Highlights

In the unaudited financial results for the nine months ended 30 September 2010, Cherkizovo Group reports strong organic volume growth across all segments, delivering a solid financial performance. Revenues increased 20 per cent to US$877.7 million from $730.1 million for the nine months of 2009, and increased 12 per cent on a rouble currency basis.

Adjusted EBITDA increased 21 per cent to $159.5 million from $132.1 million for the nine months of 2009, and increased 12 per cent on a rouble currency basis. Adjusted EBITDA margin was flat at 18 per cent.

Gross profit increased 16 per cent to $235.9 million from $202.5 million for the nine months of 2009, and increased eight per cent on a rouble currency basis. Group gross margin was a robust 27 per cent. Net income increased 26 per cent to $104.4 million from $82.9 million for the nine months of 2009, and increased 17 per cent on a rouble currency basis.

As of 30 September 2010, net debt decreased six per cent to $417.0 million. The effective cost of debt decreased to three per cent.

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.

The 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 per cent 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, the company 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 will be combined into Group operations in a manner similar to a pooling of interest for the full year 2010. Cherkizovo Group's historical financial information will also be restated to include the acquired entities for all periods presented.

On 10 November 2010, Cherkizovo Group successfully placed three billion roubles (RUB) in three-year bonds with a coupon rate of 8.25 per cent. The funds will be allocated to refinance short-term loans, fund capital expenditure and to other investment needs.

CEO's comments

Sergey Mikhailov, Chief Executive Officer of Cherkizovo Group, said: "During the first nine months of 2010, we have delivered a solid performance, with a 20 per cent increase in revenue and growth in Adjusted EBITDA of 21 per cent. This has resulted in a healthy 18 per cent Adjusted EBITDA margin. However, our results were affected by the tighter pricing environment in the poultry and pork divisions, particularly towards the end of the third quarter, and we expect pricing trends to remain challenging throughout the fourth quarter of 2010 and rolling over into the first quarter of 2011.

"In the poultry division, profitability was at record level of 30 per cent Gross Margin, and a 22 per cent Adjusted EBITDA margin. We have made solid progress at our two step capacity-increase projects in Bryansk and Penza and our recent acquisition of the Zarechnaya facility in the Penza region will enable us to achieve targeted production volumes ahead of plan.

"The pork division has enjoyed significant growth and we anticipate this will be further supported in the fourth quarter by the integration of the two new farms. Moreover, we are pleased that construction has commenced on three greenfield complexes in the Tambov, Voronezh and Lipetsk regions which are expected to become operational during 2011 and 2012, adding some 37,500 tonnes of capacity. By the end of 2012 our production volumes will have grown to approximately 153,000 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.

"Going forward, we anticipate a rather challenging year in terms of grain supplies globally, particularly in Russia. At the Group level, we have already secured approximately half of our grain stock needs for 2011, and are actively continuing to secure further grain supplies. This year, inflation for meat products in Russia has been relatively low compared to other consumer food products, despite the sharp increase in grain costs. We are now witnessing a slight oversupply of meat in the market, as less efficient producers and individual households are slaughtering livestock due to grain shortage. Combined with an increased share of poultry imports in the second half of this year, this puts a downward pressure on selling prices, especially for poultry sales. This may continue into the beginning of 2011, as producers will accumulate stocks. In the medium term reduction of livestock will potentially lead to more aggressive meat price inflation in 2011.

"As a recent development, we welcome the Government's recent announcement to decrease import quotas for 2011. However, with the anticipated growth in domestic production, the market is expected to reach self-sufficiently levels towards the end of 2011 and further quota reductions may be required," said Mr Mikhailov.

Cherkizovo Group OJSC is one of the largest Russian meat producers. Its business is organized in three segments: poultry production (four full-cycle poultry production clusters), pork production (five pork production complexes), and meat processing (seven meat processing plants). Also, the Group produces its own feed (two feed mills), and sells its products through its own three trading houses. Cherkizovo Group enjoys dominant market positions, and its brand portfolio includes leading brands, such as Petelinka, Chicken Kingdom, Cherkizovsky, and Five Stars.

Outlook

Cherkizovo has made solid progress in the first nine months of 2010 in its operational and financial results, though performance was affected by a tighter pricing environment compared to last year and unusual weather conditions which have somewhat affected operational results and costs.

For the remaining period of 2010, we have a positive view on Russian consumption trends as positive volume-wise, although the pricing environment has been and remains tight, despite rising input costs. The rising grain prices and shortage in grain supply are expected to continue until visibility on 2011 harvest, and we may reasonably expect meat price inflation in 2011, as producers will seek to transfer cost increases on to the consumer, which has not yet happened in the third quarter of 2010. Cherkizovo also welcomes the significant reduction in imports, as this presents excellent opportunities for Cherkizovo as the leading domestic producer. The Company will continue to benefit from investments already made to increase production capacity, particularly in our higher margin pork and poultry businesses, and from recovery trends in meat processing. Overall, Cherkizovo Group remains confident that it will continue to enhance value and deliver against its strategy going forward.

Further Reading

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