FINANCIAL RESULTS FOR THE THIRD QUARTER AND NINE MONTHS ENDED 30 SEPTEMBER 2011

December 1, 2011

Cherkizovo Group (LSE: CHE), one of Russia’s leading integrated and diversified meat producers, today announces third quarter and nine months unaudited financial results for the period ended 30 September 2011. 

Highlights

Business Developments

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

“Despite the challenging operating environment at the beginning of this year, we have delivered a solid performance across all segments in the first nine months of 2011, in line with our targets. The Group achieved a 24% increase in revenue and growth in Adjusted EBITDA of 6%, resulting in a healthy 17% Adjusted EBITDA margin.

Moreover, we have confirmed our status as the most active operator in the Russian meat sector through the acquisition of Mosselprom, one of Russia’s best known poultry producers, at the start of 2011. We have also started construction of the country’s largest poultry production complex in the Lipetsk region.

We have completed the integration of Mosselprom within the Group’s production structure. As a result of the synergy benefits we have received, operational efficiency is increasing in our poultry segment, where we continue to deliver against our large scale capacity increase projects. In addition to opening two large poultry production facilities in our Bryansk and Penza clusters, we have also launched two incubation facilities, which are amongst the largest not just in Russia, but across Europe.

Our results in the pork segment demonstrate that we have successfully overcome the consequences of last year’s extreme weather conditions, and are now witnessing production growth. In the course of the first nine months of the year, we have launched three breeding facilities at our greenfield pork farms in Tambov, Voronezh and Lipetsk. We have also integrated our new asset “Orelselprom”, which was acquired through the Mosselprom transaction.

In the meat processing segment we see a steady increase in demand for our meat products, while this year we are concentrating on improving the product mix in favour of value added products.

In terms of the pricing environment, we see that in poultry the prices so far this year have been relatively flat, while in pork they have demonstrated some growth.

Overall, management is optimistic that the Group will produce a strong financial performance for the full year in line with our expectations and will further continue to deliver against its strategy.”

Chief Executive’s Review

Financial Overview

The table below summarizes the Group’s strong performance on a rouble currency basis for the third quarter and the nine months of 2011:

RUR, mln (unaudited)

9M2011

9M2010

Change

3Q2011

3Q2010

Change

Sales

31 027.2

26 243.9

18%

11 304.0

9 021.3

25%

Gross Profit

7 768.5

7 366.2

6%

2 910.9

2 446.9

19%

Gross margin, %

25%

28%

 

26%

27%

 

Operating expenses

(4 083.5)

(3 434.5)

19%

(1 383.9)

(1 164.0)

19%

Operating Income

3 685.0

3 931.7

-6%

1 527.0

1 282.8

19%

Operating Income margin, %

12%

15%

 

14%

14%

 

Net Income

3 118.2

3 327.1

-6%

1 235.4

1 100.3

12%

Adjusted EBITDA

5 117.5

5 073.2

1%

2 091.9

1 675.1

25%

EBITDA margin, %

17%

19%

 

19%

19%

 

On a reported currency basis sales increased for the nine months of 2011 by 24% to US$1078.6 million (9M2010: US$867.5 million); and for the third quarter by 32% due to healthy organic growth across all segments and acquisition of Mosselprom. Gross profit increased 11% to US$270.1 million (9M2010: US$243.5 million). Operating expenses as a percentage of sales were largely flat at 13%. Net income decreased 1% to $108.4 million (9M2010: US$110.0 million).

Adjusted EBITDA* increased 6% to US$177.9 million (9M2010: US$167.7 million) and adjusted EBITDA* margin was 17% for the 9M2011, and 19% for the third quarter of 2011, reflecting a improvement in profitability and a robust operating performance by the Group.

USD, mln (unaudited)

9M2011

9M2010

Change

3Q2011

3Q2010

Change

Sales

1 078.6

867.5

24%

389.2

294.7

32%

Gross Profit

270.1

243.5

11%

100.4

79.9

25%

Gross margin, %

25%

28%

 

26%

27%

 

Operating expenses

(142.0)

(113.5)

25%

(47.7)

(38.0)

25%

Operating Income

128.1

130.0

-1%

52.7

41.9

26%

Operating Income margin, %

12%

15%

 

14%

14%

 

Net Income

108.4

110.0

-1%

42.6

35.9

18%

Adjusted EBITDA

177.9

167.7

6%

72.2

54.7

32%

EBITDA margin, %

17%

19%

 

19%

19%

 

Poultry Division

Sales volumes in the Poultry division for the first nine months of 2011 increased by a robust 26% to approximately 185,620 tonnes of sellable weight compared to 146,830 tonnes for the first nine months of 2010, reflecting organic volumes added in the Bryansk cluster and sales by Mosselprom, acquired in May 2011.

Prices for poultry sales in dollar terms increased by 8% from $2.33 per kg for the first nine months of 2010 to $2.52 per kg for the first nine months of 2011 (excluding VAT)**. Compared to the second quarter of 2011, the price in the third quarter was almost flat at $2.53 per kg.

Prices in rouble terms increased by 3% from 70.56 roubles per kg for the first nine months of 2010 to 72.40 roubles per kg in the first nine months of 2011 (excluding VAT). Compared to the second quarter of 2011, the price in the third quarter increased 1% to 73.47 roubles per kg.

Total sales in the Poultry division increased by 35% to US$504.8 million (9M2010: US$375.2 million). Gross Profit increased to US$119.6 million (9M2010: US$110.9 million), divisional Gross Margin decreased to 24% (9M2010: 30%) mostly due to increasing input and labour costs. In the second quarter the segment also accounted for approximately 396.3 million RUR or US$13.8 million of direct subsidies which offset the cost of sales.

Operating expenses as a percentage of sales went down from 13% in nine months 2010 to 12%. Operating income of the division decreased by 9% to US$58.2 million (9M2010: US$64.1 million), and operating margin was 12%. Profit in the Poultry division decreased by 8% to US$54.6 million (9M2010: US$59.2 million).

Adjusted EBITDA* increased 1% to US$83.0 million (9M2010: US$82.0 million), while Adjusted EBITDA* margin in the Poultry division was 17% in the nine months of 2011.

Pork Division

Sales volumes in the Pork division for the first nine months of 2011 increased 7% to approximately 65,800 tonnes of live weight, compared to 61,250 tonnes for the first nine months of 2010.

In dollar terms, prices for pork sales increased by 15% from $2.38 per kg of live weight for the first nine months of 2010 to $2.74 per kg of live weight for the same period of 2011 (excluding VAT)***. Compared to the second quarter of 2011, the price in the third quarter was almost flat at $2.80 per kg.

Prices in rouble terms increased by 9% from 72.09 roubles per kg for the first nine months of 2010 to 78.90 roubles per kg for the first nine months of 2011 (excluding VAT). Compared to the price in the second quarter of 2011 the price in the third quarter increased by 2% to 81.37 roubles per kg.

Total sales in the Pork division increased by 24% to US$196.6 million (9M2010: US$158.0 million). Gross Profit increased 12% to US$75.9 million (9M2010: US$67.9 million) while Gross Margin decreased to 39% due to input cost increases and amortization and labour cost increases resulting from the launch of new assets into operation. In the second quarter the segment also accounted for approximately 168.3 million RUR or US$5.9 million of direct subsidies which offset the cost of sales.

Operating Expenses as a percentage of sales were flat at 7%. The division generated Operating Income of US$61.3 million (9M2010: US$56.7 million), while Operating Margin was 31% (9M2010: 36%). Profit in the Pork division increased by 9% to US$57.2 million (9M2010: US$52.3 million).

Adjusted EBITDA* generated by the division increased 13% to US$76.3 million (9M2010: US$67.7 million), and Adjusted EBITDA* Margin was 39% (9M2010: 43%).

Meat Processing Division

Sales volumes increased by 5% to approximately 108,420 tonnes from 102,870 tonnes for the first nine months of 2010.

Prices in dollar terms increased by 19% from $3.82 per kg for the first nine months of 2010 to $4.54 per kg for the first nine months of 2011 (excluding VAT)***. Compared to the second quarter of 2011, the price in the third quarter was flat at $4.66 per kg.

Prices in rouble terms increased by 13% from 115.52 roubles for the first nine months of 2010 to 130.56 roubles per kg for the first nine months of 2011 (excluding VAT). Compared to the price in the second quarter, the price in the third quarter of 2011 increased by 4% to 135.27 roubles per kg.

Total sales in the Meat Processing division increased 25% to US$472.0 million (9M2010: US$379.0 million). Divisional Gross Profit increased 17% to US$76.0 million (9M2010: US$64.9 million), while Gross Margin decreased to 16% (9M2010: 17%) due to meat price increase, and an increase in labour costs and social tax. Operating expenses as a percentage of sales were flat at 12%. Division profit decreased to US$12.3 million (9M2010: 14.0 million).

Adjusted EBITDA* for the division increased by 8% to US$29.9 million, and Adjusted EBITDA* margin decreased to 6% (9M2010: 7%).

Financial Position

The Group’s Capital Expenditure on property, plant and equipment and maintenance amounted to US$152.7 million in the nine months of 2011. Of that, US$63.3 million was invested into the Poultry division, mainly into breeding and incubation sites, as well as slaughter and processing sites within the capacity increase projects at the Bryansk and Penza clusters; US$81.9 million was invested into the Pork division, mainly into the construction of three pork complexes, and US$7.5 million was invested into the Meat Processing division.

Net Debt** at the end of the nine months of 2011 was US$709.4 million or RUR22 610.9 million. Total Debt was US$741.0 million or RUR 23 620.1 million. Of Total Debt, long-term debt was approximately US$520.3 million, or 70% of the debt portfolio. Short-term debt was US$220.7 million, or 30% of the portfolio. Cost of Debt for the nine months of 2011 decreased to 2.3%. The portion of subsidized debt in the portfolio was 90%, improving from 88% as of 30 June 2011. Cash and cash equivalents totalled US$31.7 million at 30 September 2011.

Subsidies

For the nine months of 2011 under Government decree № 1247-p, agro-industrial companies have received direct government support for pork, poultry and egg production due to extraordinary weather conditions in the second and third quarter of 2010 that resulted in sharp cost increases. Cherkizovo Group has applied for these subsidies on the basis of its actual production volumes. This corresponds to 396 million roubles in poultry segment, or US$13.8 million and 168 million roubles, or US$5.9 million in pork segment. The total of 564 million roubles or US$19.7 million in subsidies has offset the cost of sales.

The Group received interest reimbursement of US$42.6 million for the nine months of 2011 which offset interest expense. For the nine months of 2010 the interest reimbursement was US$33.3 million.

Outlook

For the remainder of the year, we anticipate some continued momentum from the supportive pricing environment in the second and third quarters. We remain focused on improving profitability through efficiency gains, increasing demand for our products, and a more stable input cost environment. The current grain harvest has turned out to be favourable for Russia, although grain prices in Russia still depend on global grain pricing trends, given Russia’s return to the international export markets.

We are pleased to be returning to normalised profitability levels, offsetting the negative performance at the beginning of the year. Accordingly, management is optimistic that we are on track to meet expectations for the full year, confirming our status as the leading company in the industry.

*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.

*** For price calculation in dollar terms the Company used the average exchange rate for the first nine months of 2011 of 28.7664 roubles per 1 US dollar, for the first nine months of 2010 the average rate was 30.2538 roubles per 1 US dollar.