Annual report strategy

Transcription

1 Annual report 2011 strategy at work

2 CHERKIZOVO is A leading vertically integrated russian MEAT producer DISTRIBUTION Our best-in-class distribution network gives consumers across the length and breadth of Russia easy access to our products BRANDED MEAts Our meat brands are established as leaders in many sectors of the Russian meat market PORK AND poultry We invest in organic growth and acquisitions that enable the Group to produce first-class pork and chicken at competitive prices FEED production We produce our own feed to ensure effective cost management and the quality of our meat Continuous progress 2005 The Cherkizovsky and Mikhailovsky agro-industrial groups merged to form the Cherkizovo holding company 2006 The first two modules of the greenfield pork complex at Lipetsk were launched The company listed on the London Stock Exchange. Trading commenced on the MICEX and rts exchanges 2007 We acquired Kurinoe Tsarstvo (Chicken Kingdom) 2008 The third and fourth modules at Lipetsk and the first two at the Tambov pork complex were launched

3 strategy Contents at work Cherkizovo s strategic direction has remained consistent despite the environmental and economic challenges we have faced We continue to drive industry consolidation through strategic acquisitions, such as 2011 s purchase of Mosselprom. Since 2007 the Group has acquired eight highly valuable and synergistic assets We also continue to grow organically through our investments in state-of-the-art production facilities. Since 2005, we have invested more than US$1 billion, to create the leading infrastructure for efficient, high quality domestic meat production Strategy AT Work ifc Continuous progress 2 Driving industry consolidation 4 Driving organic growth overview 6 Delivering strong performance 8 Leading market positions 9 Growing opportunities 10 Chairman s statement Business review 12 Chief Executive s statement 14 Poultry 16 Pork 18 Meat Processing 20 Distribution 22 Financial review Governance 32 Board of Directors and executive management 34 Corporate social responsibility 35 Community 36 Corporate governance 40 Directors report 42 Statement of management s responsibilities for the preparation and approval of the consolidated financial statements 43 Independent auditors report FINANCIAL StateMentS 44 Consolidated balance sheets 46 Consolidated income statements 47 Consolidated cash flow statements 49 Consolidated statement of changes in equity and comprehensive income 50 Notes to accounts Shareholder information 77 Advisers and corporate information 2009 We launched one of the largest poultry facilities in Europe Vertunovka in our Penza cluster The project to transform poultry production at Bryansk and Penza started 2010 We acquired pork complexes in Penza and Lipetsk We bought the Kaliningrad meat-processing plant We purchased the Zarechnaya poultry facility in Penza 2011 We acquired the highly efficient Mosselprom chilled poultry and pork business We started a RUR19.5 billion large-scale poultry production project in Elets The poultry breeding, hatching and slaughtering elements of the capacityincrease project at Bryansk and Penza were launched cherkizovo-group.com annual report

4 Driving industry consolidation Market consolidation is a key strategic priority for Cherkizovo. The acquisition of high-profile market-leading companies like Chicken Kingdom in 2007 and Mosselprom in 2011 have substantially grown our share of the high-margin chilled poultry sector, materially increasing both the scale and the efficiency of our business THE MOSSELPROM ACQUISition adds SIGNIFICANTLY TO OUR VertiCALLY INTEGrated BUSINESS +67,000 tonnes of poultry capacity +12,500 tonnes of pork capacity +27,500 ha of landbank 2 cherkizovo-group.com annual report 2011

5 Strategy at work St Petersburg Vologda Dmitrov Ekaterinburg Naro- Fominsk Moscow * Chelyabinsk Kaliningrad Bryansk Tula * Orel * Penza Ulyanovsk Kursk * Lipetsk Tambov Voronezh Distribution & storage facility Poultry production facility Pork production facility Meat processing production facility Labinsk * Additional Mosselprom assets +150,000 tonnes of feed production capacity FURTHER MOSSELPROM BENEFITS Substantial scale and sales synergies across the lucrative Moscow region and Central Russia Market-entry in new regions Major potential for operational improvements The addition of two powerful brands to our portfolio cherkizovo-group.com annual report

6 Driving organic growth The transformational Elets agro-industrial project will drive new standards of efficiency and competitive production, which will transform our ability to produce high quality domestic meat, and secure Russia s food supply. Designed to EU production standards, the complex will also support a parallel focus on developing export markets, from its go-live date in 2014 to reach full capacity in 2015 THE 19.5 BILLION * ROUBLE REVOLUtion MAJOR INCREASES IN CAPACITY and CAPABILITY MARK A transformational MOMENT IN CherkiZOVO S DEVELOPMENT * Including VAT +125,000 tonnes of sellable weight poultry production +230 million eggs incubated each year +10 million poultry places in five broiler houses 4 cherkizovo-group.com annual report thousand heads in four parent stock and reproduction sites +24,000 units per hour at new processing plant

7 Strategy at work +90 tonnes of fodder per hour +300 thousand tonnes of grain at new storage facility +650 units per hour at pig slaughter and processing plant +4,000 new jobs for the region cherkizovo-group.com annual report

8 DElivering StronG PERFORMANCE Sales +24% Gross Profit +14% adjusted EBitda* +12% net Income +2% All three of Cherkizovo s divisions made a telling contribution to our continued growth momentum in The Group once again delivered record results despite high grain prices at the beginning of the year In Pork, we continued to achieve excellent margins thanks to our investments to ensure that our production processes are some of the most efficient in the Russian meat industry. Poultry experienced dramatic growth in sales volumes following our successful acquisition and integration of the Mosselprom business, while restored consumer confidence saw Meat Processing return to growth prospects following a difficult period Sales US$m Gross profit US$m Adjusted EBITDA* US$m Net income US$m Adjusted EBITDA* margin % Gross margin % cherkizovo-group.com annual report 2011

9 Overview Our POULTRY division recorded a 38% increase in total sales, reflecting a healthy mix of organic and M&A growth. CONTRIBUTION TO GROUP TOTAL SALES CONTRIBUTION TO ADJUSTED EBITDA 43% 42% In PORK, prices increased by 15% to $2.72 per kilo of live weight, supporting our margins and driving a 20% increase in Gross Profit. CONTRIBUTION TO GROUP TOTAL SALES CONTRIBUTION TO ADJUSTED EBITDA 17% 42% Our total MEAT PROCESSING sales grew by 20% to $635.4 million as prices strengthened and consumption returned to pre-crisis levels. CONTRIBUTION TO GROUP TOTAL SALES 40% CONTRIBUTION TO ADJUSTED EBITDA 16% cherkizovo-group.com annual report

10 Leading market positions At Cherkizovo Group, we have market-leading positions in each of our three main areas of focus, strongly reflecting the continued sustainable growth of our Pork and Poultry divisions. We continue to grow our share of the Russian meat market which continues to expand each year Looking ahead, our investments in organic growth and strategic acquisitions will deliver substantial scale increases to further strengthen our position as Russia s leading agro-industrial group No2 MEAT PROCESSING By volume % Ostankino 5.9 Cherkizovo 5.4 ABI Group 4.4 Prodo 4.2 Mikoms 2.5 Tsaritsino 2.4 Tavr 1.0 Dymov 1.0 Other 73.2 Source: Russian Meat Union estimates, Company estimates No2 POULTRY Slaughter weight by volume % Prioskolie 14.1 Cherkizovo 10.1 Severnaya poultry farm 5.9 Resurs 5.8 Belgrankorm 5.6 Prodo-Trade 4.8 Belaya Ptitsa 2.9 Lisko Broiler 1.8 Chelny Broiler 1.8 Alpi Holding 1.6 Other 45.7 Source: Russian Poultry Union estimates, Company estimates No3 PORK Live weight by volume % Miratorg 7.7 Agro-Belogorie 5.7 Cherkizovo 5.4 Prodo 3.8 Rusagro 3.4 Agrarian Group 3.3 KoPitania 3.2 Komos group 2.1 Eksima 1.9 APK Don 1.8 Other 61.7 Source: Russian Pork Union, Company estimates 8 cherkizovo-group.com annual report 2011

11 growing overview opportunities Annual per capita meat consumption 2011 (kg) Imported meat consumption (%) Import quotas (000 tonnes) Shift in Russian meat market (volume %) * USA Australia Canada EU Biological norm (75kg) 2016 estimate Source: Russian Meat Union Russia USSR (1988) E Pork Poultry Beef Source: Russian Meat Union E E Pork Poultry Pork Poultry Beef Mutton Source: Russian Meat Union * Based on internal consumption Russian meat market Production volume (million tonnes) CAGR 6.3% E Source: Russian Meat Union cherkizovo-group.com annual report

12 Chairman s statement In 2011, Cherkizovo generated almost one and a half billion dollars in total sales Today our company is the largest Russian food products manufacturer We are on a path to stable development, with significant growth opportunities still ahead. We have repeatedly demonstrated that we are not only able to resist the inevitable difficulties which the agro-industrial sector faces, but also to progress year on year 10 cherkizovo-group.com annual report 2011

13 Overview The last year has given me more confidence in our future. The Russian government has continued to support the revival of the agro-industrial sector, helping the industry and creating the right environment for further growth and development. The Government s policies for the agro sector have already produced some good results: just five years ago, imports accounted for 40% of the poultry market. Today, this figure has decreased to 10%, with an overall 70% increase in production. Meanwhile pork production in the same period has grown by a third. Wise and timely action by the government last year helped to quickly stabilize the pricing environment of the grain market. The system of subsidized loans, zero profit tax rate and customs regulation measures all contributed to improving the Russian agrarian sector which was almost ruined in the 1990 s. Cherkizovo Group and other agro-industrial producers appreciate such support and understand our responsibility to the food security of Russia and for the prosperity of the agro sector. Today there is anxiety surrounding Russia s forthcoming entry to the World Trade Organisation (WTO) and the potential influence this will have on the sector. However, personally I am less worried about this, as the Russian government has already proved, in words and actions, its support for the development and prosperity of the agro-industrial sector. I am also sure that the authorities will consider the needs of agricultural workers too. Our company is ready for Russia s accession to the WTO and we are sure that in the future it will help us to become even stronger and more competitive. Our BUSiness and the market In 2011 Cherkizovo was very well positioned to maintain dynamic growth across all of our business segments poultry, pork production and meat processing. Our long term strategy is to combine the organic growth of our business with market consolidation through valuable acquisitions, and this strategy has proved successful. We are successfully investing in growth, for example, via capacity increase projects in Penza and Bryansk, and building state-ofthe-art pork complexes in Lipetsk, Tambov and Voronezh. All of this work is being done, while maintaining comfortable levels of debt. In 2011 we started a transformational project in Elets (Lipetsk region); where over the next few years we are developing the largest modern complex for poultry production in Russia. Elsewhere, in May we were delighted to close a transaction to acquire Mosselprom a company with modern production facilities and a good brand portfolio. The sector has great growth opportunities: meat consumption in Russia is still 20% lower than it was 25 years ago, and the sector remains highly fragmented providing good consolidation opportunities for strong players such as Cherkizovo. In terms of the sector s future, I see the potential emergence of some new opportunities for example the increased consumption and production of turkeys in Russia. There is also the emergence of potential government support for cattle breeding, which could produce investment opportunities. While there are possibilities for growth in the processing of poultry meat and pre-cooked poultry products. There is good export potential, as we see growing demand for quality meat products from neighbouring countries. The continued long-term partnership between the Russian government and business, which has already helped to revive poultry and pork production, will enable agro-industrial companies to make further gains. Cherkizovo has a unique advantage from its vertically integrated structure that combines all segments of agro-industrial production. Our land bank located in the most fertile Central region of Russia, is approximately 100,000 ha. We have our own storage facilities, enabling us to protect grain stocks in case of crop failures. Cherkizovo produces almost 90% of the feed needed for production and its high quality feeds benefit the production of healthy livestock. Our production sites meet the strictest veterinarian requirements. While the Group s slaughtering and storage facilities combine with a fleet of refrigerated vehicles to make us a reliable and trusted partner for distributors and retailers. These factors combine to make Cherkizovo one of the leading companies in Russia, with great resources and significant potential. Management Cherkizovo continues to invest in attracting and retaining the best specialists, with Russian and foreign experience. Our team today comprises industry professionals from soviet technological schools, managers from international companies and foreign specialists. The unique composition of different experiences and approaches gives us a unique competitive advantage and corporate culture. People are our main asset and I would like to thank all members of our team for their hard work and devotion to our company. Dividend policy and outlook Continued uncertainty in financial markets during 2011 put pressure on Russian securities and the Board believes the price of Cherkizovo s shares today doesn t reflect either the potential of the Group, or the acquisitions made last year. However, this presents good opportunities for long-term investors who understand the true value of the Group and its assets. The dividend policy of the Group remains unchanged: the Company will continue to act in the interest of all shareholders and stakeholders, focusing on long-term stable growth. We will continue to invest in Cherkizovo for future growth prioritizing investment in new projects. I am confident that in the medium term this approach provides the best and most efficient use of available funds. However, over the long-term, we will periodically return to this question, in order to ensure the optimum strategy for our shareholders is being pursued. Igor Babaev Chairman cherkizovo-group.com annual report

14 Chief executive s review 2011 was another consecutive year in which Cherkizovo Group s ongoing strategy of continuous investment enabled us to deliver record revenues in the face of significant market challenges We have successfully maintained and accelerated positive momentum in top-line growth, delivering strong results that were largely in line with our expectations for the year With revenues rising by 24% from US$1,188.2 million to US$1,472.9 million and gross profit up by 14% to US$369.3 million, which delivered a Group gross margin of 25%, this was clearly a satisfactory trading performance for us We are particularly pleased with these results at a time when Russian agricultural businesses have struggled with the residual impact of the previous year s disastrous weather conditions, causing grain prices to remain at a damagingly high level 12 cherkizovo-group.com annual report 2011

15 Business review SUCCESSFUL StrateGY Our strategy of maintaining a leading market presence across three core segments has paid off. We consolidated our leading poultry position, realised strong pork prices and delivered healthy margins in our processed meats division. The contribution of our Pork segment, which was particularly profitable due to the investments we have made in highly efficient production facilities over recent years, was extremely important during As we target a further doubling in production during 2012 and 2013, this contribution is set to become an increasingly significant source of revenue in the years to come. STABLE results and Market CONSOLidation Our Meat Processing segment has stabilised after a number of difficult years, and it is now showing good prospects for growth. The division has an important strategic role to play in the future development of Cherkizovo Group as a whole, since its products deliver the true value that helps to drive the development of closer consumer relationships with Cherkizovo and its brands. While sales volumes in our Poultry division rose significantly during 2011 (by 34% to approximately 260,200 tonnes of sellable weight) flat pricing and higher input costs contributed to a decline in divisional gross margin from 29% in 2010 to 23%. However, the true strategic significance of 2011 for our Poultry division lies in the successful purchase and early integration of the Mosselprom company, which further consolidates and strengthens the Russian poultry industry following our acquisition of Chicken Kingdom in There is still much to be achieved in enhancing shared production efficiencies, and our early progress in combining the two sales operations has already brought us access to new markets and laid the foundations for further volume increases during Our capacity increase projects in Penza and Bryansk have already demonstrated significant volume growth and will continue to make a valuable contribution moving forward. MAJor organic GROWTH Looking ahead, the work started during 2011 on the transformational Elets poultry production complex, will drive significant volume growth at the division over the next three years moving Cherkizovo towards the leading position in the Russian poultry market. In an additional important strategic move, the site will also house pig-slaughtering facilities enabling the Group to operate through the value chain by providing cut meat for wholesale and retail distribution as well as supplying our own Meat Processing Division. This is a key step forward in increasing the strength and impact of Cherkizovo s branded products. WTO MEMBERSHIP While the performance of our Pork division throughout 2011 and in early 2012 appears to be strong, Russia s accession to the WTO and the potential fall in import duties mean that future pricing trends from the second half of this year are uncertain. We are confident that our track record of long-term investment and constant improvement make us highly competitive on an international as well as a national basis. Our modern facilities and processes are a clear differentiator, enabling Cherkizovo to stand alone within the Russian pork sector. In addition, our growing feed production and storage capacity is a powerful means of both controlling input costs and protecting us against the impact of possible poor harvests in the future. As a major Russian agri-business, we believe that the terms for Russia s entry into the WTO appear to be fair and we anticipate that they will be of economic benefit to the whole country in the longterm. However, we also believe that this major change in the country s trading position will accentuate the short and medium-term uncertainty, and will cause us to manage risk by refining our future investment strategies ever more precisely. Russian businesses will need to learn the new realities with which they will have to operate in future, and will certainly become increasingly competitive as they gain greater experience. OUTLook Looking ahead, we can draw many positives from our programme of continuous investment. These include sustainable growth in production, efficiency and revenue, which ensure we remain committed to making the investments required for sustainable yearon-year improvement. It is this approach that has enabled us to maintain the momentum of continuous growth and deliver three years of record earnings throughout a period when each year has thrown up its own challenges to contend with, from crop failures to the stresses of market consolidation. Yet again, our strategy has been proven as the route to sustainable growth in difficult conditions, which will continue to deliver long-term value for our company, our staff and our shareholders. Sergei Mikhailov Chief Executive Officer cherkizovo-group.com annual report

16 Poultry One of the market leaders, Cherkizovo continues to increase capacity through capital investment and acquisition Total sales US$m Gross profit US$m Adjusted EBITDA US$m Divisional profit US$m Operational KPIs * 2010 ** 2011 Change % Average liveweight, g 2,034 2, % Annual flock turnover, times % Hatch, % % Liveability, % % Average growing period, days % Meat yield, % % Adjusted fodder conversion rate (2,000g liveweight) % Average daily gain, g % *2010 excluding Mosselprom **2011 including Mosselprom 3 1. In 2011, in the Penza region, we launched one of Europe s largest hatcheries, capable of incubating 105 million eggs each year. 2. Our new poultry-breeding facilities in the Bryansk cluster use state-of-the-art technologies to drive global best practice. 3. Our poultry brands: Petelinka is the leading chilled poultry brand in Moscow and the Moscow region. Kurinoe Tsarstvo has very high customer loyalty throughout the Central Federal District of Russia. During 2011, we added the high-profile Mosselprom brand to our portfolio. 14 cherkizovo-group.com annual report 2011

17 Business review In 2011, despite record high grain prices in the first half of the year, our Poultry division built strongly on its success from previous years, growing sales during the year by over a third (+38%) from US$501.0 million in 2010 to US$691.5 million. Our ability to increase sales on such an impressive scale was driven by a number of factors. These included ongoing organic growth that derives from strategic investments made in the year under review and previously. The launch of additional facilities in both our Bryansk and Penza clusters as part of a major project to increase capacity significantly improved productivity at both sites. We also saw the first contributions from our acquisition of Mosselprom in May 2011, which was the largest transaction in Russia s agroindustrial sector. Overall, we are delighted with the progress made by the division. The capacity-increase project, for example, is successfully positioning our business for long-term growth, through the productivity and efficiency improvements it is delivering. In particular, launching our own large incubation facilities means we can significantly reduce our costs. In Penza, we launched 34 bird houses at our Komarovka breeding facility, which has an annual capacity of almost 1.1 million broilers. We also launched Russia s largest hatchery with an annual capacity of 105 million eggs, and a new slaughtering facility that handles 8,000 heads an hour; this in addition to the existing one, which has an hourly capacity of 6,000 heads. Current developments include the reconstruction and building of bird houses, as well as a new fodder factory which will open in 2012 with a storage capacity of 300,000 tonnes. By 2013, our total new investments at Penza will have taken the cluster s annual capacity from 61,500 tonnes of live-weight poultry meat in 2010, when the project started, up to 140,000 tonnes. comprising 26 bird houses, whose combined capacity is close to 880,000 broilers. Current developments include the reconstruction and building of bird houses, as well as a new fodder factory which will open in We successfully acquired and integrated Mosselprom into the Group s production structure We successfully acquired and integrated Mosselprom, one of Russia s best known meat producers, into the Group s production structure during the year. As a result, we significantly increased the presence of our products in high-margin markets of Moscow and the Moscow region. Not only does this acquisition highlight the serious role that Cherkizovo has to play in industry consolidation, it is already delivering valuable synergies that are driving important improvements in operational efficiency throughout our poultry division. With four broiler production facilities capable of 67,000 22% sales increase after Mosselprom acquisition Volume sales 000 sellable weight tonnes Mosselprom Organic growth 187-2% % 194 tonnes of sellable weight, incubation facilities with a total annual capacity of 68 million eggs each year, and three slaughter facilities processing 215,000 heads a day, this makes a profound contribution to the Group s segment growth. We are also behind Russia s largest agroindustrial building project, with a 19.5 billion-rouble venture in the city of Elets in the Lipetsk region. With a go-live date of 2014, reaching full capacity by 2015, this amounts to an entire new poultry production and processing cluster, with facilities including incubation capacity for 230 million eggs, five broiler sites totalling 10 million places, four parent stock and reproduction sites for 900,000 heads and a slaughtering complex with the capacity for 24,000 heads an hour. Overall, we will be able to produce over 125,000 tonnes of poultry in sellable product each year at the new Elets cluster. In 2015 we plan to increase production of poultry to approximately 470,000 tonnes of sellable weight product and become the leading poultry producer in Russia. + 34% % During 2012, our investments at Bryansk will see the cluster s capacity increase from 38,200 in 2010 to 75,000 tonnes of liveweight poultry meat. In 2011, we launched a new hatchery with an annual capacity of 66 million eggs and a new breeding facility E cherkizovo-group.com annual report

18 Pork Cherkizovo s Pork division is on the verge of further important expansion, building on enhanced production efficiency and capacity to increase market share 1 Total sales US$m Gross profit US$m Adjusted EBITDA US$m 90.0 Divisional profit US$m Operational KPIs * 2010 ** 2011 Change % Average marketable pig weight, kg % Average fattening period, days % Number of farrows per year % Number of pigs per farrow % Liveability, % % Annual pork (live weight) yield per sow, kg 2,090 2, % Average fodder conversion rate kg per kg of weight gain % Average daily gain, g % *2010 excluding Mosselprom **2011 including Mosselprom 1. The Orelselprom site has been integrated into Cherkizovo following its purchase as part of the Mosselprom acquisition. 3. We launched three new pig-breeding facilities in 2011 in Central Russia s Tambov, Voronezh and Lipetsk regions We bought 1,300 purebred Large White pigs from world-leading breeder PIC to form the core of our breeding stock. 16 cherkizovo-group.com annual report 2011

19 Business review During 2011, Cherkizovo Group concentrated on putting in place and refining the new resources and facilities that will virtually double our live weight sales of pork to 180,000 tonnes by Sales increased by 22% from US$222.2 million in 2010 to US$270.5 million That said we have had successful growth in sales by 22% from US$222.2 million in 2010 to US$270.5 million in This confirms us as the third-largest pork producer in Russia, enjoying industry-leading margins thanks to our investments in state-of-theart facilities that provide a humane and ecologically sound environment. We are the third largest pork producer in Russia, enjoying industry leading margins proximity to Cherkizovo s existing porkproduction and processing resources. We are also targeting production increases at our new Orelselprom site, which we purchased during 2011 as part of the Mosselprom acquisition. This is a state-ofthe-art pork production complex, whose total annual capacity is expected to reach 12,500 tonnes by During 2011, we bought 1,300 thoroughbred Large White sows for our Lipetsk cluster During 2011, we also bought 1,300 purebred Large White sows for our Lipetsk cluster. This is a rugged and hardy breed that is highly regarded for the leanness of its meat, ensuring the competitive production of excellent pork. These animals will now form the genetic hub of our future production efforts, further enhancing our existing status as a low-cost producer of high-quality pork with industry-leading margins. Indeed, the opportunity to rear our own stock as well as produce our own feed puts us in almost total control of cost and quality, providing a clear advantage over most competitors. As our production increases during 2012 and into 2013, the Pork division is developing plans to drive further results increases by selling processed pork alongside its existing trade in live pigs. These conditions are a stark contrast to the small holdings that currently produce close to 50% of Russian pork using old-fashioned techniques and obsolete equipment. This was a particularly important consideration during 2011, when our focus on applying strict hygiene regulations to keep our stock healthy and free of disease paid great dividends at a time when swine fever was prolific. Looking ahead, we will realize our ambitious growth plans by increasing production at our existing sites and by leveraging the investments we have made in previous years, including complexes we have purchased in Penza and Lipetsk. The investments we made in 2011 will also have a critical role to play. These include the launch of three new breeding facilities at our greenfield pig farms in the Tambov, Voronezh and Lipetsk regions. We will launch rearing and fattening facilities at these sites during 2012, and they are set to reach full capacity in early 2013 when they will have a combined capacity of 37,500 live-weight tonnes of pork. 210% estimated increase in sales volume Volume sales estimate 000 live-weight tonnes Orelselprom Acquired farms Greenfield farms Existing farms % % % % Significant synergetic benefits are expected from these new facilities, due to their E cherkizovo-group.com annual report

20 meat processing In 2011, our Meat Processing division saw a steady increase in demand which resulted in a 3% growth in sales volume from 141,550 tonnes in 2010 to 145,270 tonnes 1 Total sales US$m Gross profit US$m Adjusted EBITDA US$m Divisional profit US$m We use the most modern equipment and technology at our production facilities to ensure the highest possible quality for all our products. 2. Production has started at the meatprocessing plant in the Kaliningrad region that we acquired in Our brands: Cherkizovsky products enjoy very high levels of brand recognition and customer loyalty throughout the central region of Russia. We only use top-quality meat in our premium brand, Pyat Zvezd, to make a range of sausages and specialist delicacies. Two of our local brands Ulyanovsky and Penzensky are market leaders in their localities. IT ARCHITECTURE In 2011, we continued to work on the active development of the sophisticated new IT-architecture at our meat processing sites, which comprises a pyramid of three interconnected levels. 1 This is connected to analytical accounting, which consolidates information about activities at each plant including sales, supply, production and debts. The system will be able to use the data it gathers to build development 18 cherkizovo-group.com annual report 2011

21 Business review The division achieved stable profitability, with an increase in total sales of 20% to US$635.4million. This improvement is mainly due to measures taken by management to restructure the business and reduce costs. The division achieved stable profitability with an increase in total sales up from US$529.4 to US$635.4m We also built upon the 2010 purchase of the Otechestvenniy Product meatprocessing plant in the Kaliningrad region, to take further steps towards increased efficiency and building the division s resource base. During the year, we built a state-ofthe-art new production line for smoked sausages at the plant. This was launched in June, using equipment manufactured by the world-renowned Italian company, Travaglini. Our investment in the project totals approximately US$3.3 million. This followed our strategy from when we acquired the plant in September 2010, when we had the aim of focusing its operations on the production of delicacy meat products using only the best Russian and European technologies. Now, the renovated plant has a monthly production capacity of 400 tonnes. We sell its products under our famous Cherkizovsky and Pyat Zvezd brands, and we plan to increase capacity to tonnes a month during As well as increasing the Group s meatprocessing capacity, the Kaliningrad project also provides us with special customs preferences thanks to its location in the free economic zone. This position enables Cherkizovo to take advantage of emerging opportunities for the effective distribution of value-added products in Russia. The Kaliningrad project also provides us with special customs preferences thanks to its location in the free economic zone We will continue to modernise the plant during Before the end of the year, we plan to launch a line for the production of hams, smoked sausages and boiled and smoked sausages, with a monthly capacity of 1,800 tonnes. This will involve an investment of some US$10 million. As well as this large-scale Kaliningrad project, we plan to invest during 2012 in modernising our existing production sites in Moscow, Penza and Ulyanovsk, in renovating our transport fleet, and in developing the IT infrastructure at our plants by introducing integrated, CSBbased software. We abide by international quality standards and strictly follow sanitary and hygienic production regulations at all Cherkizovo Group production sites. We use only fresh raw meat in our products, as well as the most modern equipment and effective systems of control. We are confident in the quality and safety of our products, which is supported by many Russian and international certification schemes, including the international quality management standard, GOST R ISO models and forecasts, providing management with key information on the influence on our production results of various different internal and external factors. 2 The middle financial and economic level constitutes covering resource planning and including the whole business cycle from customs through to sales. 3 This records the transit of products and raw materials through each plant,as well as our production and storage operations. We activated the system at the production level (MES) during It has made the entire technological process transparent, understandable and manageable, from the supply of raw materials in the storage room to the dispatch of completed products. The system also provides maximum traceability, driving a reduction in losses and preventing theft. Its implementation has had a positive effect on the plant s operations and is enabling an increase in the quality of our products. 1 Business Intelligence (BI) 2 Enterprise Resource Planning (ERP) 3 Manufacturing Execution System (MES) cherkizovo-group.com annual report

22 distribution Our exceptional logistics capability is a powerful source of advantage for Cherkizovo, adding value through the reliability, promptness and security of our deliveries for the nationwide network of retailers that carry our products During 2011, we successfully extended the reach of our distribution infrastructure with the integration of Mosselprom into our logistics network. This has enabled us to broaden our target market in the Kursk and Tula regions, growing the number of Russian consumers who are familiar with and loyal to our brands. Mosselprom strengthens what is already a powerful portfolio of brands The acquisition and integration of Mosselprom is fundamental to strengthening what was already a leading portfolio with great brands. It enhances our appeal to consumers and retailers alike, ensuring we have a high profile in stores and growing visibility. The close control that we exercise over our logistics network is not simply a means of reducing costs, although it plays an important role in protecting our margins. More importantly it ensures that our 1. Our storage and distribution network is one of the most advanced in Russia. 2. Our fleet of refrigerated vehicles is a vital factor in ensuring the freshness and quality of our products. 3. We ensure that our well-known and highly regarded meat products reach stores the length and breadth of Russia. customers always receive our products fresh and tasty. The efficiency of our distribution facilities underpins strong relationships with all the large retail chains operating in Russia, including X5 Retail Group, Auchan, Real, Metro, Billa and many others. We are also close to a number of independent distributors who supply smaller retailers and reach more remote areas of the country. For the retailers and distributors we deal with, our rapid response to their needs and consistently high levels of promptness and efficiency are vital aspects of the ongoing relationships we share, based on mutual trust and understanding. At the heart of our capability is our use of innovative technologies in storage and transport logistics, and we strive each year to continuously improve the speed and quality of our labelling and storage operations and consistently reduce product loss. Our dedicated fleet includes close to one thousand refrigerated trucks We only use specialised vehicles to reach our customers, and our dedicated fleet contains up to 1,000 refrigerated trucks. In addition, our use of GPS-based automated tracking technology maximises the timeliness and efficiency of all our delivery operations. 20 cherkizovo-group.com annual report 2011

23 Business review ENHANCING EFFICIENCY The distribution of products from each of our three business segments is managed by specialist trading houses that have strategically sited distribution centres: Cherkizovsky Trading House Handles our processed meats Petelino Trading House Specialist distributor of our chilled and frozen poultry products Myasnoe Tsarstvo Trading House Sells products from our Pork division cherkizovo-group.com annual report

24 Financial review During 2011 we have delivered a solid performance, with a 24% increase in revenue and growth of 12% in Adjusted EBITDA *. This has resulted in a healthy 17% Group Adjusted EBITDA * margin However, our results were affected by a soft pricing environment in the Poultry division, as well as high input costs at the beginning of the year. The Group profit for 2011 was also adversely affected by the write-off of $4.8 million of uncollectable fodder subsidies. In line with its market consolidation strategy, in 2011 Cherkizovo Group completed the Mosselprom acquisition, one of the largest agroindustrial companies in Russia, increasing the company s market positions in poultry and pork and adding modern production sites and a land bank in Central Russia Gross Profit +14% adjusted EBitda* +12% net Income +2% 22 cherkizovo-group.com annual report 2011

25 Business review Cherkizovo is the leading integrated diversified meat producer in the Russian Federation. According to statistics from Russia s Meat Union, we are the second largest manufacturer of processed meat products in Russia. According to the Russian Poultry Union and our own estimates, we have the largest sales of poultry in the lucrative markets of Moscow and the Moscow Region, and we are the second largest producer nationally. We are also third largest producer of pork in the highly-fragmented Russian pork industry Consolidated Selected Financial Data Corporate Meat assets/ Processing Poultry Pork Grain expenditures Interdivision Combined Total Sales 635, , ,450 2,335 3,657 (130,431) 1,472,891 including other sales 5,024 68,225 21,416 94,665 including sales volume discount (33,462) (21,248) (54,710) Interdivision Sales (1,958) (50,518) (74,271) (51) (3,633) 130,431 Sales to external customers (Sales) 633, , ,179 2, ,472,891 % of Total sales 43.0% 43.5% 13.3% 0.2% 100.0% Cost of Sales (530,576) (531,064) (162,895) (3,896) (13) 124,868 (1,103,576) Gross profit 104, , ,555 (1,561) 3,644 (5,563) 369,315 Gross margin 16.5% 23.2% 39.8% -66.9% 25.1% Operating expenses (78,936) (85,023) (20,758) (758) (19,034) 5,563 (198,946) Operating income 25,906 75,375 86,797 (2,319) (15,390) 170,369 Operating margin 4.1% 10.9% 32.1% 11.6% Other income and expenses, net 16 4,814 (57) 12,972 (17,775) (30) Financial expenses, net (10,618) (7,778) (4,127) (46) (9,978) 17,775 (14,772) Division profit/(loss) 15,304 72,411 82,613 (2,365) (12,396) 155,567 Division profit margin 2.4% 10.5% 30.5% % 10.6% Supplemental information: Income Tax expense 6,233 (229) (166) 38 (1,119) 4,757 Depreciation expense 11,952 31,540 20, ,281 Adjusted EBITDA* reconciliation Division profit/(loss) 15,304 72,411 82,613 (2,365) (12,396) 155,567 Add: Interest expense, net 10,618 7,778 4, ,978 (17,775) 14,772 Interest income (226) (4,929) (241) (14,314) 17,775 (1,935) Foreign exchange loss/gain 667 1, ,375 3,601 Depreciation and amortisation 11,952 31,540 20, ,281 Impairment of assets 3,395 3,395 Uncollectable fodder subsidies 2,854 1,950 4,804 Adjusted EBITDA* 41, , ,543 (1,851) (14,827) 245,485 Adjusted EBITDA Margin* 6.6% 16.0% 40.5% -79.3% 16.7% Reconciliation between net division profit and income attributable to Cherkizovo Group Total net division profit 155,567 Net (income) loss attributable to non-controlling interests (2,984) Income taxes (4,757) Net income attributable to Cherkizovo Group 147,826 cherkizovo-group.com annual report

26 Financial review continued Our principal operations consist of the production and sale of processed meat products, primarily in the European part of Russia, the breeding of chickens, and the processing and sale of chilled and frozen poultry products produced at facilities in the Moscow, Lipetsk, Bryansk, Penza, Tula and Kursk regions, and also the breeding of pigs at facilities in the Moscow, Lipetsk, Tambov, Vologda, Penza, Voronezh and Orel regions, as well as the sale of live pigs. We also carry out trading and distribution operations and produce the feed consumed in our Poultry and Pork operations. Our operations are structured into three operating divisions: Meat Processing, Poultry and Pork. We operate six meat processing plants where we process raw meat into fresh and ready-to-cook products, and process it further into processed meat, sausages, hams and other products. The division also carries out associated sales and trading operations. Our Poultry division consists of seven production clusters and associated sales and trading operations. Our Pork operations consist of ten integrated pork complexes. All three operating divisions are also involved in other non-core Activities. Expenses for our corporate headquarters are recorded under Corporate Expenditure key highlights In 2011, we sold approximately 145,270 tonnes of meat products, 260,200 slaughter-weight tonnes of poultry products and 91,400 live-weight tonnes of pork. In the Poultry division, profitability was at a robust level of 23% Gross Margin, and a 16% Adjusted EBITDA* margin. We have made significant progress at our capacity-increase projects. At the Penza cluster, Cherkizovo Group has launched the Komarovka breeding facility, a modern high technology hatchery and slaughtering facility. At the Bryansk cluster, new breeding and hatchery facilities were launched. In 2011, Cherkizovo started construction of the Elets Agroindustrial Complex in the Lipetsk region. This is a unique integrated poultry production facility, with production set to start in The launch of the Elets project is likely to make Cherkizovo the largest poultry producer in the country, with a combined capacity of 470,000 tonnes of sellable weight p.a. The Pork division has enjoyed significant growth and delivered an EBITDA* margin of 41%. In 2011, Cherkizovo started production at its greenfield pork complexes in Tambov, Voronezh and Lipetsk with the launch of three breeding facilities. These sites will reach full capacity by the end of 2013, producing 180,000 live weight tonnes annually. 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. In 2011, prices in the meat processing division were growing at low double digit rates, due to a change in product mix. Kaliningrad meat processing plant, acquired in September 2010, enabled increased operational efficiency, as well as a growth in the share of value-added products in the portfolio. In May 2011, Cherkizovo Group completed the acquisition of 100% of Mosselprom, a large, diversified, vertically integrated agroindustrial holding company. The transaction was consistent with Cherkizovo Group s strategy of combining organic growth, while consolidating valuable assets in the sector through acquisition. The transaction was based on an enterprise value of US$251.7 million for Mosselprom, comprising US$183.8 million debt and US$67.9 million equity. Cherkizovo assumed the acquired company s debt, which was mostly long term and subsidized. The US$23.7 million of equity, was financed through an additional issue of ordinary shares, and the remaining US$44.2 million was paid in cash from the Group s own funds. 1 The acquisition added four integrated poultry factories, a state-ofthe-art pork complex, a feed production facility and an operational land bank to the Group s existing operations. State support for agricultural production in Russian Enterprises Favourable profit tax Enterprises engaged in agricultural production in Russia, including our poultry and pork production facilities, benefit from a favourable profit tax rate. In 2008 the zero corporate tax rate, which had originally been applicable only for 2008, was extended to the end of This rate is scheduled to increase to 18% for , and to 20% thereafter. Our non-production agricultural operations, such as the processing of chilled and frozen poultry, trading operations and feed production, do not benefit from this reduced tax rate. Largely as a result of these reduced tax rates, our overall effective tax rate in 2011 was 3.1% (2010: 2.7%), compared to the general corporate profit tax rate in Russia of 20%. 1 Figures are given at actual payment date and differ from transaction press release due to RUR/USD exchange rate changes. Figures stated here are final. 24 cherkizovo-group.com annual report 2011

27 Business review ReiMBUrsement of interest payments Agricultural enterprises are also eligible for the reimbursement of up to two-thirds of the official Central Bank of Russia ( CBR ) refinancing rate from the Russian federal authorities for interest payable on loans, as well as up to one-third of the official CBR refinancing rate from regional authorities. The CBR s refinancing rate slowly increased during 2011 from 7.75% at the beginning of the year to 8.25% in May and then decreased to 8% in December. We account for interest on these loans on a net basis, after taking the subsidies into account. As of 31 December 2011, approximately 93% (up from 88% at the end of 2010) of the aggregate principal amount of our loans was eligible for, and received, the subsidies, which reduced interest for the year by US$54,8 million (2010: US$42.7 million). As of 31 December 2011, our effective interest rate applicable to the loans to which the interest subsidies applied ranged from 0.71% to 1.37%, compared with the interest rate on outstanding amounts under the loans, which ranged from 7.2% to 17.0%. As of 31 December 2011, our effective interest rate was at 2% (2010: 3%). The favourable interest rate subsidies are not available to non-production agriculture-related operations, such as our trading, mergers and acquisitions and Meat Processing operations. Subsidies In the second quarter of 2011 under Government decree 1247-p, agro-industrial companies 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 405 million roubles in the poultry segment, or US$13.8 million and 176 million roubles, or US$6.0 million in the pork segment. The total of 581 million roubles or US$19.8 million in subsidies has offset the cost of sales. Seasonality The volume of sales and average selling prices in each of our divisions are generally most favourable in the second quarter, at the start of the summer season, and in the fourth quarter, at the beginning of the New Year holiday season. Post-holiday economising, combined with the period of Lent before Russian Orthodox Easter, makes the year s first quarter generally the least favourable. Seasonality also affects average selling prices as retail consumers generally buy more (and more expensive) high-quality products in the fourth quarter. In addition, because feed costs are lower when crops are harvested, the second half of the year is notably more profitable for pork and poultry production. Interest rates and CUrrency exchange Our reporting currency is the US Dollar; our subsidiaries functional currency is the Rouble. The Rouble is not fully convertible outside the Russian Federation. Within the Russian Federation, official exchange rates are determined daily by the CBR. Market rates and official rates may differ, although this is generally within narrow parameters monitored by the CBR. Our products are typically priced in Roubles, and our direct costs, including raw materials (other than imported meat products and some fodder components), labour and transportation, are also largely incurred in Roubles. Other costs, such as interest, are incurred in Roubles, US Dollars and Euros. According to the CBR, the Rouble appreciated in real terms against the US Dollar by 1% FY in 2011 (2010: appreciation 12.2%). In nominal terms, the Rouble appreciated against the Dollar from January to July, then two sharp declines with a later correction followed. Since November, the Dollar appreciated to the Rouble, and in full year terms, the Rouble depreciated by 6.1% (2010: appreciation 4.3%). 99% of our long-term debt outstanding (excluding finance leases) at 31 December 2011 consisted of rouble denominated loans, 1% was Euro denominated. At 31 December 2010 all our long-term debt outstanding consisted of Rouble denominated loans. Practically all of our short-term debt balance (excluding the current portion of long-term loans) at 31 December 2011 and 2010 was Rouble-denominated. We have not entered into transactions to hedge against the interest rate risk. Results of operations Group ReSULts Cherkizovo has made solid progress in 2011 in its operational and financial results, though performance was affected by a soft pricing environment in the poultry segment, while unusual weather conditions seriously affected input costs in the first half of the year. Revenues increased 24% to US$1,472.9 million in 2011 from US$1,188.2 million for 2010, and increased 20% on a rouble currency basis. Adjusted EBITDA* increased 12% to US$245.5 million from US$218.5 million for 2010, and increased 9% on a rouble currency basis. Adjusted EBITDA* margin was 17% in 2011, down from 18% for Adjusted EBITDA* margin in the fourth quarter of 2011 increased to 17%. Gross profit increased 14% to US$369.3 million from US$323.8 million for 2010, and increased 10% on a rouble currency basis. Group gross margin was 25% for 2011 and 25% for the fourth quarter. cherkizovo-group.com annual report

28 Financial review continued Net income increased 2% to US$147.8 million from US$144.4 million for 2010, and decreased by 1% on a rouble currency basis. Poultry Division Sales volumes in the Poultry division in 2011 increased by 34% to approximately 260,200 tonnes of sellable weight compared to 194,100 tonnes in 2010, which reflects the organic volume added by the Bryansk and Penza clusters, as well as the inclusion of sales by Mosselprom, which was acquired in May Prices in rouble terms increased by 1% from roubles per kg in 2010 to roubles per kg in 2011 (excluding VAT)**. Prices for poultry sales in dollar terms increased by 5% from US$2.37 per kg in 2010 to US$2.48 per kg in 2011 (excluding VAT). Total sales in the Poultry division increased by 38% to US$691.5 million (2010: US$501.0 million). Gross Profit increased by 10% to US$160.4 million (2010: US$146.2 million), divisional Gross margin decreased to 23% (2010: 29%) mostly due to increasing raw material, utility and labour costs. The fact that in the second quarter, the segment also accounted for approximately million roubles or US$13.8 million of direct subsidies which offset the cost of sales, should also be taken into consideration. In the fourth quarter, uncollectable fodder subsidies of US$2.9 million were written-off, which decreased both the gross and operating profits for the segment. This write-off represents a one-off non-cash item and consequently the division s EBITDA* was adjusted for it. Operating expenses as a percentage of sales went down from 13% in 2010 to 12%. Operating Income for the division decreased by 8% to US$75.4 million (2010: US$81.5 million), and the Operating margin was 11%. Profit in the Poultry division decreased by 3% to US$72.4 million (2010: US$74.6 million). Adjusted EBITDA* increased 5% to US$110.9 million (2010: US$105.6 million), while Adjusted EBITDA* margin in 2011 in the Poultry division was 16%. Consolidated income Year ended Year ended statement data 31 December 31 December (as adjusted)* Sales 1,472,891 1,188,213 incl. Sales volume discount (54,710) (41,212) incl. Sales returns (14,944) (12,302) Cost of sales (1,103,576) (864,445) Gross profit 369, ,768 Gross margin 25.1% 27.2% Operating expenses (198,946) (156,859) Operating Income 170, ,909 Operating margin 11.6% 14.0% Income before income tax and minority interest 155, ,784 Net income attributable to Group Cherkizovo 147, ,410 Net profit margin 10.0% 12.2% Weighted average number of shares outstanding 42,953,544 43,028,022 Earnings per share Net income attributable to Cherkizovo Group per share basic and diluted Consolidated Adjusted EBITDA reconciliation* Income before income tax and minority interest 155, ,784 Add: Interest expense, net 14,772 15,936 Interest income (1,935) (1,220) Foreign exchange loss/gain 3, Depreciation and amortisation 65,281 50,645 Impairment of assets 3,395 Uncollectable fodder subsidies 4,804 Consolidated Adjusted EBITDA* 245, ,498 Adjusted EBITDA* Margin 16.7% 18.4% Poultry sales channels, % Wholesale 40 Traditional retail 13 Modern retail 47 Wholesale 38 Traditional retail 16 Modern retail cherkizovo-group.com annual report 2011

29 Business review Pork Division Sales volumes in the Pork division in 2011 increased 4% to approximately 91,400 tonnes of live weight, compared to 87,650 tonnes in Prices in rouble terms increased by 11% from roubles per kg in 2010 to roubles per kg in 2011 (excluding VAT) **. Prices for pork sales in dollar terms increased by 15% from US$2.37 per kg of live weight in 2010 to US$2.72 per kg of live weight in 2011 (excluding VAT). Total sales in the Pork division increased by 22% to US$270.5 million (2010: US$222.2 million). Gross Profit increased 20% to US$107.6 million (2010: US$90.0 million), while the divisional Gross margin decreased to 40% (2010: 41%) as a result of input cost increases and amortization and labour cost increases, which arose from the launch of new assets into operation. In the second quarter, the segment also accounted for approximately RUR million or US$6.0 million of direct subsidies which offset the cost of sales. In the fourth quarter, US$2.0 million of uncollectable fodder subsidies were written-off, which reduced both the gross and operating profits for the segment. This write-off represents a oneoff non-cash item and consequently the division s EBITDA* was adjusted for it. Operating Expenses as a percentage of sales went up from 7% in 2010 to 8%. The division generated Operating Income of US$86.8 million (2010: US$74.4 million), while Operating margin was 32% (2010: 34%). Profit in the Pork division increased by 19% to US$82.6 million (2010: US$69.4 million). Adjusted EBITDA* generated by the division increased 22% to US$109.5 million (2010: US$90.0 million), and Adjusted EBITDA* margin in 2011 in the Pork division was flat at 41%. Poultry processing division Year ended Year ended income statement data 31 December 31 December (as adjusted)* Total Sales 691, ,961 Interdivision sales (50,518) (35,962) Sales to external customers 640, ,999 Cost of sales (531,064) (354,805) Gross profit 160, ,156 Gross margin 23.2% 29.2% Operating expenses (85,023) (64,697) Operating Income 75,375 81,459 Operating margin 10.9% 16.3% Other income and expenses, net 4,814 (399) Interest expenses (7,778) (6,436) Division profit/(loss) 72,411 74,624 Division profit margin 10.5% 14.9% Poultry division Adjusted EBITDA reconciliation* Division profit/(loss) 72,411 74,624 Add: Interest expense, net 7,778 6,436 Interest income (4,929) (31) Foreign exchange loss/gain 1, Depreciation and amortisation 31,540 23,797 Uncollectable fodder subsidies 2,854 Poultry division Adjusted EBITDA* 110, ,552 Adjusted EBITDA* Margin 16.0% 21.1% Pork processing division Year ended Year ended income statement data 31 December 31 December (as adjusted)* Total Sales 270, ,239 Interdivision sales (74,271) (27,773) Sales to external customers 196, ,466 Cost of sales (162,895) (132,198) Gross profit 107,555 90,041 Gross margin 39.8% 40.5% Operating expenses (20,758) (15,614) Operating Income 86,797 74,427 Operating margin 32.1% 33.5% Other income and expenses, net (57) 422 Interest expenses (4,127) (5,438) Division profit/(loss) 82,613 69,411 Division profit margin 30.5% 31.2% Pork division Adjusted EBITDA reconciliation* Division profit/(loss) 82,613 69,411 Add: Interest expense, net 4,127 5,438 Interest income (241) (355) Foreign exchange loss/gain 303 (13) Depreciation and amortisation 20,791 15,521 Uncollectable fodder subsidies 1,950 Pork division Adjusted EBITDA* 109,543 90,002 Adjusted EBITDA* Margin 40.5% 40.5% cherkizovo-group.com annual report

30 Financial review continued Meat Processing Division In 2011, consumption recovered to pre-crisis levels, and sales volumes in the Meat Processing segment increased by 3% to approximately 145,270 tonnes compared to 141,550 tonnes in Prices in rouble terms increased by 13% from roubles in 2010 to roubles per kg in 2011 (excluding VAT)**. Prices in dollar terms increased by 17% from US$3.89 per kg in 2010 to US$4.55 per kg in 2011 (excluding VAT). Total sales in the Meat Processing division increased 20% to US$635.4 million (2010: US$529.4 million). Divisional Gross Profit increased 20% to US$104.8 million (2010: US$87.5 million), while divisional Gross margin was flat at 17%. (2010: 5%). Operating income in the Meat Processing division was negatively impacted by the impairment of a non-significant subsidiary, for the amount of US$3.4 million. Profit in the Meat Processing division decreased by 16% to US$15.3 million (2010: US$18.3 million). Adjusted EBITDA* for the division increased by 13% to US$41.7 million (2010: US$36.9 million), and the Adjusted EBITDA* margin in the Meat Processing division was flat at 7%. The EBITDA* figure for the Meat Processing Division was adjusted for a non-cash one-off item the impairment of a non-significant subsidiary in the amount of US$3.4 million. Operating Expenses as a percentage of sales were flat at 12%. The division generated Operating Income of US$25.9 million (2010: US$25.7 million), while Operating margin decreased to 4% Meat Processing sales channels, % Wholesale 55 Modern retail 22 Traditional retail 23 Wholesale 65 Modern retail 14 Traditional retail 21 Meat processing division Year ended Year ended income statement data 31 December 31 December (as adjusted)* Total Sales 635, ,354 Interdivision sales (1,958) (616) Sales to external customers 633, ,738 Cost of sales (530,576) (441,829) Gross profit 104,842 87,525 Gross margin 16.5% 16.5% Operating expenses (78,936) (61,805) Operating Income 25,906 25,720 Operating margin 4.1% 4.9% Other income and expenses, net 16 1,081 Interest expenses (10,618) (8,473) Division profit/(loss) 15,304 18,328 Division profit margin 2.4% 3.5% Meat processing division Adjusted EBITDA reconciliation* Division profit/(loss) 15,304 18,328 Add: Interest expense, net 10,618 8,473 Interest income (226) (530) Foreign exchange loss/gain 667 (461) Depreciation and amortisation 11,952 11,099 Impairment of assets 3,395 Meat processing division Adjusted EBITDA* 41,710 36,909 Adjusted EBITDA* Margin 6.6% 7.0% 28 cherkizovo-group.com annual report 2011

31 Business review Liquidity and capital resources Capital requirements In addition to our working capital requirements, we need capital to finance the following: capital expenditure, particularly in connection with further development of our Pork and Poultry segments potential acquisitions repayment of debt We anticipate that capital expenditure, potential acquisitions and repayment of long-term debt will represent the most significant use of funds over the next few years. We generally rely on operating cash flows and bank loans to finance capital expenditure. In 2011, the major sources of our funds were our operating cash flows and long-term borrowings. We financed our capital expenditure primarily with long-term borrowings. Debt Net Debt*** at the end of 2011 was US$719.2 million or RUR 23,154.1 million. Total Debt was US$747.4 million or RUR 24,063.5 million. Of Total Debt, long-term debt was approximately US$533.3 million, or 71% of the debt portfolio. Short-term debt was US$214.1 million, or 29% of the portfolio. Cost of Debt for 2011 decreased to 2% (2010: 2.5%). The portion of subsidized debt in the portfolio was 93%, improving from 88% as of 31 December Cash and cash equivalents totalled US$28.2 million at 31 December Capital expenditure The Group s capital expenditure on property, plant and equipment and maintenance amounted to US$212.8 million in Of that, US$92.6 million was invested into the Poultry division, mainly into the breeding and incubation sites, as well as the slaughter and processing sites within the capacity increase projects at the Bryansk and Penza clusters; US$109.3 million was invested into the Pork division, mainly into the construction of three pork complexes, and US$10.8 million was invested into the Meat Processing division. Total debt, RUR million Cost of Debt for 2011 was 2% 24,063.5 Short-term debt 29% Long-term debt 71% 19,759.9 Short-term debt 28% Long-term debt 72% Capital expenditure, Land Poultry Pork Meat Processing 173, , ,588 3,921 5,624 74, ,092 85, ,819 92, , , , Non-subsidised debt 7% Non-subsidised debt 12% 65,473 85,247 79,751 44,830 Subsidised debt 93% Subsidised debt 88% 12,234 5,906 4,722 10,842 18, E cherkizovo-group.com annual report

32 Financial review continued Cash FLow The table below represents movements in our cash flows from various activities during the two years ended 31 December 2011 and 2010: Total net cash from operating activities 232, ,359 Total net cash used in investing activities (213,919) (212,942) Total net cash (used in) from financing activities (59,057) 75,504 Net (decrease) increase in cash and cash equivalents (39,917) 28,330 Net cash from operating activities in 2011 increased to US$232.2 million (2010: US$166.4 million). This increase in net cash from operating activities in 2011 compared to 2010 (by US$65.8 million) mostly related to factors including: significant decrease in trade receivables and advances paid in 2011, compared to the increase in 2010; slight increase in inventories in 2011, compared to a significant increase in The decrease in trade receivables is mainly due to the fact that the Federal law On the principles for state regulation of commercial activities restricting the payment period up to 10 business days came into effect on January 1, Decrease in advances given in 2011 mostly related to prepayment for sunflower oil. In 2011 the Group concluded favorable contracts that stipulate approximately a twofold decrease in prepayments for sunflower oil in comparison with 2010 figures. In contrast with 2010 data, raw materials (corn, wheat, pea) remained stable due to the abundant crop harvested in 2011 and favorable cereals price forecast. Net cash used in the Group s investing activities stayed almost flat, amounting to US$ 213,9 million (2010: US$212.9 million). The increase of cash used in investing activities due to the Mosselprom acquisition was offset by deposit redemption in Zenit Bank. In 2011, net cash flow used in financing activities was US$59 million. In 2010, net cash flow from financing activities was US$75.5 million. This decrease in net cash flow from financing activities was due to the early redemption of Mosselprom bonds (held by Nomos Bank), as well as a loan repayment that matured in LiQUidity As of 31 December 2011, we had total cash and cash equivalents of US$ 28,2 million (2010: US$68.2 million) plus short-term bank deposits of US$1 million. We also had working capital of US$4.2 million, representing significant improvement vs negative working capital of US$37.4 million in Following this date, we have continued to meet our obligations to trade creditors from operating cash flow and debt financing. Our trade working capital, which we define as current assets less current liabilities excluding short-term loans and the current portion of long-term loans, was US$280.0 million as of 31 December 2011 (2010: US$343.8 million). In 2011 trade receivables slightly decreased to US$ 77.6 million (2010: US$81.3 million). Trade receivables from related parties at 31 December 2011 decreased to US$5.6 million (2010: US$13.5 million). Trade receivables turnover averaged 19 days as of 31 December 2011 (2010: 25 days). The allowance for doubtful accounts, which we create on a case-by-case basis, was US$5.2 million (2010: US$4.8 million). Trade accounts payable increased and amounted to US$ 88.2 million at 31 December 2011 (2010: US$73.3 million). Trade payables to related parties decreased to US$3.7 million as of 31 December 2011 (2010: US$4.4 million). As of 31 December 2011 trade payables turnover averaged 29 days (2010: 31 days). As of 31 December 2011, advances paid amounted to US$ 26 million, net of allowances for doubtful accounts (2010: US$42.1 million). Of our total net advances, US$4.3 million (2010: US$6.2 million) was to related parties. The allowance for doubtful accounts at 31 December 2011 was US$2.8 million (2010: US$1.8 million). Inventory consists primarily of raw materials and goods for resale, work-in-progress, livestock and finished goods. As of 31 December 2011, our inventories were US$219.7 million (2010: US$183.2 million). The value of our livestock at 31 December 2011 was US$101.4 million (2010: US$71.8 million). An increase is due to the increase of operations at pork site in Lipetsk, Tambov and Voronezh, as well as reaching full capacity at Roscha poultry site in Bryansk and commissioning of Komarovka poultry site in Penza. Other receivables mainly comprise subsidies due from the government, which increased to US$11.1 million in 2011 (2010: US$6.0 million). Outlook Cherkizovo has made solid progress in 2011 in both its operational and financial results, although profitability was affected by extremely high input costs in the first half of the year, a soft pricing environment in the poultry segment, and write-offs of uncollectable subsidies. During the year the Group continued to invest in both organic and acquisitive production growth. The Group s current investment programme is chiefly focused on the large-scale Elets agro industrial project, which will significantly increase poultry capacity over the next three years. Looking ahead, management is positive on the outlook for the remainder of 2012, albeit with some uncertainties from the planned WTO admission. We anticipate comfortable grain prices, at similar levels to those seen in late 2011, providing some support for Cherkizovo s Group margins. However, the Poultry division is likely to 30 cherkizovo-group.com annual report 2011

33 Business review see weaker pricing as competition and market saturation impact the sector. Management anticipates the poultry market s share of imports will fall from the current 13% level, as quota and import restrictions, coupled with consumer demand for local products takes effect. There is a possibility that live pigs import duty, which was at 40% at the beginning of the year, may decrease to 5% after WTO admission in the late summer. This would result in strong price pressure at the end of the year, negatively affecting the Pork division s high margins. The Government, in line with its goals for self-sufficiency in key food products, is looking at additional measures to help sustain Russian pork production, which has received substantial investments over the last decade. Further volume growth is anticipated across our Poultry, Pork and Meat Processing divisions. Management is confident that the Group will continue to focus on providing efficiency increases and delivering against our strategy. Ludmila I Mikhailova Chief Financial Officer *Non-GAAP financial measures. This financial review 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 EBITDA. Adjusted EBITDA represents operating income plus depreciation and amortisation expense, loss on disposal of property, plant and equipment and other items, which are expenses primarily related to financing activities, adjusted for certain other items. We believe that EBITDA and Adjusted EBITDA are measures commonly used by investors. Our calculation of EBITDA and Adjusted EBITDA may be different from the calculation used by other companies and therefore comparability may be limited. Some of the information in this financial review may contain projections or other forward-looking statements regarding future events or the future financial performance of the Group. Forward looking statements can be identified 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 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 2011 of roubles per 1 US dollar, for the 2010 the average rate was roubles per 1 US dollar. *** Net debt is calculated as total debt minus cash and cash equivalents cherkizovo-group.com annual report

34 Board of directors & executive management Igor Babaev Sergei Mikhailov Evgeny Mikhailov Igor Babaev, 62 Chairman of the Board Mr Babaev has served as Chief Executive Officer of most Group companies since He joined Cherkizovsky MPP in 1988 as chief engineer, becoming President and a member of the Board of Directors in Before joining Cherkizovsky MPP, he was an engineer and senior engineer at Essentuki Canning Plant. He was also head of Anapa Meat Processing Plant, head of Armavir Meat Canning Plant, head of the Production Division of Nalchik Meat Processing Plant, engineer-in-chief of Stavropol Meat Canning Plant, chief engineer-technologist of Simferopol Poultry Processing Plant and engineerin-chief of NPO Complex of the Gosagroprom of the USSR. He graduated from Krasnodar Polytechnic Institute in 1971 and received a PhD from the Moscow Technological Institute of Meat and Milk Processing Industry in He holds an honorary distinction of the Honored Worker of the Food Industry of the Russian Federation and has been an acting member of the Russian Engineering Academy since In 2009 Mr. Babaev was awarded the Order of Honor for his outstanding achievements by the President of the Russian Federation Dmitry Medvedev. Sergei Mikhailov, 33 Chief Executive Officer, Member of the Board Mr Mikhailov has been Chief Executive Officer of Cherkizovo Group since He was Deputy President and Chief Operating Officer of Cherkizovsky MPP from 2000 and joined AIC Cherkizovsky as Deputy President of the Marketing and Sales Department in In the same year, he was appointed General Director of Cherkizovsky Trade House. From 1998 to 2001, he served as a director and founder of the telecommunications company atelo, Inc. in the United States. In 1997, he worked as an intern at Goldman Sachs and in 1999 was a financial analyst at Morgan Stanley. He received a BSc in Finance from Georgetown University (Washington DC) in Evgeny Mikhailov, 30 Head of Investments Project Department, Member of the Board Mr Mikhailov has been Head of Investments project department of Cherkizovo Group since He has also been a member of the Board of Directors of AIC Mikhailovsky since He joined OJSC AIC Mikhailovsky as Deputy General Director in In 2002, he worked as a financial analyst at Morgan Stanley and in 2001 was an assistant to the Vice-President at atelo, Inc. in Washington DC. He received a BSc in Economics from the University of California at Los Angeles in The Board s rich experience enables Cherkizovo to deliver its stated strategy 32 cherkizovo-group.com annual report 2011

35 Governance Yury Dyachuk Samuel Lipman Musheg Mamikonian Marcus Rhodes Ludmila Mikhailova Artur Minosyants Yury Dyachuk, 44 Head of Legal Department, Member of the Board Mr Dyachuk has been head of Cherkizovo Group s Legal Department since He has 17 years experience practicing law, and in 2005, led the restructuring of the Cherkizovo Group. Since 2011 he served as Head of the Legal Department of AIC Cherkizovsky. Prior to this he was head of the Legal Department at CMPP until 2000, and a member of the legal department at CMPP from He graduated from the Moscow State Law Academy with a degree in Civil Law in Marcus Rhodes, 51 Non-executive Director, Chairman of Audit Committee Mr Marcus Rhodes joined the Board of Directors in February He has 30 years experience in audit and accounting of which he spent the last 20 years in Russia. From 1996 to 2008 he was an audit partner in the practices of Arthur Andersen and Ernst & Young. He also served as an Independent Director for the Boards of Directors of Phosagro Group, Rosinter Restaurants Group and Tethys Petroleum. Mr. Rhodes earned a BA degree (Hons) in economics from Loughborough University in England in 1982 and has been a member of the Institute of Chartered Accountants in England & Wales since He is also a member of the non-executive group of the Institute s facility in London. Samuel Lipman, 64 Non-executive Director Mr Lipman joined the Board of Directors in April He also currently serves as President of The Lipman Company, which he founded in 1997, which provides management consulting services to the broiler industry. He has served as Chief Executive Officer of Broiler of the Future LLC since 2007 and as President of Stromyn Breeders LLC, an investment holding company, since Mr Lipman founded and was President and Chief Executive Officer of Golden Rooster in Lipetsk, Russia from He is a graduate of Colby College, Maine, USA with a BA in English in Ludmila Mikhailova, 36 Chief Financial Officer Ms Mikhailova has been Chief Financial Officer of Cherkizovo Group since She was Deputy Chief Executive Officer of the Company from September 2005 to February From January 2005 to March 2005 she was First Deputy President of AIC Cherkizovsky, and Deputy Chief Executive Officer of LLC Group Cherkizovo from March 2005 to September From July to December 2004 she was Deputy President of Cherkizovsky MPP. From 2002 to 2004, she was a financial analyst at General Mills Corporation Canada (Toronto). In 2002, she worked at ING Barings in London, and from 2000 to 2001 she worked for McFarlane Gordon Inc. (Toronto). She was previously a financial analyst at Cherkizovsky MPP (1996 to 1998). She graduated from the Financial Academy of the Government of the Russian Federation in In 1999, she completed a Canadian Securities Course at the Canadian Securities Institute, and in 2003 she received an MBA from Schulich School of Business, York University (Canada). Musheg Mamikonian, 52 Non-executive Director Mr Mamikonian joined the Board of Directors in Mr Mamikonian has also served as Chief Executive Officer of OJSC Lianozovsky Sausage Plant, Chairman of the Board of Directors of OJSC Dmitrovsky Meat Plant and Chief Executive Officer of CJSC Myasnoy Alliance since He has been President of the Russian Meat Union since From 2001 to 2003 and from 2007 to 2008 he was Chairman of the Board of Directors of OJSC Lianozovsky Sausage Plant. In 1998, he was Chief Executive Officer of CJSC Eko-Torg and between 1997 and 1998 was Deputy President at CMPP. He graduated from Yerevan K. Marx Polytechnic Institute with a degree in Engineering in 1981 and received a PhD from Moscow Technological Institute of Meat and Milk Industry in He holds over 100 patents for technical and technological inventions, and in 1999 received a Russian Federation State award for achievements in Science and Technology. Artur Minosyants, 47 Chief Operating Officer Mr Minsoyants has been Chief Operating Officer of Cherkizovo Group since He was previously First Deputy President for Finance and Economics of Cherkizovsky MPP, and from 1996 to 2000 was Finance and Economics Director of Birulevsky MPP. Before joining, he was Head of Finance of Armavir City Administration. Mr Minosyants is a graduate of the Moscow Plekhanov Institute for the National Economy and holds a PhD in Economics. cherkizovo-group.com annual report

36 corporate social responsibility Cherkizovo remains focused on its commitment to be a good corporate citizen. We aim to reduce the impact we make on the environment, and to have positive interaction with the communities in which we operate. We also make considerable efforts to ensure effective communication with our shareholders, suppliers and employees. Health, safety and the environment We comply with applicable environmental legislation and observe biological and veterinary safety requirements in our poultry and pigfarming operations. This involves ensuring: CoMFort We stimulate the healthy growth and development of our poultry and pigs by controlling air temperature and circulation, lighting and humidity Traceability To ensure the high quality of our products, we control all stages of production, from feed production to breeding, processing and distribution Balanced feed We produce our own feed made to special formulas that ensure it contains the optimum balance of energy and protein, micro-elements, vitamins and amino acids Environmental measures We have systems at all sites that control waste water, air pollution and energy consumption. employment policies Our employees are our most valuable asset, and Cherkizovo seeks to excel in the recruitment, motivation, education and training of all personnel. The Group s HR policies are designed to ensure we recruit and retain high-quality people at all levels of the business. Training When new people join the Group, we provide introductory training on the Company and its history, as well as on production, distribution, sales and our quality policy. Professional development is an ongoing priority for our employees. We consider the shortage of suitably trained people to be one of the major risks to our business. As a result, we work closely with final-year students in educational establishments in an effort to attract the best people. We have also introduced programmes to give existing senior members of staff international training. equal opportunities We do not consider age, colour, ethnic origin, gender, political or other opinions, religion or sexual orientation to be a barrier to employment or advancement. Specialisation and separation of sites We carry out all stages of production at discrete sites, divided by minimum sanitation zones of at least five kilometres. This prevents the transfer of diseases between generations of animals and between breeding and production stock. We also take prevailing winds into consideration when choosing locations all FULL/all empty Individual sites only contain animals of the same generation. Sites are cleaned and disinfected between production periods Preventative measures We seek to operate our agricultural facilities to international best practice standards. We undertake a large number of preventative measures to ensure that our sites are safe, both to limit stock s susceptibility to disease and to prevent the spread of any diseases which may occur. These measures include: Legislation and Benefits Employees work a 40-hour week, including a daily one-hour lunch break. Each of our facilities has a staff canteen at which food is available at low cost (and for free for some categories of staff). In addition, each employee is given a food hamper at New Year. We reward employees for particular achievements. These include particularly good work, reaching output targets, long service and a generally outstanding contribution. Women are entitled to paid maternity leave, receive a cash gift on the birth of a child, and their jobs are kept open for three years. We also give financial assistance on marriage and in cases of disability or bereavement. The Company organises and partly funds summer camps for employees children, and many of our operations have a gym or facilities for football and tennis. strictly controlling access to sites limiting the number of visitors, including foreign delegations prohibiting the movement of staff between sites ensuring the effective operation of veterinary and sanitary stations providing staff with work shoes and clothing using disposable packaging for deliveries prohibiting staff from visiting countries which suffer from pig and poultry diseases regularly eliminating potential carriers of disease, such as rodents and insects regularly testing blood samples from our pigs and chickens clinically examining and taking veterinary care of stock vaccinating to required procedures Cherkizovo has its own corporate magazine, which aims both to inform employees about key events at Cherkizovo and in our market place, and also to help the development of our corporate culture. Health Our employees are given medical examinations three times a year. Those who work with raw meat receive additional examinations and inoculations. All employees are given flu injections every autumn. We have medical centres at which employees can receive help, although Russian citizens have government medical insurance which entitles them to free treatment. 34 cherkizovo-group.com annual report 2011

37 community Governance Playing our part In 2011, Cherkizovo formalised and centralised its charity programme across the Group, providing a stronger focus for everybody in the organisation to help those who most need support. Charitable giving has always been important for Cherkizovo, but until last year support and donations for deserving charities and individuals had been undertaken on the initiative of particular managers. Now, through the development of a formal programme, we can focus far more attention on agreed objectives, bringing the power of the whole Group to make a real difference to those causes that are selected for support. The programme was launched in 2011, with an initial move to support the United Way Russian Charity Fund in its efforts to raise money for a range of deserving causes. Cherkizovo sponsored and participated in a charity golf tournament, organised annually by Deloitte in aid of the United Way of Russia charity foundation. We also hosted a Christmas Bazaar where shoppers could buy Christmas gifts made by foster children of the participating charities. The Group also supported a fund to distribute Cherkizovo products to elderly people in need, on behalf of the Chamah Charity fund, the Veteran Council and poverty-struck individuals. Elsewhere, the Group worked with the Diema s Dream Charity fund, which was created to support disabled children and people in need, by providing meat products to the Kimovsk orphanage. A charity picnic for children from Kimovsk orphanage was also sponsored. The day was a great success; Cherkizovo s volunteers joined the children in games and activities, and the children enjoyed sampling some of our finest products and receiving souvenirs and sweets. The chosen charities were selected on account of their commitment to applying the same levels of transparency and openness to their work as Cherkizovo does. They publish Annual Reports containing details of their charity programmes, including donations, expenses and the outcome of their activities. We have enjoyed working with these groups and will participate in further interesting and rewarding charity projects in the future. cherkizovo-group.com annual report