RUSSIAN SEA GROUP announces financial results for first six months of 2010

OJSC "Russian Sea Group", one of the leading Russian consumer food companies, specializing in the production, sale and distribution of branded ready-to-eat fish & seafood products, and the sale and distribution of chilled and frozen fish & seafood products, announces its financial results for the six months ended 30 June 2010 based on interim unaudited condensed consolidated financial statements, reports www.megafishnet.com with reference to Russian Sea Group.

The Group revenue (in Russian Rubles) decreased by 15.6% to 7,051.4 million in the first six months of 2010 from 8,351.9 million in the same period of the last year. Consolidated EBITDA declined to RUR (367.8) million compared to RUR 834.7 million in the first six months of 2009.

Key Financial Indicators for the first six months of 2010 vs first six months of 2009

Chilled and frozen segment

Sales in the Chilled and Frozen Segment decreased by 10.9% to RUR 6,434.7 million in the first half of 2010 compared to RUR 7,224.8 million in the first half of 2009. Gross margin declined to 10.3% in the first half of 2010 from 14.4% in the same period last year. This was driven primarily by shortage in supply of trout and frozen salmon accompanied by the purchase price increase and lower sales of frozen salmon in the regions.

Ready-to-Eat Segment

Sales in the Ready-to-Eat Segment decreased by 20.4% to RUR 1,617.1 million in the first half of 2010 from RUR 2,031.7 million in the first half of 2009. Gross margin declined to 8.3% compared to 28% in the first half of 2009. This decrease resulted from significant growth in raw material prices and heavy promotions aimed at sales stimulation. The average selling price dropped by 19.4% while the dollar price of salmon increased by more than 40%. Stable production fixed costs along with decreasing volumes have further contributed to the gross margin deterioration.

Key costs and expenses

In the first half of 2010 selling and distribution costs increased by 86.8% year-on-year to RUR 821.1 million from RUR 439.5 million in the first half of 2009. This was driven primarily by the increase of payroll, logistic expenses and one-off provision for obsolete stock. Regional expansion, return of tariffs almost to its pre-crisis level, product mix shift to the more remote Far East supply, aimed at replacing the lacking Norwegian trout, substantially raised transportation expenses. By increasing the advertising expenses we have returned to the regular brand support via TV advertising that was suspended in 2009 due to the economic crisis. The employment of new commercial personnel in the regions and hiring higher qualified and higher paid managers in the 2nd half of 2009 caused the payroll increase.

General and administrative expenses increased by 21.7% in the first 6 months of 2010 as compared to the first six months of 2009 primarily due to the hiring higher qualified and inevitably more expensive personnel in the 2nd half of 2009 and IPO related expenses.

Interest expense decreased from RUR 384.9 million in the first half of 2009 to RUR 296.5 million in the first half of 2010 via achieving lower bank interest rates. The average interest rate has declined from 17.4% to 10.5%.

Exchange gain in the first six months of 2010 occurred as a result of currency exchange rates fluctuation and relevant revaluation of USD-denominated deposits and accounts payable.

In the first half of 2010 Group consolidated net loss amounted to RUR 472.9 million compared to net income of RUR 277 million in the similar period of 2009.

Dmitry Dangauer, the Company CEO, has commented on the Company results and relevant measures taken:

«Now we have to report the 6 months results significantly below our standards and expectations. We have experienced a number of unfortunate external factors that have triggered these results. Among these external factors we can mention:

• Shortage of trout and frozen salmon supply due to Norwegian producers focusing on producing fresh salmon only
• Extremely high salmon prices, that limited salmon affordability to the Russian consumers
• Intensifying competition and increasing consumers price sensitivity that put a downwards pressure on the prices, margins and sales volume

In order to address the abovementioned external factors, we have implemented a number of measures that we expect to bring positive results in the long-term, however in the short-term they have worsened the reported financials:

• We have lowered the sales prices aiming at sales stimulation, which has significantly affected our margins
• We have hired additional sales staff and merchandisers aiming at sales increase. This have increased our headcount and personnel costs, however due to the time lag has not realized yet into increased sales
• In order to replace the missing trout and frozen salmon volumes we have shifted the product mix towards Russian Far Eastern and Pelagic assortment. As this assortment has much lower unit price and longer transporting distance, compared to salmon and trout, our relative transportation costs increased, while sales efficiency and margins deteriorated

At the same time some of the measures we took in the 1st half of 2010, particularly in the sales area, delivered results significantly below our expectations:

• Our sales increase initiatives, such as regional and traditional trade expansion and new product launch, progressed much slower than we expected and have not yet provided sufficient input to the sales increase
• In the Ready-to-Eat segment the sacrificed sales prices and margins did not sufficiently support the sales volumes

Realizing the problems we faced in the 1st half 2010, we have made a number of steps that we believe will help us to return to the profitable growth:

• We have replaced the Sales Directors and few top managers in both Chilled and Frozen and Ready-to-Eat segments, promoting the regional managers that has proven to be successful even during these tough months, as well as bringing new professionals from outside the Company
• We have signed contracts and launched cooperation with the new trout and frozen salmon suppliers aimed at providing us the volumes we lacked in the previous 6 months
• We have implemented rigorous pricing strategy, retailers price markup and shelf price monitoring, which has already helped to improve the margins significantly in August and September 2010, particularly in the Ready-to-Eat segment
• We continue development of our aquaculture business. We have identified a number of promising farming sites and are currently working on getting titles for these sites. Currently we are finishing construction of the fish processing plant in Karelia, close to our fish farm, which will allow us to produce high quality trout fillets, both chilled and frozen

We still believe in the significant growth potential offered by our penetration into new regions, trade channels and products. Along with stabilizing our position in the existing markets we continue building our regional presence and preparing launch of a number of new products.

Our commitment is to apply every effort possible to returning company to the profitable growth from the 2nd half of 2010 onwards."