group evaluates segment performance based on Adjusted the chief operating decision maker (the Chief Executive Officer) is EBITDA, which is the primary segment profit measure of the Group. the individual responsible for allocating resources to and assessing Adjusted EBITDA is the measure reported to the chief operating the performance of each segment of the business. decision maker for the purposes of resource allocation and assessment of segment performance. the Group accounts for • The Meat processing segment operations include the production inter-segment sales and transfers as if the sales or transfers were to of two distinctive product lines: the Sausages product line, which third parties. the accounting policies of the reportable segments are comprises a wide range of processed meat products, including the same as the Group’s accounting policies described in Note 2. sausages, ham, hot dogs, etc., and the Pork product line, which Segment assets and liabilities are not disclosed, as this information is comprises production and sales of pork meat. not provided to the chief operating decision maker. • The Poultry segment operations consist of breeding, raising and Adjusted EBITDA is defined as profit for the period before income processing broilers, as well as sales of chilled and frozen chicken tax expense/benefit, interest income and interest expense, net, products. foreign exchange loss/gain, depreciation and amortisation expense, net change in fair value of biological assets, bonuses to employees • The Pork segment operations consist of breeding, raising and under long-term incentive program and share of loss of joint ventures selling live pigs. and associates plus share of Adjusted EBITDA of joint ventures and associates and depreciation and amortisation accumulated in • The Grain segment is involved in the farming of wheat and other harvested crops in stock. crops. • The Feed segment is involved in the production of feed for internal changed the presentation of revenue from sales of meat-processing use by pork and poultry segments. products produced from the Group’s sows and related cost of sales. Starting from 1 January 2019, in the Segment information the Group All five segments are involved in other business activities, including sows was shown in sales of Meat-processing segment net of cost production of dairy, sale of non-hatchery eggs and other services, of sows purchased from Pork segment. After the change the Group which are non-core business activities. the Group also presents shows such sales and related cost of sows on a gross basis in Sales separately two reconciling columns in the table with segment and Cost of sales of Meat-processing segment, respectively, wherein Previously, revenue from sales of products produced from the Group’s information: this gross-up is eliminated in Intersegment column. the comparative information for the year ended 31 December 2018 has been • the Corporate column mainly include payroll and other expenses retrospectively adjusted to reflect the change in presentation. of the holding company and www.cherkizovo.com 183 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites5. OPERATING SEGMENTS CONTINUED Segment information for the year ended at 31 December 2019 comprised: Meat-processing Total 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 expense ˙**˙ Share of (loss) profit of joint ventures and associates Operating income (loss) Other income (expense), net ˙***˙ Interest expense, net Profit (loss) before income tax Adjustments for: Interest expense, net Interest income Foreign exchange (gain) loss Depreciation and amortisation expense Net change in fair value of biological assets Share of loss (profit) 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 Supplemental information: Segment capital expenditure Income tax expense (benefit) 40,056 (872) (31) 40,025 - - (37,035) 3,021 (5,033) (23) (2,035) 502 (158) (1,691) 158 (17) (441) 1,245 - 23 104 11 - (608) 1,337 (36) Pork 24,478 - (20,948) 3,530 (1,244) - (17,588) 5,646 (440) - 5,206 50 (1,025) 4,231 1,025 (32) (14) 1,870 1,244 - - 40 - Poultry 70,332 (773) (1,820) 68,512 (135) - (53,281) 16,916 (7,581) 15 9,350 216 (1,504) 8,062 1,504 (246) 41 2,847 135 (15) 193 41 - 8,364 12,562 2,798 (1) 1,859 22 Grain 5,758 - (3,545) 2,213 - 155 (4,128) 1,785 (274) - 1,511 23 (132) 1,402 132 (1) (10) 510 - - - 3 94 2,130 1,109 15 ˙*˙ Included in total sales are revenues which arose from sales to the Group’s two largest customers each contributing more than 10 per cent to the Group’s revenue in 2019. No other single customer contributed 10 per cent or more to the Group’s revenue in 2019. ˙**˙ Operating expenses include selling, general and administrative expenses and other operating income/expense, net. ˙***˙ Other income (expense), net presents interest income and other income/expense as a combined line item. ˙****˙ Adjusted EBITDA of joint ventures and associates is calculated consistently to that of the Group and reported to the CODM as part of segment reporting. 184 2 Annual report 2019 Total reportable segments Corporate Intersegment Turkey Total consolidated Total without Feed 40,321 (40,311) 10 (39,945) 376 (173) 203 386 (727) (138) 727 (73) (311) 725 - - - - - - - - 7 719 40 180,945 (1,645) (66,655) 114,290 (1,379) 155 (151,977) 27,744 (13,501) (8) 14,235 1,177 (3,546) 11,866 3,546 (369) (735) 7,197 1,379 8 297 102 94 7,822 40 - - - - - - - - - - - - - (3,990) (3,990) 183 (1,306) (5,113) 1,306 (242) 59 618 103 730 6 (67,552) 66,801 (751) (126) 67,090 (588) 653 - 65 (368) 368 65 (368) 368 - - - - - - - - - - - Turkey 113,393 (1,645) 146 113,539 (1,379) 29 (84,887) 27,156 (16,838) (8) 10,310 992 (4,484) 6,818 4,484 (243) (676) 7,815 1,379 8 297 205 94 8,552 46 6,716 (134) (146) 6,570 (6,009) 707 (713) (115) (121) (121) 3 - 115 439 - - - - - - - - - - - 120,109 (1,779) - 120,109 (1,379) 29 (90,896) 27,863 (17,551) (123) 10,189 992 (4,484) 6,697 4,484 (243) (676) 7,818 1,379 123 736 205 94 8,552 46 937 23,385 (3,269) 65 20,181 436 20,617 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)Segment information for the year ended at 31 December 2019 comprised: Meat-processing Total 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 expense ˙**˙ Share of (loss) profit of joint ventures and associates Operating income (loss) Other income (expense), net ˙***˙ Interest expense, net Profit (loss) before income tax Adjustments for: Interest expense, net Interest income Foreign exchange (gain) loss Depreciation and amortisation expense Net change in fair value of biological assets Share of loss (profit) 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 Supplemental information: Segment capital expenditure Income tax expense (benefit) 40,056 (872) (31) 40,025 - - (37,035) 3,021 (5,033) (23) (2,035) 502 (158) (1,691) 158 (17) (441) 1,245 - 23 104 11 - (608) 1,337 (36) Pork 24,478 (20,948) 3,530 (1,244) (17,588) 5,646 (440) - - - 5,206 50 (1,025) 4,231 1,025 (32) (14) 1,870 1,244 - - - 40 2,798 (1) Poultry 70,332 (773) (1,820) 68,512 (135) - (53,281) 16,916 (7,581) 15 9,350 216 (1,504) 8,062 1,504 (246) 41 2,847 135 (15) 193 41 - 1,859 22 Grain 5,758 (3,545) 2,213 155 (4,128) 1,785 (274) - - - 1,511 23 (132) 1,402 132 (1) (10) 510 - - - 3 94 2,130 1,109 15 ˙*˙ Included in total sales are revenues which arose from sales to the Group’s two largest customers each contributing more than 10 per cent to the Group’s revenue in 2019. No other single customer contributed 10 per cent or more to the Group’s revenue in 2019. ˙**˙ Operating expenses include selling, general and administrative expenses and other operating income/expense, net. ˙***˙ Other income (expense), net presents interest income and other income/expense as a combined line item. ˙****˙ Adjusted EBITDA of joint ventures and associates is calculated consistently to that of the Group and reported to the CODM as part of segment reporting. Feed 40,321 - (40,311) 10 - - (39,945) 376 (173) - 203 386 (727) (138) 727 (73) (311) 725 - - - 7 - Total reportable segments Corporate Intersegment Total without Turkey Turkey Total consolidated 180,945 (1,645) (66,655) 114,290 (1,379) 155 (151,977) 27,744 (13,501) (8) 14,235 1,177 (3,546) 11,866 3,546 (369) (735) 7,197 1,379 8 297 102 94 - - - - - - - - (3,990) - (3,990) 183 (1,306) (5,113) 1,306 (242) 59 618 - - - 103 - (67,552) - 66,801 (751) - (126) 67,090 (588) 653 - 65 (368) 368 65 (368) 368 - - - - - - - 113,393 (1,645) 146 113,539 (1,379) 29 (84,887) 27,156 (16,838) (8) 10,310 992 (4,484) 6,818 4,484 (243) (676) 7,815 1,379 8 297 205 94 6,716 (134) (146) 6,570 - - (6,009) 707 (713) (115) (121) - - (121) - - - 3 - 115 439 - - 120,109 (1,779) - 120,109 (1,379) 29 (90,896) 27,863 (17,551) (123) 10,189 992 (4,484) 6,697 4,484 (243) (676) 7,818 1,379 123 736 205 94 8,364 12,562 937 23,385 (3,269) 65 20,181 436 20,617 719 40 7,822 40 730 6 - - 8,552 46 - - 8,552 46 www.cherkizovo.ru www.cherkizovo.com 185 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites5. OPERATING SEGMENTS CONTINUED Segment information for the year ended at 31 December 2018 comprised: Meat-processing Total 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 expense ˙**˙ Share of loss of joint ventures and associates Operating income (loss) Other (expense) income, net ˙***˙ Interest expense, net Profit (loss) before income tax Adjustments for: Interest expense, net Interest income Foreign exchange loss (gain) Depreciation and amortisation expense Net change in fair value of biological assets Share of 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 Supplemental information: Segment capital expenditure Income tax (benefit) expense 38,780 (682) (1,027) 37,753 - - (35,341) 3,439 (3,916) - (477) (452) (122) (1,051) 122 (20) 485 883 - - - 39 - 458 2,181 (375) Pork 23,262 - (20,238) 3,024 899 - (13,567) 10,594 (179) - 10,415 61 (588) 9,888 588 (64) 10 1,339 (899) - - 40 - 10,902 3,883 2 Poultry 52,723 (709) (1,594) 51,129 1,264 - (41,205) 12,782 (5,379) - 7,403 119 (621) 6,901 621 (172) 74 2,055 (1,264) - - 172 - 8,387 2,020 88 Grain 6,899 - (3,945) 2,954 - 1,297 (6,273) 1,923 (205) - 1,718 3 (173) 1,548 173 (2) - 809 - - - 8 (273) 2,263 390 104 (30,703) (127,089) Feed 31,210 (31,210) - - - - - - - - - 507 (170) 337 (221) (870) (754) 870 (55) 277 609 19 966 300 14 Total reportable segments Corporate Intersegment Turkey Total consolidated Total without Turkey 152,874 (1,391) (58,014) 94,860 2,163 1,297 29,245 (9,849) - 19,396 (490) (2,374) 16,532 2,374 (313) 846 5,695 (2,163) - - 278 (273) 22,976 8,774 (167) - - - - - - - - - - - - - (3,505) (3,505) 148 (1,046) (4,403) 1,046 (130) (17) 347 373 979 (20) (58,267) 58,267 (327) 945 56,897 (752) 398 - (354) (153) 153 (354) (153) 153 327 - - - - - - - - - - 94,607 (1,391) 253 94,860 1,836 2,242 (70,192) 28,493 (12,956) - 15,537 (495) (3,267) 11,775 3,267 (290) 829 6,042 (1,836) - - 651 (273) 20,165 9,753 (187) (2,784) (27) 5,815 (82) (253) 5,562 (5,126) 689 (614) (57) 18 18 - - - - - - - 3 - 7 - - - 57 165 250 100,422 (1,473) - 100,422 1,836 2,242 (75,318) 29,182 (13,570) (57) 15,555 (495) (3,267) 11,793 3,267 (290) 829 6,045 (1,836) 57 165 658 (273) 20,415 9,753 (187) ˙*˙ Included in total sales are revenues which arose from sales to the Group’s two largest customers each contributing more than 10 per cent to the Group’s revenue in 2018. No other single customer contributed 10 per cent or more to the Group’s revenue in 2018. ˙**˙ Operating expenses include selling, general and administrative expenses and other operating income/expense, net. ˙***˙ Other income (expense), net presents interest income and other income/expense as a combined line item. ˙****˙ Adjusted EBITDA of joint ventures and associates is calculated consistently to that of the Group and reported to the CODM as part of segment reporting. 186 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)Segment information for the year ended at 31 December 2018 comprised: Meat-processing Total 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 Share of loss of joint ventures and associates Cost of sales Gross profit (loss) Operating expense ˙**˙ Operating income (loss) Other (expense) income, net ˙***˙ Interest expense, net Profit (loss) before income tax Adjustments for: Interest expense, net Interest income Foreign exchange loss (gain) Depreciation and amortisation expense Net change in fair value of biological assets Share of loss of joint ventures and associates in stock Adjusted EBITDA Supplemental information: Segment capital expenditure Income tax (benefit) expense 38,780 (682) (1,027) 37,753 (35,341) 3,439 (3,916) (477) (452) (122) (1,051) 122 (20) 485 883 - - - - - - - 2,181 (375) Pork 23,262 (20,238) 3,024 899 (13,567) 10,594 (179) - - - 10,415 61 (588) 9,888 588 (64) 10 1,339 (899) - - - 40 3,883 2 Poultry 52,723 (709) (1,594) 51,129 1,264 (41,205) 12,782 (5,379) 7,403 119 (621) 6,901 621 (172) 74 2,055 (1,264) 172 - - - - - 2,020 88 Grain 6,899 (3,945) 2,954 1,297 (6,273) 1,923 (205) 1,718 (173) 1,548 173 (2) 809 - - - 3 - - - - 8 (273) 2,263 390 104 Share of adjusted EBITDA of joint ventures and associates ˙****˙ Bonuses to employees under long-term incentive program       39 Depreciation and amortisation accumulated in harvested crops 458 10,902 8,387 Total reportable segments Corporate Intersegment Total without Turkey Turkey Total consolidated Feed 31,210 - (31,210) - - - 152,874 (1,391) (58,014) 94,860 2,163 1,297 (30,703) (127,089) 507 (170) - 337 (221) (870) (754) 870 (55) 277 609 - - - 19 - 966 300 14 29,245 (9,849) - 19,396 (490) (2,374) 16,532 2,374 (313) 846 5,695 (2,163) - - 278 (273) 22,976 8,774 (167) - - - - - - - - (3,505) - (3,505) 148 (1,046) (4,403) 1,046 (130) (17) 347 - - - 373 - (58,267) - 58,267 - (327) 945 56,897 (752) 398 - (354) (153) 153 (354) (153) 153 - - 327 - - - - (2,784) (27) 979 (20) - - 94,607 (1,391) 253 94,860 1,836 2,242 (70,192) 28,493 (12,956) - 15,537 (495) (3,267) 11,775 3,267 (290) 829 6,042 (1,836) - - 651 (273) 20,165 9,753 (187) 5,815 (82) (253) 5,562 - - (5,126) 689 (614) (57) 18 - - 18 - - - 3 - 57 165 7 - 250 - - 100,422 (1,473) - 100,422 1,836 2,242 (75,318) 29,182 (13,570) (57) 15,555 (495) (3,267) 11,793 3,267 (290) 829 6,045 (1,836) 57 165 658 (273) 20,415 9,753 (187) ˙*˙ Included in total sales are revenues which arose from sales to the Group’s two largest customers each contributing more than 10 per cent to the Group’s revenue in 2018. No other single customer contributed 10 per cent or more to the Group’s revenue in 2018. ˙**˙ Operating expenses include selling, general and administrative expenses and other operating income/expense, net. ˙***˙ Other income (expense), net presents interest income and other income/expense as a combined line item. ˙****˙ Adjusted EBITDA of joint ventures and associates is calculated consistently to that of the Group and reported to the CODM as part of segment reporting. www.cherkizovo.com 187 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites6. COST OF SALES Cost of sales for the years ended 31 December 2019 and 2018 comprised: Raw materials and goods for resale Personnel (excluding pension costs) Depreciation Utilities Pension costs Other Total cost of sales 2019 59,803 12,496 6,996 4,260 2,563 4,778 90,896 2018 48,988 10,147 5,595 3,956 2,042 4,590 75,318 Raw materials and goods for resale include as an offset subsidies received from local governments in the amount of 37 and 48 for the years ended 31 December 2019 and 2018, respectively. These subsidies were received based on square of cultivated land and volumes of meat and eggs produced. Deprecation includes an impairment loss recognized for non-operational items of property, plant and equipment in the amount of 531 and nil for the years ended 31 December 2019 and 2018, respectively (Note 12). 188 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)7. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the years ended 31 December 2019 and 2018 comprised: Personnel (excluding pension costs) Transportation Advertising and marketing Penalties Pension costs Materials and supplies Depreciation and amortisation Security services Taxes (other than income tax) Information technology and communication services Audit, consulting and legal fees Utilities Bonuses to employees under long-term incentive program ˙*˙   Insurance Rent expenses Change in expected credit losses and other write-off Veterinary services Repairs and maintenance Bank charges Other Total selling, general and administrative expenses 2019 5,626 3,374 1,218 897 834 831 718 534 509 368 304 210 205 155 130 129 115 52 27 1,205 17,441 2018 4,538 2,684 1,088 390 741 592 369 457 273 277 285 218 658 153 404 118 163 61 41 724 14,234 ˙*˙ 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. www.cherkizovo.com 189 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites8. OTHER OPERATING (EXPENSES) INCOME, NET Other operating (expenses) income, net for the years ended 31 December 2019 and 2018 comprised: Income from non-core activities of the Group Expenses related to income from non-core activities, comprising: Raw materials Personnel (excluding pension costs) Depreciation Utilities Pension costs Other (Loss) gain on disposal of property, plant and equipment, net (Loss) gain on disposal of non-current biological assets, net Other operating (expenses) income, net 9. INTEREST EXPENSE, NET Interest expense, net for the years ended 31 December 2019 and 2018 comprised: Interest on bank overdrafts and loans* Interest on lease liabilities Less: amounts included in the cost of qualifying assets Total interest expense Government grants for compensation of interest expenses accrued ˙*˙ Government grants for compensation of interest expenses write-off Less: amounts included in the cost of qualifying assets Total government grants for compensation of interest expenses Total interest expense, net 2019 1,863 (1,749) (1,277) (148) (104) (53) (32) (135) (164) (60) (110) 2019 5,771 121 (95) 5,797 (1,648) 254 81 (1,313) 4,484 2018 2,217 (1,792) (1,409) (173) (82) (37) (35) (56) 47 192 664 2018 4,853 41 (290) 4,604 (1,519) - 182 (1,337) 3,267 ˙*˙ 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 1,065 (2018: 537). 190 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)10. OTHER INCOME (EXPENSES), NET Other income (expenses), net for the years ended 31 December 2019 and 2018 comprised: Foreign exchange gain (loss) Other income, net Total other income (expenses), net 11. INCOME TAX 2019 676 73 749 2018 (829) 44 (785) 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 2019 and 2018 were as follows: Current tax expense Deferred tax benefit Total income tax (expense) benefit 2019 (160) 114 (46) 2018 (201) 388 187 www.cherkizovo.com 191 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites10. OTHER INCOME (EXPENSES), NET CONTINUED The income tax expense can be reconciled to the theoretical tax provision at the statutory rate for the years ended 31 December 2019 and 2018 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 Additional income tax accrued for prior years Other Income tax expense (benefit) 2019 6,697 8,706 120 (2,129) 0% 10% 20% (414) 255 134 71 46 2018 11,793 13,861 281 (2,349) 0% 10% 20% (442) 186 43 26 (187) The following amounts, determined after appropriate offsetting, are presented in the consolidated statement of financial position as of 31 December 2019 and 2018: Deferred tax asset Deferred tax liability Net deferred tax asset 31 December 2019 31 December 2018 1,214 (1,023) 191 1,073 (996) 77 192 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)The movement in the net deferred tax asset for the year ended 31 December 2019 comprised: Property, plant and equipment and investment property Trade receivables Other assets and liabilities Tax loss carry forward Net deferred tax asset 31 December 2018 Recognised in profit or loss 31 December 2019 (1,274) (66) 16 1,401 77 (107) 19 87 115 114 (1,381) (47) 103 1,516 191 The movement in the net deferred tax asset for the year ended 31 December 2018 comprised: 1 January 2018 Recognised in profit or loss 31 December 2018 Property, plant and equipment and investment property Trade receivables Other assets and liabilities Tax loss carry forward Net deferred tax asset (liability) (1,267) (77) 39 994 (311) (7) 11 (23) 407 388 (1,274) (66) 16 1,401 77 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. www.cherkizovo.com 193 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites12. PROPERTY, PLANT AND EQUIPMENT The following table represents movements in property, plant and equipment for the years ended 31 December 2019 and 2018: Land and land lease rights Buildings, infrastructure and leasehold improvements Machinery and equipment Vehicles Other Construction in progress Cost Balance as at 1 January 2018 Additions Acquisitions of subsidiaries (Note 33) Disposals As at 31 December 2018 Additions Acquisitions of subsidiaries (Note 33) Transferred to right-of-use assets Disposals As at 31 December 2019 Accumulated depreciation Balance as at 1 January 2018 Depreciation charge Eliminated on disposals As at 31 December 2018 Depreciation charge ˙*˙ Transferred to right-of-use assets Eliminated on disposals As at 31 December 2019 Carrying amounts At 31 December 2018 At 31 December 2019 7,627 98 39 (164) 7,600 305 - (433) (123) 7,349 (15) (20) - (35) - 35 - - 7,565 7,349 50,347 6,420 3,362 (207) 59,922 3,495 1,402 (497) (699) 63,623 (10,918) (2,015) 114 (12,819) (2,809) 457 652 (14,519) 47,103 49,104 28,999 5,450 1,253 (767) 34,935 3,854 2 (262) (955) 37,574 (13,714) (2,808) 718 (15,804) (3,307) 138 855 (18,118) 19,131 19,456 ˙*˙ Depreciation charge includes 531 of impairment loss recognized through accelerated depreciation for non-operational assets. 194 2 Annual report 2019 5,424 867 153 (118) 6,326 1,231 1 (138) (559) 6,861 (2,824) (702) 97 (3,429) (888) 85 533 (3,699) 2,897 3,162 289 50 - (25) 314 121 - - (45) 390 (196) (53) 24 (225) (68) - 41 (252) 89 138 10,301 (4,694) 18 (17) 5,608 (1,957) (238) 3,413 - - - - - - - - - - 5,608 3,413 Total 102,987 8,191 4,825 (1,298) 114,705 7,049 1,405 (1,330) (2,619) 119,210 (27,667) (5,598) 953 (32,312) (7,072) 715 2,081 (36,588) 82,393 82,622 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated) 12. PROPERTY, PLANT AND EQUIPMENT The following table represents movements in property, plant and equipment for the years ended 31 December 2019 and 2018: Land and land lease rights Machinery and equipment Vehicles Other Buildings, infrastructure and leasehold improvements Construction in progress Balance as at 1 January 2018 Acquisitions of subsidiaries (Note 33) As at 31 December 2018 Cost Additions Disposals Additions Acquisitions of subsidiaries (Note 33) Transferred to right-of-use assets Disposals As at 31 December 2019 Accumulated depreciation Balance as at 1 January 2018 Depreciation charge Eliminated on disposals As at 31 December 2018 Depreciation charge ˙*˙ Transferred to right-of-use assets Eliminated on disposals As at 31 December 2019 Carrying amounts At 31 December 2018 At 31 December 2019 7,627 98 39 (164) 7,600 305 - (433) (123) 7,349 (15) (20) (35) 35 - - - - 7,565 7,349 50,347 6,420 3,362 (207) 59,922 3,495 1,402 (497) (699) 63,623 (10,918) (2,015) 114 (12,819) (2,809) 457 652 (14,519) 47,103 49,104 28,999 5,450 1,253 (767) 34,935 3,854 2 (262) (955) 37,574 (13,714) (2,808) 718 (15,804) (3,307) 138 855 (18,118) 19,131 19,456 ˙*˙ Depreciation charge includes 531 of impairment loss recognized through accelerated depreciation for non-operational assets. 5,424 867 153 (118) 6,326 1,231 1 (138) (559) 6,861 (2,824) (702) 97 (3,429) (888) 85 533 (3,699) 2,897 3,162 289 50 - (25) 314 121 - - (45) 390 (196) (53) 24 (225) (68) - 41 (252) 89 138 10,301 (4,694) 18 (17) 5,608 (1,957) - - (238) 3,413 - - - - - - - - 5,608 3,413 Total 102,987 8,191 4,825 (1,298) 114,705 7,049 1,405 (1,330) (2,619) 119,210 (27,667) (5,598) 953 (32,312) (7,072) 715 2,081 (36,588) 82,393 82,622 Net book values of buildings, infrastructure and leasehold Advances paid for acquisition and construction of property, plant and improvements include 40 of leased buildings and infrastructure as of equipment are included in construction in progress in the amount of 31 December 2018. Net book values of vehicles and machinery and 425 and 532 as at 31 December 2019 and 2018, respectively. equipment include 177 of leased equipment as of 31 December 2018. www.cherkizovo.com 195 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites 13. 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 2019 and 2018 were as follows: Land Buildings Total Cost Balance as at 1 January 2018 Reconstruction and modernisation As at 31 December 2018 Reconstruction and modernisation As at 31 December 2019 Accumulated depreciation Balance as at 1 January 2018 Depreciation charge As at 31 December 2018 Depreciation charge As at 31 December 2019 Carrying amounts At 31 December 2018 At 31 December 2019 275 - 275 - 275 - - - - - 275 275 386 17 403 82 485 (71) (12) (83) (13) (96) 320 389 661 17 678 82 760 (71) (12) (83) (13) (96) 595 664 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 (Level 3 of fair value hierarchy). The management anticipates that the fair value did not materially change in subsequent years. The Group recognised the following amounts in respect of the investment property in profit or loss: Rental income from investment property Direct operating expenses arising from investment property that generated rental income during the year Operating loss from investment property 2019 197 (210) (13) 2018 193 (196) (3) 196 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)14. RIGHT-OF-USE ASSETS For the year ended 31 December 2019 the movement of right-of-use assets was as follows: Buildings, infrastructure and leasehold improvements Machinery and equipment Vehicles 771 (297) 41 - - 812 (297) 515 326 (75) 44 - - 370 (75) 295 53 (40) 109 - (36) 126 (40) 86 Land 518 (42) 185 10 - 713 (42) 671 Cost at 1 January 2019 Depreciation New lease contracts and modification of existing lease contracts New lease contracts arose from acquisition Transfer to property, plant and equipment, net Cost at 31 December 2019 Accumulated depreciation as at 31 December 2019 Carrying amount at 31 December 2019 15. GOODWILL 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 2019 250 680 698 1,628 Total 1,668 (454) 379 10 (36) 2,021 (454) 1,567 2018 250 680 698 1,628 The recoverable amount of Poultry and Grain cash-generating units is amount is based would not cause the aggregate carrying amount to determined based on a value in use calculation, which uses cash flow exceed the aggregate recoverable amount of the cash-generating projections based on financial budgets approved by management unit. covering a five-year period and 11% discount rate. The cash flows beyond that period have been extrapolated using a steady 3.5% Key inputs in determination of the recoverable amount of Meat- per annum growth rate. Management believes that any reasonably processing cash-generating unit together with sensitivity to possible change in the key assumptions on which recoverable reasonably possible changes in those inputs are disclosed in Note 4. www.cherkizovo.com 197 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites16. INTANGIBLE ASSETS The following table represents movements of intangible assets for the years ended 31 December 2019 and 2018: Computer software Indefinite life trademarks Other intangible assets Total Cost Balance at 1 January 2018 Additions Balance at 31 December 2018 Additions Balance at 31 December 2019 Accumulated amortisation Balance at 1 January 2018 Amortisation expense Balance at 31 December 2018 Amortisation expense Balance at 31 December 2019 Carrying amounts At 31 December 2018 At 31 December 2019 1,450 410 1,860 494 2,354 (705) (278) (983) (304) (1,287) 877 1,067 1,216 - 1,216 - 1,216 - - - - - 1,216 1,216 166 7 173 10 183 (111) (11) (122) (9) (131) 51 52 2,832 417 3,249 504 3,753 (816) (289) (1,105) (313) (1,418) 2,144 2,335 Computer software Software is amortised over its useful life ranging from 2 to 10 years As of 31 December 2019 and 2018, management tested the Kurinoe Tsarstvo trademark for impairment and determined that the trademark and is mainly presented by SAP and Oracle systems installed by was not impaired. The fair value was determined using a relief from the Group. Indefinite life trademarks 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 Kurinoe Tsarstvo (“Куриное Царство”) trademark the projected long-term average general inflation in Russia. The carrying value of the Kurinoe Tsarstvo trademark was 745 as of 31 December 2019 and 2018. 198 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)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 2019 31 December 2018 16.0% 3.5% 3.3% 4.4% 18.1% 3.5% 3.3% 4.4% The values assigned to the key assumptions represented As of 31 December 2019 and 2018, management tested management’s assessment of future trends in the relevant industries the Cherkizovo trademark for impairment and determined that and were based on historical data from both external and internal the trademark was not impaired. The fair value was determined sources. using a relief from royalty method based on current year actual sales by trademark and royalty rate of 3.3%. Potential royalty from one- The management believes that any reasonably possible change in year sales covers the carrying value of the trademark and therefore the key assumptions on which recoverable amount is based would the Group did not make a detailed calculation for the whole life of not cause the aggregate carrying amount to exceed the aggregate the trademark. recoverable amount of the trademark. Cherkizovo (“Черкизово”) trademark the key assumptions on which recoverable amount is based would The carrying value of the Cherkizovo trademark was 436 as of not cause the aggregate carrying amount to exceed the aggregate 31 December 2019 and 2018. recoverable amount of the trademark. The management believes that any reasonably possible change in www.cherkizovo.com 199 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites17. BIOLOGICAL ASSETS Non-current biological assets The balances of non-current biological assets were as follows: 31 December 2019 31 December 2018 Units Carrying amount Units Carrying amount Sows, heads Cattle, heads Total bearer non-current biological assets 107,888 - 107,888 2,007 - 2,007 100,903 510 101,413 The following table represents movements in sows: Balance at 1 January 2018 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 Increase due to purchases and breeding costs of growing livestock Decrease due to sale Loss arising from changes in fair value less estimated point-of-sales costs Balance at 31 December 2019 2,638 35 2,673 Amount 2,259 944 (993) 428 2,638 1,307 (834) (1,104) 2,007 200 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)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 2019 31 December 2018 Units Carrying amount Units Carrying amount 1,277,298 1,277,298 36,510,440 3,576,183 40,086,623 25,327,958 - 59,005 1,130,928 1,130,928 32,859,688 2,884,976 35,744,664 23,257,939 435 59,555 7,390 7,390 3,525 3,224 6,749 400 - 838 910 7,628 7,628 2,910 3,094 6,004 345 16 783 619 16,287 15,395 www.cherkizovo.com 201 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites 17. BIOLOGICAL ASSETS CONTINUED The following table represents movements in the most material classes of the current biological assets: Balance at 1 January 2018 Increase due to purchases and gain arising from cost inputs Increase due to acquisition of subsidiaries Transfer to consumable biological assets Pork Broilers Breeders 6,101 13,909 - - 1,928 39,310 205 1,572 1,969 1,770 589 (1,572) Unharvested crops and related WIP 1,286 2,528 - - Total 11,284 57,517 794 - Decrease due to sale or harvest of assets (23,262) (47,700) - (4,736) (75,698) Gain arising from changes in fair value less estimated point- of-sales costs 10,880 7,595 338 2,324 21,137 Balance at 31 December 2018 7,628 2,910 3,094 1,402 15,034 Increase due to purchases and gain arising from cost inputs 18,163 49,668 Increase due to acquisition of subsidiaries Transfer to consumable biological assets - - 2,571 356 - 2,364 (2,364) 4,856 75,258 - - 356 - Decrease due to sale or harvest of assets (24,478) (60,597) - (6,075) (91,150) Gain (loss) arising from changes in fair value less estimated point-of-sales costs 6,077 9,180 (433) 1,565 16,389 Balance at 31 December 2019 7,390 3,525 3,224 1,748 15,887 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 2019 (6,583) - 5,204 (1,379) 2018 (4,457) (290) 6,583 1,836 202 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)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 The main crops of the Group’s agricultural production and output were as follows (in thousands of tonnes): Winter wheat Spring wheat Corn Sunflower Soybean Barley Peas The production output of pork and poultry segments of the Group were as follows (in thousands of tonnes): Pork meat Poultry meat 2019 (1,128) 1,157 29 2019 230 125 99 84 46 41 12 2019 284 663 2018 1,114 1,128 2,242 2018 235 73 61 65 33 34 17 2018 247 544 Key inputs in fair value measurement of biological assets together with sensitivity to reasonably possible changes in those inputs are disclosed in Note 4. www.cherkizovo.com 203 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites18. INVESTMENTS IN JOINT VENTURES AND ASSOCIATES The Group’s significant joint ventures and associates include: Type of investment Ownership and voting interest of the Group 31 December 2019 31 December 2018 LLC Tambovskaya Indeika (Tambov Turkey JV) Joint venture Samson – Food Products LLC COBB-RUSSIA Associate Joint venture Total investments in joint ventures and associates 50% 75% 50% 3,266 327 196 3,789 2,987 350 181 3,518 Tambov Turkey JV During the year ended 31 December 2012 the Group, together with Summarised financial information in respect of the Group’s joint Grupo Corporativo Fuertes, S.L., established a joint venture, LLC venture and its reconciliation to the carrying amount of the interest Tambovskaya Indeika. The joint venture’s primary business is breeding in the joint venture are set out below. The summarised financial of turkey. The joint venture started construction of an integrated full information below represents amounts shown in the joint venture’s cycle turkey production complex in 2013 and started operations in financial statements prepared in accordance with IFRSs adjusted by November 2016. 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 venture ˙*˙ Carrying amount of the Group’s interest in the joint venture 31 December 2019 31 December 2018 145 2,460 8,334 (641) (1,643) (72) (1,937) (114) 6,532 50% 3,266 - 3,266 4 3,121 7,876 (546) (1,720) (136) (3,531) (93) 4,975 50% 2,487 500 2,987 ˙*˙ 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 completed 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. 204 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)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 2019 6,310 (5,432) 878 (620) 16 (150) 32 (379) (7) (230) 50% 439 (115) 2018 5,331 (5,000) 331 (624) - (202) (38) 420 (1) (114) 50% 165 (57) As of 31 December 2019, management tested the Group’s investment the Group agreed that operational management, including in Tambov Turkey for impairment and determined that the investment the General Director appointment decisions, remains the authority was not impaired. Samson – Food Products 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. On 25 December 2018 the Group acquired 75% in LLC Samson – Food Products is a meat-processing group of companies “Myasokombinat Vsevolzhskyi” and LLC “Svezhyi Product” (together located in the North-West region and offering meat products under “Samson – Food Products”) for cash consideration of 350 payable such brands as Samson, Grillmania, Fileya and others. at the acquisition date and contingent consideration payable within two years after the acquisition. the contingent consideration depends Summarised financial information in respect of the Group’s associate on performance of Samson – Food Products in 2019 and based on and its reconciliation to the carrying amount of the interest in the performance of the associate in 2019 was estimated as zero. At the associate are set out below. The summarised financial information the acquisition date the Group also signed a shareholders agreement below represents amounts shown in the associate’s financial with JSC “Samson-Producty Pitaniya”, being the Seller and holder statements prepared in accordance with IFRSs adjusted by the Group of the residual 25% share. Under the terms of this arrangement, for equity accounting purposes. www.cherkizovo.com 205 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites18. INVESTMENTS IN JOINT VENTURES AND ASSOCIATES CONTINUED 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 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 2019 31 December 2018 ˙*˙ 154 551 388 501 503 (628) (856) (30) (147) 436 75% 327 1 254 388 508 542 (541) (552) (63) (70) 467 75% 350 ˙*˙ Comparative information for the year ended 31 December 2018 has been retrospectively adjusted for the finalization of the allocation of the purchase price of the associate acquired. 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 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 associate 2019 4,700 (4,562) 138 (99) 2 (89) 4 13 (31) 75% 104 (23) 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. 206 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)19. LONG-TERM DEPOSITS IN BANKS CCY Effective rate, % Maturity 31 December 2019 31 December 2018 Deposits in Gazprombank RUR 8% 2022 641 641 641 641 Total long-term deposits in banks 20. INVENTORIES Raw materials Spare parts Work in-progress Finished goods Total inventory 21. TAXES RECOVERABLE AND PREPAID Value added tax Income tax prepaid Other taxes Total tax recoverable and prepaid 22. TRADE RECEIVABLES, NET Trade receivables Less: allowance for expected credit losses Total trade receivables, net www.cherkizovo.com 31 December 2019 31 December 2018 9,544 830 418 2,431 13,223 8,971 899 461 2,098 12,429 31 December 2019 31 December 2018 1,209 608 579 2,396 1,399 365 145 1,909 31 December 2019 31 December 2018 5,659 (183) 5,476 5,852 (119) 5,733 207 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites22. TRADE RECEIVABLES, NET CONTINUED The following table summarizes the changes in the allowance for expected credit losses for the years ended 31 December 2019 and 2018: 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 23. OTHER RECEIVABLES, NET Subsidies receivable for interest expense reimbursement Subsidies receivable for compensation of capital expenditure ˙*˙ Subsidies receivable for purchase of fodder Other receivables Less: allowance for expected credit losses Total other receivables, net 2019 119 101 (37) 183 2018 86 59 (26) 119 31 December 2019 31 December 2018 31 - - 292 (124) 199 985 200 15 455 (132) 1,523 ˙*˙ 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. The following table summarizes the changes in the allowance for expected credit losses for the years ended 31 December 2019 and 2018: 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 2019 132 - (8) 124 2018 120 56 (44) 132 208 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)2. ** CONTINUED24. CASH AND CASH EQUIVALENTS RUR-denominated cash at banks USD-denominated cash at banks Bank deposits Cash in hand Total 31 December 2019 31 December 2018 771 18 2,513 2 3,304 773 77 8,759 4 9,613 Bank deposits are denominated in rubles and euro and have original maturity of less than 3 months. 25. OTHER CURRENT ASSETS Prepaid expenses Notes receivable Loans receivable Other assets Total other current assets 26. SHAREHOLDER’S EQUITY 31 December 2019 31 December 2018 252 - 48 28 328 179 310 46 28 563 Share capital As of 31 December 2019 and 2018, issued shares of the Company Dividends In accordance with Russian legislation, earnings available for had a par value of 0.01 rubles. The total number of authorized shares dividends are limited to retained earnings of the Company, calculated was 54,702,600 and the number of issued shares was 43,963,773. in accordance with statutory rules in local currency. On March All issued and outstanding shares have equal voting rights. 2019 and September 2019 dividends of approximately 101.63 Russian The Company is authorized to issue preferred shares not exceeding rubles per share (4,173 in total) and approximately 48.79 Russian 25% of its ordinary share capital. No such shares are currently issued. rubles per share (2,003 in total) were approved at the extraordinary shareholders’ meeting and have been fully paid during the year ended 31 December 2019. On February 2018 and September 2018 dividends of approximately 75.07 Russian rubles per share (3,081 in total) and approximately 20.48 Russian rubles per share (841 in total) were approved at the extraordinary shareholders’ meeting and have been fully paid during the year ended 31 December 2018. www.cherkizovo.com 209 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites27. NON-CONTROLLING INTERESTS JSC Petelinskaya LLC PKO Otechestvennyi Product LLC Cherkizovo trade house Other non-controlling interests Total non-controlling interests NCI percentage 31 December 2019 31 December 2018 11.8% 4.0% 11.8% 142 215 307 215 879 468 209 23 290 990 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 2019 and for 2019 JSC Petelinskaya LLC PKO Otechestvennyi Product LLC Cherkizovo trade house NCI percentage Non-current assets Current assets Non-current liabilities Current liabilities Net assets Carrying amount of NCI Revenue (Loss) profit Total comprehensive (loss) income (Loss) profit allocated to NCI Cash flows from operating activities Cash flows from investment activities Cash flows from financing activities (dividends to NCI: nil) Net increase in cash and cash equivalents 11.8% 1,782 1,606 - (2,184) 1,204 142 6,694 341 341 40 (805) 345 460 - 4.0% 311 5,412 (101) (194) 5,428 215 2,067 156 156 6 175 (20) 1 156 11.8% 1,267 12,796 (266) Total 3,360 19,814 (367) (11,193) (13,571) 2,604 307 95,267 (695) (695) (82) (1,607) 2,465 209 1,067 9,236 664 104,028 (198) (198) (36) (2,237) 2,790 670 1,223 210 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)As at 31 December 2018 and for 2018 JSC Petelinskaya LLC PKO Otechestvennyi Product LLC Cherkizovo trade house 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 Cash flows from financing activities (dividends to NCI: nil) Net increase (decrease) in cash and cash equivalents 11.8% 2,289 3,675 - (2,001) 3,962 468 6,946 714 714 84 (600) 760 (160) - 4.0% 379 5,320 (19) (408) 5,272 209 2,736 230 230 9 29 (45) - (16) 11.8% 1,148 12,594 (245) Total 3,816 21,589 (264) (13,298) (15,707) 199 23 9,434 700 62,068 71,750 (252) (252) (30) 973 616 - 1,589 692 692 63 402 1,331 (160) 1,573 www.cherkizovo.com 211 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites28. 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 31. Terms and conditions of outstanding loans were as follows: Nominal interest rate EIR ˙1˙ Adjusted EIR ˙2˙ Year of maturity Bonds 7.50%-12.50% 9.17% 9.17% 2020-2023 Bank loans 1.17%-12.50% 6.54% 5.57% 2020-2026 Other borrowings 7.00% 7.00% 7.00% 2029 Interest payable Finance lease liabilities ˙*˙ Total borrowings n/a n/a n/a n/a 31 December 2019 31 December 2018 Current 5,000 15,442 - 348 - Non- current 10,000 33,100 82 - - Current Non- current - 5,000 23,708 39,471 - 372 90 7 - 165 20,790 43,182 24,170 44,643 ˙*˙ Following the adoption of IFRS 16 (Note 3), finance lease liabilities as at 31 December 2019 were reclassified to long-term lease liabilities and short-term lease liabilities of the consolidated statement of financial position as at 31 December 2019. As of 31 December 2019, the Group’s borrowings are denominated in Bonds the following currencies: 61,966 in Russian roubles and Bonds due in October 2020 2,006 in Euro. As of 31 December 2018, the Group’s borrowings are In October 2015, the Group placed 5,000,000 bonds in roubles at par denominated in the following currencies: 66,418 in Russian roubles value (1,000 roubles at the issuance date) with a maturity date in and 2,395  in Euro. October 2020. The coupon rate on the bonds, payable semi-annually, is set at 12.5% per annum. The Group accounts for these instruments Interest on the majority of borrowings is paid on a monthly or at amortized cost. quarterly basis, with the exception of bonds, for which the interest is paid on a semi-annual basis. Bonds due in May 2023 In November 2019, the Group placed 10,000,000 bonds in roubles at par value (1,000 roubles at the issuance date) with a maturity date in May 2023. The coupon rate on the bonds, payable semi-annually, is set at 7.5% 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 9 for further disclosure of government subsidies related to interest on borrowings. 212 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)        Bank loans Terms and conditions of outstanding bank loans were as follows: Sberbank of Russia Sberbank of Russia Alfa bank Bank VTB Gazprombank Gazprombank Raiffeisenbank Rosselkhozbank UniCredit Bank Total bank loans Currency Nominal interest rate Year of maturity 31 December 2019 31 December 2018 Russian roubles 1.40%˙*˙-10.80% 2020-2024 12,394 Euro 3.40% Russian roubles 1.17%˙*˙-9.10% Russian roubles 1.60%˙*˙-9.20% Russian roubles 1.40%˙*˙-8.99% Euro Russian roubles n/a 6.31% Russian roubles 1.40%˙*˙-10.31% Russian roubles 6.91%-12.50% 2024 2020-2026 2020-2024 2020-2022 n/a 2020 2020-2023 2021-2022 2,006 4,476 7,012 4,982 - 5,985 7,310 4,377 22,348 2,299 10,695 9,645 6,617 96 5,986 5,456 37 48,542 63,179 ˙*˙ Low interest rates relate to subsidized borrowings under new government policy effective since 2017 (Note 9). Unused lines of credit The total amount of unused credit on lines of credit as of 31 December 2019 is 75,542. the unused credit can be utilized from 2020 to 2026 with expiration of available amounts varying as follows: 29,295 expires by 31 December 2020, 10,832 expires by 31 December 2021, 27,215 expires by 31 December 2022, 500 expires by 31 December 2024 and 7,700 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 2019: JSC Altaisky Broiler LLC Cherkizovo Pork CJSC Rovesnky Broiler JSC Kurinoe tsarstvo JSC Cherkizovo-Kashira www.cherkizovo.com 31 December 2019 31 December 2018 100% - 100% - 100% 100% 51% - 100% 100% 213 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites      28. BORROWINGS CONTINUED Property, plant and equipment with a carrying value of 10,427 and maintenance of specific debt to EBITDA, net debt to EBITDA, EBIT to 11,200 were pledged as security under loan agreements as of Interest expense, debt service coverage and other ratios. 31 December 2019 and 2018, respectively, including construction in progress pledged with a carrying value of nil and nil as of The Group was in compliance with all covenants as at 31 December 31 December 2019 and 2018, respectively. 2019. Notes receivable, net with a carrying value of nil and 310 were pledged as security under loan agreements as of 31 December Reconciliation of liabilities arising from financing activities The table below details changes in the Group’s liabilities arising 2019 and 2018, respectively. from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash Certain significant loan agreements with the Sberbank of Russia, flows were, or future cash flows will be, classified in the Group’s Rosselkhozbank, Bank VTB, Gazprombank, UniCredit Bank, consolidated statement of cash flows as cash flows from financing Raiffeisenbank and Alfa-bank contain financial covenants requiring activities. Non-cash changes 31 December 2018 Financing cash flows ˙(i)˙ Restricted cash (used in investing activities) Acquisition of subsidiaries (Note 33) Effect of adoption of IFRS 16 Forex adjust- ments Other non-cash changes Interest accruals and payments 31 December 2019 68,813 (5,233) (109) 290 1,344 (302) 372 (24) 65,151 Non-cash changes 31 December 2017 Financing cash flows ˙(i)˙ Restricted cash (used in investing activities) Acquisition of subsidiaries (Note 33) Acquisition of debt rights (Note 33) Forex adjust- ments Other non-cash changes Interest accruals and payments 31 December 2018 50,015 14,001 (632) 338 4,685 419 32 (45) 68,813 Borrowings, including lease liabilities Borrowings, including lease liabilities ˙(i)˙ Net amount of repayment of lease liabilities, proceeds from short-term and long-term borrowings and repayments of short-term and long-term borrowings in the consolidated statement of cash flows. 214 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)29. LEASE LIABILITIES For the year ended 31 December 2019 the movement of lease liabilities was as follows: Balance at 1 January 2019 Interest expense on lease liabilities Lease payments New leased contracts arose from acquisition New lease contracts and modification of existing lease contracts Balance at 31 December 2019 1,308 121 (541) 10 281 1,179 For the year ended 31 December 2019 lease expenses for leases with lease term of 12 months or less and leases of low-value assets amounted to 178 and lease expenses for variable lease payments not included in the measurement of lease liabilities amounted to 25. 30. 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 2019 31 December 2018 617 385 261 52 7 2 3 758 315 145 92 9 5 1 1,327 1,325 www.cherkizovo.com 215 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites31. 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 33, as of 31 December 2019 and 2018 are as follows: 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 Cash and cash equivalents Financial liabilities not measured at fair value Amortised cost Borrowings (including finance lease liabilities as at 31 December 2018) Lease liabilities Trade payables Payables for non-current assets Payroll related liabilities Other payables and accruals 31 December 2019 31 December 2018 Carrying value Fair value Carrying value Fair value - 641 246 5,476 199 76 - 3,304 9,942 63,972 1,179 11,560 656 2,317 237 79,921 - 678 246 5,476 199 76 - 3,304 9,979 62,968 1,179 11,560 656 2,317 237   78,917   310 641 177 5,733 1,523 75 109 9,613 18,181 68,813 - 10,830 1,216 2,707 905 310 667 177 5,733 1,523 75 109 9,613 18,207 67,513 - 10,830 1,216 2,707 905 84,471 83,171 As at 31 December 2019 the Group used 7.84% for short-term Fair value measurement of long-term deposits and borrowings was agreements, 9.2% for medium-term agreements, 8.47% for long-term categorized into Level 3 as at 31 December 2019 and 2018. agreements (as at 31 December 2018: 9.8% was used for all periods) as market rate of cost of debt for the fair value estimation (for borrowings nominated in RUB). That rate excludes the effect of subsidies. 216 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated) Financial risk management The main risks arising from the Group’s financial instruments are retained earnings. The management of the Group reviews the capital structure on a regular basis. As part of this review, management capital risk management, interest rate risk, credit risk, liquidity risk and considers the cost of capital and the risks associated with each class foreign currency risk. of capital. The Group’s management identifies measures and manages financial risks in accordance with the Group’s policies and procedures. Credit risk Credit risk refers to the risk that counterparty may default on its contractual obligations resulting in financial loss to the Group. Capital risk management The Group manages its capital to ensure that it will be able to Financial assets which potentially subject the Group to credit risk consist primarily of trade and other receivables, long-term deposits, continue as a going concern while maximizing the return to the equity notes receivable, rights to claim debt and cash in current and deposit holders. The capital structure of the Group consists of debt, cash and accounts with banks. cash equivalents and equity, comprising issued capital, reserves and 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 33): 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 31 December 2019 31 December 2018 641 - 246 5,476 199 76 - 3,302 9,940 641 310 177 5,733 1,523 75 109 9,609 18,177 www.cherkizovo.com 217 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites31. FINANCIAL INSTRUMENTS CONTINUED 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 2019 31 December 2018 965 544 418 372 300 2,877 5,476 852 838 529 494 351 2,669 5,733 The average credit period on sales of goods is 30 days. No interest For trade receivables the Group has applied the simplified approach is charged on trade and other receivables. Before accepting any new in IFRS 9 to measure the loss allowance at lifetime ECL. the Group customer, the Group uses an internal credit scoring system to assess determines the expected credit losses on these items by using the potential customer’s credit quality and defines credit limits by a provision matrix, estimated based on historical credit loss customer. Limits and scoring attributed to customers are regularly experience based on the past due status of the debtors, adjusted reviewed. 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 as appropriate to reflect current conditions and estimates of future economic conditions. Accordingly, the credit risk profile of these assets is presented based on their past due status in terms of the provision matrix: Expected credit loss rate 31 December 2019 31 December 2018 - - - 79% 100% 4,723 518 217 87 114 5,659 4,619 943 148 69 73 5,852 Other receivables Cash and cash equivalents and long-term deposits Other receivables disclosed above mainly consists of subsidies The credit risk on cash and cash equivalents and long-term deposits receivable from regional Ministries of agriculture. Timing of is limited because these funds are placed only with banks with stable collection depends on availability of budget funds and on average credit ratings assigned by international credit-rating agencies. All is approximately 6-12 months. At 31 December 2019, the amount balances on bank accounts are neither overdue nor impaired. of subsidies receivable outstanding more than one year was nil (at 31 December 2018: nil). 218 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)The table below shows the rating and cash and cash equivalents balances with major banks at the reporting dates: Rating agency Rating 31 December 2019 31 December 2018 Bank 1 Bank 2 Bank 3 Bank 4 Standard & Poor’s Moody’s Fitch Ratings Standard & Poor’s Other banks - Total cash and cash equivalents at banks BB- BB- BB+ BBB- - 2,669 317 145 41 130 3,302 - 101 189 8,103 1,216 9,609 The table below shows the rating and long-term bank deposits balances at the reporting dates: Gazprombank Fitch Ratings BB+ Total long-term bank deposits 641 641 641 641 Rating agency Rating 31 December 2019 31 December 2018 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. www.cherkizovo.com 219 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites31. FINANCIAL INSTRUMENTS CONTINUED 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: Effective interest rate, % 8% 6.35%-7.39% At 31 December 2018 Trade and other receivables Long-term deposits in banks Notes receivable, net Other non-current assets Other current assets Total At 31 December 2019 Trade and other receivables Long-term deposits in banks 8% Other non-current assets Other current assets Total Less than 6 month 6 months- 1 year 1-4 years More than 4 years 7,256 26 156 - 75 - 26 164 - - - 761 - - - 7,513 190 761 5,675 26 - 76 5,777 - 26 - - 26 - 709 - - 709 - - - 177 - 177 - - 246 - 246 Total 7,256 813 320 177 75 8,641 5,675 761 246 76 6,758 220 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)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 At 31 December 2018 Borrowings, including finance lease 5.2%-13.83% 9,108 11,736 1,216 2,707 19,645 41,417 10,808 - - - - - - - - - Total 80,978 11,736 1,216 2,707 24,767 19,645 41,417 10,808 96,637 1.17%-12.5% 5.32%-16.62% 14,051 255 11,797 656 2,317 11,486 255 47,529 720 - - - - - - 3,244 294 - - - 76,310 1,524 11,797 656 2,317 29,076 11,741 48,249 3,538 92,604 Trade and other payables Payables for non-current assets Payroll related liabilities Total At 31 December 2019 Borrowings Finance lease obligations Trade and other payables Payables for non-current assets Payroll related liabilities Total Interest rate risk Changes in interest rates impact primarily loans and borrowings by borrowings, then the Group will incur additional interest expenses increased by the Key Rate. For disclosure purposes only, the Group changing either their fair value (fixed rate debt) or their future cash determined that if Ministry of Agriculture had not continued to flows (variable rate debt). The Group adopts a policy of limiting its subsidize the interest during 2019 and the Key rate had been exposure to changes in interest rates by borrowing mostly with a fixed 1% p.p. higher/lower and all other variables were held constant, rate basis except for the subsidized borrowings obtained under new the Group’s profit and total comprehensive income for the year ended government policy effective from 2017 (Notes 9 and 28). the Group 31 December 2019 would decrease/increase by 1,065 (Note 9) and receives such borrowings from accredited banks at reduced rates 108 (2018: decrease/increase by 537 and 64). 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 Ministry of Foreign currency risk The Group undertakes transactions denominated in foreign Agriculture directly to the accredited bank. If Ministry of Agriculture currencies; consequently, exposures to exchange rate fluctuations will not continue to subsidize the interest on aforementioned arise. www.cherkizovo.com 221 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites  31. FINANCIAL INSTRUMENTS CONTINUED The table below summarizes the Group’s exposure to foreign currency exchange rate risk at the reporting date relative to the functional currency of the Group. 31 December 2019 31 December 2018 Financial assets Financial liabilities Net position Financial assets Financial liabilities Net position Hard currency (USD or Euro) 2,174 5,698 (3,524) 77 6,979 (6,902) The table below details the Group’s sensitivity to weakening of Russian Ruble against the respective foreign currencies by 20%, all other variables being held constant. The analysis was applied to monetary items at the reporting dates denominated in respective currencies. Loss Hard currency – impact 31 December 2019 31 December 2018 (705) (1,380) The strengthening of the Russian Ruble in relation to the same currency by the same percentage will produce an equal and opposite effect on the consolidated financial statements of the Group to that shown above. 32. RELATED PARTIES Transactions with key management personnel Key management personnel of the Group are all members of Parties are generally considered to be related if one party has the Board of Directors and members of the Management Board. the ability to control the other party or can exercise significant The remuneration of key management personnel during the years influence over the other party in making financial or operational ended 31 December 2019 and 2018 were as follows: 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. Salaries and bonuses, excluding social security contributions 681 550 2019 2018 222 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)Transactions with entities under common control Trading transactions with related parties mostly comprised the sale of Trade receivables, trade payables and advances issued are associated with such transactions. The Group expects to settle such sausages, raw meat and poultry to a retail chain “Myasnov” and lease balances in the normal operating cycle. of certain production and office space to “Myasnov” and other entities under common control. 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 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 31 December 2019 31 December 2018 112 73 6 7 495 3 4 2019 1,066 187 9 4 291 92 6 7 494 25 1 2018 2,593 208 14 19 Transactions with joint ventures The Group purchases day-old chicks from its joint venture LLC Cobb- Trade receivables, trade payables and advances issued are associated with such transactions. The Group expects to settle such Russia (former LLC Broiler Budushchego). The Group also purchases balances in the normal course of business. 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. www.cherkizovo.com 223 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites32. RELATED PARTIES CONTINUED Balances with joint ventures are summarized as follows: Balances Trade receivables Advances paid Other receivables Trade payables Other payables Transactions with joint ventures are summarized as follows: Transactions Sales Purchases of goods and other services 31 December 2019 31 December 2018 67 40 3 848 - 2019 229 6,626 84 - - 1,057 139 2018 303 5,936 Transactions with associate The Group sells raw meat for meat-processing and finished goods to associate Samson – Food Products. Trade receivables are associated with such transactions. The Group expects to settle such balances in the normal course of business. Balances with the associate are summarized as follows: Balances Trade receivables Trade payables Transactions with the associate are summarized as follows: Transactions Revenue 31 December 2019 31 December 2018 76 8 2019 1,133 - - 2018 - 224 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)33. ACQUISITIONS Acquisition of Rovensky Broiler On 4 October 2019, the Group completed the acquisition of 100% of 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 СJSC “Rovensky Broiler” for cash consideration of 1,664. was preliminary allocated to property, plant and equipment based on The acquired company is a hatching egg producer with production capacity of 80 million eggs/year, located in the Belgorod region, The Group is in the process of obtaining a third party valuation close to our existing operations. the acquisition will allow to cover report on the fair value of the assets and liabilities acquired including the Group’s needs in hatching eggs supply. obtaining third-party valuation of the property, plant and equipment, the internal valuation analysis done by management of the Group. 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 Biological assets Other current assets Short-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 Rovensky Broiler Less: cash and cash equivalents of subsidiaries acquired Net outflow of cash and cash equivalents on acquisition of Rovensky Broiler www.cherkizovo.com 1,664  1,406 26 356 197 (290) (31) 1,664 - 1,664 (196) 1,468 225 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites33. ACQUISITIONS CONTINUED 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 2019 (unaudited) 120,109 10,286 6,843 The actual results of operations of Rovensky Broiler are included in the consolidated financial statements of the Group only from the date of acquisition and were: Actual results of Rovensky Broiler from the date of acquisition (4 October 2019) to 31 December 2019 Revenue Operating income Profit for the period 5 90 89 Acquisition of Altaisky Broiler On 28 November 2018, the Group completed the acquisition of 100% In the consolidated financial statements for the year ended 31 December 2018 the acquisition was accounted for using of JSC “Altaisky Broiler” for cash consideration of 4,588. historical book values of assets and liabilities acquired as provisional values since there was no other information available at that time. Altaisky Broiler is one of the leading players in the Siberian poultry the difference between consideration paid and historical book value market with an annual output of 67 thousand tonnes (live weight) of of the net assets acquired was preliminary allocated to property, poultry products (58 thousand tonnes of finished products). Today, it plant and equipment based on the internal valuation analysis done by is a state-of-the-art poultry production facility comprising a hatchery, management of the Group. a feed mill, four fattening sites, a slaughterhouse, and a meat packing plant in Biysk. the acquisition will enable Cherkizovo Group to access A third party valuation report on the fair value of the individual the Siberian Federal District market and strengthen its market-leading assets and liabilities was obtained in 2019. Accordingly, the Group position in the domestic poultry market. completed the finalisation of the allocation of the purchase price of Altaisky Broiler in the consolidated financial statements for the year ended 31 December 2019 and adjusted comparative information for 2018 by changing the fair value of the following assets and liabilities at the acquisition date: 226 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)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 Provisional values (as previously reported for the year ended 31 December 2018) 4,588 3,989 533 676 (310) (28) (272) 4,588 - Fair values 4,588 3,616 533 676 (310) (28) (272) 4,215 373 The difference in depreciation charged for provisional values of Goodwill arose in the acquisition of Altaisky Broiler because property, plant and equipment and depreciation charged for their the consideration paid for the combination effectively included fair value was immaterial and therefore the Group did not adjust amounts in relation to the benefit of expected expansion of the Group the consolidated results for the year ended 31 December 2018. to the regional markets. Net outflow of cash and cash equivalents on acquisition comprised of the wollowing: 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 (560) (200) 3,828 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 2018). In determining pro forma amounts, all non-recurring costs were determined to be immaterial. www.cherkizovo.com 227 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites33. ACQUISITIONS CONTINUED Pro forma Information Revenue Operating profit Profit for the year For the year ended 31 December 2018 (unaudited) 107,440 15,994 12,334 Acquisition of poultry breeder’s facilities of Krasnoyaruzhsky Broiler On 23 October 2018, the Group acquired all tangible assets, 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 including poultry parent stock, of four hatching eggs’ production paid and statutory book value of the net assets acquired was facilities of CJSC “Krasnoyaruzhsky Broiler” (Belgorod region) preliminary allocated to property, plant and equipment based on and hired most of the employees working at these sites. the internal valuation analysis done by management of the Group. Total consideration amounted to 1,799 and was paid in cash. The acquisition will allow the Group to supply Altaisky Broiler the fair value of the individual assets and liabilities of poultry with hatching eggs and cover all of the Group’s needs in breeder’s facilities of Krasnoyaruzhsky Broiler, which confirmed In 2019, the Group received a third party valuation report on hatching eggs supply. the preliminary allocation; accordingly, there were no adjustments to the provisional book values of assets and liabilities. Fair values In the consolidated financial statements for the year ended of assets and liabilities of poultry breeder’s facilities of 31 December 2018 the acquisition was accounted for using Krasnoyaruzhsky Broiler at the acquisition date are presented statutory book values of assets acquired as provisional values since below: Purchase price Property, plant and equipment Biological assets (poultry breeders) Total assets acquired and liabilities assumed Goodwill recognized on acquisition Provisional values (as previously reported for the year ended 31 December 2018) 1,799 1,210 589 1,799 - Fair values 1,799 1,210 589 1,799 - 228 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)The acquired facilities were part of the legal entity CJSC collateral once such collateral becomes the legal property of “Krasnoyaruzhsky Broiler” and there is no separate financial the Group. At the date of acquisition of the rights, Belaya Ptitsa information related to performance of these facilities prior to Kursk’s facilities were not operational and the Group relaunched the acquisition date. Therefore, information about revenue and profit the production in Q1,2019, using it in combination with the Group’s or loss of the combined entity for the current reporting period as existing parent stock sites and feed mills to leverage the potential though the acquisition date for the business combination had been as synergies perceived as existing. of the beginning of the annual reporting period is impracticable and is not disclosed. In April 2019, the bankruptcy proceeding were initiated for LLC “Belaya Ptitsa Kursk”, which are governed by an independent Acquisition of rights to claim debt from Belaya Ptitsa Kursk On 21 December 2018 the Group acquired Rosselkhozbank’s rights bankruptcy trustee. Management has considered probability of different results of procedure and developed a strategy to ensure to claim debt (in the form of loans) from LLC “Belaya Ptitsa Kursk” positive outcome, resulting in transfer of legal title of collateral to (further “Belaya Ptitsa Kursk”) and the related security agreements the Group within 12-months period. However, laws and regulations (i.e. underlying collateral) for a principal amount of affecting businesses in Russian Federation, including bankruptcy 5,639. the collateral included property pledge agreements for most of legislation, continue to change rapidly. These changes are Belaya Ptitsa Kursk’s property, plant and equipment and share pledge characterized by different interpretations and arbitrary application by agreements for 100% of capital of LLC “Belaya Ptitsa Kursk”. authorities. Such changes are outside of the Group control. To finance the transaction the Group obtained a five-year rubles- The Group classified these rights as financial assets at FVTPL. denominated loan from Rosselkhozbank in the principal amount Management of the Group has reviewed all relevant facts and of 5,639 at 0% per annum during the first two years and 10% circumstances happened in 2019 that can affect the fair value of subsequently. the fair value of the loan at inception date was the rights and concluded that the fair value did not materially change 4,685 determined using the market interest rate of 10%. since the acquisition date. No cash was received or provided with respect to the two transactions with Rosselkhozbank, which has been reported as a non- 34. COMMITMENTS AND CONTINGENCIES cash transaction in the statement of cash flows reflecting rights to claim debt acquired and loan assumed. Legal As of 31 December 2019 and 2018, several Group companies At the acquisition date, the rights to claim debt from Belaya Ptitsa reported negative net assets in their statutory financial statements. Kursk were accounted for at fair value, which was determined as In accordance with the Civil Code of the Russian Federation, equal to the fair value of the loan obtained from Rosselkhozbank. a liquidation process may be initiated against a company reporting Belaya Ptitsa Kursk had not been servicing the debt for a number of negative net assets. Management believes that it is remote that months prior to the transaction and had also stopped its operating the liquidation process will be initiated against those companies. activities; therefore, at acquisition, the Group classified the rights as purchased credit-impaired financial assets. Notwithstanding From time to time and in the normal course of business, claims the foregoing, the Group concluded that the fair value of against the Group are received from customers and counterparties. the underlying collateral exceeds the fair value of the rights acquired Management is of the opinion that no material unaccrued losses will and therefore did not recognise a loss allowance. the Group ultimately be incurred and accordingly no provision has been made in these expects to settle the rights through the recovery of the underlying consolidated financial statements. www.cherkizovo.com 229 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unites34. COMMITMENTS AND CONTINGENCIES CONTINUED Taxation Laws and regulations affecting businesses in the Russian Federation be challenged, including transfer pricing legislation. Although the transfer pricing legislation was amended in 2012, as of now there continue to change rapidly. These changes are characterized by is no established practice in place in respect of transfer pricing. different interpretations and arbitrary application by the authorities. Therefore the management believes that their assessment of transfer Management’s interpretation of such legislation as applied to pricing position of the Group may be challenged by authorities. the activity of the Group may be challenged by the relevant regional and federal authorities. The tax authorities in the Russian Federation From 1 January 2015 a number of amendments into the Russian frequently take an assertive position in their interpretation of tax legislation aimed at deoffshorisation of the Russian economy the legislation and assessments and as a result, it is possible that became effective, with the submission of the first documentation transactions and activities may be challenged. It is therefore possible package in 2017. Specifically, they introduce new rules for controlled that significant additional taxes, penalties and interest may be foreign companies, a concept of beneficiary owner of income for assessed. Under certain circumstances reviews may cover longer the purposes of application of preferential provisions of taxation periods. At the reporting date, the Group is litigating the results of treaties of the Russian Federation and a concept of tax residency for recent field tax audits of certain subsidiaries of the Group done by foreign companies. The Group takes necessary steps to comply with the regional tax authorities. Management is of the opinion that no the new requirements of the Russian tax legislation including periodic material losses will be incurred as a result of these litigations and reviews of its tax planning strategies. However, in view of the recent accordingly no provision has been made in these consolidated introduction of the above provisions and insufficient administrative financial statements. Management estimates that the Group’s and court practice in these areas, at present the probability of claims possible exposure in relation to the aforementioned tax audits will from Russian tax authorities and probability of favourable outcome of not exceed 1% of the Group’s profit for the year ended 31 December tax disputes (if they arise) cannot be reliably estimated. 2019. Recent events also suggest that the tax authorities are taking Environmental remediation costs The Group’s management believes that the Group is in compliance a more assertive position in their interpretation of the tax legislation with applicable legislation and is not aware of any potential and assessments and as a result, it is possible that transactions environmental claims; therefore, no liabilities associated with such and activities that have not been challenged in the past may costs are recorded as of 31 December 2019 and 2018. 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 230 31 December 2019 351 113 995 85 1,544 2 Annual report 2019 About the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceCHERKIZOVO GROUPNotes to the consolidated financial statements For the year ended 31 December 2019(in millions of Russian rubles, unless otherwise indicated)At 31 December 2019, the Group had capital projects in progress 35. SUBSEQUENT EVENTS at LLC Cherkizovo Pork, JSC Kurinoe Tsarstvo, JSC Vasilievskay poulty farm, JSC СMPZ and LLC Lisko Broiler On 12 February 2020 the Board recommended that the General meeting of shareholders approve distribution of the Сompany’s net profit following 2019 results in the form of the dividends in the amount of 60.92 rubles per ordinary share of the Company. 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 2019 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. www.cherkizovo.com 231 Financial StatementsAppendixCHERKIZOVO GROUPCherkizovo unitesAppendix 1. About the Report Name of the report Cherkizovo Group’s annual report for 2019 “Cherkizovo Unites” Reporting cycle Annual, 1 January 2019 – 31 December 2019 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. 233 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 April 2019 Reporting boundaries The report discloses information about the operations and performance of Cherkizovo Group Verification of the reported information Reliability of the RAS * accounting statements and IFRS ** 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 2019 is already the second report that the Group prepared with reference to GRI Standards. Comparing to the previous report the Company disclosed additional information, in particular, number of employees hired, financial assistance received from government, and weight of waste with a breakdown by disposal methods. 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 6 topic-specific disclosures, all available in the GRI content index. The Company intends to continue improving its public reporting practices. * Auditor’s report is available on the Company’s website at http://cherkizovo.com/company/information-disclosure/financial-statements/fin-statements/ ** Auditor’s report is available on the Company’s website at http://cherkizovo.com/investors/reports/financial/financial-msfo/ 232232 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceAppendix 2. GRI Content Index 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. 2 102-2 Activities, brands, products, and services About the Company, p. 8 102-3 Location of headquarters Contacts, p. 240 102-4 Location of operations About the Company, p. 34 102-5 Ownership and legal form About the Company, p. 2 102-6 Markets served About the Company, p. 8 102-7 Scale of the organization About the Company, p. 4 – – – – – – – 102-8 Information on employees and other workers 102-9 Supply chain 102-10 Significant changes to the organization and its supply chain Business model, p. 54 Our employees, p. 114 Supply chain, p. 58 About the Company, p. 19 Supply chain, p. 58 Message from the CEO, p. 42 Shareholder and investor highlights, p. 147 102-12 External initiatives Corporate governance, p. 126 Health, safety and environment, p. 119 102-13 Membership of associations About the Company, p. 3 102-14 Statement from senior decision- maker Message from the CEO, p. 42 Message from the Chairman, p. 38 102-16 Values, principles, standards, and norms of behavior About the Company, p. 2 Supply chain, p. 58 102-18 Governance structure Corporate governance, p. 128 102-40 List of stakeholder groups Sustainable development, p. 112 102-45 Entities included in the consolidated financial statements 102-46 Defining report content and topic Boundaries Financial statements, p. 148 Appendix 1. About the report, p. 232 102-48 Restatements of information Financial statements, p. 148 Breakdowns by gender, region and employment contract type are shown separately. – – – – – – – – – – Restatements of information are provided for the financials only. 102-49 Changes in reporting Appendix 1. About the report, p. 232 102-50 Reporting period Appendix 1. About the report, p. 232 102-51 Date of most recent report Appendix 1. About the report, p. 232 102-52 Reporting cycle Appendix 1. About the report, p. 232 – – – – www.cherkizovo.com 233 Financial statementsAppendixCHERKIZOVO GROUPCherkizovo unites Appendix 2. GRI Content Index GRI Standard Disclosure GRI 102 General Disclosures 102-53 Contact point for questions regarding the report Report section Contacts, p. 240 2016 102-54 Claims of reporting in accordance with the GRI Standards Appendix 1. About the report, p. 232 102-55 GRI content index - 102-56 External assurance Appendix 1. About the report, p. 232 103 Management Approach 2016 103-1 Explanation of the material topic and its Boundary Provided separately for each specific topic. 103-2 The management approach and its components 201 Economic Performance 2016 103-1 Explanation of the material topic and its Boundary Financial performance overview, p. 90 103-2 The management approach and its components 201-1 Direct economic value generated and distributed 201-3 Defined benefit plan obligations and other retirement plans 201-4 Financial assistance received from government The Company does not have defined benefit plan obligations or other retirement plans. Financial performance overview, p. 90 202 Market Presence 2016 103-1 Explanation of the material topic and its Boundary 29% of the members of the Board of Directors are Russian citizens 103-2 The management approach and its components 87% of the members of the Management Board are Russian citizens 202-2 Proportion of senior management hired from the local community 204 Procurement Practices 2016 103-1 Explanation of the material topic and its Boundary Supply chain, p. 58 103-2 The management approach and its components 204-1 Proportion of spending on local suppliers 103-1 Explanation of the material topic and its Boundary 103-2 The management approach and its components 206-1 Legal actions for anti-competitive behavior, anti-trust, and monopoly practices In 2019, no legal actions for anti- competitive behavior, anti-trust, and monopoly practices were taken in relation to the Company. 206 Anti- competitive Behavior 234234 Omissions – – – – – – – Economic value retained is not disclosed. – – – – – – – – – – – 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governance GRI Standard Disclosure Report section Omissions 302 Energy 2016 103-1 Explanation of the material topic and its Boundary Environmental protection, p. 123 103-2 The management approach and its components 302-4 Reduction of energy consumption 306 Effluents and Waste 2016 103-1 Explanation of the material topic and its Boundary Environmental protection, p.123 103-2 The management approach and its components 306-2 Waste by type and disposal method 401 Employment 2016 103-1 Explanation of the material topic and its Boundary Our employees, p. 115 403 Occupational Health and Safety 2018 103-2 The management approach and its components 401-1 New employee hires and employee turnover 103-1 Explanation of the material topic and its Boundary 103-2 The management approach and its components 403-9 Work-related injuries Occupational health and safety, p. 120 – – 404 Training and Education 2016 103-1 Explanation of the material topic and its Boundary Our employees, p. 116 103-2 The management approach and its components 404-2 Programs for upgrading employee skills and transition assistance programs 103-1 Explanation of the material topic and its Boundary 103-2 The management approach and its components 405-1 Diversity of governance bodies and employees 405 Diversity and Equal Opportunity 2016 Our employees, p. 114 www.cherkizovo.com 235 – – Absolute value of the reduction is not disclosed, no breakdown by type of energy is provided. – – No breakdown by waste type is provided. – – No breakdowns by gender, age and region are provided. Data is provided only for the Company’s employees. The rates of fatalities, highconsequence work–related injuries (excluding fatalities) and recordable work– related injuries, as well as the main types of workrelated injuries, the number of hours worked and work–related hazards remain undisclosed. – – – – – Diversity of governance bodies is not disclosed. Financial statementsAppendixCHERKIZOVO GROUPCherkizovo unitesAppendix 2. GRI Content Index GRI Standard Disclosure Report section Omissions 408 Child Labor 2016 103-1 Explanation of the material topic and its Boundary The Company operations do not use child labor. Information on suppliers is not disclosed. 409 Forced or Compulsory Labor 2016 103-2 The management approach and its components 408-1 Operations and suppliers at significant risk for incidents of child labor 103-1 Explanation of the material topic and its Boundary The Company operations do not use forced or compulsory labor. Information on suppliers is not disclosed. 103-2 The management approach and its components 409-1 Operations and suppliers at significant risk for incidents of forced or compulsory labor 236236 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governance Appendix 3. Glossary Animal Welfare is a standard for the humane treatment of farm animals and poultry, based on the following principles: freedom from hunger, thirst and malnutrition; freedom from fear and distress; freedom from physical and thermal discomfort; freedom from pain, injury and disease; and freedom to express normal patterns of behavior. 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. Epizootic risk is a risk associated with the outbreak and spread of infectious diseases in an animal population. 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 a systematic 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. 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 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. 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). 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. Standard operating procedures are step-by-step instructions that help employees correctly perform complex, monotonous operations. www.cherkizovo.com 237 Financial statementsAppendixCHERKIZOVO GROUPCherkizovo unites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 238238 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governanceAppendix 4. Supplementary Information on Staff EMPLOYEE HEADCOUNT BY SEGMENT Poultry Pork Meat Processing Feed Grain Group = R&D Center + SSC BIKOM Distribution Center Trading Company Total EMPLOYEE HEADCOUNT BY REGION Moscow Penza Region Moscow Region Lipetsk Region Voronezh Region Kursk Region Bryansk Region Altai Territory Belgorod Region Tula Region Tambov Region Orel Region Other Total www.cherkizovo.com 2017 13,880 1,811 4,521 1,178 1,375 1,037 268 935 2018 13,914 2,042 4,298 1,091 1,420 1,133 446 1,122 2019 17,410 2,085 4,598 1,144 1,620 1,249 560 1,688 25,005 25,466 30,355 2017 4,596 4,375 3,297 4,404 3,121 980 2,047 - - 495 485 332 873 2018 4,601 4,468 3,462 4,084 3,125 994 2,192 - - 725 495 334 986 25,005 25,466 2019 5,068 4,956 3,750 3,642 3,234 2,692 1,800 1,702 910 753 505 318 1,025 30,355 239 Financial statementsAppendixCHERKIZOVO GROUPCherkizovo unites Contact Information ADDRESS AND CONTACTS Headquarters PJSC Cherkizovo Group 5B Lesnaya St., Moscow 125047, Russia White Square Office Centre Tel. +7 495 660-24-40 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. +7 495 980-11-00, +7 499 519-02-62 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 State 240240 2 Annual report 2019 CHERKIZOVO GROUPAbout the Company Strategic ReportFinancial ResultsSustainable development Corporate governance

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