Cherkizovo Group (LSE: CHE), one of Russia’s leading integrated and diversified meat producers, today announces full-year audited financial results for the period ended 31 December 2010.

Highlights 

• Strong organic volume growth across all segments, delivering a solid financial performance 
• Revenues increased 17% to $1,188.2 million from $1,019.2 million for 2010, and increased 12% on a rouble currency basis 
• Adjusted EBITDA* increased 20% to $218.7 million from $182.3 million for 2010, and increased 15% on a rouble currency basis  
• Adjusted EBITDA* margin was at 18% 
• Gross profit increased 15% to $323.9 million from $281.6 million for 2010, and increased 10% on a rouble currency basis 
• Group gross margin was a healthy 27% 
• Net income increased 21% to $144.4 million from $119.4 million for 2010, and increased 16% on a rouble currency basis 
• As of 31 December 2010 Net debt** was $580.2 million. 
• The effective cost of debt was below 3%. 
• Net income per share increased 21%. 

Business Developments 

• Cherkizovo Group commenced construction of three new greenfield pork farms in the Tambov, Voronezh and Lipetsk regions with a combined capacity of 37,500 live-weight tonnes. The new multi-site complexes will become operational during 2011 and 2012 and full capacity is expected to be reached by the end of 2012. This will increase the Group’s overall capacity to an estimated 153,000 tonnes a year. 
• Cherkizovo Group acquired a meat processing plant, located in the Kaliningrad region for US$4.1 million. It will focus on delicacy products and serve as a resource base for the Group’s meat processing segment. The plant’s location entitles it to preferential customs status.   
• Cherkizovo Group acquired a 100% controlling interest in the Zarechnaya poultry facility for a total consideration of US$5.2 million. The site, located in the Penza region, will be integrated into the existing Penza capacity increase project, thereby further increasing capacity at the cluster.   
• Subsequently, Cherkizovo Group completed the acquisition of a controlling interest in two greenfield pork production farms located in the Penza and Lipetsk regions of Central Russia. Since these acquisitions are transactions between entities under common control, their financial and operational results have been combined into Group operations in a manner similar to a pooling of interest for the full year 2010. Cherkizovo Group’s historical financial information has also been restated to include the acquired entities for all periods presented.  
• On 10 November 2010 Cherkizovo Group successfully placed 3 billion roubles in 3-year bonds with a coupon rate of 8.25%. The funds will be allocated to refinance short-term loans, fund capital expenditure and other investment needs. 
• In December the Group launched the new Rosha broiler breeding facility as part of the Bryansk poultry cluster expansion project 
• In March 2011 Cherkizovo Group launched the Komarovka broiler site, part of the Penza cluster capacity increase project. 

Sergey Mikhailov, Chief Executive Officer of Cherkizovo Group, said:  

“During 2010 we have delivered a solid performance, with a 17% increase in revenue and growth in Adjusted EBITDA of 20%. This has resulted in a healthy 18% Group Adjusted EBITDA margin. However, our results were affected by a soft pricing environment in the poultry and pork divisions, as well as rising input costs, particularly towards the end of the year.  

In the poultry division, profitability was at a robust level of 29% Gross Margin, and a 21% Adjusted EBITDA margin. We have made significant progress at our capacity-increase projects in Bryansk and Penza, and our acquisition of the Zarechnaya facility in the Penza region and recent launch of the Rosha and Komarovka broiler breeding sites will enable us to achieve significant production volume increases in 2011.  

The pork division has enjoyed significant growth and we anticipate this will be further supported in 2011 by the full integration of the two new farms. Already, for 2010 we have increased our market share and successfully positioned ourselves among the top three producers in the Russian market. Moreover, we are pleased to report that construction has commenced on three greenfield complexes in the Tambov, Voronezh and Lipetsk regions which are expected to become operational during 2011and 2012, adding some 37,500 tonnes of capacity. By the end of 2012 our production volumes will have grown to over 150,000 tonnes, further strengthening our market leadership in this high-margin business and positively affecting our overall performance. 

Meat processing continues to see rising demand as consumer confidence improves. We have seen some very positive results, with an increase in sales volumes and sustained profitability. Our products enjoy strong brand recognition and continue to win industry awards for quality.  

The outlook for 2011 is challenging. The operational impact of steep rises in grain and other feedstock input costs will largely be felt in the coming months, and we anticipate that these will only be partially offset by higher pricing. This reflects an unusually weak pricing environment in the last quarter of 2010, despite commodity inflation, partly as a result of short-term oversupply of meat in the market due to destocking by less efficient producers and individual households in response to rising feed costs. Combined with an increased share of poultry imports late in 2010, it has put downward pressure on selling prices, especially for poultry sales in the first quarter of 2011. In this respect, the recent decisions announced by the Government to introduce direct subsidies for agricultural producers to offset sharp cost increases, and the resolution to distribute feed grain from the intervention fund at below market prices to regions that have suffered most from the drought is encouraging.  

We also welcome the Government’s decision to decrease import quotas for 2011, which were cut almost by half in poultry as compared to 2010. Aside from the reduction, the new quota allows only for imports of leg quarters, which considerably changes the market picture. As well, with the anticipated growth in domestic production, pioneered by Cherkizovo Group in early 2000 the market is expected to reach Government-set self-sufficiency levels in poultry towards the end of 2011, with imports taking around 10-12% share on the market.” 

Chief Executive’s Review 

Financial Overview 

The table below summarizes the Group’s strong performance on a rouble currency basis for the year 2010:  

 

RUR, mln	2010	2009***	Change
Sales	36,085.1	32,330.7	12%
Gross Profit	9,835.7	8,934.3	10%
Gross margin, %	27%	28%
Selling, General and Aministrative Expenses	(4,765.0)	(4,501.2)	6%
Operating Income	5,070.7	4,433.1	14%
Operating Income Margin, %	14%	14%
Net Income attributable to Group Cherkizovo	4,386.8	3,789.1	16%
Adjusted EBITDA	6,641.6	5,782.9	15%
EBITDA margin, %	18%	18%

On a reported currency basis sales increased by 17% to US$1,188.2 million (2009: US$1019.2 million) driven by organic growth across all segments. Gross profit increased 15% to US$323.9 million (2009: US$281.6 million). Operating expenses as a percentage of sales have decreased to 13% from 14% for 2009, reflecting operational improvements across segments. Net income increased 21% to $144.4 million (2009: US$119.4 million). 

Adjusted EBITDA* increased 20% to US$218.7 million (2009: US$182.3 million) and adjusted EBITDA* margin was flat at 18%, reflecting a robust operating performance by the Group.  

Poultry Division 

Sales volumes in the Poultry division in 2010 increased by 5% to approximately 194,100 tonnes of slaughter weight compared to 184,300 tonnes in 2009.  

Prices for poultry sales in dollar terms increased by 1% from $2.34 per kg in 2009 to $2.37 per kg in 2010 (excluding VAT)[1]. Prices in rouble terms decreased by 3% from 74.33 roubles per kg in 2009 to 71.89 roubles per kg in 2010 (excluding VAT). The pricing environment for poultry products at the end of 2010 was affected by a large share of imports entering Russia in the fourth quarter. This led to higher inventory stocks and put pressure on prices during the first quarter of 2011. However, given the considerable reduction in poultry import quotas, together with expected meat price inflation resulting from rising input costs, we expect upward trends in poultry prices from the second quarter of the year. 

Total sales in the Poultry division increased 7% to US$501.0 million (2009: US$470.1 million). Gross Profit decreased 10% to US$146.2 million (2009: US$162.7 million), divisional Gross Margin was 29% (2009: 35%), mostly due to lower selling prices in the period, as well as rising costs. 

Operating expenses as a percentage of sales were flat at 13%. Operating income of the division decreased by 19% to US$81.4 million (2009: US$100.3 million), and operating margin was 16%. Profit in the Poultry division decreased by 16% to US$74.6 million (2009: US$88.8 million).  

Adjusted EBITDA* decreased 13% to US$106.1 million (2009: US$121.5 million), while Adjusted EBITDA* margin in the Poultry division was 21% for 2010. 

Pork Division 

In 2010, Cherkizovo’s state-of-the-art pork farms in Lipetsk and Tambov operated at near to full capacity. Production at the existing farms was approximately 76,200 tonnes of live weight. Together with the acquisition of two new farms in Lipetsk and Penza which produced approximately 11,450 tonnes, sales volumes in the Pork division in 2010 increased by 50% to approximately 87,650 tonnes of live weight, compared to approximately 58,300 tonnes in 2009. This ranked Cherkizovo Group as the third largest producer in Russia, as the Group has increased its market share to 5% in this still highly fragmented market. 

In dollar terms, prices for pork sales increased by 4% from $2.27 per kg of live weight in 2009 to $2.37 per kg of live weight in 2010 (excluding VAT)*. Prices in rouble terms were almost flat, slightly decreasing from 72.12 roubles per kg in 2009 to 71.95 roubles per kg in 2010 (excluding VAT). The pricing environment for pork products in Russia in the second half of 2010 was affected by a larger than usual reduction of livestock by smaller and less efficient producers and households as a result of a sharp increase in input costs.  

Total sales in the Pork division increased by 56% to US$222.2 million (2009: US$142.7 million). Gross Profit increased 74% to US$90.0 million (2009: US$51.6 million) while Gross Margin was 41%. In November 2010 the Group completed the acquisition of two farms in the Penza and Lipetsk region. These acquisitions are transactions between entities under common control, and have been accounted for accordingly in the financial and operational results in a manner similar to a pooling of interest with assets and liabilities transferred at historical cost. Cherkizovo’s historical financial information has also been restated to include the acquired entities for all periods presented. 

Operating Expenses as a percentage of sales were at 7%. The division generated Operating Income of US$74.4 million, up 75% (2009: US$42.4 million), while Operating Margin was 34% (2009: 30%). Profit in the Pork division increased by 87% to US$69.4 million (2009: US$37.1 million). 

Adjusted EBITDA* generated by the division increased 73% to US$90.2 million (2009: US$52.2 million), and Adjusted EBITDA* Margin was 41% (2009: 37%).  

Meat Processing Division 

In 2010, consumption recovered to pre-crisis levels, and sales volumes in the Meat Processing segment increased by 9% to approximately 141,550 tonnes.  

Prices in dollar terms increased by 8% from $3.59 per kg in 2009 to $3.89 per kg in 2010 (excluding VAT)*. Prices in rouble terms increased by 4% from 113.80 roubles in 2009 to 118.21 roubles per kg in 2010 (excluding VAT).  

Total sales in the Meat Processing division increased 15% to US$529.4 million (2009: US$460.2 million). Divisional Gross Profit increased 30% to US$87.6 million (2009: US$67.6 million), while Gross Margin increased from 15% to 17%, due to lower prices of purchased meat and increased operational efficiency. Operating expenses as a percentage of sales decreased to 12% from 13% for 2009. Division profit was US$18.4 million as opposed to a division loss of $3.8 million for 2009. 

Adjusted EBITDA* for the division increased 88% to US$36.9 million (2009: US$19.6 million), and Adjusted EBITDA* margin increased to 7% (2009: 4%). 

Financial Position 

The Group’s Capital Expenditure on property, plant and equipment and maintenance amounted to US$173.7 million for 2010. Of that, US$85.2 million was invested into the Poultry division, primarily into the capacity increase projects at the Bryansk and Penza clusters; US$79.7 was invested into the Pork division, including the construction of three new greenfield farms, and US$4.8 million was invested into the Meat Processing division. 

Net Debt** at the end of 2010 was US$580.2 million or RUR17,682.5 million. Total Debt was at US$648.4 million or RUR19,760.0 million. Of Total Debt, long-term debt was approximately US$465.9 million or 72% of the debt portfolio. Short-term debt was US$182.5 million, or 28% of the portfolio. Cost of Debt for 2010 was below 3%. The portion of subsidized debt in the portfolio was 88%, improving from 86% as of 31 December 2009. Cash and cash equivalents totalled US$68.2 million at 31 December 2010. 

Subsidies 

In 2010 the Group received interest reimbursement of US$42.7 million which offset interest expense. In 2009 the interest reimbursement was US$31.9 million. 

Outlook 

Cherkizovo has made solid progress in 2010 in its operational and financial results, though performance was affected by a soft pricing environment late in the year, while unusual weather conditions have affected operational results and costs. We have continued investing in production growth. These investments have focused on large-scale projects to increase poultry capacity, and provide significantly higher output from 2011. The first site was completed and launched in Bryansk at the end of 2010, and we have recently launched a new broiler site at our Penza cluster. The Pork division has continued to deliver its volume growth in line with management’s expectations, supported by the accretive acquisition of two farms completed in 2010.  

The outlook for 2011 is challenging. Grain prices have been rising globally, but the operational impact in Russia will be particularly felt in coming months. Other feedstock commodity input prices have also been rising sharply, and these will put margins under pressure. To some extent, pricing action will offset the impact of rising costs, but given the weak pricing environment in the fourth quarter of 2010, pricing is likely to be more pronounced in the second half of the year. The consequences of these actions on overall consumer demand remain to be seen, and ultimately an appropriate balance will be sought between profitability and growth. 

In this situation, we welcome the recent support measures announced by the Government, in particular to introduce direct subsidies for agricultural producers to offset sharp cost increases, and to distribute feed grain from the intervention fund at below market prices to regions suffering from drought consequences. As well, poultry import quotas were significantly reduced since Russia is expected to achieve self-sufficiency in poultry meat already towards the end of 2011. Overall, we anticipate further volume growth across our Poultry, Pork and Meat Processing divisions. Management is confident that the Group will continue to focus on providing efficiency increases and delivering against our strategy. 

*Non-GAAP financial measures. This press release includes financial information prepared in accordance with accounting principles generally accepted in the United States of America, or US GAAP, as well as other financial measures referred to as non-GAAP. The non-GAAP financial measures should be considered in addition to, but not as a substitute for, the information prepared in accordance with US GAAP. 

 Adjusted Earnings before Interest, Income Tax, Depreciation and Amortization (“Adjusted EBITDA”). Adjusted EBITDA represents operating income plus depreciation and amortisation expense, loss on disposal of property, plant and equipment and other items, which are expenses primarily related to financing activities, adjusted for certain other items as shown in the reconciliation in Appendix 1. Adjusted EBITDA margin is defined as Adjusted EBITDA as a percentage of our net revenues. Our adjusted EBITDA  may not be similar to adjusted EBITDA measures of other companies; is not a measurement under accounting principles generally accepted in the United States and should be considered in addition to, but not as a substitute for, the information contained in our consolidated statement of operations. We believe that adjusted EBITDA provides useful information to investors because it is an indicator of the strength and performance of our ongoing business operations, including our ability to fund discretionary spending such as capital expenditures, acquisitions and other investments and our ability to incur and service debt. While depreciation and amortization are considered operating costs under generally accepted accounting principles, these expenses primarily represent the non-cash current period allocation of costs associated with long-lived assets acquired or constructed in prior periods. Our adjusted EBITDA calculation is commonly used as one of the bases for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performance and value of companies within our industry. Adjusted EBITDA is reconciled to our consolidated statements of operations in Appendix 1. 

 ** Net debt is calculated as total debt minus cash and cash equivalents. 

 *** During 2010 the Group completed the acquisition of entities previously owned by the Group’s majority shareholder. Since these acquisitions are transactions between entities under common control, they have been accounted for in a manner similar to a pooling of interest with assets and liabilities transferred at historical cost. Cherkizovo’s historical financial information has also been restated to include the acquired entities for all periods presented. 

 Some of the information in this press release may contain projections or other forward-looking statements regarding future events or the future financial performance of the Group. You can identify forward looking statements by terms such as “expect,” “believe,” “anticipate,” “estimate,” “intend,” “will,” “could,” “may” or “might” the negative of such terms or other similar expressions. We wish to caution you that these statements are only predictions and that actual events or results may differ materially. We do not intend to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Many factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, general economic conditions, our competitive environment, risks associated with operating in Russia, rapid market change in our industry, as well as many other risks specifically related to the Group and its operations.