Financial results for the First Quarter Ended 31 March 2011

May 24, 2011

Highlights

Business Developments

Cherkizovo Group has opened the poultry breeding facility, “Komarovka”, at its Penza cluster. The facility, which was built as part of Cherkizovo’s ongoing poultry capacity increase project in Penza, consists of 34 bird houses, with a combined capacity of almost 1.1 million broilers.

Cherkizovo Group has opened a second line at the poultry breeding facility in its Bryansk cluster. It consists of 26 bird houses, with a combined capacity of almost 880,000 broilers. The bird houses will be populated using the Group’s own hatcheries, and equipped with state-of-the-art technologies that reflect the latest innovations and best practices in poultry keeping.

Cherkizovo has reached an agreement to acquire 100% of Mosselprom - the diversified vertically-integrated agro-industrial group. Mosselprom’s production activities include the following: poultry, pork, feed production and grain businesses. Subsequently, the strategic acquisition was completed on 16th May, 2011.

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

"The first quarter of 2011 was a very challenging period for all domestic producers including ourselves. This was due to a combination of especially low prices for our products caused by an increased level of imports late last year, and sharply rising input costs, as the full effect of increased grain costs impacted our Poultry segment. However, while the majority of industry producers were operating at breakeven levels, Cherkizovo did manage to report $308.2 million in Group revenue and an Adjusted EBITDA of $34.9 million, while maintaining an 11% Adjusted EBITDA margin. Towards the end of the first quarter and going into the second quarter, poultry prices recovered, and this trend is continuing.

We are making solid progress in our large-scale projects to increase poultry capacity. This is already reflected in our sales volumes for the Poultry division, and we are on track to provide significantly higher output from 2011, which is also supported by our recent launch of the poultry sites in Bryansk and Penza. The Pork division is delivering volume growth including operations at acquired farms, while demand for our meat processing products has also remained strong.

Elsewhere, we have recently announced the start of a transformational project – the construction of a unique complex in the Lipetsk region, which will allow us to significantly increase production by 2016 and set industry trends in efficiency and product quality.

We have also completed the strategic acquisition of Mosselprom, a large, diversified vertically-integrated agro-industrial holding company that comprises poultry production and feed production, as well as land cultivation and cropping, and we expect strong production volume growth in poultry and pork, with significant synergies that will further enhance our performance.

We remain broadly positive on Russian consumption, and, as the pricing environment improves, we expect consumption to remain generally favorable. This trend will be supported by growing consumer confidence, reduced imports and increased costs from rising grain prices.

We also welcome the Government’s recent decision to offer producers direct subsidies to offset sharp cost increases, and to distribute grain from the intervention fund directly to regions that have suffered most. These measures combined will stabilise the market environment and allow domestic producers to continue developing quality local products, despite the difficult trading conditions. Moreover, the current grain harvest outlook is positive for Russia, which, we expect, will further stabilise input costs.

Overall, we expect that in the second half of the year we will return to normalized profitability levels, as cost pressures decrease; this will offset the negative impact of the performance in the first quarter. Accordingly, management is optimistic that we are on track to meet expectations for the full year."

Chief Executive’s Review

Financial Overview

The table below summarises the Group’s performance on a rouble currency basis in the first quarter of 2011:

RUR, mln (unaudited) 1Q2011 1Q2010 Change
Sales 9 020.1 7 919.4 14%
Gross Profit 1 889.5 2 198.2 (14%)
Gross margin, % 21% 28%
Operating expenses (1 264.7) (1 071.0) 18%
Operating Income 624.8 1 127.2 (45%)
Operating Income margin, % 7% 14%
Net Income 537.2 952.3 (44%)
Adjusted EBITDA 1 020.6 1 481.9 (31%)
EBITDA margin, % 11% 19%

On a reported currency basis sales increased by 16% to US$308.2 million (1Q2010: US$265.0 million). Gross profit decreased 12% to US$64.6 million (1Q2010: US$73.5 million). Operating expenses as a percentage of sales were flat at 14%. Net income decreased 42% to $18.4 million (1Q2010: US$31.9 million).

Adjusted EBITDA* decreased 30% to US $34.9 million (1Q2010: US$49.6 million) and adjusted EBITDA* margin was at 11%, reflecting satisfactory operating performance by the Group in an extremely tight environment.

Poultry Division

Sales volumes in the Poultry division in the first quarter of 2011 increased by a robust 15% to approximately 53,570 tonnes of sellable weight compared to approximately 46,570 tonnes for the first quarter of 2010, reflecting the contribution from the newly launched sites at Bryansk.

Prices for poultry sales in dollar terms increased by 5% from $2.32 per kg in the first quarter of 2010 to $2.43 per kg in the first quarter of 2011 (excluding VAT)*. Compared to the price in the fourth quarter of 2010 of $2.45, prices in the first quarter of 2011 were almost flat.

Prices in rouble terms increased by 3% from 69.20 roubles per kg in the first quarter of 2010 to 71.07 roubles per kg in the first quarter of 2011 (excluding VAT)*. However, compared to the price in the fourth quarter of 2010 of 75.15 roubles per kg, the price in the first quarter of 2011 decreased by 5%, reflecting pressure from higher inventories caused by a larger share of imports entering Russia in the fourth quarter. Prices in the second quarter so far have been on an upward trend, and we anticipate this will continue through the second quarter of the year, given the considerable reduction in poultry import quotas, as well as meat price inflation resulting from rising input costs.

Total sales in the Poultry division increased 18% to US$139.4 million (1Q2010: US$118.5 million). Gross Profit decreased 23% to US$26.2 million (1Q2010: US$33.9 million), divisional Gross Margin decreased to 19% (1Q2010: 29%) due to lower selling prices in the first quarter of the year and rising input costs, as the full effect of the grain price increase was realised in this period.

Operating expenses as a percentage of sales remained flat at 13%. Operating income of the division decreased by 58% to US$7.6 million (1Q2010: US$18.3 million), and operating margin was 6% as a result of the above-mentioned factors. Profit in the Poultry division decreased by 60% to US$6.3 million (1Q2010: US$15.8 million).

Adjusted EBITDA* decreased 40% to US$14.3 million (1Q2010: US$23.9 million), while Adjusted EBITDA* margin in the Poultry division was 10% in the first quarter of 2011.

Pork Division

Sales volumes in the Pork division in the first quarter of 2011 increased by 5% to approximately 20,220 tonnes of live weight, compared to approximately 19,190 tonnes in the first quarter of 2010.

In dollar terms, prices for pork sales increased by 12% from $2.29 per kg of live weight in the first quarter of 2010 to $2.57 per kg of live weight in the first quarter of 2011 (excluding VAT)*. Compared to the price in the fourth quarter of 2010 of $2.33 per kg, the price in the first quarter of 2011 increased by 10%.

Prices in rouble terms increased by 10% from 68.59 roubles per kg in the first quarter of 2010 to 75.27 roubles per kg in the first quarter of 2011 (excluding VAT)*. Compared to the price in the fourth quarter of 2010 of 71.61 roubles per kg, the price in the first quarter of 2011 increased by 5%. The pricing environment for pork products in Russia at the end of 2010 and beginning of 2011 was negatively affected by a larger than usual reduction of livestock by smaller and less efficient producers and households, and we expect it to recover in the second quarter as the summer season progresses.

Total sales in the Pork division increased 21% to US$58.0 million (1Q2010: US$47.9 million). Gross Profit decreased 4% to US$18.6 million (1Q2010: US$19.4 million) while Gross Margin decreased to 32%, resulting from pork prices coming under pressure in the first quarter of the year, as well as rising input costs, while the full effect of the grain price increase is yet to be realised in the second quarter due to a longer cycle in pork production.

Operating Expenses as a percentage of sales decreased to 7% from 8% in the first quarter of 2010, reflecting increasing economies of scale. The division generated Operating Income of US$14.6 million (1Q2010: US$15.7 million), while Operating Margin was 25% (1Q2010: 33%). Profits in the Pork division were flat US$14.1 million.

Adjusted EBITDA* generated by the division decreased 4% to US$18.5 million (1Q2010: US$19.2 million), and Adjusted EBITDA* Margin decreased to 32% (1Q2010: 40%).

Meat Processing Division

Sales volumes increased by 8% to approximately 33,200 tonnes from 30,790 tonnes for the first quarter of 2010.

Prices in dollar terms increased by 13% from $3.80 per kg in the first quarter of 2010 to $4.30 per kg in the first quarter of 2011 (excluding VAT). Compared to the price in the fourth quarter of 2010 of $4.08, the price in the first quarter of 2011 increased by 5%.

Prices in rouble terms increased by 11% from 113.71 roubles in the first quarter of 2010 to 125.75 roubles per kg in the first quarter of 2011 (excluding VAT)*. Compared to the price in the fourth quarter of 2010 of 125.37 roubles per kg, the price in the first quarter of 2011 remained flat.

Sales in the Meat Processing division increased 23% to US$138.4 million (1Q2010: US$112.8 million). Divisional Gross Profit decreased 2% to US$19.9 million (1Q2010: US$20.3 million), while Gross Margin decreased from 18% to 14%. Operating expenses as a percentage of sales were flat at 13%. Division profit was US$0.4 million.

Adjusted EBITDA* for the division decreased 35% to US$5.5 million (1Q2010: US$8.4 million), and Adjusted EBITDA* margin decreased to 4% (1Q2010: 7%).

Financial Position

The Group’s Capital Expenditure on property, plant and equipment and maintenance amounted to US$46.8 million in the first quarter of 2011. Of that, US$19.2 million was invested into the Poultry division, mainly into the capacity increase projects at Bryansk and Penza clusters. The Pork division received US$25.1 million of investment and there was US$2.5 million of investment, primarily for capital maintenance, in the Meat Processing division.

Net Debt** at the end of the first quarter of 2011 was US$642.1 million or RUR18.3 billion. Total Debt was at US$697.5 million or RUR19 830.5 million. Of the Total Debt long-term debt was approximately US$494.1 million or 71% of the debt portfolio. Short-term debt was US$203.5 million, or 29% of the portfolio. Cost of Debt for the first quarter of 2011 was 2%. The portion of subsidised loans and credit lines in the portfolio was 88%. Cash and cash equivalents totalled US$55.4 million at 31 March 2011.

Subsidies

In the first quarter of 2011 and 2010 the Group received no direct subsidies. The Group accrued subsidies for interest reimbursement of US$11.9 million which offset interest expense (1Q2010: US$10.7).

Outlook

The first quarter of 2011 was an extremely challenging time for domestic producers, as performance was affected by lower than expected selling prices and at the same time by sharply rising input costs, as in the Poultry segment we experienced the full effect of the grain price increases. Despite this, Cherkizovo demonstrated solid operational and financial results.

Alongside the anticipated progress in our existing organic expansion projects, we have recently announced the start of a transformational project – the construction of a unique complex in the Lipetsk region, which will allow us to significantly increase production by 2016 and set new industry standards in efficiency and product quality.

We have also completed a strategic acquisition of Mosselprom, a large, diversified vertically-integrated agro-industrial holding company that comprises poultry production and feed production, as well as land cultivation and cropping; and we additionally expect strong production volume growth in poultry and pork, with significant synergies that will further enhance our performance.

We remain broadly positive on Russian consumption, and as the pricing environment improves, we expect it to remain broadly favorable thereafter, supported by growing consumer confidence, reduced imports and increased costs resulting from grain price increases.

We welcome the Government’s recent decision to offer producers direct subsidies to offset sharp cost increases and to distribute grain from the intervention fund directly to regions that have suffered most. These measures combined will stabilise the market environment and allow domestic producers to continue developing quality local produce, despite the difficult trading conditions. Moreover, the current grain harvest outlook is positive for Russia, which, we expect, will further stabilise input costs. Overall, management is confident that the Group will continue to enhance efficiency increases and delivering against its 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 income before income tax and non-controlling interests adjusted for interest, depreciation and amortization and 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

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.