OREANDA-NEWS. On 16 May 2008 Kernel announced the condensed consolidated financial report for the third quarter of the current financial year.

Financial and Production highlights.

• Successful secondary offering in March 2008, raising \\$84 Mio in additional equity earmarked for farming expansion.
• Net income has increased 157% compared to the third quarter of the previous financial year.
• Revenue increased 145% compared to the third quarter of the previous financial year.
• Farming expansion – 82% increase in land bank in the third quarter of the current financial year
3 months ended
31.03.2007
3 months ended
31.03.2008
Crushing of sunflower seeds, tons 164 796 197 012
Oil refined volume, tons 29 054 35 050
Bottled oil, produced, tons 22 512 25 418

Andrey Verevskyy, Chairman of the Board, stated:

“Following the strong semi-annual results reported on 29 April 2008 I am pleased to present also good results for the third quarter of the current financial year. We continue to show significant growth of revenue and profit, due to a combination of increased processing capacity in our edible oil business, continued focus on operational efficiency and overall strong prices in soft commodities. Both grain and oil businesses benefit from the current favorable situation in global agribusiness. As to our farming operations, over the third quarter we have almost doubled the acreage of land leased.

Market Environment

The current year is an outstanding year for the global agribusiness. Prices of soft commodities rose sharply, buoyed by strong demand, regional crop production shortages, higher energy prices and biofuels production. In that environment the Group’s oilseed processing activity performed well, while volumes in our grain activity suffered from the ban imposed on grain exports from Ukraine.

The third quarter was an important period for our grain activity. In February 2008, grain export licenses were finally allocated by the government. Our Company was allocated one of the largest licenses, equivalent to 11% of the total volume allowed to be exported from Ukraine. We sold 105 thousand tons of grain over the 3 month period ended 31 March 2008, compared to 65 thousand tons of grain sold for the 6 months ended 31 December 2007.

On 25 April 2008, with the Ukrainian government expecting a sizable 2008 harvest, export quotas for wheat and barley were increased. As to corn, limitations on export volumes were lifted on 28 March 2008. These latest developments on grain quotas will help us deliver the announced estimated results for the current financial year, with our grain activity expected to perform substantially better in the fourth quarter then even in the third quarter of our current financial year.

On 16 April 2008, following the introduction of oil export quotas, licenses to export sunflower oil were allocated by the Ukrainian government to various oil producers. Kernel received an allocation to export up to 89,5 thousand tons of oil, which fully covers our needs in terms of export of sunflower oil.

Shortly after the issuance of the oil licenses, the Spanish Health Ministry issued a health alert in respect of Ukrainian sunflower oil, having found traces of mineral oil in samples of bottled oil that exceeded allowed limits. The Spanish government swiftly reacted by issuing a health warning, followed by France, the Netherlands and Italy, where the respective governments have ordered the contaminated oil to be removed from supermarket shelves. No EU-wide action has however been taken yet and the European Commission is waiting for more data from Ukrainian authorities to determine the exact contaminants in the oil. Meanwhile, the EC said that the contaminated oil does not present a serious risk to human health.

What seems the most likely scenario is that the oil contamination happened at the oil tank farm at load port, and as most oil producers and exporters use the same oil terminal, this issue has affected most, if not all, companies operating in our market. As to Kernel, we immediately submitted oil samples from all of our crushing plants to be tested by specialised European laboratories and we can confirm that the oil produced by our plants is of the highest quality and certainly meets international standards.

Results

Our revenues for the 3 months ended 31 March 2007 have increased from USD 99 Mio to USD 243 Mio, a 145% increase over the third quarter of our previous financial year and a twofold increase over the first half of the current financial year. Pre-tax profit increased by 242% to \\$22 million (\\$6,5 million for the same period last year). Margins have also improved, with pre-tax profit margin increasing from 6.5% for the third quarter of the previous financial year to 9,1% for the current reporting period, and net profit margin increasing from 7. 7% to 8%.

Our G&A expenses are steadily decreasing relative to our turnover, from 3,7% in the third quarter of the previous financial year to 2,8% for the present reporting period. Financial expenses relative to turnover have also decreased from 6,5% in the third quarter of the previous financial year to 2,8% in the third quarter of the current financial year.

Due to seasonality, inventories have decreased from \\$256 million as of 31 December 2007 to \\$212 million as of 31 March 2008, as well as taxes prepaid (from \\$67 million to \\$61 million).Trade accounts receivable increased form \\$36 million as of 31 December 2007 to \\$48 million as of 31 March 2008 following the increase in grain export and also price increases in soft commodities.

Cash-flow from operations will traditionally be negative for the first nine months of our financial year due to seasonality in inventories. Also due to seasonality, cash flow will be positive for the third quarter of the financial year.

Increase in intangible assets (\\$43,7 million as of 31 March 2008) reflects additional lease rights resulting from the acquisition in the third quarter 2008 of farming enterprises leasing altogether 24,5 thousand hectares of land. These additional lease rights have been valued at USD 13 558 thousand. This intangible asset will be amortized over the average rental term of the land.

Other non-current assets increased from \\$5 million as of 31 December 2007 to \\$14,8 million as of 31 March 2008 due to prepayments made for crushing plant equipment and agricultural machinery, in line with our expansion program announced.

Major Company developments

In line with our strategy of increasing crushing capacity, we have successfully increased the capacity of the Volchansk crushing plant from 170 thousand tons/year of sunflower seeds crushing capacity to 330 thousand tons/year. We have also recently concluded contracts with prime suppliers of crushing equipment to be installed at our Poltava plant. As to our green field multi-seed plant under construction, we are making steady progress and expect commissioning as planned in the fall of 2009. The plant is partially financed through bank debt and a long-term credit agreement for USD 52 mio was signed to this effect.

We are also significantly expanding our farming operations. As a result of the share offering on 12 March 2008, the Company raised 84 million USD of additional equity before fees and expenses, specifically to increase farming activity in Ukraine. Since 1 January 2008 we increased the land bank from 30 thousand hectares to 60 thousand hectares and we aim to increase up to 150 thousand hectares by the end of the calendar year.

Globally, our Company is on track to implement the strategy outlined in the fall of 2007. Both our investments in additional and new crushing capacity, and our efforts to secure port facilities have been initiated in time to capitalize of the strong trends witnessed in soft commodities. On the back of such trends, the development of our farming operations will add not only a stable supply base to our agribusiness and edible oil operations, integrated in our present value chain, but also provide new pricing power to the Company.