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Executives

James Archibold – Vice President - Investor Relations, Corporate Secretary

William Carey – Chairman of the Board, President, Chief Executive Officer

Christopher Biedermann – Chief Financial Officer, Vice President

Analysts

Mark Connelly – Credit Suisse

Douglas Lane – Jefferies & Co.

[Avian Paley] – Alliance Bernstein

Andrzej Knigawka – Ing Financial Markets

David Kadarauch – Wood & Co.

Amy Greene – Avondale Partners

[Bastion Greez – West LB Milling]

[Mikhail Poutry] – Unicredit CAIB

Gulsen Ayaz – J.P. Morgan

Central European Distribution Corporation (CEDC) Q3 2008 Earnings Call November 6, 2008 8:30 AM ET

Operator

Good day and welcome to the CEDC third quarter 2008 earnings conference call. Today's call is being recorded. At this time for opening remarks, introductions, I'd like to turn the call over to the Director Investor Relations, Mr. James Archibold. Please go ahead, sir.

James Archibold 

Thank you. I’d like to welcome everyone today to CDEC's third quarter 2008 earnings conference call. Joining me this morning are William  Carey, Chairman, President and CEO of CDEC, and Chris Biedermann, our Chief Financial Officer.

Please note that the content of this call contains time-sensitive information that is accurate only as of the date of the live broadcast, November 6, 2008. The online replay will be available shortly after the conclusion of the call. You may also view a copy of yesterday's press release on our web site. Please also note that statements made during this conference call other than those related to historical information constitute forward-looking statements within the meaning of the Private Securities Litigation and Reform Act of 1995.

Without limiting the foregoing discussions, the forecast estimates, targets, schedules, plans, beliefs, expectations and the like are intended to identify forward-looking statements. These forward-looking statements, which are based on management's current beliefs and assumptions and current information known to management involve known and unknown risks and uncertainties and other factors that may cause actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by forward-looking statements.

Additional information concerning factors that could cause actual results to differ materially from those forward-looking statements are contained in the press release issued yesterday and the form 10Q to be filed with the Securities and Exchange Commission by November 10th. CEDC is under no duty and undertakes no obligation to update any forward-looking statements made in this call. With that, I'll turn the call over to William Carey, our President and Chief Executive Officer. Bill?

William Carey 

Thank you, Jim. I want to welcome everyone to our third quarter conference call. We have a lot to go over today, starting off with we'll touch base a little bit on the economy, what's happening a little bit in Poland and Russia. Probably most of you are aware anyway, but we'll touch base on that. A little bit about the P&L that we reported yesterday in the press release.

I'll turn it over to Chris Biedermann, who will give you some feedback on the balance sheet, some of the FX adjustments that were in the comparison on the GAAP earnings, as well as some other items on some of the ratios, balance sheet ratios, as well as the short-term debt, which I know I know it allows you to question about refinance of our short-term debt due in 2009. Then we'll get a little bit on the market, what's happening in the markets in general and some feedback on '09 guidance, where we confirmed guidance yesterday, and then open it up for Q&A.

So first of all we'll start off on the GDP. If we look at the Polish markets, generally the market remains quite robust. We're looking still around 5 to 5.3% of GDP growth in 2008. General forecast for 2009 as there is a slowdown projected in Poland and Russia as you know, around the world as well, but projected to about 3.5 to 4 %, or 3.5 to 4 GDP growth.

If we look at inflation, most analysts' projections this year are around 3.9%. It is coming down; next year is projected at 3 to 3.5% in Poland and on the unemployment, continues to reduce back from a high in 2007 of 12%. It's projected next year at somewhere 9 or even less than 9%.

What we are seeing is still an influx of people coming back from Ireland, UK, some other European markets at the young Polish employment opportunities that are giving less now in these markets and they are starting to come back to Poland, so we are seeing some start seeing some increase in the level of the consumer in terms of the number of consumers here within the Polish market.

If we look a little bit at the Russian market, what we're seeing is GDP growth this year estimated around 7%, most of the analysts are predicting. Next year you can see forecast pretty much from 1% up to 7%. The forecast that we see from IMF, or Redisance, a local bank in Russia and a few other roiters and a few other screens, we're seeing about 5.3% as a general consensus next year in Russia. With inflation dropping from 14% projected this year somewhere in the neighborhood of around 10 to 11% in 2009.

Again generally a slowdown. I think a lot of you know it really depends on the government's push in Russia in terms of what they're going to do on the liquidity as well as what they're planning to do in terms of supporting the ruble–as you saw yesterday I thought it was quite interesting news that the government put out that they would like to export oil in rubles.

I didn't see more detail on that, but that was a interesting dynamic as they were looking to export their oil and gas in the ruble currency to continue to support it. But generally what we see is a slowdown in Poland and Russia, but nothing to the extent that really is substantially changing our business model. As we get into more details you'll see why we have an enormous opportunity within our business cycle.

If we look at the sales numbers, the topline growth was as you saw from a year ago third quarter 300 million to this year $452 million. It's a 51% increase and that was generally strong, led by strong brand growth as well as currency, year-over-year currency. If we look at our grand growth, when we look at Poland we had a very, very robust quarter with our Bols Vodka, that's our highest premium-priced vodka, at 14% growth. These are value numbers. Also we restyled the bottle in September, beginning of September so we relaunched the bottle in mid-September so we are waiting to see the results of this in the fourth quarter.

So far we're quite optimistic on the results, and but we really need to wait and see December to see the effect, the continued effect about taking some share in the market from our Bols new restyling and new packaging.

Also Soplica, which is our second mainstream brand behind Absolwent. We saw strong growth at 12% growth. So please it continues to take market share in the market, and our imported growth we saw 30% growth of our imports, again continued strong growth imports, as it has been for the last 2.5 years. All coupled between the distribution business and the rest of our brands, we saw around a 7% organic number for Poland, which was slightly higher than we had estimated at 5 to 6% internally so it was a pretty solid quarter for Poland.

Hungary, we had a 20% growth in organic number in Hungary, which again is quite good considering the economic situation there. but again we have some of the strongest brands in Hungary, much like Poland and Russia, and what we're seeing in some of these times – like Hungary's going through, we're seeing stronger brands gain market share over weaker brands, which will touch a little bit more on the Russian market.

But again it was pretty solid growth in Hungary of 10%. If we look at the Russian market, as our difference businesses in Russia, our parliament business that we bought in March, it's a one-brand company and it's as you know they had a 19% volume growth and a 28% value growth. Again, very strong growth in the sub premium sector which continues to grow.

The category in the parliament continues to outperform the category. If you look at green Mark which is from the Russian alcohol business that we joined up with Lyon in July, Green Mark is the number one Vodka brand in Russia in terms of volume and value and Green Mark had a 41% growth in volume and a 50% growth in value. This is a – you just don't see this anywhere in the world having the largest vodka market in the world and the number one brand growing at these type of growth rates.

Obviously we don't anticipate that we can sustain 40% growth rates, but we're very encouraged that again strong brands continue to penetrate the market into a fragmented market when we get into the market place we'll supplement more on this.

If we look at our second sub premium brand that is owned by the Russian alcohol firm, it's [inaudible 00:10:41]. It's at 17% growth in volume and 25% growth in value. Again a very good quarter. Our other business within Russia in terms of the Russian alcohol business, which is the economy vodkas and the RTDs, these are areas we don't like to concentrate or focus too much. These are the least profitable areas. We had a -2% growth mainly led by the RTDs which had about a 5% decline, year-over-year.

Overall what that translates overall in Russia is about a 26% value organic growth rate that we had in the third quarter and we look at the Whitall Company also had a very good performance of 20% value growth over the third quarter of 2007. So overall Russia continues to perform very, very strong on the topline.

If we get into the margins, what's happening on the margins, as you saw we increased year-over-year from – oh, I'm sorry, quarter-over-quarter from 24.6 in the second quarter and 25.6% in the third quarter, growth margin. And that's up from 20.6% third quarter a year ago.

What we see is a continuing our core vodka is continuing to drive that gross margin expansion faster. Our growth of the higher margin business in Russia and our production brands and import brands in Russia is growing faster than our distribution business in Poland and as most of you know that has been our strategy over the last year and that continues to take shape.

So when we look at also in the gross margin contribution has been the spirit pricing in Poland. We've seen it decrease 30 to 35% year-over-year, which is very good news and that's adding out of that 1% growth over the second quarter about 30 basis points of that is coming from the spirit pricing. And we're looking probably at increasing to about 50 basis points coming into the fourth quarter as we continue to see downward pressure on the spirit pricing within Poland.

If we extend now for the rest of the year looking at the margin, what we're seeing is that the margin increase to 28 to 30% in the fourth quarter up from the 25.6 this quarter and as you saw from our guidance yesterday because of the current currency depreciation we have left the net sales guidance the same but we have raised our guidance mainly because of what's happening on the margin accretion which is quite substantial and we raised our guidance $0.10 yesterday on the EPS, mainly driven from this margin expansion and the spearpriceing that we're seeing in the market.

If you look at the SG&A, we had a very good quarter of SG&A, we dropped from 14% in the second quarter to 13.9% in the third quarter. What we saw was over those two quarters was a 9% raise in terms of revenue but only a 3% rise in SG&A and that in essence was driving the lowering of the SG&A percentage. As it moved into the fourth quarter what we're going to see is again driving more sales through our fixed cost infrastructure and you're looking at about a 13 or 13.5% SG&A percentage.

And taking the margin sales and SG&A into account, you saw offered a [inaudible 00:14:13] jumped from 10.2% to 11.7% quarter 2 to quarter 3 and if you look at quarter 4 we were projecting, we are projecting 450 to 550 basis points increase over the third quarter, again from the same results of driving a more premium portfolio. It's our biggest sales revenue cycle in the fourth quarter through relatively a quite fixed cost infrastructure.

So it was a, you know, we're very pleased on the margin increase and in the business. If you look at the company direction, our Company separately for the moment, which Chris will get to a little bit later down in the equity line, but what we saw was with the solid growth calls were very well in line. The company is performing extremely well, better than our projections and last year the Company costs were very well in line. The company’s performing extremely well, better than our projections, and with last year the company did around $50 million of EBITDA and what we’re projecting this year is a EBITDA number of about $90 million for the company which is up from about $75 million which we had projected just three to four months ago.

And looking at the line I just saw we raised the OA (ph 00:15:28) guidance from 285 midpoint to a 295 midpoint in terms of our EPS data from these underlying transfers staying in the overall business model and that is factoring in the current exchange rate from the zloty, forex (ph 00:15:42) and the ruble.

I will turn it over now to Chris who’ll take you through our quite (ph 00:15:50) line from the balance sheet and some of the FX movements.

Chris Biedermann

Okay. Thanks Bill.

Why don’t we start on the P&L which includes down below our operating profits. First line, on net interest expense. You can see increased 4.24 this year versus 9.3 last year and that’s really primarily due to the additional acquisition financing we’ve taken for the three investments we made this year: Parliament, Whitehall, and RAG.

We need to get to our other financial expense line of $34 million. This is really primarily unrealized non-cash FX losses and the FX rule out (ph 00:16:21) reflects the movements in exchange rates on our dollar and Euro debt. As we talked about in the past, that debt has been let down since zloty entities.

So you’ve got the translation exposure and that resulted in a $49 million pre-tax impact. This is also partially offset by $13 million pre-tax impacts for the reevaluation of our long-term notes. We purchased USD notes from RAG so it’s an asset on our balance sheet so that moves in the opposite direction. So the net (inaudible 00:16:50) comes to $34 million.

Now, to put that in perspective, if you look at the prior two quarters this year, we had gains of approximately $40 million and even going back to ’07 we had gains of approximately $25 million.

Looking down at our tax rate, our tax rate which is about 21 % is up from 10% last year but that last year was due to some one-time tax benefits. Normalized rate actually was at 19% and this increase really reflects just the inclusion of Russian businesses where we have a higher effective tax rate of 24% to 26% range as compared to 19% in Poland.

Now getting down to below costs before tax we have the equity earnings and you’ll see the $1 million equity earnings and that’s related to our proportional share of the MH Joint Venture which is part of Whitehall’s Panner (ph 00:17:33) investment in Russian Alcohol.

Our 42% interest in the after-tax impact of the underlying profit from Russian Alcohol was $8.8 million. The (inaudible 00:17:44) was offset by FX translation expenses and again a similar situation. They have USD debt which is often linked down late to the acquisition which is often lent down on rubles. So you have a non-tax translation impact of about $10.8 million which is our proportional share of that. So the amount is actually consolidated into our equity line was a $1.6 million loss and we had a $2.7 million profit coming from the MH JV.

And just again with regard to the MH JV, although the majority of our group is fully consolidated, is part of the group is a joint venture with Moet Hennessy and accounted for using the equity method.

(inaudible 00:18:21) interest which represents our net income attributed to the minority shareholders of Whitehall Group and Parliament which is 25% and 15% respectively.

So getting down on a comparable basis, net income was $41.7 million for the quarter or $0.89 for diluted as compared to $18.3 million ’07 or $0.45 on equivalent basis and this reflects a 98% increase in our fully diluted EPS on a comparable basis. This represents a strong growth not only in businesses but including impact of our recent investments into Russia.

Now, moving into cash flow statement, our net cash provided by operating activities for the six months was $46.4 million compared to $30.3 million last year and the primary driver is the growth in our business. There’s been some additional utilization of working capital due to the growth, however, quarter on quarter, looking at last quarter, we see improvements in working capitalization with AR goals from 58 to 51 and inventory gone from 60 to 52.

Looking at our main investing activities, the major change for the last quarter was related to Russian Alcohol. We purchased a 42% stake. The consideration for this stake included $181.5 million for the actual equity and we also as mentioned before purchased 103.5 of convertible notes and those notes will be converted to equity when we’re eligible for the calls in 2010.

These investments were primarily financed through our equity offering which we completed at the end of Q2 of $233 million and that cash was sitting in our balance sheet at the end of Q2.

Also, looking at our current liquidity positions, at the end of the quarter, 76% of our debt was long term, really going out in 2012 and 2013. Of remaining short-term debt all of which is renewable and at various times in 2009 we are right now at advanced stages of finalizing basically the Q1 and Q2 maturity.

Looking as well at EBITDA on a trailing 12-month basis our EBITDA was $181 million but that does not include the EBITDA from Russian Alcohol. If we then take a pro forma as we have the full debt on our balance sheet for these acquisitions, if we take a pro forma EBITDA number, we would include the EBITDA from RAG, Whitehall, and Parliament preacquisition, we’d be more about the $266 million EBITDA range which gives us a pro forma net back to EBITDA ratio about 3.5 and we would expect that to move down to about 3 at year end.

You know, as we mentioned, we’re expecting about a $90 million of EBITDA full year coming from the Russian Alcohol business and when we begin to consolidate fully in 2010 when we call it you’ll see that fully in our business.

I’ll now turn it back over to Bill who will provide further overview of the current activities and future activities.

William Carey

Thanks, Chris. So we settle down in the market if we first look at Russia and then Poland, what we’re seeing in Russia in general in the market is that producers are having more and more difficulty. I think that difficulty is really coming from the fact that the operating efficiency of many of the producers not taking care of the balance sheet is coming back and hurting them now in Russia.

I think a lot of these companies are having problems with the Russian banks in terms of refinancing, working capital credits. So what’s happening on the producer’s side is they’re having difficulty meeting their calls for XI/excise (ph 00:21:29), meeting their liquidities call. We’re giving companies that are well positioned, like Parliament and Russian Alcohol, to gain considerable market share. This is not only short term but we believe this is going to be a big phenomena in 2009 as what we’re going to see is faster consolidation in the market. Our biggest opportunity is in consolidation in the spirit market.

As you saw from our growth rate in our press release we went from a 12% market share combined with RAG and Parliament to 14% from the beginning of ’08 to current numbers and what we’re projecting is the entire market will move from the current 30%, 32% held by the top five players moving to about 75, 80% much like most other parts of the world in terms of the top five producers and CDC will be well-positioned to take advantage with its strong portfolio and operating efficiency within the Russian market.

So we believe that 12 to 14% currently that 14 can move up quite considerably and we’re looking at 25% within the next three to four years in terms of market share just on the brand portfolio that we have today because we’re seeing a lot of problems for various producers, our competitors within the Russian marketplace today.

If we look at the wholesalers, what we’re seeing in the wholesale trade is that the wholesalers are trying to use the current liquidity situation in Russia to try to get some extra credit days. In general we’re seeing from the Russian Alcohol business that they’re not giving any more credit days. Being the market leader this is quite a big signal of what we’re seeing in selected clients, selected wholesalers asking for an extra 14 days. Nothing really significant in the Parliament business, but overall we don’t really see any slowdown in our receivables. As you can see from our receivable numbers, in the third quarter we improved eight days in terms of working capital days and what we hear in the Russian Alcohol business also that they had a very good October month in terms of collecting on receivables.

So I think a lot of it is people who are also trying to take advantage of the situation, asking for more credit. What we’re seeing is a lot of the small retail stores did not have credit in Russia, did not operate before with credit, so they are not impacted as much as maybe some of the more medium and term (ph 00:23:54) retail account.

The large retail accounts they’re for sure using this opportunity to try to get extra credit but they don’t need the extra credit. It’s just more of a play for them of looking and trying to get the extra credit days which we and Russian Alcohol and Whitehall have not been giving. So for us though we don’t really see a slowdown in our liquidity other than maybe some selective wholesalers here and there that are asking for a couple weeks’ longer credit but nothing very significant.

If we look at the retail trade, as I said, the big retail they are fine as well as the smaller retailer. Some of the retailer – that regional retails have tried to expand too fast and again have not taken care of their balance sheet as well as operating efficiency. The same as the wholesalers that some of these people might have more difficulty but in general we don’t see a major change within the overall dynamics of the trading pattern within our spirit business. But what we do see as I said that the consolidation is moving very quickly and weaker brands are getting weaker and the stronger brands are getting stronger

So, really to summarize it was another strong quarter that we put forward, not only Poland, but also the addition of the Russian businesses, and that was really the main driver behind the racing of guidance which we saw we raised from a mid point of 1.62 billion in revenue, to a mid point of 1.73 billion in revenue, and EPS, diluted EPS accretion from around 272 EPS number to a mid point to a 285 around $0.13 increase in terms of diluted EPS accretion for 2008.

As I said is that the consolidation is moving very quickly and weaker brands are getting weaker and stronger brands are getting stronger. And we think as we move into 2010, we’re going to be very well positioned post next year in terms of having a much better position even than we have today.

If we look at the liquidity, we are quite well positioned again because we have very little that we have, only around a $4 million of our balance sheet in terms of our local lending. That’s into the Whitehall Company. The rest of that we have financed outside of Russia. So again, we’re not in this position to get these 20, 25% credits that the Russian banks are currently offering out on the market place.

And what we also see in the market as the inflation comes down, we are seeing some easing in the overall cost pressures that were early on the year in terms of salaries and other cost pressures. We are starting to see some easing on that which is also good news.

If we look at the Polish market a bit, what we’re seeing is that the Belvedere Group, which most of you know is our biggest competitor here, is still in the financial protection in Paris and in the French system in terms of protection from creditors. I think they’ll come out of that in January, but my guess is they’ll play another six months. It will probably be until July. I think they have one year maximum under the stipulations from France that they can be protected. I still think they’re in a quite difficult situation to come out of this crisis. So what we’re seeing is them losing quite quickly market share in Poland, which is certainly good news for us.

Also talked to Tranobi Card who has bought some of the B&S assets (ph 00:26:48), including the Absolute business a few months ago. What we’ve seen is that they have stated that they would like to sell the vodka soda business (ph 00:27:00), which is the leading potato market in Poland, as well as some other assets. It’s about a 7, 8% market share, which probably will be on the block here in the next two to three months which also we feel is a very attractive portfolio for us not having much of a potato market in Poland of our own would give us a very nice position in the upper mainstream, low premium category where we are very strong.

Also, in Poland, we have not seen any excise stated in the budget for 2009, which is good news. And generally in Poland what we see is just business as usual. Yes, there is some growth slowdown, as I said in the GDP, but overall, our business model remains quite well intact, good cash flow, and again our strategy’s to continue to grow imports, our own brands, as well as our key focus, as well as we are looking to restyle a couple of our market brands which I’ll get to a little bit. We talked about 2009.

If we look at 2009, as we said yesterday in the press release, we reconfirmed out net sales guides to 193 million to 2.03 billion, with EPS of $3.75 to 4. What we’ve seen is again that with the mid-single digit growth coming out of our Polish business in terms of our revenue growth, Roger (ph 00:28:29), we’re predicting again around a 20, 25% value growth in Russia. That is slightly less than 2008, but again, I think overall it’s still quite robust. And that’s also including the consolidation opportunities. And again, concentrating where we focus is on the mainstream and sub-premium sectors where we believe the consumer will continue to trade into. And we believe the mainstream and sub-premium will be the continuing benefiting factor also of the consolidation opportunities.

In Poland, we’re looking to restyle two of our biggest vodka brands, our biggest vodka brand Absolwent, which is over 4 million cases which we look to restyle in June and our Parliament Vodka, which is our best-selling vodka in Poland which we’re looking to restyle in March. This is a continuation we’ve put in since 2005 when we restyled now the other three packages of the main three vodka brands in our portfolio.

This is lap two to do next year, and we’ve seen very good results from the past so again, we were very optimistic about what we could do on this restyling of these last two vodka brands in our key vodka portfolio in Poland. But in general in Poland, it’s going to be business as usual and as I said, just still try to get the continued strong cash flow coming from Poland and as Chris said, we are quite confident of our negotiations with some of the banks on refinancing some of the short-term credits due in the spring. So overall, I think our business model remains quite strong and really we just continue to capitalize on the opportunities within the marketplace, especially in Russia with the weakness of our competitors and the growth in our overall two segments of mainstream and sub-premium.

I’ll now open the floor to Q&A. Thank you.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And we’ll take our first question from the site of Doug Lane with Jefferies. Your line is open.

Douglas Lane – Jefferies & Co.

Yes, hi Bill. Hi Chris. Chris, couple questions, first of all, can you remind us what your zloty-dollar and ruble-dollar exchange rates are going into 2009 just so we can kind of bench mark it as these currencies continue to move up and down? And secondly, you mentioned the cash generation of 46 point whatever million through nine months. I noticed it was a little bit less than what it was through six months, so I’m assuming there was a slight use of cash in the third quarter. If you could just drill down –

William Carey

Yes, there was. I’ll take the second question first. Generally there was a slight use. Now what we’re seeing is working capital management in days is better, but the business growth, particularly if you look at our Russian businesses, which are growing quite rapidly, the business growth there is just naturally using some of the cash flow. So that’s really what’s been driving that.

Back on your first question in terms of exchange rates, our basic assumptions going into ’09 is we see a euro-U.S.D. right now at a 1.30, 1.35 range. We see a zloty-U.S.D. around 2.50, 2.60 range and a ruble-U.S.D., 26, 26.50 range.

Douglas Lane – Jefferies & Co.

26.50, okay, and –

William Carey

And that’s consistent with a number of banks we’ve talked to. Obviously there’s ranges of numbers all over the place, but some banks we’ve talked to is quite consistent with what they’re saying.

Douglas Lane – Jefferies & Co.

Okay, and it’s impossible to call in these markets, but any idea what the incremental interest rate hit will be when you refinance the short-term facilities in Poland?

William Carey

It’s not going to be that much. We’re looking somewhere between 50 to 100 in worst case scenarios in some of them. (inaudible 00:32:42)

Douglas Lane – Jefferies & Co.

Okay, and then lastly, speaking on the financing, can you talk about, I guess, on the fix side with the euro bonds and the converts that you recently did, can you talk a little bit about covenants there and where you stand relative to whatever covenants those financings came with?

William Carey

Yes, I mean the converts in terms of covenants is quite nice because there really is no analytical covenant. It’s a very security. The senior secured notes, the primary covenant we have financially is effective. It’s an EBITDA interest coverage ratio of two-and-a-quarter. So again, we have quite a bit of room there. I think on a trailing 12 month basis we’re well above that. I’ll give you a number. Yes, we’re about three-and-a-quarter on that ratio, so we’ve got plenty of cover there. Generally speaking, other facilities we typically have net EBITDA on a pro forma basis about five times. So we really have quite a bit of headroom under all our covenants.

Douglas Lane – Jefferies & Co.

Okay, thank you.

William Carey

Thanks.

Operator

Our next question, from the site of Avian Paley (ph 33:55) from Alliance Bernstein. Your line is open.

[Avian Paley] – Alliance Bernstein

Good afternoon. It’s Avian from Alliance Bernstein.

William Carey

Hi.

[Avian Paley] – Alliance Bernstein

I just wanted to clarify the guidance that you reconfirmed for 2009, was that using 2.50 to 2.60 on the zloty and on the ruble, 26 to 26-and-a-half. Is that correct?

William Carey

Correct.

[Avian Paley] – Alliance Bernstein

In terms of the 2009 numbers, can you give us some kind of sensitivity in terms of depreciation? I know the last time you gave us a number. Has it changed much from that?

Chris Biedermann

No, the number that was given before has not changed. Again, with the Russian alcohol business, that is equity accounting, but in terms of the parliament business and Whitehall has very little assets in terms of fixed assets. So no, that has not changed much.

[Avian Paley] – Alliance Bernstein

But I mean if the currency stays at the current rate, this last year’s currently at 2.82, you would have to reduce those numbers?

Chris Biedermann

Well, I think when you look at the currency, Avian, I mean we saw the 2.08 number two-and-a-half months ago. We saw a 3.15 number two weeks ago. We saw a 2.70 number yesterday. It’s 2.82 today. We saw 2.60 two days ago, 2.65, so I think we’re not in the forecasting of currency. We need to use what we feel is consistent to what we feel is a proper range, otherwise you’ll be forecasting earnings every day Avian.

[Avian Paley] – Alliance Bernstein

Okay, fine. Okay, alright, thanks.

Chris Biedermann

And this is consistent to what, like I said, as Chris said various banks we spoke to. You can see projections all over the place today. And from the euro-dollar, you can see one-to-one parody (ph 00:35:49) in one year and you can see 1.6 euro-dollar also forecast.

[Avian Paley] – Alliance Bernstein

Okay, but that previous number, that 2009 guidance was initially done at zloty of 2.45, so during that you increased your currency assumptions, you are expecting obviously better margins in the Russian but it’s all better sales.

William Carey

Yes, what we’re seeing is better overall business, underlying business performances, also what we saw the third quarter as well as raising the full-year guidance of 2008. And we are expecting better than expected numbers in 2009. But obviously with the currency impact, yes it is lower than what we had forecasted before, as we did forecast a 2.45 rate. So there is some negative impact there. So the overall net-net effect is relatively the same.

[Avian Paley] – Alliance Bernstein

Okay, thanks a lot.

Chris Biedermann

Thank you.

Operator

And our next question from the site of Andrzej Knigawka from Ing. Your line is open.

Andrzej Knigawka – Ing Financial Markets

Good afternoon guys. Congratulations on the numbers. I’ve just got two questions. One, what is the total debt of Parliament, Whitehall, and Russian Alcohol Group excluding convertibles, intergroup convertibles of Russian Alcohol Group? And the second question is can you give us some color on fourth quarter year-to-date in October on receivables collection in Russia? Are you seeing any slower collection of receivables there? Are you confident on the financial spending on your major wholesale customers in Russia?

Chris Biedermann

Yes, I think on your first question on the debt levels, you’re currently looking at the debt levels pushed down to the Russian business around $300 million of the Russian Alcohol Business. Currently being utilized, Whitehall Group is around 15 million and our Parliament’s around 20 million.

William Carey

And just for perspective, the debt in Russian alcohol, again, it’s affected its acquisition debt. All the debt that was used to buy the company has been pushed down to it. So it’s not really working capital. It’s acquisition debt if you will.

Andrzej Knigawka – Ing Financial Markets

Okay and the 300 million at Russian Alcohol Group, that includes the convertible or is–I’m sorry.

William Carey

That was bank debt basically.

Andrzej Knigawka – Ing Financial Markets

Bank debt, alright, and how much of that is short-term like due over the next year or so?

Chris Biedermann

No, it’s pretty much long-term, all five-year effectively.

Andrzej Knigawka – Ing Financial Markets

Right, thanks. And on the receivables collection?

Chris Biedermann

Yes, the receivables collection again, as I said, we don’t really see a significant slowdown Andre. I guess we’re seeing some selective wholesalers asking for some 14 days extension, but overall we haven’t seen any particular change in our collection cycle nor has RAG, Russian Alcohol seen any slowdown in their collection cycle. Actually they had a bit of a slowdown in September, but October was a very good month for them in collections. So we don’t really see any material change in the collections cycle right now.

Andrzej Knigawka – Ing Financial Markets

Right, thank a lot.

Chris Biedermann

Thank you.

Operator

And we’ll go to our next question. This one from the site of David Kadarauch from Wood & Co. Your line is open.

David Kadarauch – Wood & Co.

Hi, Bill and Chris. Two questions, one is just to clarify. I may have missed it in your initial speech, but the equity line, the equity and net earnings of affiliates, that’s what, 1.1 million. And just to clarify, that’s all RAG? Is that right or –

William Carey

No, no there were two items in there. There was 2.7 million from the Moet and Hennessy J.V. And then there was minus 1 million from RAG because of FX because the underlying RAG profit was 8.8 million, which is then reduced by the 10 million FX loss. So net of those two is 1.08.

David Kadarauch – Wood & Co.

Got you, and the second question is maybe just a little bit more color on the availability of financing, in particular for potential further acquisitions. Now I guess there are consolidation opportunities by acquisition, but I’m trying to figure out whether you’re able to really benefit from these opportunities over the next year or two. I mean it sounds like if short-term finance to roll over is on 50 to 100 basis points more, it doesn’t sound too bad. What’s the situation on that? Can debt financing further be achieved for further consolidation opportunities whether they be in Russia or elsewhere or Looksasoba (ph 00:40:51) for example?

William Carey

Yes, I think David, as you know and as well as I do, the financial markets in terms of any large M&A is pretty much closed at the moment. So in terms of financing, yes, there are some smaller pockets of money available for going over some short-term working capital here and there, getting 50, 100 basis points, which is not to penal. But in general, if you’re looking for a larger term financing right now, today, David, the markets are generally still closed.

David Kadarauch – Wood & Co.

Okay, but Looksasoba, say, just a theoretical example, I mean you presumably wouldn’t issue more shares at this share price would you?

William Carey

No, we would not be looking to do equity at this share price, but certainly we still are in early November David. I think the markets are slightly improving week-by-week. Most people are expecting, as do we, that next year first quarter things will start to open up a little bit more. As Chris said, we do have some head room with our internal guidance of three, three-and-a-half net debt to EBITDA. As we move down to about three at year-end. So we do have some scope of financing possibilities as well as cash on the balance sheet. So, I think there will be opportunity moving towards the end of the first quarter to finance a small M&A. But in general we don’t envision any large M&A until the markets improve substantially.

David Kadarauch – Wood & Co.

Okay, got you. Thank you very much.

William Carey

Thank you.

Operator

It looks like our next question is from the site of Amy Greene with Avondale Partners. Your line is open.

Amy Greene – Avondale Partners

Hi guys, just a few questions, looking at the holiday season, I guess we’re getting into it now. And are you seeing the selling of the import brands that you would hope to see as we move into it in both Russia and in Poland?

William Carey

Yes, I think it’s a little bit too early Amy. Generally on the imported business on the Christmas season, the selling starts in the second week of December. So it’s a bit too early to call how the selling’s going. Business seems to be forming okay. But really we need to wait, unfortunately, until later in December because of the huge selling on second to third week of December.

Amy Greene – Avondale Partners

Okay, and then secondly, with the strong increase that you’re seeing in the Russian Alcohol Group EBITDA, have you had any success in your discussions with Lyon (ph 00:43:35) about the purchase terms that you have going out into 2010?

William Carey

Well, no we are fixed in with the purchase terms. We agreed with them. We are speaking still about adding new business into the Russian Alcohol Group including possibly maybe some Parliament sales and some reduced possibly multiples. But there was that we put a new CEO in Russian Alcohol about three weeks ago, former head of Bacardi in Russia and former head of Russian Standard, very good long-term foreigner living in Russia for the last 17 years (inaudible 00:44:19) management changes, positive ones. But so that is slowing down a little bit of discussion, but in general, no. We are fixed in with the current business model in terms of the acquisition price within the model we’ve agreed with Lyon.

Amy Greene – Avondale Partners

When you look at the Russian Alcohol Business and the strong growth that it’s seeing, is a lot of it attributed to running the company better, increasing points of sales, things like that or are you seeing an increase in demand perhaps from trade down to the more mainstream brand?

William Carey

Well, I think what we’re seeing is there’s very strong brand equity in the brands, especially the Green Mark and second the Juna Vie (ph 00:45:01), and what we’re seeing is that the sales force, as we’ve said before, they have 1500 salesmen on the ground–exclusive sales teams, meaning they work exclusively with different wholesalers around the country. So what they have is they’ve got their own sales force in these wholesalers’ offices and premises. And that’s giving them a huge advantage in the marketplace, even over for example Parliament, who has only one quarter of that sales force.

If we can’t reach the same depth of coverage that they’re reaching, then no one can. There’s no brand currently in Russia, spirit brand, that can reach that depth of coverage they’re reaching. So not only do they have strong brand equity, but they have the deepest sales coverage.

And my belief, that’s what’s accelerating their share gain over other competitors. And then you couple that with the financial difficulty some of the competitors are having, you get into even further growth rates.

Amy Greene – Avondale Partners

Okay. Thanks, guys.

William Carey

Mm-hmm.

Operator

Your next question comes from the site of Bastion Greez from West LB Milling (ph 00:46:05). Your line is open.

[Bastion Greez – West LB Milling]

Good afternoon, gentlemen. Three questions, if I may. Firstly Chris, on that 266 ProForma EBITDA number, I presume that’s a training number? And to what extent do you include Russia, in that 42% share or–

Chris Biedermann

Yes. Yes. What I did there is I’ve taken (inaudible 00:46:35) 12 months, I would take missing months from (inaudible 00:46:37) and then take the Russia alcohol I've taken 42 % of their EBITDA to come up with that number.

[Bastion Greez – West LB Milling]

Okay. And Whitehall and Parliament is fully included that total?

Chris Biedermann

I’m sorry. Could you say that last question again?

[Bastion Greez – West LB Milling]

So in that number, Whitehall and Parliament you fully include, no?

Chris Biedermann

Yes, I’ve adjusted for the full year, the estimated full year. In fact Whitehall and Parliament plus the full impact of RAG EBITDA.

[Bastion Greez – West LB Milling]

Okay. And my second question relates to your working capital development of– Chris you were referring to the high growth rates in Russia as one reason for a more pronounced tie-up in capital. If I look at the Q3 number, is that a good indication of what we should we expect for the fourth quarter ? In terms of working capital consumption?

Chris Biedermann

Well, obviously Q4 is a peak working capital period. So we will have a bit of utilization as well of working capital going into Q4.

William Carey

Because what our business cycle is, is sell in Q4, collect the money in Q1. And if you look at this year, again, Q1 was our big, strongest quarter in terms of cash flow.

[Bastion Greez – West LB Milling]

Okay. So–

William Carey

And this will be accentuated this year by the much bigger business model that we have.

[Bastion Greez – West LB Milling]

Okay. And it gives me a thought on the fourth quarter– utilization could be even stronger into the fourth quarter, yes?

William Carey

Yes, a bit stronger, yes.

[Bastion Greez – West LB Milling]

And finally, when I look at your cash flow statement, all the acquisition costs should be included by now, no? Of your–

Chris Biedermann

Yes. If you look at our (inaudible 00:48:23) , all– the bulk of all our costs are in there. There’s some deferred payment next year. But really the bulk of it is all in there, now.

[Bastion Greez – West LB Milling]

Those payments are of minor magnitude? Or?

Chris Biedermann

For example there’s $16 million still due to Parliament over the next two years. There’s another deferred payment on Whitehall group also around the 16 million range.

[Bastion Greez – West LB Milling]

You’re saying 50, 60 or–?

Chris Biedermann

One five. One five.

[Bastion Greez – West LB Milling]

Oh, yes. Thank you very much.

Chris Biedermann

Thank you.

Operator

And we’ll take our next question. This one is from the site of Mikhail Poutry (ph 00:49:00) from Unicredit CAIB. Your line is open.

[Mikhail Poutry] – Unicredit CAIB

Good afternoon. First of all congratulations on a splendid 3Q result, and what I wanted to ask you are three questions. First of all, do you know about any possible changes in taxes levels in Russia next year?

William Carey

Yes, the excise right now is what we’re getting into right now is roughly around 10 % increase.

[Mikhail Poutry] – Unicredit CAIB

Okay. Thank you.

William Carey

Pretty much in line with previous projections.

[Mikhail Poutry] – Unicredit CAIB

Okay. And another question about the raw spirit prices, they are falling at the moment but do you think it is sustainable in 2009?

William Carey

In Poland? No. We think– we’re modeling slightly more than the current prices, but we don’t foresee any significant big movements in the current commodity prices, as well as, remember we put in the storage tank, so we could store up to six months of spirit to limit any real movement. So it’s sort of a hedge a bit of any increase.

But so far we’ve only seen– the last four months we’ve only seen continued declining, even still to date. Obviously they’re going to stabilize somewhere, but no, we’re no projecting any large increase next year.

[Mikhail Poutry] – Unicredit CAIB

Okay. And another question. Can you give us an indication how much it looks as though (inaudible 00:39:35) business may be worth? Are there going to be any bidders but you?

William Carey

I’m sure Pernod would hope so! It’s still too early in the process. We’re still waiting for the IM document from the bankers, so it’s a bit too early in the process to comment on the potential valuation.

The business is very healthy, it is growing, it is a good business. But we do not have enough numbers yet to comment on the valuation.

[Mikhail Poutry] – Unicredit CAIB

Would you buy also the production property or only the brand?

William Carey

Again, we don’t have the data yet from IM exactly what they’re looking to sell.

[Mikhail Poutry] – Unicredit CAIB

Okay. Thank you.

William Carey

Mm-hmm.

Operator

We will take our next question from the site of Gulsen Ayaz from J.P. Morgan. Your line is open.

Gulsen Ayaz – J.P. Morgan

Hi, thank you for taking this questions. I have got two questions. First of all, could you give us a breakdown of organic and inorganic growth in sales number and perhaps Russia and non-Russia breakdown? And also there was some line margin decline from Q1 to Q2 in Poland, and I was wondering whether you’d seen a similar trend in Q3 as well, and if so, what the reason for that?

Chris Biedermann

Well, on your first question in terms of rolling our sales forward as you’ll see our Q next week, the organic number, there was about 6.5%, then the acquisition. And in fact if you’re looking at sales on sales all of Russia would be nonorganic, because there was no Russia in the numbers last year.

So if you looked at for the acquisition, the foreign exchange impact was about 25% and the acquisition impact was about 31%. That (inaudible 00:52:31) 299 of 452 this year. And what was your second question, I’m sorry?

Gulsen Ayaz – J.P. Morgan

I was talking about –

Chris Biedermann

Oh, the margins, right. In terms of segmental? Yes, we saw this quarter, the Polish business was kind of flat in terms of margins, you saw about 9.4, 9.5 % we’ll see that as well in the Q when it comes out next quarter.

Last quarter we had the issue where we had the large distribution sale coming in from PHS and then some other sales, so we have some stabilizing now, the quarter on quarter had some sales volume but the Russians business, kind of flat really. Polish. Sorry.

Gulsen Ayaz – J.P. Morgan

Okay. And if I can ask one last question, this margin improvement in Russian business, does it include any exceptional synergies between Parliament and Green Mark, or has that not started yet?

William Carey

No, no, that hasn’t started yet. As I said, they just changed the management in the last month or so, so we are having that discussion but we haven’t gotten to realize anything yet, no.

Gulsen Ayaz – J.P. Morgan

Okay. thank you.

William Carey

Mm-hmm.

Operator

And Mr. Archbold there appears to be no further questions at this time. I’d like to turn the conference back over to you for any additional or closing comments.

James Archbold

Thank you. We’d like to thank everyone for joining us today and we look forward to speaking to you again this quarter. Thank you.

William Carey

Thank you.

Operator

And this does conclude today’s teleconference. Have a great day and you may disconnect at any time.

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Source: Central European Distribution Corporation Q3 2008 Earnings Call Transcript
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