Highlights

• Net income increased 66% year-on-year to US $36.3 million (2007: US $21.9 million)
• Adjusted EBITDA increased 64% year-on-year to US $72.3 million (2007: US $44.1 million)
• Adjusted EBITDA margin maintained at 13%
• Gross Profit increased 48% to US $140.2 million (2007: US $94.5 million)
• Gross margin decreased to 25% (2007: 28 %)
• Turnover up 63% to US $559.2 million (2007: US $343.1 million)
• Pork Division volumes doubled as the new state-of-the-art facility at Lipetsk gained momentum.
• The Group commissioned new state-of-the-art pork breeding facilities at Lipetsk (Module 3 and 4) and Tambov (Module 1).
• Since the end of the reporting period, the company completed the second and final module at the Group's new state-of-the-art pig breeding facility in the Tambov region. The opening of the module is the final phase in the completion of the Group's Tambov facility.

Financial Overview

Group turnover in the period rose 63% to US $559.2 million (2007: US $343.1 million). Gross profit increased 48% to US $140.2 million (2007: US $94.5 million), while gross margins decreased to 25% from 28% in the same period of 2007. Net income increased 66% to US $36.3 million (2007: US $21.9 million).

Adjusted EBITDA increased 64% year-on-year to US $72.3 million (2007: US$44.1million) and adjusted EBITDA margin was maintained at 13%. Our business continues to be affected by seasonal factors, with the first half of the year accounting for 40-45% of the annual results historically. We expect this to continue in this full financial year.

Without the Federal Budget subsidies, the Gross profit increased by 15% to US$109.0 million (2007: US$94.5 million), while the gross margins decreased to 19% from 28% in the same period of 2007. Similarly, net income decreased 77% to US$5.0 million (2007: US$21.9 million).

Without subsidies, adjusted EBITDA decreased year-on-year to US $41.0 million (2007: US$44.1million) and the adjusted EBITDA* margin decreased to 7% from 13%.

Chief Executive's Review

* "The Company's Poultry division was affected by lower-than-expected poultry price increases"

Sergey Mikhailov, Chief Executive Officer of Cherkizovo Group

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. The dramatic rise in grain prices in the first six months of the year exerted substantial pressure on margins, despite substantial government support and operational efficiencies. Meanwhile the business continues to be affected by seasonality, with the first half of the year historically accounting for 40-45% of the annual result.

"Production volumes in the Company's Pork division nearly doubled in the first six months of 2008, reflecting the scale benefits emerging from the first two modules at the Lipetsk breeding facility. The division also benefited from a significant increase in pork prices over the period. The substantial investments that the Company has undertaken to increase capacity are now largely complete.

"The Company's Poultry division was affected by lower-than-expected poultry price increases, primarily due to increased imports. This led to flat poultry prices in rouble terms during the first six months of 2008. 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 had an impact on gross margins within the Meat Processing division, although volumes increased slightly in the first half of 2008. The Company won several awards for product quality over the period, which is consistent with Cherkizovo's focus on improving its value-added product offering.

"Despite the difficult environment, management remains encouraged by the Company's prospects for the full year. Some key commodity price pressures appear to be abating, while the Company's relentless focus on execution leaves it well positioned for growth."

Poultry Division

Prices for poultry increased by 11% in the first six months of 2008 to $2.61 per kg (excluding VAT), compared to $2.36 per kg (excluding VAT) in the first six months of 2007. In roubles, prices increased by 1% to 62.46 roubles per kilo (excluding VAT), compared to 61.59 roubles per kilo (excluding VAT) in the first six months of 2007.

Although poultry prices increased, the rises in the second quarter were below management's expectations. This was primarily because cheaper imports, in particular from the US and Brazil, undercut the local producers. The Federal Customs Service of Russia reported that between December 2007 and June 2008, poultry imports grew by 9.4%.

Total sales volumes across the Company's poultry division increased in the first six months of 2008 by 106% to approximately 88,400 of slaughter weight tonnes. This compares to approximately 42,800 tonnes of slaughter weight in the same period in 2007. Part of the increase in the amount of approximately 38,500 tonnes is due to the acquisition of Chicken Kingdom. As a result, sales in the Poultry Division more than doubled (increased 137%) to US $247.3 million (2007: US $104.5 million).

Gross profit in the Poultry Division increased by 81% to US $73.4 million (2007: US $40.5 million) in the first half year of 2008. Gross margin decreased to 30% (2007: 39%), mostly due to the increase in the price of grain over the same period. However, subsidies of $22.9 million offset some of the increase in the grain price.

Divisional operating expenses decreased as a percentage of sales year-on-year from 18% to 14%. The improvement was mostly due to the 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 77% to $38.5 million (2007: $21.8 million), while divisional operating margin decreased from 21% to 16% in the corresponding period. Divisional interest expenses increased to US $9.7 million (2007: US $4.0 million). Divisional profit increased 68% to US $29.7 million (2007: US $17.7 million), as a result of the above factors.

Adjusted EBITDA increased 92% to US $49.4 million (2007: US $25.7 million), while adjusted EBITDA margin in the Poultry Division in the first six months of 2007 decreased from 25% to 20%.

Pork Division

Sales in the Pork Division increased 133% to US $54.0 million in the first six months of 2008 (2007: US $23.1 million). Volumes in the Pork Division increased by more than 90% in the first half of 2008 to approximately 20,000 of live weight tonnes, as the first of two modules at the Lipetsk pig breeding facility came on stream, substantially increasing capacity.

The performance of the Pork Division was also helped by a 23% increase in pork prices in Russia year on year. Prices in the first six months of 2008 were $2.56 per kg of live weight (excluding VAT), compared to $2.07 per kg (excluding VAT) in the first six months of 2007. In roubles, pork prices increased by 13% to 61.22 roubles per kg of live weight (excluding VAT) compared to 54.12 roubles per kg (excluding VAT) in the first six months of 2007.

Gross profit tripled (up 203%) to $23.9 million (2007: $7.9 million) while gross margin increased to 44% (2007: 34%), largely due to the increase in selling price, increased operational efficiencies from the new pork farms, and as a result of the US $8.4 million in subsidies offsetting the grain price increase.

Operating expenses as a percentage of sales year-on-year decreased from 9% to 7% due to the economies of scale. The division generated operating income of US $20.1 million (2007: $5.9 million), while operating margin increased to 37% (2007: 25%). Divisional profit almost quadrupled to US $ 19.3 million (2007: US $ 5.1 million) as a result of the above factors.

Adjusted EBITDA generated by the division tripled to US $22.8 million (2007: US$ 7.8 million) and Adjusted EBITDA margin increased to 42% (2007: 34%).

Meat Processing Division

Sales in the Meat Processing Division increased 23% to US $272.2 million (2007: US $220.5 million). As a result of raw meat price growth, average prices within the meat-processing segment increased by 23% in the first six months of 2008 to $3.97 per kg (excluding VAT), compared to $3.22 per kg (excluding VAT) in the first six months of 2007. In roubles the prices increased by 13% to 95.07 roubles per kg (excluding VAT), compared to 83.98 roubles per kg (excluding VAT) in 2007. We were delighted to receive several awards for the quality of our meat products during the period reflecting our focus on improving the Group's value-added product offering

Sales volumes in the first six months of 2008 within the meat-processing segment increased by 2% to approximately 71,800 tonnes, compared to approximately 70,500 tonnes in the first six months of 2007.

Divisional gross profit decreased 7% to US $43.0 million (2007: US $46.1 million). Gross margin in the Meat Processing Division decreased from 21% to 16%, mostly due to the raw meat price increases. Operating expenses, as a percentage of sales, remain at 17%. As a result of the above factors, the operating loss for the first half of 2008 was US $3.2 million.

The division's loss was US $10.8 million in the first half of 2008. Adjusted EBITDA of the Meat Processing Division decreased to US $6.4 million (2007: US $15.3 million). Adjusted EBITDA margin decreased to 2% from 7%.

Outlook

In the period under review, the Company's increased scale and enhanced efficiencies have produced significant growth, despite the negative impact of high grain prices and increased meat imports. In the second half of the year, we anticipate that a strong Russian wheat harvest and Government intervention to reduce imports, will ensure that Cherkizovo continues to be well placed to increase its market shares and produce strong organic growth.

Looking forward, despite the slowing global economy, we believe the Group's strategy to become the leading integrated meat producer in Russia will continue to provide significant shareholder value. Cherkizovo's strong financial position and its growing scale will enable the Company to leverage its leading market positions and innovative products, to grow in tandem with the Russian Federation's consumption of domestic meat products.

Further Reading

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