Russia-Meat company results.

RUSSIA - Cherkizovo Group OJSC has published its preliminary results for the year ended 31 December 2008. Total revenue increased to $1.2 billion – 42 per cent up on 2007, whilst gross margin was down from 27 per cent to 24 per cent.

Highlights

Financial Year 2008 Performance

Net income increased 27 per cent to $78.1 million compared to $61.6 mln in 2007

Adjusted EBITDA increased 31 per cent year-on-year to $152.8 million, compared to $116.4 million in 2007

Adjusted EBITDA margin of 13 per cent, compared to 14 per cent in 2007

Gross Profit increased 26 per cent to $279.4 million compared to $222.3 million in 2007

Gross margin at 24 per cent, compared to 27 per cent in 2007

Revenues increased 42 per cent to $1.2 billion, compared to $820.8 million in 2007

The reported numbers include $52.8 million of subsidies accrued for 2008. This consists of $31.0 million of Federal Budget direct subsidies provided for the first half of the year, $3.4 million of regional direct subsidies provided for 12 months that were offset against cost of sales for the full year 2008, and subsidies for interest reimbursement of $18.4 million which offset interest expense. Out of the accrued subsidies, the Group has not yet received $13.1 million as of 31 December 2008, and this amount is included in other receivables.

Business Developments

Completed and commissioned all greenfield farms in Lipetsk and Tambov, all six new state-of-the-art pork farms are operational

Maintained leadership positions and further realized synergies resulting from acquisition of Chicken Kingdom

Successfully completed secondary public offering

Began trade of ordinary shares on MICEX.

CEO’s Comment

Sergey Mikhailov, Chief Executive Officer of Cherkizovo Group, said: "The Company continues to make solid progress against its strategic objectives, despite a challenging market environment. We increased our sales by 42 per cent, adjusted EBITDA by 31 per cent and net income by 27 per cent and continued to deliver real value for all our shareholders. However, the dramatic rise in grain prices in the first six months of the year exerted some pressure on margins for the whole year, despite substantial government support and operational efficiencies.

"Production volumes in the Company’s Pork division increased 40 per cent in 2008, reflecting the scale benefits emerging from the greenfield modules at the Lipetsk and Tambov breeding facilities. The substantial investments that the Company has undertaken to increase capacity are now fully complete. The division also benefited from a significant increase in pork prices over the period.

"The Company’s Poultry division was affected by lower than expected poultry price increases in the beginning of the year, primarily due to increased imports. Moreover, gross margins faced a marked impact from grain prices, although at the operating level this was mitigated to some extent by the economies of scale and synergy benefits from the OJSC Kurinoe Tsarstvo (Chicken Kingdom) acquisition.

"Rising raw meat prices and increasing pressure from retail chains had a significant impact on gross margins within the Meat Processing division. Nevertheless, the Company’s continuing focus on innovation and improving our value-added products offering won several awards for product quality over the period.

"These results have clearly benefited from the support of $52.8 million in direct subsidies and interest reimbursement provided by the Russian government, largely in response to uniquely challenging conditions for our business. The difficult conditions remain in place, and further support is therefore necessary to ensure that the Company continues to deliver against its objectives. Moreover, the Company has current debt commitments in place, and the ability to service those commitments and complete advanced investment projects, to a large extent depends on the overall financial and economic situation, and continued support from Cherkizovo’s banking partners.

"More broadly, the underlying operating dynamics remain supportive for the business, as food consumption per capita continues to increase in Russia. Consistent with activity elsewhere in the world, the Russian government has taken measures to support the domestic economy, and this timely involvement is welcomed. Despite the difficult environment, management remains encouraged by the Company’s prospects for 2009. Some key commodity price pressures appear to be abating, while the Company’s relentless focus on execution leaves it well positioned for growth."

Group Results

The Group performed strongly in 2008.

Overall sales increased by 42 per cent to US$1.2 billion in 2008 (2007: US$820.8 million). Meat processing accounted for 49 per cent (57 per cent in 2007), poultry for 42 per cent (35 per cent in 2007) and pork for 9 per cent (8 per cent in 2007) of the Group’s sales. The pork and poultry divisions showed the strongest growth in the year with the pork division growing at 61 per cent and the poultry division at 70 per cent.

Gross profit increased by 26 per cent to US$279.4 million (2007: US$222.3 million), while gross margins decreased to 24 per cent (2007: 27 per cent). The company managed to increase profits in spite of the challenging inflationary pressures on grain primarily as a result of its efficient purchasing strategy, increased operational efficiency at its new pork facilities and product mix improvements in its poultry and meat processing businesses.

Net income increased 27 per cent to US$ 78.1 million (2007: US$61.6 million). Net income margin slightly decreased to 7 per cent (2007: 8 per cent).

Adjusted EBITDA increased 31 per cent year-on-year to US$ 152.8 million (2007: US$116.4 million) and adjusted EBITDA margin slightly decreased to 13 per cent (2007: 14 per cent).

Without the direct subsidies and interest rate reimbursement provided by the Russian Government, the numbers for 2008 would have been the following: gross profit, $245.0 million; gross margin, 21 per cent: net income, $25.2 million; and net income margin, 2 per cent.

Poultry Division

In 2008 total volume growth in the poultry division increased 12 per cent to approximately 187,000 tonnes, compared to 167,000 tonnes in 2007. rices for Cherkizovo poultry sales increased by 11 per cent from 57.71 roubles (RUB) per kg in 2007 to RUB 63.87 per kg in 2008 (excluding VAT). In dollar terms, prices increased by 14 per cent from $2.26 per kg in 2007 to $2.57 per kg in 2008 (excluding VAT).

As a result, total sales in the poultry division increased by 70 per cent from US$296.8 million to US$ 505.2 million.

The poultry division gross profit increased 49 per cent to US$ 138.9 million (2007: US$93.4 million). Gross margin decreased to 27 per cent (2007: 31 per cent), mostly due to high grain prices in the first part of the year. However, Federal subsidies of $23.2 million and regional subsidies of $1.3 million offset some of the increase in grain prices.

Divisional operating expenses decreased as a percentage of sales year-on-year from 16 per cent to 14 per cent. The improvement was mostly due to synergies achieved by selling products from the newly acquired OJSC Kurinoe Tsarstvo (Chicken Kingdom) through the Poultry Division’s existing distribution network. As a result, operating income in the division increased by 45 per cent to $68.4 million (2007: $47.2 million), while divisional operating margin decreased from 16 per cent to 14 per cent in the corresponding period. Divisional interest expense increased to US $14.6 million (2007: US $10.7 million). Divisional profit increased 32 per cent to US $51.3 million (2007: US $38.8 million), as a result of the above mentioned factors.

Accordingly, Cherkizovo’s adjusted EBITDA in the poultry division increased 58 per cent to US$93.2 milli