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Cherkizovo Group announces Preliminary Results for the Year ended December 31, 2006

Highlights

Financial

• Net income from continuing operations almost doubled (increase 92%) to US $33.2 million (2005: US $17.3 million)

• Adjusted EBITDA* increased 15% year-on-year to US $76.1 million (2005: US $66.0 million)

• Adjusted EBITDA margin remains constant at 12%

• Group Gross profit increased 19% to US $149.1 million (2005: US $124.9m)

• Gross margins increased to 24% from 23%

• Sales increased by 16% to US $630.0 million in 2006 (2005: US $544.9 m)

Business

• Successful IPO on the London Stock Exchange and Russia's RTS

• Construction of four new state-of-the-art pig farms underway: two in Lipetsk Region, two in Tambov Region

• Lipetsk successfully delivered its first pork to market in December

• Successful five-year Rouble bond placed with a coupon of 8.85%, one of the lowest rates in the industry

• Extensive programme to modernise storage and distribution facilities underway: new or  completely refurbished facilities now operating in St Petersburg, Kazan, Samara, Ufa, Saratov, Ekaterinburg, Perm

• Divisional management strengthened by the appointment of new Chief Operating Officer and  New Poultry Division Manager

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

"We are delighted with the strong progress made by the Cherkizovo business in 2006. During the period we have taken a major step forward towards achieving our aim of becoming Russia's leading producer of meat and meat products.

"Our poultry business is now one of the largest suppliers of chilled products in Russia and we look forward to continuing to drive growth in the division and our market share both organically and through acquisition. The Pork division has had an excellent year with particularly strong sales growth in the period. With the new state of the art facilities now in place at Lipetsk and further facilities underway in Tambov we are excited about this Division's future.

"Overall we have expanded our business, begun to deliver from new state of the art facilities, upgraded our sales and distribution centres, and at the same time delivered strong financial performance. We look forward into 2007 with confidence."

*Adjusted EBITDA

Adjusted EBITDA is not a measure of financial performance under US GAAP, and it should not be considered as an alternative to net profit as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Our calculation of adjusted EBITDA may be different from the calculation used by other companies and therefore comparability may be limited.

Operational and Financial Review

Results of operations

The Group performed strongly in 2006. Despite the heavy demands made on the management team by the IPO, and the uncertainties caused by avian flu which surrounded the poultry sector in general, the business has continued to operate well and is reporting strong results as a listed company.

Overall sales increased by 16% to US$630.0 million in 2006 (2005: US$544.9 million). Meat processing accounted for 72% of total sales, poultry for 24% and pork for 4%. Our pork and poultry divisions showed the most aggressive growth in the year: pork grew at 48%, poultry at 29%.

Gross profit increased 19% to US$149.1 million (2005: US$124.9 million), while gross margins increased to 24% (2005: 23%). Net income from continuing operations increased 92% to US$33.2 million (2005: US$17.3 million).

Adjusted EBITDA increased 15% year-on-year to US$76.1 million (2005: US$66.0 million) and adjusted EBITDA margin remained constant at 12%.  

Meat Processing Division

In response to market demands, we have moved our product mix to more high-margin, value-added products. This is reflected in the significant increase in average selling prices. We have increased volumes of premium high-margin products, such as semi-smoked and cooked smoked sausages, deli and meat retail format, and decreased low-value, low-margin volume drivers. Volumes decreased by 4% year-on-year as a result of the lower production of low-margin volume drivers.

As a result, average prices increased by 15% to US$2.97 per kg (2005: US$2.59 per kg), excluding VAT. In roubles (RUR) the price increased by 10% to RUR80.80 (2005: RUR73.37), excluding VAT.

Sales in our Meat Processing Division increased by 10% to US$451.6 million (2005: US$409.3 million), principally as a result of significantly higher selling prices.

Despite these reduced volumes and higher raw material costs, higher average prices resulted in the division's gross profit increasing by 12% to US$81.9 million (2005: US$73.4 million). Gross margin remained constant at 18%.

In addition to expanding its own sales and distribution facilities, the Group continues to develop relationships with modern retail chains. Retail chains' share of our sales increased from 12% to 15%. As a result, marketing and distribution costs increased, as did the costs associated with opening new - and refurbishing old - regional sales and distribution centres. We believe these initiatives will bring long-term benefits to the division. These costs are mainly reflected in increased divisional operating expenses (SG&A) as a percentage of sales year-on-year from 13% to 14%. As a result, operating income in the Meat Processing Division decreased to US$16.6 million (2005: US$20.7 million), while divisional operating margin decreased to 4% (2005: 5%).

Financial expenses in 2006 decreased, mainly as a result of a US$4.5 million foreign-exchange gain. Interest increased by US$3.1 million, principally because of an increase in the LIBOR rate. In June the EBRD loan which had a LIBOR linked interest rate was repaid in full with a Rouble Bond.

All these factors resulted in the Meat Processing Division's profit decreasing to US$8.1 million (2005: US$11.0 million). Adjusted EBITDA decreased slightly, by 3%, to US$33.7 million (2005: US$34.5 million). The adjusted EBITDA margin also decreased slightly to 7%.

Poultry Division

Results in the Poultry Division were primarily driven by a 36% increase in sales volumes - a result of earlier investment - as well as improved operational efficiency and economy of scale.  As we expected, there was an excellent recovery in our poultry prices in the second half of the year. Compared with the first half, average prices increased by more than 7%, bringing them back to where they were before the avian flu outbreak. Compared with 2005's unusually strong prices, average prices decreased by only 1% in 2006 to US$2.15 (2005: US$2.16 per kg), excluding VAT. In roubles the price decreased by 5% to RUR58.30 per kg (2005: RUR61.22 per kg), excluding VAT.  As a result sales in the division increased by 29% to US$151.0 million (2005: US$117.1 million).

Modernisation of poultry equipment and buildings, and changes in the feed mix, significantly improved the Poultry Division's operational KPI's. The average fodder conversion rate, which shows how much feed is used per kg of weight gain decreased, and both the annual flock turnover and survival rates increased. As a result of efficient purchasing of raw materials and improved operational efficiency, gross profit increased 18% to US$56.8 million (2005: US$48.0 million). Gross margins decreased slightly to 37% (2005: 38%).

Operating expenses decreased as a percentage of sales year-on-year from 20% to 18%, primarily through economies of scale. As a result, operating income in the division increased 28% to US$28.9 million (2005: US$22.6 million), while divisional operating margin increased to 19% (2005: 18%) in the corresponding period.

Interest payments increased to US$9.0 million (2005: US$6.7 million). Profit was up 32% to US$20.9 million (2005: US$15.8 million) as a result of the above factors. Adjusted EBITDA increased by 28% to US$36.2 million (2005: US$28.3 million), while adjusted EBITDA margin increased 23% (2005: 22%).

Pork Division

The reorganisation of operations in our Pork Division had a significant effect on results in previous years. We believe, however, that the changes have improved the efficiency and the quality of the division's operations. The environment for pork sales was favourable throughout 2006 and prices exceeded our expectations. Sales increased 48% to US$27.4 million (2005: US$18.5 million), while the average selling price per kg of live weight improved by 19% to US$2.14 (2005: US$1.79), excluding VAT. In roubles, prices increased by 15% to RUR58.16 (2005: RUR50.78 per kg), excluding VAT.

Volumes from existing facilities in the Pork Division increased by 7%, in line with our forecasts.

The restructuring and modernisation of facilities and livestock requirements had a significant impact on the division's operational KPI's, such as average fodder conversion rate and improved survival rate. This had an effect on our cost of sales and, as a result, gross margin increased to 37% (2005: 14%). We expect the new pork facilities at Lipetsk to make a further improvement in our performance in 2007. The division's operating expenses decreased as a percentage of sales year-on-year to 11% (2005: 13%). 

The division generated operating income of US$7.2 million (2005: US$0.4 million), while operating margin increased to 26% and profit increased significantly to US$6.8 million (2005: loss US$0.1 million). The division generated adjusted EBITDA of US$9.1 million and an adjusted EBITDA margin of 33% in the year.

We have begun to develop two addition modules at our Lipetsk pork production facility and develop a new modern pork production facility in Tambov. Combined with the farm in Lipetsk, this will give the Group the most advanced facilities in Russia, and ones which are on a par with most in Europe. The investment and developments at Lipetsk and Tambov will further improve the division's performance and margins.

Management

The hard work, determination and commitment of all our people has been an important part of our success over the last year and will continue to be critical to our future success as we strive to achieve our vision. 

During 2006, the senior management team was strengthened with the appointment of Artur Minosyants as Chief Operating Officer, and the appointment of Joost Gerrits, as Chief of Administration of our poultry division. Both are very experienced in the industry and, the Board believes, will bring additional valuable skills and a fresh perspective to the Group.

IPO

Our initial public offering (IPO) on The London Stock Exchange in May 2006 was the result of considerable planning and hard work across the business by many of our people. This successful transaction showed confidence by international and Russian investors in Cherkizovo's strategy, historic results and the attractiveness of the market we operate in.  Proceeds from the IPO have allowed us to accelerate our growth trajectory through expansion and modernization and through pursuit of strategic acquisitions.

We would like to thank our shareholders, business partners and executives for their support through and after the process.

Outlook

Russia's large, fragmented meat market is experiencing unprecedented changes and growth and is expected to experience greater competition. We believe the current dynamics in our markets present Cherkizovo with enormous potential.  Cherkizovo is now a well-established, well capitalized, and well-managed business. We focus on efficiently producing and distributing quality products through the introduction of best international practices and quality standards, with vertically integrated production methods - from fodder, to breeding, processing and distribution.  Our business looks to the future from a position of strength, and we will aggressively seek to build on our impressive record of organic growth and strategic acquisitions.  We look forward to the future with confidence.

Appendix 1: Key Data and Figures

Consolidated Selected Financial Data (US$000)

Consolidated Selected Financial Data

Meat processing division income statement data

Poultry division income statement data

Pork division income statement data

Appendix 2: Cherkizovo Group PLC

Consolidated Income Statements

For the years ended 31 December 2006 and 2005

Consolidated Cash Flow Statements

For the years ended 31 December 2006 and 2005

Consolidated Cash Flow Statements (continued)

For the years ended 31 December 2006 and 2005